GameSquare Holdings, Inc 6-K, filed Nov 29, 2022
GameSquare Holdings, Inc. (GAME)
About this 6-K
GameSquare Holdings, Inc filed this 6-K on November 29, 2022.
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 November 2022.
Commission File Number: 333-254709
Engine Gaming and Media, Inc.
(Exact Name of Registrant as Specified in Charter)
77 King Street West, Suite 3000, 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 ☐
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, 99.3, and 99.6 of this Form 6-K of Engine Gaming and Media, 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 GAMING AND MEDIA, INC. | |||
| (Registrant) | |||
| Date: | November 29, 2022 | By: | /s/ Louis Schwartz |
| Name: | Louis Schwartz | ||
| Title: | Chief Executive Officer and Director | ||
EXHIBIT INDEX
Exhibit 99.1
ENGINE GAMING AND MEDIA, INC.
ANNUAL INFORMATION FORM
FOR THE FISCAL YEAR ENDED AUGUST 31, 2022
Dated November 29, 2022
TABLE OF CONTENTS
| Item 1. | EXPLANATORY NOTES, CAUTIONARY STATEMENTS AND GLOSSARY OF TERMS | 1 | |
| 1.1 | Explanatory Notes | 1 | |
| 1.2 | Caution Regarding Forward-Looking Information | 1 | |
| 1.3 | Exchange Rate Data | 3 | |
| 1.4 | Glossary of Certain Terms | 3 | |
| Item 2. | CORPORATE STRUCTURE | 5 | |
| 2.1 | Name, Address and Incorporation | 5 | |
| 2.2 | Intercorporate Relationships | 6 | |
| Item 3. | GENERAL DEVELOPMENT OF THE BUSINESS | 6 | |
| Three Year History | 8 | ||
| Item 4. | DESCRIPTION OF THE BUSINESS | 14 | |
| 4.1 | Business Overview | 14 | |
| 4.2 | Industry Overview and Principal Markets | 15 | |
| 4.3 | Revenue Model | 15 | |
| 4.4 | Customers | 17 | |
| 4.5 | Foreign Operations | 18 | |
| 4.6 | Competitive Conditions | 18 | |
| 4.7 | Proprietary Protection | 18 | |
| 4.8 | Employees | 19 | |
| 4.9 | Specialized Skill and Knowledge | 19 | |
| 4.10 | Risk Factors | 20 | |
| Item 5. | DIVIDENDS | 28 | |
| 5.1 | Dividends | 28 | |
| Item 6. | DESCRIPTION OF SHARE CAPITAL | 28 | |
| 6.1 | Common Shares | 28 | |
| 6.2 | Preference Shares | 29 | |
| 6.3 | Warrants and Finder Warrants | 29 | |
| 6.4 | Awards | 31 | |
| 6.5 | Debt Securities | 32 | |
| Item 7. | MARKET FOR SECURITIES | 33 | |
| 7.1 | Trading Price and Volume | 33 | |
| 7.2 | Prior Sales | 34 | |
| Item 8. | DIRECTORS AND executive OFFICERS | 35 | |
| 8.1 | Name, Occupation and Security Holding | 35 | |
| 8.2 | Orders, Penalties and Bankruptcies | 36 | |
| 8.3 | Audit Committee Disclosure | 37 | |
| 8.4 | Conflicts of Interest | 41 | |
| Item 9. | INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS | 41 | |
| 9.1 | Interest of Management and Others in Material Transactions | 41 | |
| Item 10. | TRANSFER AGENT AND REGISTRAR | 42 | |
| 10.1 | Transfer Agents and Registrar | 42 | |
| Item 11. | MATERIAL CONTRACTS | 42 | |
| 11.1 | Material Contracts | 42 | |
| Item 12. | Interests of Experts | 42 | |
| 12.1 | Interests of Experts | 42 | |
| Item 13. | ADDITIONAL INFORMATION | 42 | |
| 13.1 | Additional Information | 42 | |
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ANNUAL INFORMATION FORM
| Item 1. | EXPLANATORY NOTES, CAUTIONARY STATEMENTS AND GLOSSARY OF TERMS |
| 1.1 | Explanatory Notes |
In this Annual Information Form (the “AIF”), the term “Company”, or “Engine” refers to Engine Gaming and Media, Inc. and its subsidiaries as a whole, unless otherwise specified or the context otherwise requires.
Information contained in this AIF is given as of August 31, 2022, the fiscal year end of Company, unless otherwise specifically stated.
Unless otherwise indicated in this AIF, references to “$”, “US$” or “U.S dollars” are to United States dollars, references to “Canadian dollars” or “CDN$” are to the currency of Canada, and references to “EUR”, “€” or “Euros” are to European Euros.
Market and industry data used throughout this AIF was obtained from various publicly available sources. Although the Company believes that these independent sources are generally reliable, the accuracy and completeness of such information are not guaranteed and have not been verified due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and the limitations and uncertainty inherent in any statistical survey of market size, conditions and prospects.
This AIF should be read in conjunction with the Company’s audited consolidated financial statements and management’s discussion and analysis for the year ended August 31, 2022. The financial statements and management’s discussion and analysis are available under the Company’s profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com. The financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
| 1.2 | Caution Regarding Forward-Looking Information |
This AIF contains “forward-looking statements” within the meaning of that term under Canadian securities laws. These statements relate to future events or future performance and reflect the Company’s expectations and assumptions regarding such future events and performance. In particular, all statements, other than historical facts, included in this AIF that address activities, events or developments that management of the Company expect or anticipate will or may occur in the future are forward-looking statements, including but 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; |
| ● | the Company’s ability to successfully execute its business plan; |
| ● | any expectation of regulatory approval and receipt of certifications with respect to the Company’s current and proposed business transactions; |
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| ● | expectations regarding existing products and plans to develop, implement or adopt new technology or products; |
| ● | 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; |
| ● | the Company’s ability to compete with its competitors and their technologies; |
| ● | the Company’s reliance on key executives and the ability to attract and retain qualified personnel; |
| ● | the availability of intellectual property protection for the Company’s products, and the Company’s ability to expand and exploit its intellectual property; |
| ● | statements related to the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic; |
| ● | the completion of and the Company’s use of the proceeds of any offering; and |
| ● | other expectations of the Company. |
Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, or “believes” or variations (including negative variations) of such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved.
Such statements, made as of the date hereof, reflect the Company’s current views with respect to future events and are based on information currently available to the Company and are subject to and involve certain known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed in or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.
When relying on forward-looking statements to make decisions, readers should ensure that the preceding information, the risk factors described herein under the section entitled “Risk Factors”, and the contents of this AIF are all carefully considered. These forward-looking statements are made as of the date of this AIF, and, except as may be required by law, the Company disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations, estimates and projections with regard thereto or any changes in events, conditions or circumstances on which any statement is based. Readers should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. In addition to the disclosure contained herein, for more information concerning the Company’s various risks and uncertainties, please refer to the Company’s periodic public filings available under its profile on SEDAR at www.sedar.com.
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| 1.3 | Exchange Rate Data |
The following table sets forth the rate of exchange for the Canadian dollar, expressed in United States dollars in effect at various times.
| Canadian Dollars to U.S. Dollars | Year Ended August 31, 2022 | Year Ended August 31, 2021 | ||||||
| High for period | 0.8111 | 0.8306 | ||||||
| Low for period | 0.7612 | 0.7465 | ||||||
| Average rate for period | 0.7863 | 0.7887 | ||||||
| Rate at end of period | 0.7627 | 0.7926 | ||||||
As of November 25, 2022, the closing exchange rate for Canadian dollars in terms of the United States dollar, as quoted by the Bank of Canada, was CDN$1.00 = US$0.7476.
The following table sets forth the rate of exchange for the Canadian dollar, expressed in Euros in effect at various times.
| Canadian Dollars to Euros | Year Ended August 31, 2022 | Year Ended August 31, 2021 | ||||||
| High for period | 0.7754 | 0.6840 | ||||||
| Low for period | 0.6649 | 0.6357 | ||||||
| Average rate for period | 0.7167 | 0.6598 | ||||||
| Rate at end of period | 0.7598 | 0.6709 | ||||||
As of November 25, 2022, the closing exchange rate for Canadian dollars in terms of Euros, as quoted by the Bank of Canada, was CDN$1.00 = EUR€0.7192.
| 1.4 | Glossary of Certain Terms |
In this AIF, unless there is something in the subject matter or context inconsistent therewith, the following terms shall have the meanings set out below. This list is not exhaustive and terms otherwise defined in the body of the AIF shall have the meaning ascribed thereto.
“AIF” means this Annual Information Form.
“Audit Committee” means the audit committee of the Board.
“Board” means the board of directors of the Company.
“BCBCA” Business Corporation Act (British Columbia)
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“Capital Pool Company” or “CPC” means a corporation:
| (a) | that has been incorporated or organized in a jurisdiction in Canada; | |
| (b) | that has filed and obtained a receipt for a preliminary CPC prospectus from one or more of the securities regulatory authorities in compliance with the CPC Policy; and | |
| (c) | in regard to which the completion of a Qualifying Transaction has not yet occurred. |
“Common Shares” means the common shares in the capital of the Company.
“Company” or “Engine” means Engine Gaming and Media, Inc., a company existing under the BCBCA.
“CPC Policy” means Policy 2.4 of the Exchange Corporate Finance Manual entitled “Capital Pool Companies”.
“esports” means organized multiplayer video game competitions.
“IFRS” means the International Financial Reporting Standards set by the International Accounting Standards Board which are applicable on the date on which any calculation is to be effective or the date of any financial statements referred to herein, as the case may be.
“Insider” when used in relation to the Company, means:
| (a) | a director or senior officer of the Company; | |
| (b) | a director or senior officer of a company that is an Insider or subsidiary of the Company; | |
| (c) | a Person that beneficially owns or controls, directly or indirectly, voting shares carrying more than 10% of the voting rights attached to all outstanding voting shares of the Company; or | |
| (d) | the Company itself if it holds any of its own securities. |
“Securities Exchange Agreement” shall have the meaning ascribed to such term in Item 3.1.
“SEDAR” means System for Electronic Document Analysis and Retrieval.
“Qualifying Transaction” means a transaction where a CPC acquires significant assets other than cash, by way of purchase, amalgamation, merger or arrangement with another company or by other means.
“TSXV” means the TSX Venture Exchange.
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| Item 2. | CORPORATE STRUCTURE |
| 2.1 | Name, Address and Incorporation |
The Company was incorporated as “Stratton Capital Corp.” under the Business Corporations Act (Ontario) pursuant to articles of incorporation on April 8, 2011. On October 19, 2016, the Company filed Articles of Amendment changing its name from “Stratton Capital Corp.” to “Millennial Esports Corp.”
On June 7, 2019, the Company filed Articles of Amendment to effect a consolidation of the Common Shares on the basis of one post-consolidation Common Share for every fifteen pre-consolidation Common Shares (the “June 2019 Consolidation”). On October 17, 2019, the Company filed Articles of Amendment to (i) change its name from “Millennial Esports Corp.” to “Torque Esports Corp.”, and (ii) to effect a consolidation of the Common Shares on the basis of one post-consolidation Common Share for every five pre-consolidation Common Shares (the “October 2019 Consolidation”).
On August 13, 2020, the Company filed Articles of Amendment to (i) change its name from “Torque Esports Corp.” to “Engine Gaming and Media, Inc.”, and (ii) to effect a consolidation of the Common Shares on the basis of one post-consolidation Common Share for every fifteen pre-consolidation Common Shares (the “August 2020 Consolidation”).
On December 18, 2020, the Company filed a Continuance Application with the British Columbia Registrar of Companies to continue into British Columbia under the BCBCA.
On October 19, 2021, the Company changed its name from “Engine Media Holdings, Inc.” to “Engine Gaming and Media, Inc.”
The head office of the Company is located at 33 Whitehall Street, 8th Floor, New York, NY 10004 and the registered office of the Company is located at 77 King Street West, Suite 3000, PO Box 95, Toronto, Ontario M5K 1G8.
The Company is a reporting issuer in the provinces of Alberta, British Columbia, Ontario, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland. The Common Shares are listed and posted for trading on the TSXV under the trading symbol “GAME”, on the NASDAQ Global Market (the “NASDAQ”) under the symbol “GAME”, and the OTCQB under the trading symbol “GAME”.
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| 2.2 | Intercorporate Relationships |
The following is a summary of the inter-corporate relationships between the Company and its subsidiaries, which together comprise the consolidated Company as at the date hereof:
| Item 3. | GENERAL DEVELOPMENT OF THE BUSINESS |
Businesses of Engine
Engine is a building a leading media and gaming platform for sports and esports for fans, publishers, influencers, and brands. The Company 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. 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.
Engine Media operates a portfolio of businesses that bring together key capabilities and technology for the benefit of its customers. Engine’s media focused businesses include Frankly, Stream Hatchet, and Sideqik and its gaming platform and gaming businesses included WinView Games.
Engine generates revenue through a combination of direct-to-consumer and subscription fees; streaming technology and data software-as-a-service (“SaaS”) based offerings; and, programmatic advertising and sponsorships.
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Media
Frankly Inc.
Frankly Inc. (“Frankly”), through its wholly-owned subsidiary Frankly Media, LLC, 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.
Sideqik, Inc.
Sideqik, Inc. (“Sideqik”), is an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content creators. Sideqik’s end-to-end solutions offer marketers advanced capabilities to discover influencers with demographic and content filtering; connect and message influencers; share marketing collateral such as campaign briefs, photos, logos, videos; measure reach, sentiment, and engagement across all major social media platforms; and evaluate earned media value and return on investment across the entire campaign.
Gaming
Stream Hatchet
Stream Hatchet S.L (“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.
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, which include 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.
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 played on the mobile second screen, its foundational patents and 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. The Company discontinued operations of WinView on July 31, 2022.
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Three Year History
The following is a description of how the business of the Company developed over the three most recently completed financial years and the current financial year.
Fiscal Year Ended August 31, 2020
Frankly Arrangement and WinView Merger
On March 10, 2020, the Company, Frankly and WinView Inc. announced that they had entered into a business combination agreement dated March 9, 2020 (the “Business Combination Agreement”) where the three companies agreed to form an integrated news, gaming, sports and esports platform (the “FW Transaction”).
On May 8, 2020, the Company acquired all of the issued and outstanding common shares of Frankly in exchange for consideration of one Engine Common Share for each Frankly common share acquired, pursuant to a court approved plan of arrangement under the Business Corporations Act (British Columbia), resulting in the issuance of 2,216,607 Common Shares upon closing the business combination. All outstanding convertible securities of Frankly were exchanged for equivalent securities of the Company (other than outstanding warrants to purchase common shares of Frankly, which remain outstanding and have the terms of such securities adjusted to reflect the exchange ratio). The Company also concurrently indirectly acquired WinView, pursuant to a statutory merger under the laws of the State of Delaware, with WinView securityholders receiving an aggregate of 1,759,997 Common Shares of the Company as well as certain contingent consideration. The contingent consideration entitles WinView holders to proceeds from the enforcement of WinView’s patent portfolio, equal to 50% of the net license fees, damages awards or settlement amounts collected from third parties, with such payments to be calculated after deduction of certain amounts. In connection with the transaction, it was announced that the combined company would be co-led by Darren Cox and Frankly Chief Executive Officer Lou Schwartz, and WinView Executive Chairman Tom Rogers, who also served as Chairman of Frankly, would serve as Executive Chairman of the combined company.
For more information on the FW Transaction, see the Company’s business acquisition report dated November 13, 2020 on www.sedar.com.
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Convertible Debentures
On August 19, 2020, the Company closed a first tranche of a non-brokered private placement of convertible debentures in the amount of US$5,750,000 (“2020 Convertible Debentures”). The 2020 Convertible Debentures will mature 24 months from the date of issuance and bear interest at a rate of 5% per annum (subject to the following adjustments), payable on maturity. At the Company’s option, interest under the 2020 Convertible 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 Convertible 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 Convertible Debentures holders may convert all or a portion of the principal amount of the 2020 Convertible Debentures into units of the Company at a price equal to the lesser of (a) US$11.25 per unit, and (b) if such conversion occurs after a public offering of securities by the Company, a 15% discount to the public offering price, provided that such conversion price shall not be less than US$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 of the Company and the exercise of Warrants of the Company to be issued pursuant to the conversion of the 2020 Convertible Debentures, holders of 2020 Convertible Debentures may convert such convertible debentures into units at US$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 US$7.50 per unit and the interest rate increased to 10% on December 19, 2020.
Each unit is comprised of one Common Shares and one-half of one warrant, with each Warrant exercisable into one Common Shares of the Company at an exercise price of US$15.00 per share for a period of three years from the issuance of the 2020 Convertible Debentures. Under certain circumstances, the Company shall be entitled to call for the exercise of any outstanding Warrants in the event.
Acquisition of Interest in One Up Group
On August 25, 2020, Engine announced it completed the acquisition of a 20.48% interest in mobile gaming company One Up Group, LLC (“One Up”). One Up operates the OneUp mobile app, which allows gamers to organize and play one-on-one matches with other gamers and compete for money. The purchase price was satisfied with the issuance of principal amount US$3 million convertible debentures, having the same terms as the 2020 Convertible Debentures, except that references therein to US$7.50 have been changed to US$9.50.
Fiscal Year Ended August 31, 2021
Financings
On September 15, 2020, the Company closed the final tranche of 2020 Convertible Debentures in the amount of US$1,901,393.
On October 16, 2020, the Company announced that it closed a first tranche of principal amount US$1,050,000 of the first US$2,000,000 draw of a US$8,000,000 stand-by convertible debenture facility (“Standby Debentures”). The Standby Debentures have substantially similar terms as the 2020 Convertible Debentures, described above, except the following: (i) the references therein to a minimum US$7.50 conversion price have been changed to US$8.90; and (ii) the Standby Debentures are only convertible into common shares of the Company, not units.
On October 16, 2020, the Company announced that it closed a principal US$1 million convertible debenture financing which has similar terms to the 2020 Convertible Debentures, described above, except the references therein to US$7.50 have been changed to US$7.80 (the “2020 Convertible Debentures ($7.80)”).
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On November 20, 2020, the Company announced that it closed the final tranche of the previously announced US$2,000,000 draw of the Standby Debentures, for total proceeds of US$950,000. In connection with the Standby Debentures, the Company issued 224,719 Warrants, with each Warrant exercisable into a Common Share at an exercise price of US$15.00 until November 20, 2024.
On December 2, 2020, the Company announced that its wholly-owned subsidiaries Frankly Media LLC and Frankly have amended the existing secured credit facility (as amended, the “EB Loan”) with arm’s length lender EB Acquisition Company, LLC (the “EB Lender”), in connection with the advance of an additional US$1,000,000 under the EB Loan, which is convertible at the option of the EB Lender, at a conversion price per share of US$11.25. The credit limit under the EB Loan of US$5 million is now fully drawn. In connection with the amendment, the maturity date of the EB Loan has been extended from January 5, 2021 until January 5, 2022. Additionally, the Company has guaranteed the obligations under the EB Loan and has granted a security interest in favour of the EB Lender over the assets of the Company. In consideration of the extension of the maturity date, the Company has agreed to issue to the EB Lender an aggregate of 6,666 Common Shares and an amendment fee of US$100,000 which forms part of the outstanding principal under the EB Loan. The Common Shares issuable will be subject to a hold period expiring four months and a day following the date of issuance, as well as restrictions on transfer under applicable securities laws.
On January 8, 2021 the Company settled convertible debentures (the “Debt Settlements”) of an aggregate principal amount of US$10,726,393 in outstanding convertible debentures through the issuance of 1,430,186 units at a deemed price of US$7.50 per unit, with each unit consisting of a Common Share and three-quarters of a warrant, with each whole Warrant exercisable into a Common Share at an exercise price of US$15.00 per share for a period of three years. Included in the Debt Settlements was the US$3,000,000 convertible debenture that was issued in connection with the Company’s acquisition of an interest in One Up.
On December 23, 2020, the Company announced its intention to complete a non-brokered private placement of up to approximately 3,300,000 units at a price of US$7.50 per unit for gross proceeds of up to US$25,000,000 (“December 2020 Private Placement”). Each Unit consists of one Common Share and one-half of one common share purchase warrant. Each whole Warrant entitles the holder to acquire one additional Common Share of the Company at a price of US$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 US$30,000,000, and (iii) the closing price of the common shares on NASDAQ is US$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.
On January 8, 2021, the Company closed the first tranche of the December 2020 Private Placement for aggregate gross proceeds of US$10,540,883 and 1,405,451 units were issued. The Company paid cash commissions to eligible finders totalling US$284,989 and also issued the following securities as partial payment of commissions to finders: 36,948 units; and, 74,947 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.
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In January and February 2021, the Company completed multiple tranches of equity financings totaling 4,371,767 units at an issue price of US$7.50 per unit, for gross proceeds of US$32,788,253. Each unit consisted of one Common Share and one-half of one Common Share purchase warrant. Each whole Warrant entitles the holder to acquire one additional share of the Company at a price of US$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.
On February 26, 2021 the EB Lender converted the EB Loan into a US$5,000,000 secured convertible debenture, which is convertible into units of the Company at a conversion price of US$10.25 per unit. Each such unit is comprised of one Common Share and one-half of one common share purchase warrant, with each whole Warrant exercisable into a Common Share at an exercise price of US$15.00 per share for a period of three years from the issuance of the convertible debenture.
On March 25, 2021, the Company filed a final short form base shelf prospectus (with the securities regulators in each province of Canada, except for the Province of Québec) (the “Base Shelf Prospectus”) and a corresponding shelf registration statement on Form F-10 with the U.S. Securities and Exchange Commission. The prospectus and registration statement allow the Company to offer up to US$150 million of common shares, preference shares, warrants, subscription receipts, debt securities, units, or any combination thereof during the 25-month period that the shelf prospectus is effective.
On June 7, 2021, the Company received approval to list its shares on NASDAQ. The Company’s Common Shares commenced trading on NASDAQ on June 17, 2021.
On August 10, 2021, the Company entered into an at-the-market Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC (“Canaccord”), on behalf of itself and co-sales agents Oppenheimer & Co. Inc. and B. Riley Securities, Inc., to establish an at-the-market equity program (the “ATM Program”). Under the ATM Program, the Company will have the flexibility through the expiration date of its Base Shelf Prospectus to issue up to US$50 million of Common Shares as needed to support the Company’s ongoing business activities. Any Common Shares sold under the ATM Program will be sold at the prevailing market price at the time of sale, when sold through NASDAQ. No Common Shares will be offered or sold in Canada. As of the date hereof, the Company has not yet issued any shares under the ATM Program.
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Patent Lawsuits against DraftKings and FanDuel
On July 7, 2021, Engine announced that its Winview subsidiary commenced an action in the United States District Court for the District of New Jersey against DraftKings Inc. (NASDAQ: DKNG), alleging infringement of patents owned by Winview. The lawsuit alleges that various gaming services provided by DraftKings infringe Winview’s United States Patent No. 9,878,243 (the “‘243 Patent”) entitled “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 (the “‘543 Patent”) entitled “Method Of and System For Managing Client Resources and Assets for Activities On Computing Devices.” The action seeks the recovery of damages and other appropriate relief.
On July 20, 2021, Engine announced that its Winview subsidiary commenced an action in the United States District Court for the District of New Jersey against FanDuel, Inc., alleging infringement of patents owned by Winview. The lawsuit alleges that various gaming services provided by FanDuel infringe Winview’s 243 Patent and 543 Patent. The action seeks the recovery of damages and other appropriate relief.
On July 29, 2021, Engine announced that its Winview subsidiary filed amended complaints in its patent infringement lawsuits against DraftKings, and FanDuel, which are pending in the United States District Court for the District of New Jersey, to include allegations that the gaming services provided by DraftKings and FanDuel infringe two additional patents owned by Winview: United States Patent No. 9,993,730 entitled “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. 10,806,988 entitled “Method Of and System For Conducting Multiple Contests of Skill with a Single Performance.” These actions seek the recovery of damages and other appropriate relief.
Acquisition of Sideqik
On July 6, 2021, the Company announced the completion of the acquisition of Sideqik. Engine will integrate Sideqik with its subsidiary Stream Hatchet, a global leader in live gaming video distribution analytics and audience engagement. Sideqik’s and Stream Hatchet’s combined assets will allow brands and agencies to have a one-stop-shop solution with proven expertise in evaluating and generating efficiencies across all live and non-live influencer marketing expenditures. With this focus on influencer marketing, Engine will empower brands to discover and connect with content creating influencers across any content vertical. It will provide tools to best shape the creation of authentic content that resonates with consumers, as well as best in class measurement to determine earned media value, sales effectiveness, and campaign return on investment.
Fiscal Year Ended August 31, 2022
WinView Games Partnership with 680 The Fan
On September 21, 2021 WinView announced that it entered into a partnership with 680 The Fan, to elevate listener engagement with live games of skill that test the audience’s sports IQ for cash or fun. The partnership consists of exclusive WinView contests and promotions that are synchronized to 680 The Fan’s broadcast and website. These contests allow people to play along while they listen or watch a game, which span Braves, Hawks, Falcons, Bulldogs, and Yellow Jackets games. These games are produced in both live and pregame modes, which will allow users to constantly engage with the events. 680 The Fan has worked with Engine’s wholly-owned subsidiary, Frankly Media, to develop and manage its digital sports destination, including leveraging its live streaming audio and video platform.
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The decision for WinView to partner with 680 TheFan is driven by their content and large sports following that will promote and market WinView Games. The decision for 680 The Fan to partner with WinView is driven by their commitment to continue improving fan engagement through the play-along game prediction platform offered by WinView. This commitment will be furthered by three of their top on-air personalities (Matt Chernoff, Carlos Medina, and Brian Hoyt).
Allinsports Arbitration
On October 1, 2021, the arbitration in Ontario commenced by the shareholders of Allinsports was completed. The arbitration sought, among other things, a ruling that the Company’s pending acquisition of Allinsports, a manufacturer of motorsports racing simulators, had been completed and that the selling shareholders were entitled to receive the outstanding payment of 966,667 Common Shares due under the acquisition agreement. The arbitrator determined that the transaction was completed and that the Allinsports shareholders are entitled to receive the outstanding share consideration under the acquisition agreement. The Company is reviewing the decision to determine its options, including other relief and remedies it may pursue.
Sideqik Services Extension with HyperX
On February 10, 2022, Sideqik finalized a multi-year services extension with HyperX, the gaming peripherals team at HP Inc. and brand leader in gaming and esports. HyperX will continue to leverage Sideqik’s premium influencer marketing technology, enabling discovery, verification and management of creators across numerous live-streaming and social platforms. In addition, HyperX will leverage Sideqik’s recently launched social commerce technology integrations, enabling tracking of individual creator and affiliate sales performance across all platforms. The end-to-end suite of services, from discovery to commerce, enables brands to effectively and efficiently grow sales through creator marketing across all major social media channels.
Sale of Eden Games
On April 7, 2022, Engine sold its 96% interest in Eden Games for approximately USD$15.3 million (approximately CAD$19.2 million) in cash consideration. To facilitate the sale of Eden Games, under a separate agreement, the Company agreed to purchase Euro-denominated 6% promissory notes amounting to EUR$1,453,154 ($1,558,319) that were due to the former co-founders of Eden Games from third parties. EUR$1,081,081 ($1,181,005) of the consideration was paid on the closing of the sale with the remainder due in two equal payments on April 4, 2023, and October 6, 2023.
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Sale of UMG Media Ltd. Assets
On June 13, 2022, Engine Gaming and Media, Inc. entered into an Agreement to sell certain assets of UMG for $100 to Harena Data, Inc. (“Harena”). On June 30, 2022, the Company completed the sale. Concurrently with the sale agreement the Company entered into a transition services agreement with the purchaser for a total value of $300,000 with payments beginning July 31, 2022, and the remainder to be paid in full, 12 months following the first payment. Harena will take ownership of the UMG online business, which hosts daily tournaments and matches for competitive e-sports players, as well as the ownership of the studio and media properties under UMG including its social channels.
Frankly Media Partnership with Scioto Valley Guardian
On September 26, 2022, Frankly Media, announced a partnership with Scioto Valley Guardian (“The Guardian”), the number 1 local news source for the Scioto Valley area in Ohio. Through Frankly Media’s premium programmatic advertising services, Frankly Media developed news and entertainment centric iOS and Android apps for The Guardian in which monetization has commenced for both the developed apps and website.
Recent Developments
Frankly Media Partnership with Aggregated Media
On October 3, 2022, Frankly Media, announced a partnership with Aggregated Media (“A8”), an esports and video game culture media company. The partnership enables Frankly Media to monetize A8’s content via their premium yield advertising services and maximize their audience reach through Frankly Media’s video streaming platform, mobile apps and OTT/CTV.
Frankly Media Partnership with Filmfeed, Inc.
On October 10, 2022, Frankly Media announced a partnership with Filmfeed, Inc. The partnership enables Frankly to monetize their recently launched Stash TV video streaming content via their premium yield advertising services. Frankly Media’s Programmatic Advertising monetization services are being leveraged for their revenue growing AI technology, audience insight solutions and performance tracking tools to better track and importantly, monetize newly launched Stash TV CTV streaming content.
| Item 4. | DESCRIPTION OF THE BUSINESS |
| 4.1 | Business Overview |
The Company is addressing massive market opportunities in esports, gaming, data, and streaming content distribution. The Company owns a unique combination of technology assets that include: (i) a skills-based mobile engagement platform for traditional sports and esports – WinView; (ii) a data intelligence platform – Stream Hatchet; (iii) influencer marketing – Sideqik; and (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.
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| 4.2 | Industry Overview and Principal Markets |
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 biggest differences between esports and video games of old is the community and spectator nature of esports - the 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 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.
| 4.3 | Revenue Model |
Overview
The Company generates revenue through a combination of (i) business-to-business software-as-a-service (“SaaS”) subscription and professional service fees; and (ii) 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 the Company’s long-term growth strategy.
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Brands
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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. 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.
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, which include streamers, esports organizations and video game producers. 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. Stream Hatchet’s customers include industry leaders such as Microsoft, Allied Esports, Activision and Twitch. |
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Sideqik
Sideqik is an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content creators. Sideqik’s end-to-end solutions offer marketers advanced capabilities to discover influencers with demographic and content filtering; connect and message influencers; share marketing collateral such as campaign briefs, photos, logos, videos; measure reach, sentiment, and engagement across all major social media platforms; and evaluate earned media value and return on investment across the entire campaign. |
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Frankly Media
Frankly Media provides a complete suite of content management, video streaming and engagement solutions that give broadcasters and publishers a unified workflow for the creation, management, publishing and monetization of digital content to any device, while maximizing audience value and revenue. Frankly delivers publishers and their audiences the solutions and services to meet the dynamic challenges of a multi-screen content distribution world. Frankly Media’s products include a groundbreaking online video platform for Live, VOD and Live-to-VOD workflows, a full-featured CMS with rich storytelling capabilities, as well as native apps for iOS, Android, Apple TV, Fire TV and Roku. Additionally, Frankly’s in-house team of digital advertising sales and operations experts monetize billions of monthly display and video advertising impressions through programmatic and direct brand sales across client and owned and operated media properties. Frankly has over 1,200 radio, TV and print media brands, including CNN, Newsweek and Vice Media; TV affiliates of NBC, CBS, FOX and ABC, and radio station groups such as Cumulus. |
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Breakdown of Revenue Streams
The following table provides the breakdown for the main streams of revenue from continuing operations for the two most recently completed financial years:
| Source of Revenue | Twelve-month period ended August 31, 2022 ($ and %) | Twelve-month period ended August 31, 2021 ($ and %) | ||
| Media(1) | 39,976,476 (95%) | 31,943,287 (96%) | ||
| Gaming(2)(3)(4)(5) | 1,906,317 (5%) | 1,401,981 (4%) |
Notes:
| (1) | Media includes the operations of Frankly and Sideqik |
| (2) | Gaming includes the operations of Stream Hatchet |
| (3) | The sale of Eden Games was completed on April 6, 2022. Eden Games is not included in the table above as it is part of discontinued operations. |
| (4) | A disposition of UMG Events LLC assets took place on June 13, 2022. UMG is not included in the table above as it is part of discontinued operations. |
| (5) | The Company discontinued operations of WinView on July 31, 2022. WinView is not included in the table above as it is part of discontinued operations. |
| 4.4 | Customers |
The Company has different business segments which target different customers.
Frankly’s services are currently being used by approximately 1,200+ U.S. local news and radio stations, mostly affiliated with large broadcasting networks such as Cumulus, NBC, CBS, FOX and ABC.
Stream Hatchet’s customers include industry leaders such as Microsoft, Allied Esports, Activision and Twitch.
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| 4.5 | Foreign Operations |
Although the Company is headquartered in Canada, the majority of its business is conducted outside of Canada:
| ● | Stream Hatchet has an office in Terrassa, Spain; |
| ● | Frankly has an office in Atlanta, Georgia; |
| ● | Sideqik has an office in Atlanta, Georgia. |
See “Item 4.10 – Risk Factors”.
| 4.6 | Competitive Conditions |
The Company competes in highly competitive and fragmented sectors, which include esports content, streaming technology, gaming platforms, data analytics and intellectual property. Some of the Company’s most direct competitors in North America and Europe include well capitalized and multinational companies.
The major competitors in the Company’s markets include:
| ● | Nielsen Holdings Plc | |
| ● | CreatorIQ | |
| ● | TownNews |
Despite intense competition, the Company believes it is well positioned to compete with its competitors by means of having an industry-leading management team and directors, integrated business model, in-house data analytics and in being a market leader in expanding key verticals. The Company’s management and directors have broad and extensive experience, an optimal blend of abilities across channels and assets, and a global footprint. The Company currently holds a number of growth assets that offer its customers the ability to deliver marketing and analytics to an expanding global customer base.
| 4.7 | Proprietary Protection |
The Company considers the creation, use, and protection of intellectual property to be crucial to its business. The Company’s general practice is to require all key employees and consultants to sign confidentiality agreements and assign all rights of inventions to the Company. In addition to the above contractual arrangements, the Company also relies on a combination of trade secret, copyright, domain name and other legal rights to protect its intellectual property. The Company typically owns the copyright to the software code to its content as well as the brand or title name under which its games are marketed. The Company believes that it has provided sufficient security for its intellectual property.
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Non-patent intellectual properties owned by the Company include:
| ● | Trade secrets and know-how that it uses to develop games and processes; | |
| ● | Common law trademarks, including product names and graphics, music and other audio-visual elements of games; | |
| ● | Software code relating to its products; | |
| ● | Certain program assets; and | |
| ● | Sports and esports-focused apps. |
| 4.8 | Employees |
As at August 31, 2022, the Company had approximately 113 employees globally. Of these employees, approximately 3 are located in Canada, 24 in Spain, 9 in India, and 77 in the United States. None of the Company’s employees are represented by a collective bargaining agreement. The Company considers its relations with its employees to be strong and views its employees as an important competitive advantage.
| 4.9 | Specialized Skill and Knowledge |
Specialized skill and knowledge is necessary to capitalize on significant trends, esports, news streaming and gaming. The Company has assembled experienced management and technical teams within its portfolio companies.
As part of the Company’s acquisition of Frankly and WinView, media/technology industry veteran, founder of CNBC and long-time CEO of TiVo, Tom Rogers, joined the Company as executive chairman and board member. Additionally, seasoned executive Lou Schwartz joined the Company and is now its CEO.
Stream Hatchet are the leaders in the provision of data for esports companies from leading streaming platforms. Stream Hatchet has developed unique back-end IP and technology for its data collection services.
The Sideqik software platform enables discovery, collaboration, and technology integration with social media influencers, as well as engagement with a target audience, across all major social media platforms. The discovery feature in the software enables searching of relevant influencers by keywords, interest, location, brand affinity, and other such parameters. The audience engagement tool utilizes artificial intelligence to provide insight into how influencers perform before launching a relationship. Audience analytics breakdown demographics of users and audiences by age, gender, race, income, and other such parameters to ensure audiences align with target demographics. The influencer relationship manager streamlines communication with influencers with messages, emails, and attachments centralized inside of the platform. Customizable groups allow users to organize and identify influencers and group them by different pre-sets.
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| 4.10 | Risk Factors |
The Company’s operations and financial performance are subject to the normal risks of its industry and are subject to various factors which are beyond the control of the Company. Certain of these risk factors are described below. The risks described below are not the only ones facing the Company. Additional risks not currently known to the Company, or that it currently considers immaterial, may also adversely impact the Company’s business, operations, financial results or prospects, should any such other events occur.
Risks Associated with the Business and Industry of the Company
Liquidity concerns and future financings
Although the Company has been successful in the past in financing its activities, there can be no assurance that it will be able to obtain additional financing as and when needed in the future to execute its business plan and future operations. The ability of the Company to arrange such financing in the future will depend in part upon the prevailing capital market conditions as well as the business performance of the Company. It may be difficult or impossible for the Company to obtain financing on commercially acceptable terms. This may be further complicated by the limited market liquidity for shares of smaller companies such as the Company, 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 the Company pays to service future debt incurred by the Company and affect the Company’s ability to fund ongoing operations.
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 the Company’s business, financial condition and results of operations.
The Company may not be able to successfully execute its business plan
The execution of the Company’s business plan poses many challenges and is based on a number of assumptions. The Company may not be able to successfully execute its business plan. If the Company’s business plan is more costly than anticipated or there are significant cost overruns, certain products and development activities may be delayed or eliminated or the Company may be compelled to secure additional funding (which may or may not be available) to execute its business plan. The Company cannot predict with certainty its future revenues or results from its operations. If the assumptions on which revenue or expenditure forecasts are based change, the benefits of the Company’s business plan may change as well. In addition, the Company may consider expanding its business beyond what is currently contemplated in its business plan. Depending on the financing requirements of a potential acquisition or new product opportunity, the Company may be required to raise additional capital through the issuance of equity or debt. If the Company is unable to raise additional capital on acceptable terms, the Company may be unable to pursue a potential acquisition or new product opportunity.
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Difficulties integrating acquisitions and strategic investments
The Company has acquired businesses, personnel and technologies in the past and expects to continue to pursue acquisitions, such as the completed acquisitions of Frankly, WinView, Stream Hatchet, SideQik, and other investments that are complementary to the existing business, and expanding the employee base and the breadth of the Company’s offerings. The Company’s 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 the Company expects the esports industry to consolidate in the future, the Company may face significant competition in executing its growth strategy. Future acquisitions or investments could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt, and contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could adversely affect the financial condition and results of operations of the Company. The benefits of an acquisition or investment may also take considerable time to develop, and the Company cannot be certain that any particular acquisition or investment will produce the intended benefits.
The above risks and difficulties, if they materialize, could disrupt the Company’s ongoing business, distract management, result in the loss of key personnel, increase expenses and otherwise have a material adverse effect on the Company’s business, results of operations and financial performance.
Management of growth
The Company has grown rapidly since its inception and it plans to continue to grow at a rapid pace. This growth has put significant demands on the Company’s processes, systems and personnel.
The Company may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. Managing the Company’s growth will require significant expenditures and allocation of valuable management resources. The inability of the Company to deal with this growth may have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.
The Company may continue to have reduced cash reserves
The Company expects its cash reserves will be reduced due to future operating losses, working capital requirements, capital expenditures, and potential acquisitions and other investments by its business, and the Company cannot provide certainty as to how long its cash reserves will last or that it will be able to access additional capital when necessary.
The Company expects to incur continued losses and generate negative cash flow until it can produce sufficient revenues to cover its costs. The Company may never become profitable. Even if the Company does achieve profitability, it may be unable to sustain or increase profitability in the future. For the reasons discussed in more detail below, there are substantial uncertainties associated with the Company achieving and sustaining profitability. The Company expects its cash reserves will be reduced due to future operating losses, and working capital requirements, and the Company cannot provide certainty as to how long its cash reserves will last or that it will be able to access additional capital if and when necessary.
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Competition
The Company’s failure to compete successfully in its various markets could have a material adverse effect on the Company’s business, financial condition and results of operations. The market for the various types of product and service offerings of the Company is very competitive and rapidly changing. The Company faces competition from other esports businesses, many of which are larger and better funded than the Company. There can be no guarantee that the Company’s current and future competitors will not develop similar or superior services to the Company’s products and services which may render the Company 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 the business of the Company.
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 the Company’s customers to offer greater variety, affordability, interactivity and enjoyment. These other forms of entertainment compete for the discretionary time and income of the Company’s customers. If the Company is unable to sustain sufficient interest in its games in comparison to other forms of entertainment, including new forms, the business model may no longer be viable.
For a detailed description of the competitive environment faced by the Company, see “Item 4.6 – Competitive Conditions”.
Security and privacy breaches
Security or privacy breaches may result in an interruption of service or a reduced quality of service, which could increase the Company’s costs or result in a reduction in the use of the Company’s services by its customers. The Company’s systems may be vulnerable to physical break-ins, computer viruses, attacks by computer hackers or similar disruptive problems. If unauthorized users gain access to the Company’s databases, they may be able to steal, publish, delete or modify sensitive information that is stored or transmitted on the Company’s networks and which the Company is required by its contracts to keep confidential. A security or privacy breach could result in an interruption of service or a reduced quality of service. Confidential information internal to the Company may also be disclosed to unauthorized personnel who may use such information in a manner adverse to the Company’s interests. Hackers may attempt to “flood” the network, thereby preventing legitimate network traffic or to disrupt the network, thereby preventing access to a service or preventing a particular individual from accessing a service. The Company may therefore be required to make significant expenditures in connection with corresponding corrective or preventive measures. In addition, a security or privacy breach may harm the Company’s reputation and cause its customers to reduce their use of the Company’s services, which could harm the Company’s revenue and business prospects. In addition, the Company’s revenue may be adversely affected by un-captured usage, in the event that the Company’s system is “hacked”, resulting in transmissions that may not be detected by its billing system. Further, the increase in traffic as a result of such unauthorized “hacking” may slow or overload the Company’s transmission network, thereby adversely affecting the overall quality of services which the Company provides to its paying customers. If the Company incurs any such losses or liabilities, the Company’s operating results, financial condition, business and prospects may be adversely affected.
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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, the Company 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 the Company accurately predicts consumer demand for such product. If its future products do not achieve expected consumer acceptance or generate sufficient revenues upon introduction, the Company 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 the Company’s technologies, products or services obsolete or cause the Company 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 the Company’s revenue. There can be no assurance that the Company can improve the features, functionality, reliability and responsiveness of infrastructure. Similarly, the technologies that the Company employs may become obsolete or subject to intense competition from new technologies in the future. If the Company fails to develop, or obtain timely access to, new technologies, or if it fails to obtain the necessary licenses for the provision of services using these new technologies, the Company may lose market share, and its results of operations would be adversely affected.
Failure to license necessary third party software for use in the Company’s products and services, or failure to successfully integrate third party software, could cause delays or reductions in the Company’s sales, or errors or failures of the Company’s service
The Company licenses third party software that it incorporates into its products and services. In the future, the Company might need to license other software to enhance its products and meet evolving customer requirements. These licenses may not continue to be available on commercially reasonable terms or at all. Some of this technology could be difficult to replace once integrated. The loss of, or inability to obtain, these licenses could result in delays or reductions of the Company’s applications until it identifies, licenses and integrates or develops equivalent software, and new licenses could require the Company to pay higher royalties. If the Company is unable to successfully license and integrate third party technology, it could experience a reduction in functionality and/or errors or failures of the Company’s products, which may reduce demand for its products and services.
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Third-party licenses may expose the Company to increased risks, including risks associated with the integration of new technology, the impact of new technology integration on existing technology, open source software disclosure risks, the diversion of resources from the development of the Company’s own proprietary technology, and inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.
Proprietary protection and intellectual property disputes
Protection of the trade secrets, copyrights, trademarks, domain names and other product rights of the Company are important to its success. The Company protects its intellectual property rights by relying on trademark protection, common law rights as well as contractual restrictions. However, many of the Company’s proprietary technologies are currently unpatented nor has the Company made any applications for such intellectual property registrations and has no present intention to do so in the near future. As such, the current steps that it takes to protect its intellectual property, including contractual arrangements, may not be sufficient to prevent the misappropriation of its proprietary information or deter independent development of similar technologies by others.
Should the Company decide to register its intellectual property in one or more jurisdictions, it will be an expensive and time consuming process and there is no assurance that the Company 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 the Company being unable to successfully prevent its competitors from imitating its solutions or using some or all of its processes. Even if patents and other registered intellectual property rights were to be issued to the Company, its intellectual property rights may not be sufficiently comprehensive to prevent its competitors from developing similar competitive products and technologies.
With the Company’s acquisition of WinView, it acquired WinView’s intellectual property portfolio. WinView’s patent portfolio is an important asset to the Company and the Company’s patent strategy with respect to the WinView patent portfolio is to pursue the broadest possible patent protection of its technologies in selected jurisdictions. Litigation may be necessary to enforce the intellectual property rights of the Company. 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 the business and operating results of the Company. Moreover, due to the differences in foreign patent, trademark, copyright and other laws concerning proprietary rights, the Company’s intellectual property may not receive the same degree of protection in foreign countries as it would in Canada or the United States. The Company’s failure to possess, obtain or maintain adequate protection of its intellectual property rights for any reason could have a material adverse effect on its business, results of operations and financial condition.
The Company may also face allegations that it has infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from its competitors and former employers of the Company’s 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, the Company 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 the Company’s software and features, or develop substitutes. The Company has already had communication from trade mark trolls in this respect. At this time these actions are a nuisance rather than a quantifiable business risk.
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In addition, the Company uses open source software in its games and expects to continue to use open source software in the future. From time to time, the Company 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 the Company to purchase a costly license or require the Company to devote additional research and development resources to change its games, any of which would have a negative effect on the Company’s business and operating results.
System failures, delays and other technical problems
System failures, delays and other technical problems could harm the Company’s reputation and business, causing the Company to lose customers and expose it to customer liability. The Company may experience failures or interruptions of its systems and services, or other problems in connection with its operations as a result of, amongst other things:
| ● | damage to, or failure of, its computer software or hardware or its infrastructure and connections; | |
| ● | data processing errors by its systems; | |
| ● | computer viruses or software defects; and | |
| ● | physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events. |
If the Company cannot adequately ensure that its network services perform consistently at a high level or otherwise fail to meet its customers’ expectations:
| ● | it may experience damage to its reputation, which may adversely affect its ability to attract or retain customers who participate in online esports tournaments; | |
| ● | its operating expenses or capital expenditures may increase as a result of corrective actions that the Company must perform; or | |
| ● | one or more of its significant contracts may be terminated early, or may not be renewed. |
Transmission of User Data
The Company transmits and stores a large volume of data. The Company is subject to legislation and regulations on the collection, storage, retention, transmission, and use of user-data that it collects. The Company’s efforts to protect the personal information of its users, partners and clients may be unsuccessful due to the actions of third parties, software bugs or technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to the Company’s data, users’ data, partners’ data or 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 the Company’s terms of service or policies could damage the Company’s reputation and brands and diminish its competitive position. Moreover, affected users, clients or governmental authorities could initiate legal or regulatory action against the Company in connection with such incidents, which could cause the Company to incur significant expense and liability or result in orders or consent decrees forcing the Company to modify its business practices and remediate the effects of any such incidents of unauthorized access or use. Any of these events could have a material adverse effect on the Company’s prospects, businesses, financial condition or results of operations.
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Data collection risks
The Company partially relies on data captured by Stream Hatchet for its revenues and for assessing the performance of some of its 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 the Company’s 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.
Global economy
The business of the Company is subject to general economic conditions. Adverse changes in general economic and market conditions could adversely impact demand for the Company’s products, prices, revenue, operating costs, results of financing efforts, and the timing and extent of capital expenditures.
Foreign operational risks
A significant portion of the business and operations of the Company is conducted in foreign jurisdictions, including the United States, and Spain. As such, the Company’s 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 the control of the Company, 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 the Company’s business is conducted. The Company’s operations may also be adversely affected by laws and policies of such foreign jurisdictions affecting foreign trade, taxation and investment.
If the Company’s operations are disrupted and/or the economic integrity of its contracts is threatened for unexpected reasons, its business may be harmed. In the event of a dispute arising in connection with the Company’s operations in a foreign jurisdiction where the Company conducts or will conduct its business, the Company 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. The Company may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly, the Company’s activities in foreign jurisdictions could be substantially affected by factors beyond their control, any of which could have a material adverse effect on the Company. The Company believes that its management is sufficiently experienced to manage these risks.
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Regulation
The Company is 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 the Company’s 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. Unfavourable changes in regulations and laws could decrease demand for the Company’s events, online offering and merchandise, increase its cost of doing business or otherwise have a material adverse effect on the Company’s reputation, popularity, results of operations and financial condition.
The Company has never paid dividends and may not do so in the foreseeable future
The Company has never paid cash dividends on its Common Shares. Currently, the Company intends to retain its future earnings, if any, to fund the development and growth of its business, and does not anticipate paying any cash dividends on its Common Shares in the near future. As a result, shareholders will have to rely on capital appreciation, if any, to earn a return on investment in any Common Shares in the foreseeable future.
The market price for Common Shares has been volatile in the past, and may be subject to fluctuations in the future
The market price of the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares.
Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
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Emerging diseases, like COVID-19, may adversely affect the Company’s operations, suppliers, or customers
Emerging diseases, like COVID-19, and government actions to address them, may adversely affect the Company’s operations, suppliers, or customers. The COVID-19 pandemic continues to evolve rapidly and, as a result, it is difficult to accurately assess its continued magnitude, outcome and duration, but it could:
| ● | worsen economic conditions, which could negatively impact access to capital; | |
| ● | reduce consumer spending; | |
| ● | limit the Company’s employees from travelling which could affect the execution of the Company’s business plan given the Company is multi-jurisdictional; or | |
| ● | result in governmental regulation adversely impacting the Company’s business |
all of which could have a material adverse effect on the Company’s business, financial condition and results of operations, which could be rapid and unexpected.
| Item 5. | DIVIDENDS |
| 5.1 | Dividends |
The Company has not paid any dividends since its incorporation. Any determination to pay any future dividends will remain at the discretion of the Board and will be made based on the Company’s financial condition and other factors deemed relevant by the Board. There are currently no restrictions on the ability of the Company to pay dividends except as set out under the Company’s governing statute.
| Item 6. | DESCRIPTION OF SHARE CAPITAL |
The Company is authorized to issue an unlimited number of Common Shares and an unlimited number of preference shares (“Preference Shares”).
| 6.1 | Common Shares |
As of the date of this AIF, 15,913,210 Common Shares were issued and outstanding. The Common Shares are the only class of shares currently issued by the Company, and the only equity and voting securities of the Company. The holders of Common Shares are entitled to dividends, subject to the rights of holders of any other class of shares of the Company, if, as and when declared by the Board, to one vote per share at meetings of the shareholders of the Company and, subject to the rights of holders of any other class of shares of the Company, to share, on a pro rata basis with the other holders of Common Shares, the net assets of the Company, upon liquidation, dissolution or winding up of the Company. The Common Shares are not subject to call or assessment nor do they carry any pre-emptive or conversion rights. There are no provisions attached to such shares for redemption, purchase for cancellation, surrender or sinking or purchase funds.
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| 6.2 | Preference Shares |
As of the date hereof, no Preference Shares are issued and outstanding. Holders of Preference Shares shall not be entitled to receive notice of, or attend or vote at, any meeting of shareholders of the Company except as required by law or as provided in the special rights and restrictions attached to any series of Preference Shares. Holders of Preference Shares shall be entitled, on the distribution of assets or property of the Company on the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or on any other distribution of assets or property of the Company among its shareholders for the purpose of winding up its affairs, to receive, before any distribution or payment is made to holders as set out in the special rights and restrictions attached to the applicable series of Preference Shares. After payment to holders of Preference Shares of the amounts so payable to them, they shall not, as such, be entitled to share in any further distribution of assets or property of the Company except as specifically provided in the special rights and restrictions attached to any particular series of Preference Shares.
| 6.3 | Warrants and Finder Warrants |
As of the date of this AIF, the Company has outstanding Warrants and Finder Warrants to purchase 4,841,261 Common Shares. The following table summarizes the Warrants and Agent Options outstanding as of the date of this AIF:
| Date of Issue | Type of Warrant / Option | Number of Warrants / Options | Exercise Price (CDN$) | Expiry Date | ||||||||
| October 18, 2019 – August 31, 2021 | Common Share purchase warrant(1) | 445,982 | $ | 7.50 | July 8, 2024 | |||||||
| October 18, 2019 – August 31, 2021 | Common Share purchase warrant(1) | 401,624 | $ | 7.50 | July 25, 2024 | |||||||
| August 20, 2020 – August 31, 2021 | Common Share purchase warrant(1) | 230,800 | $ | 7.50 | August 8, 2024 | |||||||
| December 18, 2019 | Common Share purchase warrant(2) | 29,066 | $ | 27 | December 20, 2022 | |||||||
| March 20, 2020 – May 27, 2020 | Common Share purchase warrant(3) | 222,212 | $ | 13.50 | March 20 – May 27, 2023 | |||||||
| January 8, 2021 | Common Share purchase warrant(4)(5) | 1,868,787 | US$ | 15 | January 8, 2024 | |||||||
| January 22, 2021 | Common Share purchase warrant(6) | 522,898 | US$ | 15 | January 22, 2024 | |||||||
| February 24, 2021 | Common Share purchase warrant(7) | 1,058,227 | US$ | 15 | February 24, 2024 | |||||||
| February – March , 2021 | Common Share purchase warrant(8) | 49,999 | US$ | 15 | August 19, 2024 | |||||||
| March 18, 2021 | Common Share purchase warrant(9) | 11,666 | US$ | 15 | September 15, 2024 | |||||||
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Notes:
(1) Common Share purchase warrants issued on conversion of the 2019 Convertible Debentures. Each warrant is exercisable into a Common Share at an exercise price of $7.50 per share until either July 8, 2024, July 25, 2024 or August 8, 2024.
(2) Common Share purchase warrants issued under the December 18, 2019 non-brokered private placement. On December 18, 2019, the Company closed a non-brokered private placement of up to 266,666 units at a price of CDN$18.75 per unit for gross proceeds of up to CDN$5,000,000. A total of 58,133 units were issued for cash proceeds of CDN$550,000 and CDN$540,000 issued to creditors to settle amounts owing on the closing of this first tranche of the Offering. Each unit consisted of one common share of the Company and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional share of the Company for a period of 36 months from the date of issuance at a price of CDN$27.00 per share. Of the CDN$1,090,000 raised, CDN$100,000 were subscribed to by a director of the Company.
(3) Common Share purchase warrants issued under the March 20 – May 27, 2020 non-brokered private placement. On March 25, 2020, the Company announced it closed the first tranche of its non-brokered private placement of up to 444,444 units at a price of CDN$9.00 per unit for gross proceeds of up to CDN$4,000,000. Each unit consisted of one Common Share of Engine and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional Common Share of Engine for a period of 36 months from the date of issuance at a price of CDN$13.50 per share. Aggregate proceeds of CDN$500,000 were raised and 55,555 units were issued on the closing of the first tranche of the offering. On March 30, 2020, the Company announced it closed the second tranche of the offering, for aggregate gross proceeds of CDN$844,370 and 93,818 units were issued on the closing of the tranche. On March 31, 2020, the Company announced it closed an additional tranche of the offering, for aggregate gross proceeds of CDN$310,000 and 34,444 units were issued on the closing of the tranche. On May 28, 2020, the Company announced it closed the final tranche of the offering, for aggregate gross proceeds of CDN$2,344,890 and 260,609 units were issued on the closing of this final tranche.
(4) Common Share purchase warrants issued in connection with the Standby Debentures. On October 16, 2020, the Company announced that it closed a first tranche of principal amount US$1,050,000 of the first US$2,000,000 draw of a US$8,000,000 stand-by convertible debenture facility. The Standby Debentures have substantially similar terms as the 2020 Convertible Debentures, as described under Note 15 above, except the following: (i) the references therein to a minimum US$7.50 conversion price have been changed to US$8.90; and (ii) the Standby Debentures are only convertible into common shares of the Company, not units. Common Share purchase warrants issued in connection with the Debt Settlements. On January 8, 2021 the Company completed the Debt Settlements through the issuance of 1,430,186 units at a deemed price of US$7.50 per unit, with each unit consisting of a common share and three-quarters of a warrant, with each whole warrant exercisable into a common share at an exercise price of US$15 per share for a period of three years.
(5) Common Share purchase warrants issued in connection with the Debt Settlements. On January 8, 2021 the Company completed the Debt Settlements through the issuance of 1,430,186 units at a deemed price of US$7.50 per unit, with each unit consisting of a common share and three-quarters of a warrant, with each whole warrant exercisable into a common share at an exercise price of US$15 per share for a period of three years.
(6) Common Share purchase warrants issued in connection with the December 2020 Private Placement. On January 8, 2021 the Company closed the first tranche of the December 2020 Private Placement for aggregate gross proceeds of US$7,247,222.50 and 1,405,451 units were issued. The Company paid cash commissions to eligible finders totalling $284,989 and also issued the following securities as partial payment of commissions to finders: 36,948 units; and, 74,947 finders warrants, with each finder warrant exercisable into a common share at an exercise price of US$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 US$30,000,000, and (iii) the closing price of the common shares on NASDAQ is US$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.
(7) Common Share purchase warrants issued in connection with the second tranche of the December 2020 Private Placement. On January 22, 2021 the Company closed the second tranche of the December 2020 Private Placement for aggregate gross proceeds of US$10,540,883 and 966,296 units were issued. The Company paid cash commissions to eligible finders totalling $205,652.05 and also issued the following securities as partial payment of commissions to finders: 12,752 units; and, 40,040 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.
(8) Common Share purchase warrants issued in connection with the final tranche of the December 2020 Private Placement. On January 22, 2021 the Company closed the second tranche of the December 2020 Private Placement for aggregate gross proceeds of US$10,540,883 and 966,296 units were issued. The Company paid cash commissions to eligible finders totalling $205,652.05 and also issued the following securities as partial payment of commissions to finders: 12,752 units; and, 40,040 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.
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(9) Common Share purchase warrants issued in connection with the following: On August 19, 2020, Engine closed a first tranche of a non-brokered private placement of convertible debentures in the amount of US$5,750,000. The 2020 Convertible Debentures will mature 24 months from the date of issuance and bear interest at a rate of 5% per annum (subject to the following adjustments), payable on maturity. At the Company’s option, interest under the 2020 Convertible Debentures is payable in kind in Engine 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 Convertible 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 Convertible Debentures holders may convert all or a portion of the principal amount of the 2020 Convertible Debentures into units of the Company at a price equal to the lesser of (a) US$11.25 per unit, and (b) if such conversion occurs after a public offering of securities by the Company, a 15% discount to the public offering price, provided that such conversion price shall not be less than US$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 of the Company and the exercise of warrants of the Company to be issued pursuant to the conversion of the 2020 Convertible Debentures, holders of 2020 Convertible Debentures may convert such convertible debentures into units at US$7.50 per unit. Each unit is comprised of one Common Shares and one-half of one warrant, with each warrant exercisable into one Common Shares of the Company at an exercise price of US$15.00 per share for a period of three years from the issuance of the 2020 Convertible Debentures. Under certain circumstances, the Company shall be entitled to call for the exercise of any outstanding warrants in the event. On September 15, 2020, Engine closed the final tranche of 2020 Convertible Debentures in the amount of US$1,901,393. .
| 6.4 | Awards |
The Company has adopted an omnibus equity incentive plan (the “Omnibus Plan”) in accordance with the policies of the TSXV which provides that the Board may from time to time, in its discretion and in accordance with TSXV requirements, grant to directors, officers, employees and consultants of the Company and/or its affiliates (“Eligible Participants”), Common Share purchase options (“Options”), restricted share units (“RSUs”), and deferred share units (“DSUs”, and collectively with the Options and RSUs, the “Awards”).
Under the policies of the TSXV, RSUs and DSUs are subject to a 1-year vesting period except in certain circumstances. Further, Directors may grant Awards with vesting periods as the circumstances require. The Omnibus Plan authorizes the Board to grant Awards to Eligible Participants on the following terms:
| 1. | Under the Omnibus Plan, subject to Article 7, the total number of Common Shares reserved and available for grant and issuance pursuant to Options shall not exceed 10% of the issued and outstanding Common Shares. |
| 2. | For so long as the Company is listed on the TSXV or on another exchange that 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 and DSUs together shall be an aggregate of 1,548,174 Common Shares. |
| 3. | The aggregate number of Common Shares issuable to Insiders at any time, under all of the Corporation’s Share Compensation Arrangements, shall not exceed 10% of the Corporation’s issued and outstanding Common Shares at any point in time, unless the Corporation has obtained disinterested shareholder approval as required by the policies of the TSXV. |
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| 4. | The aggregate number of Common Shares for which Awards may be issued to any one participant in any 12-month period shall not exceed 5% of the outstanding Common Shares, unless the Company obtains disinterested shareholder approval as required by the policies of the TSXV. The aggregate number of Common Shares for which Awards may be issued to any one consultant within any 12-month period shall not exceed 2% of the outstanding Common Shares, calculated on the date an Award is granted to the consultant. The aggregate number of Common Shares for which Options may be issued to any Investor Relations Service Provider (as defined by the TSXV) within any 12-month period shall not exceed 2% of the outstanding Shares, calculated on the date an Option is granted to such persons. Investor Relations Service Providers are not eligible to receive any Award of RSUs or DSUs. |
| 5. | Unless disinterested shareholder approval as required by the policies of the TSXV is obtained, and subject to the adjustment pursuant to provisions of Article 7 of the Omnibus Plan, the aggregate number of Shares (i) issued to Insiders under the Plan or any other proposed or established Share Compensation Arrangement within any 12-month period and (ii) issuable to Insiders at any time under the Plan or any other proposed or established Share Compensation Arrangement, shall in each case not exceed ten percent (10%) of the total issued and outstanding Shares of the Corporation (on a non-diluted basis) from time to time. |
| 6. | The Board shall not make grants of Awards to Directors if, after giving effect to such grants of Awards, the aggregate number of Shares issuable to Directors, at the time of such grant, under all of the Corporation’s Share Compensation Arrangements would exceed 2% of the issued and outstanding Common Shares on a non-diluted basis, provided that such limit shall not apply to (i) Awards taken in lieu of any cash retainer or meeting director fees, and (ii) a one-time initial grant to a Director upon such Director joining the Board. |
| 7. | All Awards granted under the Omnibus Plan are non-transferable and non-assignable in any manner, including assignment, except as may be permitted by TSXV policies. |
The Omnibus Plan was approved by shareholders of the Company at a meeting held on November 23, 2022, which amends and restates the equity incentive plan which was previously established as of October 6, 2021. As of August 31, 2022, there were an aggregate of 1,143,182 Options, nil DSUs, and 1,196,211 RSUs outstanding under the existing Omnibus Plan.
| 6.5 | Debt Securities |
As of the date of this AIF, the company had the following debt securities outstanding:
| Type of Debt Security | Amount Outstanding as of the Date of this AIF | |
| 2020 Convertible Debentures(1) | US$250,000 | |
| EB Convertible Debenture(2) | US$5,000,000 | |
| Three Curve Capital Convertible Debenture(3) | US$1,250,000 |
Notes:
(1) On August 19, 2020, Engine closed a first tranche of a non-brokered private placement of convertible debentures in the amount of US$5,750,000. The 2020 Convertible Debentures will mature 24 months from the date of issuance and bear interest at a rate of 5% per annum (subject to the following adjustments), payable on maturity. At the Company’s option, interest under the 2020 Convertible Debentures is payable in kind in Engine 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 Convertible 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 Convertible Debentures holders may convert all or a portion of the principal amount of the 2020 Convertible Debentures into units of the Company at a price equal to the lesser of (a) US$11.25 per unit, and (b) if such conversion occurs after a public offering of securities by the Company, a 15% discount to the public offering price, provided that such conversion price shall not be less than US$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 of the Company and the exercise of warrants of the Company to be issued pursuant to the conversion of the 2020 Convertible Debentures, holders of 2020 Convertible Debentures may convert such convertible debentures into units at US$7.50 per unit. Each unit is comprised of one Common Shares and one-half of one warrant, with each warrant exercisable into one Common Shares of the Company at an exercise price of US$15.00 per share for a period of three years from the issuance of the 2020 Convertible Debentures. Under certain circumstances, the Company shall be entitled to call for the exercise of any outstanding warrants in the event. On September 15, 2020, Engine closed the final tranche of 2020 Convertible Debentures in the amount of US$1,901,393.
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(2) On December 2, 2020, the Company announced that its wholly-owned subsidiaries Frankly Media LLC and Frankly have amended the existing secured credit facility with arm’s length lender EB Lender, in connection with the advance of an additional $1,000,000 under the EB Loan, which is convertible at the option of the EB Lender, at a conversion price per share of $11.25. The credit limit under the EB Loan of $5 million is now fully drawn. In connection with the amendment, the maturity date of the EB Loan has been extended from January 5, 2021 until January 5, 2022. Additionally, the Company has guaranteed the obligations under the EB Loan and has granted a security interest in favour of the EB Lender over the assets of the Company. In consideration of the extension of the maturity date, the Company has agreed to issue to the EB Lender an aggregate of 6,666 Common Shares and an amendment fee of $100,000 which forms part of the outstanding principal under the EB Loan. The Common Shares issuable will be subject to a hold period expiring four months and a day following the date of issuance, as well as restrictions on transfer under applicable securities laws. On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a secured 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. The convertible debenture is secured by the Company’s real and personal property, fixtures, leasehold improvements, trade fixtures, equipment, and other personal property as well as all general intangibles relating to or arising from the personal property.
(3) On September 22, 2022, the Company announced it had extended convertible debentures that were due to expire in October and November 2022 with an aggregate principal amount of US$1,250,000. The original convertible debentures had an annual interest rate of 10% per annum and a conversion price of US$8.90 per share. In place of the expiring convertible debentures, the Company has issued a new convertible debenture with an aggregate principal amount of US$1,250,000 which expires on August 31, 2025, carries an annual interest rate of 7% per annum and is convertible into common shares of the Company at a conversion price of US$1.10 per share.
| Item 7. | MARKET FOR SECURITIES |
| 7.1 | Trading Price and Volume |
Common Shares
The Common Shares are listed and posted for trading on the TSXV and on the NASDAQ under the trading symbol “GAME”. The following table sets forth, on a monthly basis, the reported price range (which are not necessarily the closing prices) and the aggregate volume of trading of the Common Shares on the TSXV and the NASDAQ, respectively, for the most recently completed financial year ended August 31, 2022 as well as the periods up to November 25, 2022.
| TSXV (prices in Canadian dollars) | NASDAQ (prices in U.S. dollars) | |||||||||||||||
| Date | Price Range (high - low) | Total Volume | Price Range (high - low) | Total Volume | ||||||||||||
| November 1 – 25, 2022 | $0.95 - $0.79 | 52,333 | $0.72 - $0.58 | 714,000 | ||||||||||||
| October 2022 | $1.14 - $0.79 | 52,073 | $0.90 - $0.56 | 1,040,915 | ||||||||||||
| September 2022 | $0.93 - $0.70 | 83,015 | $0.77 - $0.51 | 820,435 | ||||||||||||
| August 2022 | $1.37 - $0.93 | 86,513 | $1.11 - $0.70 | 763,420 | ||||||||||||
| July 2022 | $1.70 - $1.10 | 70,057 | $1.39 - $0.80 | 1,370,642 | ||||||||||||
| June 2022 | $1.25 - $0.95 | 81,442 | $1.05 - $0.73 | 619,413 | ||||||||||||
| May 2022 | $1.71 - $1.05 | 65,649 | $1.39 - $0.78 | 888,629 | ||||||||||||
| April 2022 | $2.80 - $1.40 | 100,869 | $2.26 - $1.08 | 1,342,125 | ||||||||||||
| March 2022 | $3.67 - $2.13 | 283,694 | $2.99 - $1.52 | 1,518,524 | ||||||||||||
| February 2022 | $4.25 - $3.10 | 202,742 | $3.36 - $2.34 | 833,715 | ||||||||||||
| January 2022 | $4.12 - $2.79 | 327,310 | $3.30 - $2.18 | 2,666,820 | ||||||||||||
| December 2021 | $5.75 - $3.62 | 247,116 | $4.55 - $2.75 | 6,451,920 | ||||||||||||
| November 2021 | $5.38 – $3.81 | 401,108 | $4.30 – $2.90 | 26,875,390 | ||||||||||||
| October 2021 | $5.98 - $4.49 | 401,125 | $4.79 – $3.65 | 2,361,116 | ||||||||||||
| September 2021 | $8.82 - $4.80 | 643,831 | $7.00 – $3.78 | 5,696,274 | ||||||||||||
The closing price of the Common Shares on the TSXV on November 25, 2022 was CDN$0.81. The closing price of the Common Shares on the NASDAQ on November 25, 2022 was US$0.63.
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| 7.2 | Prior Sales |
During the most recently completed financial year, and as of the date of this AIF, the Company has issued the following securities that were not listed on an exchange or marketplace:
| Types of Security | Date of Issue | Number of Securities/ Principal Amount | Exercise Price | Expiry Date | ||||
| Common Shares(1) | July 2, 2021 | 1,951 | N/A | N/A | ||||
| Common Shares(2) | August 13, 2021 | 117,321 | $8.01 | N/A | ||||
| RSUs(3) | October 29, 2021 | 100,626 | N/A | N/A | ||||
| Common Shares(4) | November 5, 2021 | 78,690 | US$3.76 | N/A | ||||
| Common Shares(5) | November 25, 2021 | 12,945 | US$3.39 | N/A | ||||
| Common Shares(6) | March 21, 2022 | 23,985 | US$11.70 | N/A | ||||
| RSUs(7) | May 26, 2022 | 966,691 | N/A | N/A | ||||
| Common Shares(8) | July 4, 2022 | 57,029 | US$11.69 | N/A | ||||
| RSUs(9) | July 15, 2022 | 11,719 | N/A | N/A | ||||
| RSUs(10) | August 10, 2022 | 7,346 | N/A | N/A | ||||
| Common Shares(11) | August 31, 2022 | 87,963 | US$0.75 | N/A | ||||
| Common Shares(12) | November 8, 2022 | 108,269 | US$0.69 | N/A | ||||
| Common Shares(13) | November 25, 2022 | 10,164 | US$0.63 | N/A |
Notes:
(1) On July 2, 2021 the Company issued 1,951 common shares to Ryan Summers pursuant to the vesting of RSUs.
(2) On August 13, 2021 the Company issued a total of 117, 321 common shares pursuant to the vesting of RSUs to the following individuals: Bryan Reyhani (10,986); Hank Ratner (10,889); Tom Rogers (37,698); Lou Schwartz (39,683); Mike Munoz (10,582); Larry Rutkowski (6,398); Lori Conkling (523); Rudolph Cline-Thomas (562) pursuant to the vesting of RSUs at an exercise price of $8.01.
(3) October 29, 2021, the Company granted 100,626 to members of the board of directors pursuant to the Company’s incentive plan. The fair value of the RSUs will be recognized as share-based compensation expense over the vesting period, which is approximately ten months.
(4) On November 5, 2021 the Company issued a total of 78,690 common shares to the following individuals: Eduard Montserrat (9,827); Eric Vaughn (13,985); John Wilk (12,353); Alan Pavlish (8,391); Bobby Baird (2,098); Jake Phillips (2,913); Jason Rogers (5,034); Albert Alemany (3,003); Adam Hynes (6,293); Omar Karim (4,195); Ryan Summers (1,277); Chuck Giddens (1,748); Benj Smith (2,797); David Nadal (1,965); Jean-Yves Geffroy (1,692); Brian Sewell (1,119) at an exercise price of US$3.76.
(5) On November 25, 2021, the Company issued a total of 12,945 common shares pursuant to the vesting of RSUs to the following individuals: Omar Karim (2,778); John Wilk (2,778); Benj Smith (2,778); Mike Munoz (2,778); and Darrin Patrick (1,833) at an exercise price of US$3.39.
(6) On March 21, 2022 the Company issued a total of 23,985 common shares in connection with the acquisition of Sideqik, Inc. for a total of US$280,086.30. The common shares were issued to the following individuals: Nancy Rothman (4,275); Chloe McQuilian (3,420); Zubair Hossain (6,412); Simon Cowart (2,137); Michael Farell (1,710); Robert Fogarty (1,710); Daniel Powell (4,275) at an exercise price of US$11.70.
(7) On May 26, 2022, the Company granted 966,691 to employees and members of the board of directors pursuant to the Company’s incentive plan. The fair value of the RSUs will be recognized as share-based compensation expense over the vesting period, which is approximately one to three years.
(8) On July 4, 2022 the Company issued a total of 57,029 common shares to the following individuals: Tremain McGlown (14,257); and Jeremy Haile (42,772) at an exercise price of US$11.69.
(9) On July 15, 2022, the Company granted 11,719 to a member of the board of directors pursuant to the Company’s incentive plan. The fair value of the RSUs will be recognized as share-based compensation expense over the vesting period, which is approximately one year.
(10) On August 10, 2022, the Company granted 7,346 to a member of the board of directors pursuant to the Company’s incentive plan. The fair value of the RSUs will be recognized as share-based compensation expense over the vesting period, which is approximately one year.
(11) On August 31, 2022 the Company issued a total of 87,963 common shares pursuant to the vesting of RSUs to the following individuals: Tom Rogers (37,698); Lou Schwartz (39,683); and Mike Munoz (10,582) at an exercise price of US$0.75.
(12) On November 9, 2022 the Company issued a total of 108,269 common shares pursuant to the vesting of RSUs to the following individuals: Larry Rutkowski (19,878); Bryan Reyhani (2,793); Bryan Reyhani (26,340); Rudolph Cline-Thomas (17,038); Edward Montserrat (9,872); John Wilk (12,353); Jake Phillips (2,913); Jason Rogers (5,034); Albert Alemany (3,003); Adam Hynes (6,293); and Benj Smith (2,797) pursuant to the vesting of RSUs at an exercise price of US$0.69.
(13) On November 25, 2022 the Company issued a total of 10,164 common shares pursuant to the vesting of RSUs to the following individuals: Darrin Patrick (1,833); John Wilk (2,777); Mike Munoz (2,777) and Benj Smith (2,777) at an exercise price of US$0.63.
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| Item 8. | DIRECTORS AND executive OFFICERS |
| 8.1 | Name, Occupation and Security Holding |
At present, the directors of the Company are elected at each annual general meeting and hold office until the next annual general meeting or until his or her successor is appointed, unless his or her office is earlier vacated in accordance with the BCBCA and the articles and by-laws of the Company.
The following table and the notes thereto state the names of all directors and executive officers, all other positions or offices with the Company and its subsidiaries now held by them, their principal occupations or employment, the year in which they became directors and/or executive officers of the Company, the approximate number of Common Shares beneficially owned, directly or indirectly, by each of them, or over which they exert control or direction, and the number of options to acquire Common Shares held as of the date hereof.
Name Province/State Country of Residence and Position(s) with the Company(1) | Principal
Occupation Business or Employment for Last Five Years(1) | Periods
Served as a Director or Officer (1) | Number
of Common Shares owned, directly or indirectly or controlled or directed(1)(2) | |||||
| Tom
Rogers New York, USA Chairman and Director | Executive Chairman and Director of the Company since May 2020. Chairman and CEO of TRget Media, LLC, a media investment and operations advisory firm since June 2003. | May 2020 | 259,535 | |||||
| Louis
Schwartz(6) Georgia, USA Chief Executive Officer and Director | Co-CEO of the Company from May 2020 to November 2020, CEO of the Company since November 2020. Director of the Company since July 2020. | July 2020 | 263,126 | |||||
| Gregory
Raifman(3)(4)(5), Kamas, UT, USA Director | Director of the Company. The former President of Nexstar Digital, LLC, a wholly owned subsidiary of Nexstar Media Group, Inc. [NASDAQ: NXST]. | July 2022 | 0 | |||||
| Lawrence
Rutkowski(3)(4)(5)(6) California, USA Director | Director of the Company. President & owner of L&S Investments, L.L.C. Director of Stanley M. Proctor Co. | January 2021 | 29,926 | |||||
| Rudolph
Cline-Thomas(3) New York, New York, USA Director | Director of the Company. Founder and Managing Partner of venture fund MASTRY. Founder of commercial real estate investment firm Mastry Properties. Serves on Salesforce Global Advisory Board (NYSE: CRM). Strategic advisor to Gucci. Board advisor for Jumia Technologies (NYSE: JMIA) and Zuora (NYSE: ZUO). | July 2021 | 17,600 | |||||
| Stuart
Porter Boston, MA, USA Director | Director of the Company. Founder of Denham Capital and is its Chief Executive Officer and Chief Investment Officer. | January 2022 | 1,546,400 | |||||
Notes:
| (1) | Information has been furnished by the directors and executive officers individually or from www.sedi.ca. | |
| (2) | The information as to shares beneficially owned, directly or indirectly, or over which control or direction is exercised, is based upon information furnished to the Company by the respective directors and executive officers as at the date hereof and does not include any convertible securities held by such person. | |
| (3) | Member of the Audit Committee. | |
| (4) | Member of the Nominating and Governance Committee. | |
| (5) | Member of the Compensation Committee. | |
| (6) | Member of the Patent Committee. |
The directors and executive officers of the Company listed above, as a group, beneficially owned, control or direct, directly or indirectly, 2,116,587 Common Shares as of the date hereof.
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| 8.2 | Orders, Penalties and Bankruptcies |
To the knowledge of the Company, except as disclosed hereinafter, as of the date hereof:
| (a) | no director or executive officer of the Company is, or has been, within 10 years before the date hereof, a director, chief executive officer or chief financial officer of any company (including the Company) that: |
| (i) | was subject to an order that was issued while the proposed director was acting in the capacity as director, chief executive officer or chief financial officer, or | |
| (ii) | was subject to an order that was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; |
| (b) | no director or executive officer of the Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company: |
| (i) | is, or has been, within 10 years before the date hereof, a director or executive officer of any company (including the Company) that, while such director or executive officer was acting in that capacity, or within a year of such director or executive officer ceased to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or | |
| (ii) | has, within ten years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangements or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of such director, executive officer or shareholder. |
For the purposes of the above section (a), the term “order” means
| (a) | a cease trade order; | |
| (b) | an order similar to a cease trade order; or | |
| (c) | an order that denied the relevant company access to any exemption under securities legislation, |
that was in effect for a period of more than 30 consecutive days.
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To the knowledge of the Company, as of the date hereof, no director, executive officer or shareholder holding a sufficient number of securities of the Company to materially affect the control of the Company has been subject to:
| (a) | any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or | |
| (b) | any other penalties or sanctions imposed by a court or regulatory body. |
June 2020 Cease Trade Order
On June 22, 2020, the OSC issued a temporary cease trade order against the Company for failure to file its second quarter interim financial statements for the six-month period ended February 29, 2020, the related management’s discussion and analysis and certificates of its CEO and CFO (the “Q2 Filings”). On July 8, 2020, the Company filed the Q2 Filings. The OSC lifted the cease trade order on July 10, 2020. The Company was reinstated for trading on the TSXV and the Common Shares resumed trading on July 27, 2020. At the time, Bryan Reyhani, Steven Zenz, Louis Schwartz, Tom Rogers and Michael Munoz were directors or officers of the Company.
| 8.3 | Audit Committee Disclosure |
National Instrument 52-110 of the Canadian Securities Administrators (“NI 52-110”) requires the Company to disclose annually in its AIF certain information concerning the constitution of its Audit Committee and its relationship with its independent auditor.
The Audit Committee Charter
The Board is responsible for reviewing and approving the unaudited interim financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities. The Audit Committee assists the Board in fulfilling this responsibility. The Audit Committee meets with management to review the financial reporting process and the unaudited interim financial statements together with other financial information of the Company. The Audit Committee reports its findings to the Board for its consideration in approving the unaudited interim financial statements together with other financial information of the Company for issuance to the shareholders.
The Audit Committee has the general responsibility to review and make recommendations to the Board on the approval of the Company’s annual and interim financial statements, the Management Discussion and Analysis and the other financial information or disclosure of the Company. More particularly, it has the mandate to:
| (i) | oversee all the aspects pertaining to the process of reporting and divulging financial information, the internal controls and the insurance coverage of the Company; |
| (ii) | oversee the implementation of the Company’s rules and policies pertaining to financial information and internal controls and management of financial risks and to ensure that the certifications process of annual and interim financial statements is conformed with the applicable regulations; and |
| (iii) | evaluate and supervise the risk control program and review all related party transactions. |
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The Audit Committee ensures that the external auditors are independent from management. The Audit Committee reviews the work of outside auditors, evaluates their performance, evaluates their remuneration and makes recommendations to the Board. The Audit Committee also authorizes non-related audit work. A copy of the Charter of the Audit Committee is appended hereto as Schedule “A”.
Composition of the Audit Committee
The Audit Committee is currently comprised of the following members of the Board:
| Name | Position | Independent(1) | Financial Literacy(1) | |||
| Lawrence Rutkowski(2) | Director | Yes | Financially literate | |||
| Gregory Raifman(3) | Director | Yes | Financially literate | |||
| Rudolph Cline-Thomas | Director | Yes | Financially literate |
Notes:
| (1) | Terms have their respective meanings ascribed in NI 52-110. |
| (2) | Chairman of the Audit Committee. |
| (3) | Effective April 27, 2022, Hank Ratner resigned as a director of the Company. On July 20, 2022, he was replaced by Gregory Raifman, who joined the Company’s Audit Committee. |
Relevant Education and Experience
The following table describes the education and experience of each Audit Committee member that is relevant to the performance of his responsibilities as an Audit Committee member:
| Lawrence Rutkowski | Lawrence R. Rutkowski, is an accomplished senior executive of major corporations with more than 30 years of experience spanning finance, media, retail, private equity, online publishing, and technology. Leveraging extensive experience identifying strategic global opportunities and implementing international expansions, Mr. Rutkowski is a valuable asset for a company requiring advisory related to international operations, accounting, forecasting, internal controls, or financial analysis. His broad areas of expertise include strategic planning, managerial finance, debt financing, private equity, M&A, and investor relations. Mr. Rutkowski is a chief financial officer who leads management information system strategies, navigates U.S. Securities and Exchange Commission (“SEC”) filings, and drives M&A activities (a leader on over 100 business transactions). Currently, Mr. Rutkowski is an esteemed corporate advisor and board member of several corporations. Since December 2013, Mr. Rutkowski has served a member of the board of the Stanley M. Proctor Company in Twinsburg, OH. He has also been a key corporate advisor to the chief executive officers of boards of directors of Goal Structured Solutions in San Diego, CA and Logic Source in Norwalk, CT.
Throughout his executive career, Mr. Rutkowski has held leadership positions with PETCO Animal Supplies, Inc., Warnaco, Inc., Primedia, NBC/General Electric, The Walt Disney Company, and NCR. At each of these companies, he was instrumental in enhancing their strategic planning and process accountability. He has been responsible for implementing turnaround plans that resulted in significant revenue growth, leveraging digital internet platforms to drive sales and market share, and leading a major company from bankruptcy to profitability.
Mr. Rutkowski has directed turnarounds resulting in increased stock price by more than 700% and a doubling of employees, in addition to over 100 strategic deal and business transactions. In addition, Mr. Rutkowski has been a chief financial officer to public companies listed on the NASDAQ and the New York Stock Exchange (“NYSE”). He is well-versed in managing SEC reporting matters, along with working with major investment banks and other banking institutions. He also has worked closely with the largest U.S. private equity firms. Along with extensive experience with various consumer-facing channels, such as media, digital content, publishing, consumer packaged goods, and retail, his background also includes e-commerce and omni-channel expertise.
An industry leader, Mr. Rutkowski specializes in leading enterprises through international expansions and developing new sales opportunities. At Warnaco, he led the expansion of a domestic company to a global company.
As a result of these business transactions, new revenues increased significantly and facilitated the increase in international sales to over 35% of the business. While at the Walt Disney Company, Mr. Rutkowski was instrumental in the launch/acquisition of animation studios around the world, developed international media distribution channels, and led expansions throughout Asia. At PETCO Animal Supplies, Inc., he developed an austerity program reducing fixed expenses by more than USD$60 million per year, led an acquisition of a USD$225 million e-commerce platform, and facilitated expansion plans in Mexico. Mr. Rutkowski attained his master in business administration degree from Michigan State University and his literature, science and arts/education degrees from the University of Michigan. |
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Gregory Raifman
|
Mr. Raifman has been a director of the Board since July 2022. Mr. Raifman is a nearly four-decade, Internet industry veteran with a focus on Technology and Internet, Web Services and marketplaces, and data analysis and software platforms. Most recently, Mr. Raifman was President of Nexstar Digital, LLC, a wholly owned subsidiary of Nexstar Media Group, Inc. [NASDAQ: NXST], the largest broadcast company in the United States.
Previously, Mr. Raifman was President and a member of the board of directors of Rubicon Project, Inc., [NYSE: “RUBI’], an advertising technology company now known as Magnite, Inc. [NYSE: “MGNI”]. While at Rubicon Project, Mr. Raifman served on several boards of directors, including the Mobile Marketing Association, IAB’s Trustworthy Accountability Group [TAG] and Advertising Women of New York.
Before Rubicon, Mr. Raifman acted as the Executive Chairman of LiveRail, Inc., a video ad exchange and real-time bidding company based in San Francisco and helped management develop the strategy to pivot LiveRail from a video serving company to a video exchange that was ultimately acquired by Facebook for $500 million.
Additionally, Mr. Raifman founded Dragon Media Online, Inc., a performance-based online media company that owns “Careers.org”, one of the leading career advancement sites. Prior to founding Dragon Media Online, Mr. Raifman founded and served as the Chairman, CEO & President of Mediaplex, Inc. (NASDAQ: “MPLX”). Under his watch, Mediaplex developed from inception to a publicly traded global advertising technology company valued at over $4 billion in less than four years. Mediaplex eventually merged with ValueClick.
Prior to Mediaplex, Mr. Raifman founded PointBreak Ventures, LLC, a venture capital firm that founded or invested in several internet pioneers, including GlobalCast, TimeShift, Internet Extra Corporation, MindSource, Sandpiper Networks, Good Technology, and The Internet Mall/SHOPNOW.
| |
| Rudolph Cline-Thomas | Mr. Cline-Thomas has served as director of the Board since July 2021. He is the Founder and Managing Partner of Mastry, a multistage venture fund, which counts world-class athletes, top CEOs, and influencers as limited partners to assist in creating top-tier platform-building opportunities. Mastry has made early investments in more than 80 companies including Robinhood, Marqeta, Grab, Dapper Labs, Allbirds, Uber, PagerDuty, Zoom, Cloudflare, Jumia, Qualtrics, Zuora, Hippo, HIMS, Datadog, GOAT, and Klarna. |
| 39 |
|
In 2021, Mr. Cline-Thomas launched commercial real estate investment firm Mastry Properties, a division of Mastry, to invest in developments that seek to empower the communities in which they are located. The first portfolio investment is a $1 billion joint venture with Tishman Speyer to develop the first phase of the Harvard Enterprise Research Campus (ERC), located in Allston, Massachusetts. Harvard ERC is a 900,000-square-foot future hub of innovation comprising a science lab, apartment units, hotel, and a conference center.
Leveraging his deep relationships in the worlds of sports and entertainment, Mr. Cline-Thomas was the mastermind and Executive Producer of the 2021 Sports Emmy-nominated “The Scheme,” HBO’s riveting look at the underbelly of college basketball. The revealing and no-holds-barred documentary focused on the federal government’s three-year investigation into college basketball corruption.
In 2017, Mr. Cline-Thomas founded The Players Technology Summit, which brings together leaders in the technology, venture capital, and sports communities to discuss tech investing, trends, partnerships, and future sports/tech initiatives.
Mr. Cline-Thomas serves on the Salesforce Global Advisory Board (NYSE: CRM). Mr. Cline-Thomas is a strategic advisor to Gucci, and a board advisor for Jumia Technologies (NYSE: JMIA) and Zuora (NYSE: ZUO). He also sits on the advisory board of Global Communities and is a member of the board of trustees for Providence College, where he earned his college degree. |
Audit Committee Oversight
At no time since the commencement of the financial year ended August 31, 2022 was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the Board.
Pre-Approval Policies and Procedures
The Audit Committee has not adopted specific policies and procedures for the engagement of non-audit services.
| 40 |
External Auditor Service Fees
Aggregate fees paid to the Auditor during the financial years ended August 31, 2022 and 2021 were as follows:
| 2022 Fee Amount ($) | 2021 Fee Amount ($) | |||||||
| Audit Fees(1) | $ | 533,665 | $ | 552,091 | ||||
| Audit-Related Fees(2) | Nil | Nil | ||||||
| Tax Fees(3) | Nil | Nil | ||||||
| All Other Fees(4) | Nil | Nil | ||||||
| Total: | $ | 533,665 | $ | 552,091 | ||||
Notes:
| (1) | “Audit fees” include fees rendered by the Company’s external auditor for professional services necessary to perform the annual audit and any quarterly reviews of the Company’s financial statements. This includes fees for the review of tax provisions and for accounting consultations on matters reflected in the financial statements. |
| (2) | “Audit-related fees” include fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and that are not included in the “Audit Fees” category. |
| (3) | “Tax fees” include fees for professional services rendered by the Company’s external auditor for tax compliance, tax advice and tax planning. |
| (4) | “All other fees” include fees for products and services provided by the Company’s external auditor, other than services reported under the table headings “Audit Fees”, “Audit-Related Fees” or “Tax Fees”. |
| 8.4 | Conflicts of Interest |
In the event conflicts of interest arise at a meeting of the Board, a director who has such a conflict will declare the conflict and abstain from voting. In appropriate cases, the Company will establish a special committee of independent non-executive directors (drawn from the majority of its members who must at all times be “independent” within the meaning of NI 52-110) to review a matter in which one or more directors or management may have a conflict.
Except as disclosed in this AIF, to the best of the Company’s knowledge, there are no known existing or potential material conflicts of interest between the Company or any subsidiary of the Company and any director or officer of the Company or any subsidiary of the Company, except that certain of the directors of the Company serve as directors and officers of other companies and it is therefore possible that a conflict may arise between their duties as a director or officer of the Company and their duties as a director or officer of such other companies. Where such conflicts arise, they will be addressed as indicated above.
| Item 9. | INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS |
| 9.1 | Interest of Management and Others in Material Transactions |
No director or executive officer of the Company, or a person or company that beneficially owns, or controls or directs, directly or indirectly, more than 10 percent of the Common Shares, or any associate or affiliate of any of the aforementioned persons or companies, has any material interest, direct or indirect, in any transaction which has occurred within the financial years ended August 31, 2022 and 2021 or during the current year that has materially affected or is reasonably expected to materially affect the Company or any of its subsidiaries.
| 41 |
| Item 10. | TRANSFER AGENT AND REGISTRAR |
| 10.1 | Transfer Agents and Registrar |
The Company’s current transfer agent and registrar is Computershare Trust Company of Canada, 100 University Avenue, 8th Floor, Toronto, Ontario M5J 2Y1.
| Item 11. | MATERIAL CONTRACTS |
| 11.1 | Material Contracts |
Except as disclosed herein and other than contracts entered into in the ordinary course of business, there have been no material contracts entered into by the Company within the most recently completed financial year, or before the most recently completed financial year that are still in effect.
| Item 12. | Interests of Experts |
| 12.1 | Interests of Experts |
There is no person or company whose profession or business gives authority to a statement made by such person or company and who is named as having prepared or certified a statement, report or valuation described or included in a filing, or referred to in a filing, made under National Instrument 51-102 by the Company during, or related to, the Company’s most recently completed financial year other than Baker Tilly WM LLP, the Company’s auditors for the most recently completed financial year. Baker Tilly WM LLP are independent in accordance with the ethical requirements that are relevant to audits of financial statements in Canada.
In addition, none of the aforementioned persons or companies, nor any director, officer or employee of any of the aforementioned persons or companies, is or is expected to be elected, appointed or employed as a director, officer or employee of the Company or of any associate or affiliate of the Company. Neither Baker Tilly WM LLP nor its partners or associates beneficially own, directly or indirectly, any of the outstanding Common Shares of the Company.
| Item 13. | ADDITIONAL INFORMATION |
| 13.1 | Additional Information |
Additional financial information is provided in the Company’s consolidated financial statements and management discussion and analysis for the financial years ended August 31, 2022 and 2021, and additional information relating to the Company is on SEDAR at www.sedar.com.
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SCHEDULE “A”
ENGINE
GAMING AND MEDIA, INC.
AUDIT COMMITTEE CHARTER
June 11, 2020
NAME
There shall be a committee of the board of directors (the “Board”) of Engine Gaming and Media, Inc. (the “Company”) known as the “Audit Committee”.
PURPOSE OF AUDIT COMMITTEE
The Audit Committee has been established to assist the Board in fulfilling its oversight responsibilities with respect to the following principal areas:
| (a) | the Company’s external audit function; including the qualifications, independence, appointment and oversight of the work of the external auditors; | |
| (b) | the Company’s accounting and financial reporting requirements; | |
| (c) | the Company’s reporting of financial information to the public; | |
| (d) | the Company’s compliance with law and regulatory requirements; | |
| (e) | the Company’s risks and risk management policies; | |
| (f) | the Company’s system of internal controls and management information systems; and | |
| (g) | such other functions as are delegated to it by the Board. |
Specifically, with respect to the Company’s external audit function, the Audit Committee assists the Board in fulfilling its oversight responsibilities relating to: the quality and integrity of the Company’s financial statements; the independent auditors’ qualifications; and the performance of the Company’s independent auditors.
MEMBERSHIP
The Audit Committee shall consist of as many members as the Board shall determine but, in any event not fewer than three directors appointed by the Board. Each member of the Audit Committee shall be “independent” (as such term is defined under applicable laws and in the rules and regulations of all exchanges on which the securities of the Company are listed for trading) and continue to be a member until a successor is appointed, unless the member resigns, is removed or ceases to be a director of the Company. The Board may fill a vacancy that occurs in the Audit Committee at any time.
| A-1 |
Members of the Audit Committee shall be selected based upon the following and in accordance with applicable laws, rules and regulations:
| (a) | Financially Literate. Each member shall be financially literate. For these purposes, an individual is “financially literate” if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements. At least one member of the Audit Committee shall have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. | |
| (b) | No Participation in Preparation of Financial Statements. No member can have participated in the preparation of the Company’s, or any of its subsidiaries’, financial statements at any time during the past three years. |
CHAIR AND SECRETARY
The Chair of the Audit Committee shall be designated by the Board. If the Chair is not present at a meeting of the Audit Committee, the members of the Audit Committee may designate an interim Chair for the meeting by majority vote of the members present. The Secretary of the Company shall be the Secretary of the Audit Committee, provided that if the Secretary is not present, the Chair of the meeting may appoint a secretary for the meeting with the consent of the Audit Committee members who are present. A member of the Audit Committee may be designated as the liaison member to report on the deliberations of the audit committees of affiliated companies (if applicable).
MEETINGS
The Chair of the Audit Committee, in consultation with the Audit Committee members, shall determine the schedule and frequency of the Audit Committee meetings provided that the Audit Committee will meet at least four times in each fiscal year and at least once in every fiscal quarter. The Audit Committee shall have the authority to convene additional meetings as circumstances require.
Notice of every meeting shall be given to the external and internal auditors of the Company, and meetings shall be convened whenever requested by the external auditors or any member of the Audit Committee in accordance with applicable law. The Audit Committee shall meet separately and periodically with management, legal counsel and the external auditors.
MEETING AGENDAS
Agendas for meetings of the Audit Committee shall be developed by the Chair of the Audit Committee in consultation with the management and the corporate secretary, and shall be circulated to Audit Committee members as far in advance of each Audit Committee meeting as is reasonable.
| A-2 |
RESOURCES AND AUTHORITY
The Audit Committee shall have the resources and the authority to discharge its responsibilities, including the authority, in its sole discretion, to engage, at the expense of the Company, outside consultants, independent legal counsel and other advisors and experts as it determines necessary to carry out its duties, without seeking approval of the Board or management. The Audit Committee shall have the authority, without seeking approval of the Board or management, to set and pay the compensation for any such outside consultants, independent legal counsel and other advisors and experts employed by the Audit Committee in connection with carrying out its duties.
The Audit Committee shall have the authority to conduct any investigation necessary and appropriate to fulfilling its responsibilities, including investigations relating to complaints with respect to accounting, internal accounting controls and/or auditing matters. The Audit Committee shall have direct access to and the authority to communicate directly with the internal and external auditors, the counsel of the Company and other officers and employees of the Company.
The members of the Audit Committee shall have the right for the purpose of performing their duties to inspect all the books and records of the Company and its subsidiaries and to discuss such accounts and records and any matters relating to the financial position, risk management and internal controls of the Company with the officers and external and internal auditors of the Company and its subsidiaries. Any member of the Audit Committee may require the external or internal auditors to attend any or every meeting of the Audit Committee.
RESPONSIBILITIES
The Company’s management is responsible for preparing the Company’s financial statements and the external auditors are responsible for auditing those financial statements. The Audit Committee is responsible for overseeing the conduct of those activities by the Company’s management and external auditors, and overseeing the activities of the internal auditors (as applicable).
The specific responsibilities of the Audit Committee shall include those listed below. The enumerated responsibilities are not meant to restrict the Audit Committee from examining any matters related to its purpose.
1. Financial Reporting Process and Financial Statements
The Audit Committee shall:
| (a) | in consultation with the external auditors and the internal auditors, review the integrity of the Company’s financial reporting process, both internal and external, and any major issues as to the adequacy of the internal controls and any special audit steps adopted in light of material control deficiencies; |
| A-3 |
| (b) | review and oversee on an ongoing basis (i) all material transactions and material contracts entered into between (A) the Company or any subsidiary of the Company, and (B) any subsidiary, director, officer, insider or related party of the Company, other than transactions in the ordinary course of business; (ii) potential conflict of interest situations; and (iii) all “related party transactions” (as such term or similar term is defined under all applicable laws) for potential conflict of interest situations; | |
| (c) | review and discuss with management and the external auditors: (i) the preparation of the Company’s annual audited consolidated financial statements and its interim unaudited consolidated financial statements; (ii) whether the financial statements present fairly (in accordance with accounting principles generally accepted in the United States of America, or, if applicable, IFRS) in all material respects the financial condition, results of operations and cash flows of the Company as of and for the periods presented; (iii) any matters required to be discussed with the external auditors; (iv) an annual report from the external auditors of the matters required to be discussed under Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16 including: (A) all critical accounting policies and practices used by the Company; (B) all material alternative accounting treatments of financial information within generally accepted accounting principles that have been discussed with management of the Company, including the ramifications of the use of such alternative treatments and disclosures and the treatment preferred by the external auditors; and (C) other material written communications between the external auditors and management; | |
| (d) | following completion of the annual audit, review with each of: (i) management; (ii) the external auditors; and (iii) the internal auditors, any significant issues, concerns or difficulties encountered during the course of the audit; | |
| (e) | resolve disagreements between management and the external auditors regarding financial reporting; | |
| (f) | review the interim quarterly and annual financial statements, Management’s Discussion and Analysis and annual and interim profit or loss press releases prior to the public disclosure of such information; and | |
| (g) | review and be satisfied that adequate procedures are in place for the review of the public disclosure of financial information by the Company extracted or derived from the Company’s financial statements, other than the disclosure referred to in (f) above, and periodically assess the adequacy of those procedures. |
2. External auditors
The Audit Committee shall:
| (a) | require the external auditors to report directly to the Audit Committee; |
| A-4 |
| (b) | be directly responsible for the selection, nomination, compensation, retention, termination and oversight of the work of the Company’s external auditors engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services for the Company, and in such regard recommend to the Board the external auditors to be nominated for approval by the shareholders; | |
| (c) | approve all audit engagements and must pre-approve the provision by the external auditors of all non-audit services, including fees and terms for all audit engagements and non-audit engagements, and in such regard the Audit Committee may establish the types of non-audit services the external auditors shall be prohibited from providing and shall establish the types of audits, audit related and non-audit services for which the Audit Committee will retain the external auditors. The Audit Committee may delegate to one or more of its independent members the authority to pre-approve non-audit services, provided that any such delegated pre-approval shall be exercised in accordance with the types of particular non-audit services authorized by the Audit Committee to be provided by the external auditor and the exercise of such delegated pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting following such pre-approval; | |
| (d) | review and approve the Company’s policies for the hiring of partners and employees and former partners and employees of the present and former external auditors; | |
| (e) | receive written communications from the external auditor, consistent with PCAOB Rule 3526, on all relationships between the external auditor and the Company or persons in financial oversight reporting roles at the Company that may be thought to bear on the external auditor’s independence and the written affirmation of the external auditor of their independence as of the date of the communication. Actively engage in a dialogue with the external auditor regarding any relationship or services that may impact the objectivity or independence of the external auditor. Evaluate the qualifications, performance and independence of the auditor, including considering whether the provision of permitted non-audit services is compatible with maintaining the auditor’s independence. Confirm with the independent auditor that the rotation of the audit partner, lead partner and concurring partner of the external auditor is occurring as required by law. Obtain from the independent auditor assurance that the audit was conducted in a manner consistent with Section 10A(b) of the Exchange Act regarding the detection and reporting of any illegal acts; | |
| (f) | request and review the audit plan of the external auditors as well as a report by the external auditors to be submitted at least annually regarding: (i) the external auditing firm’s internal quality-control procedures; (ii) any material issues raised by the external auditor’s own most recent internal quality-control review or peer review of the auditing firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues; and (iii) all relationships between independent auditor and the Company to enable assessment of the auditor’s independence; and | |
| (g) | review any problems experienced by the external auditors in performing the audit, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management. |
| A-5 |
3. Accounting Systems and Internal Controls
The Audit Committee shall:
| (a) | oversee management’s design and implementation of and reporting on internal controls. The Audit Committee shall also receive and review reports from management, the internal auditors and the external auditors on an annual basis with regard to the reliability and effective operation of the Company’s accounting system and internal controls; and | |
| (b) | review annually the activities, organization and qualifications of the internal auditors and discuss with the external auditors the responsibilities, budget and staffing of the internal audit function. |
4. Legal and Regulatory Requirements
The Audit Committee shall:
| (a) | receive and review timely analysis by management of significant issues relating to public disclosure and reporting; | |
| (b) | review, prior to finalization, periodic public disclosure documents containing financial information, including the Management’s Discussion and Analysis and Annual Information Form, if required; | |
| (c) | prepare the report of the Audit Committee required to be included in the Company’s periodic filings; | |
| (d) | review with the Company’s counsel legal compliance matters, significant litigation and other legal matters that could have a significant impact on the Company’s financial statements; and | |
| (e) | assist the Board in the oversight of compliance with legal and regulatory requirements and review with legal counsel the adequacy and effectiveness of the Company’s procedures to ensure compliance with legal and regulatory responsibilities. |
5. Additional Responsibilities
The Audit Committee shall:
| (a) | discuss policies with the external auditor, internal auditor and management with respect to risk assessment and risk management, including discussing with management the Company’s major risk exposures and the steps that have been taken to monitor and control such exposures; |
| A-6 |
| (b) | establish procedures and policies for the following: |
| (i) | the receipt, retention, treatment and resolution of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and | |
| (ii) | the confidential, anonymous submission by directors or employees of the Company of concerns regarding questionable accounting or auditing matters or any potential violations of legal or regulatory provisions; |
| (c) | prepare and review with the Board an annual performance evaluation of the Audit Committee; | |
| (d) | report regularly to the Board, including with regard to matters such as the quality or integrity of the Company’s financial statements, compliance with legal or regulatory requirements, the performance of the internal audit function, and the performance and independence of the external auditors; and | |
| (e) | review and reassess the adequacy of the Audit Committee’s Charter on an annual basis. |
6. Limitation on the Oversight Role of the Audit Committee
Nothing in this Charter is intended, or may be construed, to impose on any member of the Audit Committee a standard of care or diligence that is in any way more onerous or extensive than the standard to which all members of the Board are subject.
Each member of the Audit Committee shall be entitled, to the fullest extent permitted by law, to rely on the integrity of those persons and organizations within and outside the Company from whom he or she receives financial and other information, and the accuracy of the information provided to the Company by such persons or organizations.
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company’s financial statements and disclosures are complete and accurate and in accordance with applicable accounting principles and standards and applicable rules and regulations. These are the responsibility of management and the external auditors.
| A-7 |
Exhibit 99.2
ENGINE GAMING AND MEDIA, INC.
(formerly, Engine Media Holdings, Inc.)
Consolidated Financial Statements
For the years ended
August 31, 2022 and 2021
(Expressed in United States Dollars)
|
Engine Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) |
 |
Table of Contents
| Page 2 of 66 |
 |
Baker Tilly WM LLP 1500 - 401 Bay Street Toronto, Ontario Canada M5H 2Y4 T: +1 416.368.7990 F: +1 416.368.0886
toronto@bakertilly.ca www.bakertilly.ca |
To the Shareholders of Engine Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.):
Opinion
We have audited the consolidated financial statements of Engine Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) and its subsidiaries (together the “Company”), which comprise the consolidated statements of financial position as at August 31, 2022 and 2021, and the consolidated statements of loss and comprehensive loss, consolidated statements of changes in shareholders’ equity (deficiency) and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at August 31, 2022 and 2021, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinion
We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our opinion.
Material Uncertainty Related to Going Concern
We draw attention to Note 1(b) in the consolidated financial statements, which describes the events and conditions indicating that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Other Information
Management is responsible for the other information. The other information comprises:
| ● | The information included in the Management’s Discussion & Analysis. | |
| ● | The information, other than the consolidated financial statements and our auditor’s report thereon, in the Form 20-F. |
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained the Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.
The Form 20-F is expected to be made available to us after the date of this auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance.
| Page 3 of 66 |
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:
| ● | Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. | |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. | |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. | |
| ● | Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. | |
| ● | Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. | |
| ● | Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. |
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor's report is Mary Louise Hall.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
November 29, 2022
ASSURANCE ● TAX ● ADVISORY
Baker Tilly WM LLP is a member of Baker Tilly Canada Cooperative, which is a member of the global network of Baker Tilly International Limited. All members of Baker Tilly Canada Cooperative and Baker Tilly International Limited are separate and independent legal entities.
| Page 4 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Consolidated Statements of Financial Position August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| Note | August 31, 2022 | August 31, 2021 | |||||||||
| $ | $ | ||||||||||
| ASSETS | |||||||||||
| Current | |||||||||||
| Cash | 8,601,706 | 15,305,996 | |||||||||
| Restricted cash | 18 | 47,455 | 331,528 | ||||||||
| Accounts and other receivables | 9 | 8,404,009 | 8,646,807 | ||||||||
| Government remittances | 874,334 | 1,070,216 | |||||||||
| Publisher advance, current | 9 | 1,490,648 | 3,197,102 | ||||||||
| Prepaid expenses and other | 2,064,221 | 3,006,033 | |||||||||
| Promissory notes receivable | 10 | 576,528 | - | ||||||||
| 22,058,901 | 31,557,682 | ||||||||||
| Non-Current | |||||||||||
| Publisher advance, non-current | 9 | - | 1,337,116 | ||||||||
| Investment at FVTPL | 11 | 2,629,851 | 2,629,851 | ||||||||
| Property and equipment | 12 | 127,390 | 403,811 | ||||||||
| Goodwill | 13 | 15,200,188 | 18,495,121 | ||||||||
| Intangible assets | 14 | 2,667,363 | 12,482,244 | ||||||||
| Right-of-use assets | 15 | 11,115 | 557,022 | ||||||||
| 20,635,907 | 35,905,165 | ||||||||||
| 42,694,808 | 67,462,847 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Page 5 of 66 |
| Engine Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Consolidated Statements of Financial Position August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| Note | August 31, 2022 | August 31, 2021 | |||||||||
| $ | $ | ||||||||||
| LIABILITIES | |||||||||||
| Current | |||||||||||
| Accounts payable | 29 | 12,772,375 | 10,403,665 | ||||||||
| Accrued liabilities | 31 | 3,756,758 | 5,722,470 | ||||||||
| Players liability account | 18 | 47,455 | 331,528 | ||||||||
| Deferred revenue | 1,077,923 | 2,644,948 | |||||||||
| Lease liabilities, current | 17 | 388,834 | 222,583 | ||||||||
| Long-term debt, current | - | 96,664 | |||||||||
| Promissory notes payable | 19 | 771,762 | 821,948 | ||||||||
| Warrant liability | 21 | 49,894 | 4,868,703 | ||||||||
| Convertible debt, current | 20 | 2,267,367 | 914,427 | ||||||||
| Arbitration reserve | 26 | 692,613 | 6,468,330 | ||||||||
| 21,824,981 | 32,495,266 | ||||||||||
| Convertible debt, non-current | 20 | 4,983,236 | 9,037,069 | ||||||||
| Lease liabilities, non-current | 17 | - | 364,968 | ||||||||
| 4,983,236 | 9,402,037 | ||||||||||
| 26,808,217 | 41,897,303 | ||||||||||
| SHAREHOLDERS’ EQUITY (DEFICIENCY) | |||||||||||
| Share capital | 22 | 124,897,859 | 122,741,230 | ||||||||
| Contributed surplus | 20,351,522 | 17,819,933 | |||||||||
| Foreign currency translation reserve | (2,069,219 | ) | (2,324,025 | ) | |||||||
| Deficit | (127,293,571 | ) | (112,814,973 | ) | |||||||
| 15,886,591 | 25,422,165 | ||||||||||
| Non-controlling interest | - | 143,379 | |||||||||
| 15,886,591 | 25,565,544 | ||||||||||
| 42,694,808 | 67,462,847 | ||||||||||
| Going concern | 1 | ||||||||||
| Commitments and contingencies | 26 | ||||||||||
| Subsequent events | 32 | ||||||||||
| Approved on Behalf of Board: | “Larry Rutkowski” | “Lou Schwartz” | |
| Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
| Page 6 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Consolidated Statements of Loss and Comprehensive Loss August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| For the year ended | |||||||||||
| Note | August 31, 2022 | August 31, 2021 | |||||||||
| CONTINUING OPERATIONS | $ | $ | |||||||||
| REVENUE | |||||||||||
| Software-as-a-service | 7 | 9,220,069 | 7,952,426 | ||||||||
| Advertising | 7 | 32,662,544 | 25,392,842 | ||||||||
| 41,882,613 | 33,345,268 | ||||||||||
| EXPENSES | |||||||||||
| Salaries and wages | 29 | 14,086,955 | 12,161,000 | ||||||||
| Consulting | 29 | 2,253,836 | 2,223,147 | ||||||||
| Professional fees | 1,920,663 | 1,771,190 | |||||||||
| Revenue sharing expense | 30,090,316 | 22,853,680 | |||||||||
| Advertising and promotion | 1,187,161 | 1,299,909 | |||||||||
| Office and general | 5,282,145 | 2,406,678 | |||||||||
| Technology expenses | 3,062,181 | 2,309,248 | |||||||||
| Amortization and depreciation | 12,14,15 | 1,242,383 | 1,112,863 | ||||||||
| Share-based payments | 23, 24 | 4,688,218 | 3,702,754 | ||||||||
| Interest expense | 19, 20 | 729,848 | 1,274,998 | ||||||||
| (Gain) loss on foreign exchange | 400,521 | 1,090,944 | |||||||||
| Loss on extinguishment of debt | - | 2,428,900 | |||||||||
| Gain on retained interest in former associate | - | (99,961 | ) | ||||||||
| Transaction costs | 1,327,990 | 341,702 | |||||||||
| Arbitration settlement reserve | 26 | (5,775,717 | ) | 6,468,330 | |||||||
| Impairment expense | 13, 14 | 3,873,000 | - | ||||||||
| Restructuring costs | 177,952 | - | |||||||||
| Change in fair value of promissory notes receivable and investment at FVTPL | 10, 11 | 873,778 | (581,812 | ) | |||||||
| Change in fair value of warrant liability | 21 | (4,748,893 | ) | (9,037,108 | ) | ||||||
| Change in fair value of convertible debt | 20 | (2,388,120 | ) | 6,066,594 | |||||||
| 58,284,217 | 57,793,056 | ||||||||||
| ASSOCIATES | |||||||||||
| Share of net loss of associate | - | 103,930 | |||||||||
| Net income (loss) for the year before discontinued operations | (16,401,604 | ) | (24,551,718 | ) | |||||||
| Income tax expense | 16 | - | - | ||||||||
| (16,401,604 | ) | (24,551,718 | ) | ||||||||
| DISCONTINUED OPERATIONS | |||||||||||
| Gain (loss) on disposal of subsidiary | 27 | 14,934,149 | (678,931 | ) | |||||||
| Gain on disposal of asssets | 27 | 257,550 | - | ||||||||
| Loss from discontinued operations | 27 | (13,203,474 | ) | (15,564,168 | ) | ||||||
| Net income (loss) for the year from discontinued operations | 1,988,225 | (16,243,099 | ) | ||||||||
| Net loss for the year | (14,413,379 | ) | (40,794,817 | ) | |||||||
| Net income (loss) attributable to non-controlling interest | (65,219 | ) | 74,006 | ||||||||
| Net loss attributable to owners of the Company | (14,478,598 | ) | (40,720,811 | ) | |||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||
| Items that may be reclassified subsequently to profit or loss | |||||||||||
| Foreign currency translation differences | 393,928 | 10,250 | |||||||||
| Comprehensive loss for the year | (14,084,670 | ) | (40,710,561 | ) | |||||||
| INCOME (LOSS) PER SHARE | |||||||||||
| Basic loss per share - continuing operations | 8 | (1.05 | ) | (2.06 | ) | ||||||
| Basic income (loss) per share - discontinued operations | 0.13 | (1.37 | ) | ||||||||
| Basic and diluted loss per share | 8 | (0.93 | ) | (3.43 | ) | ||||||
| Weighted average number of shares outstanding - Basic | 8 | 15,637,418 | 11,874,775 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Page 7 of 66 |
| Share
capital: Number | Share
capital: Amount | Shares to be issued | Contributed surplus | Foreign currency translation reserve | Deficit | Total equity before non-controlling interest | Non-controlling interest | Total equity | ||||||||||||||||||||||||||||
| # | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| 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 | - | - | - | 3,702,705 | - | - | 3,702,705 | - | 3,702,705 | |||||||||||||||||||||||||||
| Shares issued on vesting of RSUs | 277,749 | 1,895,891 | - | (1,715,891 | ) | - | - | 180,000 | - | 180,000 | ||||||||||||||||||||||||||
| Common shares issued on exercise of options | 20,833 | 290,558 | (104,303 | ) | 186,255 | - | 186,255 | |||||||||||||||||||||||||||||
| Convertible debt conversion | 1,728,848 | 13,704,605 | - | 4,256,114 | - | - | 17,960,719 | - | 17,960,719 | |||||||||||||||||||||||||||
| Common shares issued on private placement, net of costs | 4,435,433 | 24,225,901 | - | 6,791,473 | - | - | 31,017,374 | - | 31,017,374 | |||||||||||||||||||||||||||
| Warrants issued in private placement of convertible debt | - | - | - | 618,916 | - | - | 618,916 | - | 618,916 | |||||||||||||||||||||||||||
| 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 | 901,060 | 9,000,851 | - | - | - | - | 9,000,851 | - | 9,000,851 | |||||||||||||||||||||||||||
| Disposal of Motorsports | - | - | (1,059,214 | ) | - | - | - | (1,059,214 | ) | - | (1,059,214 | ) | ||||||||||||||||||||||||
| Shares issued on acquisition of SideQik | 386,584 | 3,962,000 | - | 245,000 | - | - | 4,207,000 | - | 4,207,000 | |||||||||||||||||||||||||||
| Non-controlling interest in subsidiary | - | - | - | (8,404 | ) | - | - | (8,404 | ) | - | (8,404 | ) | ||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | - | (40,720,811 | ) | (40,720,811 | ) | (74,006 | ) | (40,794,817 | ) | |||||||||||||||||||||||
| Foreign currency translation differences | - | - | - | - | 10,250 | - | 10,250 | - | 10,250 | |||||||||||||||||||||||||||
| Balance, as at August 31, 2021 | 15,543,309 | 122,741,230 | - | 17,819,933 | (2,324,025 | ) | (112,814,973 | ) | 25,422,165 | 143,379 | 25,565,544 | |||||||||||||||||||||||||
| Balance, as at August 31, 2021 | 15,543,309 | 122,741,230 | - | 17,819,933 | (2,324,025 | ) | (112,814,973 | ) | 25,422,165 | 143,379 | 25,565,544 | |||||||||||||||||||||||||
| Share-based payments | - | - | - | 4,688,218 | - | - | 4,688,218 | - | 4,688,218 | |||||||||||||||||||||||||||
| Shares issued on vesting of RSUs | 203,537 | 1,489,962 | - | (1,489,962 | ) | - | - | - | - | - | ||||||||||||||||||||||||||
| Shares issued under shares for services | 57,029 | 666,667 | - | (666,667 | ) | - | - | - | - | - | ||||||||||||||||||||||||||
| Disposal of Eden Games | - | - | - | - | (139,122 | ) | - | (139,122 | ) | (208,598 | ) | (347,720 | ) | |||||||||||||||||||||||
| Net income for the year | - | - | - | - | - | (14,478,598 | ) | (14,478,598 | ) | 65,219 | (14,413,379 | ) | ||||||||||||||||||||||||
| Foreign currency translation differences | - | - | - | - | 393,928 | - | 393,928 | - | 393,928 | |||||||||||||||||||||||||||
| Balance, as at August 31, 2022 | 15,803,875 | 124,897,859 | - | 20,351,522 | (2,069,219 | ) | (127,293,571 | ) | 15,886,591 | - | 15,886,591 | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Page 8 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Consolidated Statements of Cash Flows August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| For the year ended | ||||||||||
| Note | August 31, 2022 | August 31, 2021 | ||||||||
| $ | $ | |||||||||
| OPERATING ACTIVITIES | ||||||||||
| Net loss for the year | (14,413,379 | ) | (40,794,817 | ) | ||||||
| Items not affecting cash: | ||||||||||
| Amortization and depreciation | 12,14,15 | 3,690,939 | 5,092,432 | |||||||
| Impairment expense | 13,14,15 | 9,515,210 | 3,885,001 | |||||||
| Arbitration settlement reserve | 26 | (5,775,717 | ) | 6,468,330 | ||||||
| Gain on disposal of Eden Games, net of cash | 27 | (15,128,417 | ) | - | ||||||
| Gain on disposal of UMG assets, net of cash | 27 | (257,550 | ) | - | ||||||
| Loss on disposal of Motorsports, net of cash | 27 | 194,268 | 678,931 | |||||||
| Loss on disposal of P&E | 27 | - | 9,767 | |||||||
| Gain on bankruptcy of subsidiary | (1,105,023 | ) | - | |||||||
| Loss on extinguishment of debt | 20 | - | 2,428,900 | |||||||
| Gain on retained interest in former associate | - | (99,961 | ) | |||||||
| Share of net loss of associate | - | 103,930 | ||||||||
| Change in fair value of investment at FVTPL | 10 | 873,778 | (581,812 | ) | ||||||
| Change in fair value of warrant liability | 21 | (4,748,893 | ) | (9,037,108 | ) | |||||
| Change in fair value of convertible debt | 20 | (2,388,120 | ) | 6,066,594 | ||||||
| Accretion of debt | 4,610 | 108,616 | ||||||||
| Share-based payments | 23, 24 | 4,688,218 | 3,702,705 | |||||||
| (24,850,076 | ) | (21,968,492 | ) | |||||||
| Changes in non-cash working capital: | ||||||||||
| Restricted cash | 284,073 | 57,059 | ||||||||
| Accounts and other receivables | (275,778 | ) | (4,008,628 | ) | ||||||
| Government remittances | (370,449 | ) | 30,601 | |||||||
| Publisher advance | 9 | 3,043,570 | (4,534,218 | ) | ||||||
| Prepaid expenses and other | 905,688 | (1,388,709 | ) | |||||||
| Accounts payable | 2,871,087 | (1,030,542 | ) | |||||||
| Accrued liabilities | (110,301 | ) | 953,086 | |||||||
| Players liability account | (260,692 | ) | (57,059 | ) | ||||||
| Deferred revenue | (1,567,025 | ) | 1,607,553 | |||||||
| 4,520,173 | (8,370,857 | ) | ||||||||
| (20,329,903 | ) | (30,339,349 | ) | |||||||
| INVESTING ACTIVITIES | ||||||||||
| Purchase of property and equipment | (78,698 | ) | (188,170 | ) | ||||||
| Purchase of promissory notes | (1,181,005 | ) | - | |||||||
| Cash acquired, net of cash paid in business combinations | - | 255,852 | ||||||||
| Proceeds on disposal of Eden Games, net of cash | 14,710,616 | - | ||||||||
| Proceeds on disposal of UMG assets, net of cash | 100 | - | ||||||||
| Proceeds on disposal of Motorsports, net of cash | - | 24,348 | ||||||||
| 13,451,013 | 92,030 | |||||||||
| FINANCING ACTIVITIES | ||||||||||
| Proceeds from issuance of Units, net of costs | 22 | - | 31,017,374 | |||||||
| Proceeds from convertible debentures | - | 4,901,393 | ||||||||
| Proceeds from promissory notes payable | 19 | 330,814 | 263,384 | |||||||
| Payments on promissory notes payable | 19 | (381,000 | ) | (3,260,356 | ) | |||||
| Proceeds from exercise of options | - | - | ||||||||
| Proceeds from exercise of warrants | 21 | - | 6,866,735 | |||||||
| Proceeds from exercise of options | - | 186,255 | ||||||||
| Payments on lease financing | 17 | (201,156 | ) | (228,328 | ) | |||||
| Payments on long-term debt | (75,262 | ) | (162,040 | ) | ||||||
| (326,604 | ) | 39,584,417 | ||||||||
| Impact of foreign exchange on cash | 501,204 | 725,620 | ||||||||
| Change in cash | (6,704,290 | ) | 10,062,718 | |||||||
| Cash, beginning of year | 15,305,996 | 5,243,278 | ||||||||
| Cash, end of year | 8,601,706 | 15,305,996 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Page 9 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
1. Corporate information and going concern
| (a) | Corporate information |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) (“Engine”, “Engine Media” or the “Company”) was incorporated under the Business Corporations Act (Ontario) on April 8, 2011. The registered head office of the Company is 77 King St. West, Suite 3000, PO Box 95, TD Centre – North Tower, Toronto, Ontario, M5K 1G8, Canada.
With the acquisition of Sideqik, Inc. on July 2, 2021 (Note 6), 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.
Pursuant to shareholder approval at the October 6, 2021, shareholders’ meeting, effective October 19, 2021, the Company changed its name to Engine Gaming and Media, Inc. The Company’s common shares trade on the TSX Venture Exchange under the trading symbol GAME.V and NASDAQ under the trading symbol GAME.
| (b) | Going concern |
These 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 profitable levels of operations.
The Company has not yet realized profitable operations and has incurred significant losses to date resulting in a cumulative deficit of $127,293,571 as of August 31, 2022 (August 31, 2021 – $112,814,973). 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, it cannot provide assurance that it will be able to execute on its business strategy or be successful in future financing activities. As of August 31, 2022, the Company had a working capital surplus of $233,920 (August 31, 2021 – working capital deficiency of $937,584) which is comprised of current assets less current liabilities. The Company also faced uncertain future impacts from COVID-19 (Note 3(b)).
These conditions indicate the existence of a material uncertainty that may 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 10 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
2. Basis of preparation
| (a) | Statement of compliance |
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements for the year ended August 31, 2022 (including comparatives) were approved and authorized for issue by the board of directors on November 29, 2022.
| (b) | Basis of consolidation |
The consolidated financial statements comprise the accounts of the Company and its controlled subsidiaries. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.
Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if and only if the Company has all the following:
(a) power over the investee.
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.
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.
The Company’s material subsidiaries as of August 31, 2022, are as follows:
Schedule of material subsidiaries
| Name of Subsidiary | Country of Incorporation | Ownership Percentage |
Functional Currency | |||
| Frankly Inc. | Canada | 100% | Canadian Dollar | |||
| Stream Hatchet S.L. | Spain | 100% | Euro | |||
| SideQik, Inc. | USA | 100% | US Dollar |
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 Company’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
Business combinations are accounted for using the acquisition method under IFRS 3 Business Combinations.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.
| Page 11 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The measurement period is the period from the date of acquisition to the date the Company obtains complete information about facts and circumstances that existed as of the acquisition date – and is subject to a maximum of one year. The Company elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date.
Acquisition costs are expensed as incurred, unless they qualify to be treated as debt issue costs, or as cost of issuing equity securities.
| (c) | Basis of presentation |
These consolidated financial statements have been prepared on a historical cost basis, except for financial instruments which are measured at fair value. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting except for cash flow information.
| (d) | Functional and presentation currency |
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 consolidated financial statements is the US Dollar (“USD”).
| (e) | Reclassifications |
For comparability, certain prior year amounts have been reclassified to conform with fiscal 2022 presentation.
These reclassifications had no effect on Net loss or shareholders’ deficiency.
3. Significant judgments, estimates and assumptions
The preparation of these 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 consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as at the date of the 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 consolidated financial statements are outlined below.
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.
| Page 12 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (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 consolidated financial statements is included in the following notes:
| Note 1 | Going concern | |
| Note 30 | Expected credit losses | |
| Note 21 | Valuation of warrant liability | |
| Note 6 | Business acquisitions | |
| Note 13 and 14 | Goodwill and intangible assets | |
| Note 23 and 24 | Valuation of share-based payments | |
| Note 20 | Convertible debt | |
| Note 26 | Contingencies |
| (b) | Update on 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. The Company anticipates 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.
In an effort to protect the health and safety of our employees, much of the Company’s workforce is currently working from home. The Company has implemented business continuity plans and has increased support and resources to enable employees to work remotely and thus far has been able to operate with minimal disruption.
The global COVID-19 pandemic remains an evolving situation. The Company will continue to actively monitor the developments of the pandemic and may take further actions that could alter business operations as may be required by federal, state, local, or foreign authorities, or that management determines 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 the Company’s business, including the effects on our employees, players and consumers, customers, partners, development and content pipelines, the Company’s reputation, financial condition, results of operations, revenue, cash flows, liquidity or stock price.
4. Changes in significant accounting policies
Future accounting pronouncements
The following standards have not yet been adopted and are being evaluated to determine their impact on the Company:
Amendments to IAS 1 - Classification of liabilities as current or non-current
Amendments to IAS 1 - Non-current Liabilities with Covenants
Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of Accounting Policies
Amendments to IAS 8 - Definition of Accounting Estimates
Amendments to IAS 12 Income Taxes - Deferred Tax Related to Assets and liabilities Arising from a Single Transaction
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.
| Page 13 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
5. Significant accounting policies
(a) Foreign currency translation
The functional currency of the Company and its subsidiaries is disclosed in Note 2(b). The presentation currency of the consolidated financial statements is the US Dollar (“USD”).
The financial statements of entities that have a functional currency different from the presentation currency are translated into US dollars as follows: assets and liabilities at the closing rate at the date of the Company’s consolidated statement of financial position and income and expenses at the average rate of the year (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting changes are recognized in other comprehensive income (loss) as foreign currency translation adjustments, except to the extent that the translation difference is allocated to non-controlling interest.
Foreign currency transactions are translated into the functional currency of each entity using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the consolidated statements of loss.
(b) Revenue recognition
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it transfers control of its services to a customer.
The following provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers, including significant payment terms and related revenue recognition policies:
| i) | Software-as-a-service |
The Company enters into license agreements with customers for its content management system, video software, and mobile applications (Frankly), e-sports data platform (Stream Hatchet) and an influencer marketing platform (SideQik). These license agreements, generally non-cancellable, without paying a termination penalty, and multiyear, provide the customer with the right to use the Company’s application solely on a Company-hosted platform or, in certain instances, on purchased encoders. The license agreements also entitle the customer to technical support.
Revenue from these license agreements is recognized ratably over the license term. Early termination fees are recognized when customer ceases use of agreed upon services prior to the expiration of their contract. These fees are recognized in full on the date the customer has completed their migration of the Company’s solutions and there is no continuing service obligation to the customer.
The Company charges its customers for the optional use of its content delivery network to stream and store videos. The revenue is recognized as earned based on the actual usage because it has stand-alone value and delivery is in control of the customer. The Company also charges its customers for the use of its ad serving platform to serve ads under local advertising campaigns. The Company reports revenue as earned based on the actual usage.
| ii) | Advertising |
Under national advertising agreements with advertisers, the Company sources, creates, and places advertising campaigns that run across the Company’s network of publisher sites. National advertising revenue, net of third-party costs, is shared with publishers based on their respective contractual agreements. The Company invoices national advertising amounts due from advertisers and remits payments to publishers for their share. Depending on the agreement with the publisher, the obligation to remit payment to the publisher is based on either billing to the advertiser or the collection of cash from the advertiser.
| Page 14 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
National advertising revenue is recognized in the period during which the ad impressions are delivered. The Company reports revenue earned through national advertising agreements either on a net or gross basis. The Company applies judgement in recognizing revenue earned through national advertising agreements on a net or gross basis based on the criteria as disclosed below.
Under national advertising agreements wherein the Company does not bear inventory risk and only has credit risk on its portion of the revenue, national advertising revenues are accounted for on a net basis and the publisher is identified as the customer.
In select national advertising agreements with its publishers, the Company takes on inventory risk and additional credit risk. Under these agreements, the Company either a) provides the publisher with a guaranteed minimum gross selling price per advertising unit delivered, wherein the greater of the actual selling price or guaranteed minimum selling price is used in determining the publisher’s share or b) provides the publisher with a fixed rate per advertising unit delivered, wherein the publisher is paid the fixed rate per advertising unit delivered irrespective of the actual selling price. Under these national advertising agreements, national advertising revenues are accounted for on a gross basis with the advertiser identified as the customer and the publisher identified as a supplier, with amounts billed to the advertiser reported as revenue and amounts due to the publisher reported as a revenue sharing expense, within expenses.
Also included in advertising revenue is advertising revenue generated by the Company’s various owned and operated properties.
The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Company.
Deferred revenue consists of customer advances for Company services to be rendered that will be recognized as income in future periods.
(c) Cash and equivalents, and restricted cash
The “cash and cash equivalents” category consists of cash in banks, call deposits and other highly liquid investments with initial maturities of three months or less. Any investments in securities, investments with initial maturities greater than three months without early redemption feature and bank accounts subject to restrictions, other than restrictions due to regulations specific to a country or activity sector (exchange controls, etc.) are not presented as cash equivalents but as financial assets. Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Restricted cash is presented as a separate category on the statement of financial position and consists of cash in a bank account restricted for use in the WinView Inc. businesses (Note 18).
(d) Accounts and other receivables
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost less provision for impairment of trade accounts receivable. A provision for impairment of trade accounts receivable is established based on a forward-looking “expected loss” impairment model. The carrying amount of the trade receivables is reduced using the provision for impairment account, and the amount of any increase in the provision for impairment is recognized in the consolidated statement of loss and comprehensive loss. When a trade receivable is uncollectible, it is written off against the provision for impairment account for trade accounts receivable. Subsequent recoveries of amounts previously written off are credited to the consolidated statement of loss and comprehensive loss.
| Page 15 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
(e) Property and equipment
Property and equipment are carried at historical cost less any accumulated depreciation and impairment losses. Historical cost includes the acquisition cost or production cost as well as the costs directly attributable to bringing the asset to the location and condition necessary for its use in operations. When property and equipment include significant components with different useful lives, they are recorded and depreciated separately. Depreciation is computed using the straight-line and declining balance methods based on the estimated useful life of the assets. Useful life is reviewed at the end of each reporting period.
After initial recognition, the cost model is applied to property and equipment. Where parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment.
The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognized in the consolidated statement of loss and comprehensive loss as an expense as incurred. Depreciation is provided at rates calculated to write off the cost of property, plant and equipment less their estimated residual value on the straight-line and declining balance methods, over the estimated useful lives, as follows.
Schedule of estimated useful lives of property, plant and equipment
| Computer equipment | 3 years, straight-line | |
| Furniture and fixtures | 5 years, straight-line | |
| Leasehold improvements | Term of the lease, plus one renewal |
(f) Goodwill
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.
(g) Intangible assets
Intangible assets include acquired software used in production or administration and brand names and customer relationships that qualify for recognition as an intangible asset in a business combination. They are accounted for using the cost model whereby capitalized costs are amortized on a straight-line basis over their estimated useful lives, as these assets are considered finite. Residual values and useful lives are reviewed at each reporting date.
The useful lives of the intangibles are as follows:
Schedule of useful lives of intangibles
| Software | 3-5 years | |
| Brands | 1-20 years | |
| Customer relationships | 1-10 years | |
| Patents | 5 years | |
| Application platforms | 3 years |
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and install the specific software. Subsequent expenditure on brands is expensed as incurred. Costs associated with maintaining computer software (expenditure relating to patches and other minor updates as well as their installation), are expensed as incurred.
| Page 16 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Patents and Application platforms with a finite useful life that are acquired in an asset acquisition are initially recognized on the basis of their relative fair value at the acquisition date. These assets are amortized on a straight-line basis over their useful life, which is generally up to 5 years. Amortization is calculated over the cost of the asset less its residual value. Amortization expense is recognized on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use.
Other intangible assets, such as brands, that are acquired by the Company are stated at cost less accumulated amortization and impairment losses. Expenditures on internally generated brands, mastheads or editorial pages, publishing titles, customer lists and items similar in substance is recognized in the consolidated statement of loss and comprehensive loss as an expense as incurred.
Research costs are expensed when incurred. Development costs are capitalized when the feasibility and profitability of the project can be reasonably considered certain. Expenditure on development activities, whereby research findings are applied to a plan or design to produce new or substantially improved products and processes, is capitalized if the product or process is technically and commercially feasible and the Company has sufficient resources to complete development. The expenditure capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads. Other development expenditure is recognized in the consolidated statement of loss and comprehensive loss as an expense as incurred. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses.
(h) Impairment of property and equipment, intangible assets and goodwill
| i) | Timing of impairment testing |
The carrying values of property and equipment and finite life intangible assets are assessed at the reporting date as to whether there is any indication that the assets may be impaired. Goodwill and indefinite life intangible assets are tested for impairment annually or when there is an indication that the asset may be impaired.
| ii) | Impairment testing |
If any indication of impairment exists or when the annual impairment testing for an asset is required, the Company estimates the recoverable amount of the asset or cash generating unit (“CGU”) to which the asset relates to determine the extent of any impairment loss. The recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use (“VIU”) to the Company. In assessing VIU, estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. In determining fair value less costs of disposal, recent market transactions are considered, if available. If the recoverable amount of an asset or a CGU is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statement of loss and comprehensive loss.
For impaired assets, excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of loss and comprehensive loss. Impairment losses relating to goodwill cannot be reversed.
| Page 17 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
(i) Leases
The Company assesses whether a contract is or contains a lease, at inception of the contract. The Company recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Company recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise:
| ● | Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable; | |
| ● | Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; | |
| ● | The amount expected to be payable by the lessee under any residual value guarantees; | |
| ● | The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and | |
| ● | Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. |
The lease liability is presented as a separate line in the consolidated statement of financial position.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset)
whenever:
| ● | The lease term has changed or there is a significant event or change in circumstances resulting in a change the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. | |
| ● | The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). | |
| ● | A lease contract is modified, and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. |
The Company did not make any such adjustments during the periods presented.
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.
| Page 18 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.
The right-of-use assets are presented as a separate line in the consolidated statement of financial position.
The Company applies IAS 36 Impairment of Assets to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the ‘property and equipment’ policy.
Variable rents that do not depend on an index or rate are not included in the measurement the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in the line “other expenses” in profit or loss.
As a practical expedient, IFRS 16 Leases permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Company has not used this practical expedient. For contracts that contain a lease component and one or more additional lease or non-lease components, the Company allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.
(j) Issuance of Units
The Company issues units that consist of shares and warrants. The fair value is allocated to the shares and warrants utilizing the relative fair value method.
(k) Financial instruments
Financial assets
Recognition and Initial Measurement
The Company recognizes financial assets when it becomes party to the contractual provisions of the instrument. Financial assets are measured initially at their fair value plus, in the case of financial assets not subsequently measured at fair value through profit or loss, transaction costs that are directly attributable to their acquisition. Transaction costs attributable to the acquisition of financial assets subsequently measured at fair value through profit or loss are expensed in profit or loss when incurred.
Classification and Subsequent Measurement
On initial recognition, financial assets and liabilities are classified as subsequently measured at amortized cost, fair value through other comprehensive income (“FVOCI”) or fair value through profit or loss (“FVTPL”). The Company determines the classification of its financial assets, together with any embedded derivatives, based on the business model for managing the financial assets and their contractual cash flow characteristics.
Financial assets are classified as follows:
| ● | Amortized cost - Assets that are held for collection of contractual cash flows where those cash flows are solely payments of principal and interest are measured at amortized cost. Interest revenue is calculated using the effective interest method and gains or losses arising from impairment, foreign exchange and derecognition are recognized in profit or loss. Financial assets measured at amortized cost are comprised of cash, restricted cash, accounts and other receivables and advances. | |
| ● | Fair value through other comprehensive income - Assets that are held for collection of contractual cash flows and for selling the financial assets, and for which the contractual cash flows are solely payments of principal and interest, are measured at fair value through other comprehensive income. Interest income calculated using the effective interest method and gains or losses arising from impairment and foreign exchange are recognized in profit or loss. All other changes in the carrying amount of the financial assets are recognized in other comprehensive income. Upon derecognition, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss. The Company does not hold any financial assets measured at fair value through other comprehensive income. |
| Page 19 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| ● | Mandatorily at fair value through profit or loss - Assets that do not meet the criteria to be measured at amortized cost, or fair value through other comprehensive income, are measured at fair value through profit or loss. All interest income and changes in the financial assets’ carrying amount are recognized in profit or loss. Financial assets measured mandatorily at fair value through profit and loss include publisher advance, promissory notes receivable and investment at FVTPL. |
| ● | Designated at fair value through profit or loss – On initial recognition, the Company may irrevocably designate a financial asset to be measured at fair value through profit or loss in order to eliminate or significantly reduce an accounting mismatch that would otherwise arise from measuring assets or liabilities, or recognizing the gains and losses on them, on different bases. All interest income and changes in the financial assets’ carrying amount are recognized in profit or loss. |
Business Model Assessment
The Company assesses the objective of its business model for holding a financial asset at a level of aggregation which best reflects the way the business is managed, and the way information is provided to management. Information considered in this assessment includes stated policies and objectives.
Contractual Cash Flow Assessment
The cash flows of financial assets are assessed as to whether they are solely payments of principal and interest on the basis of their contractual terms. For this purpose, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, the credit risk associated with the principal amount outstanding, and other basic lending risks and costs. In performing this assessment, the Company considers factors that would alter the timing and amount of cash flows such as prepayment and extension features, terms that might limit the Company’s claim to cash flows, and any features that modify consideration for the time value of money.
Impairment
The Company recognizes a loss allowance for the expected credit losses associated with its financial assets, other than financial assets measured at fair value through profit or loss. Expected credit losses are measured to reflect a probability-weighted amount, the time value of money, and reasonable and supportable information regarding past events, current conditions, and forecasts of future economic conditions.
The Company applies the simplified approach for accounts receivable. Using the simplified approach, the Company records a loss allowance equal to the expected credit losses resulting from all possible default events over the assets’ contractual lifetime.
The Company assesses whether a financial asset is credit-impaired at the reporting date. Regular indicators that a financial instrument is credit-impaired include significant financial difficulties as evidenced through borrowing patterns or observed balances in other accounts and breaches of borrowing contracts such as default events or breaches of borrowing covenants. For financial assets assessed as credit-impaired at the reporting date, the Company continues to recognize a loss allowance equal to lifetime expected credit losses.
For financial assets measured at amortized cost, loss allowances for expected credit losses are presented in the statement of financial position as a deduction from the gross carrying amount of the financial asset.
Financial assets are written off when the Company has no reasonable expectations of recovering all or any portion thereof.
| Page 20 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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Derecognition of Financial Assets
The Company derecognizes a financial asset when its contractual rights to the cash flows from the financial asset expire.
Financial Liabilities
Recognition and Initial Measurement
The Company recognizes a financial liability when it becomes party to the contractual provisions of the instrument. At initial recognition, the Company measures financial liabilities at their fair value plus transaction costs that are directly attributable to their issuance, except for financial liabilities subsequently measured at fair value through profit or loss for which transaction costs are immediately recorded in profit or loss.
Financial liabilities are classified as either financial liabilities at FVTPL or at amortized cost. The Company determines the classification of its financial liabilities at initial recognition.
| ● | Amortized cost - Financial liabilities are classified as measured at amortized cost unless they fall into one of the following categories: financial liabilities at FVTPL, financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, financial guarantee contracts, or commitments to provide a loan at a below-market interest rate, or contingent consideration recognized by an acquirer in a business combination. |
The Company’s accounts payable, accrued liabilities, players liability account, line of credit, long-term debt and promissory notes payable do not fall into any of the exemptions and are therefore classified as measured at amortized cost.
| ● | Financial liabilities recorded at FVTPL - Financial liabilities are classified as FVTPL if they fall into one of the five exemptions detailed above, or they are derivatives or they are designated as such on initial recognition. The Company’s warrants that are not issued in exchange for goods or services and have characteristics of derivative financial liabilities as a result of the warrants having an exercise price in a currency different from the functional currency of the Company, are measured as financial liabilities at FVTPL. The Company’s convertible debt is designated as financial liabilities at FVTPL. |
Transaction costs
Transaction costs associated with financial instruments, carried at FVTPL, are expensed as incurred, while transaction costs associated with all other financial instruments are included or deducted from the initial carrying amount of the asset or the liability.
| Page 21 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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Subsequent measurement
Instruments classified as FVTPL are measured at fair value with unrealized gains and losses recognized in profit or loss. Instruments classified as amortized cost are measured at amortized cost using the effective interest rate method. Instruments classified as FVTOCI are measured at fair value with unrealized gains and losses recognized in other comprehensive income.
Derecognition of financial liabilities
The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled, or expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any noncash assets transferred or liabilities assumed, is recognized in profit or loss.
Fair value measurement
The Company categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs used in the measurement.
| Level 1: | This level includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. | |
| Level 2: | This level includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. | |
| Level 3: | This level includes valuations based on inputs which are unobservable. |
Offsetting
Financial assets and liabilities are offset, and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
(l) Short-term employee benefits
Short-term employee benefits include wages, salaries, compensated absences, profit-sharing and bonuses. Short-term employee benefit obligations are measured on an undiscounted basis and are recognized in salaries and wages expense as the related service is provided or capitalized if the service rendered is in connection with the creation of an asset. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
| Page 22 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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(m) Income taxes
Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill; the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries, associates, and jointly controlled entities to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the financial position reporting date applicable to the period of expected realization or settlement.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
(n) Share capital
Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares, share purchase options, and equity classified warrants are recognized as a deduction from equity, net of any tax effects. When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from total equity.
(o) Share-based payment
The share-based payment plan allows Company employees and consultants to acquire shares of the Company. The fair value of share-based payment awards granted is recognized within share-based payments expense with a corresponding increase in equity.
Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value is measured at grant date and each tranche is recognized on a straight-line basis over the period during which the share purchase options vest. The fair value of the share-based payment awards granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the awards
were granted such as stock price, term, and stock volatility. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the actual number of awards, for which the related service and non-market vesting conditions are expected to be met.
For each Restricted Share Units (“RSU”) granted, the Company recognizes an expense equal to the market value of a common share at the date of grant and for each common share option granted, the Company recognizes an expense equal to the fair value of the option estimated using a Black Scholes model at grant date, based on the number of RSUs/options expected to vest, recognized over the term of the vesting period, with a corresponding increase to contributed surplus. Share based payments expense is adjusted for subsequent changes in management’s estimate of the number of RSUs/options that are expected to vest. The effect of these changes is recognized in the period of the change.
| Page 23 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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The Company’s warrants having an exercise price in the functional currency of the Company that are not issued in exchange for good and services are equity measured and the fair value at grant date for these warrants is classified within contributed surplus.
For equity-settled share-based payment transactions, including share options and RSUs granted to officers and directors of the Company and warrants granted to advisors in a financing transaction, the Company measures the goods or services received, and the corresponding increase in contributed surplus, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which cases, the Company measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.
(p) Discontinued operations and assets held for sale
A non-current asset or a group of assets and liabilities is a disposal group when the carrying amount will be recovered principally through its divestiture and not by continuing utilization. To meet this definition, the asset must be available for immediate sale, and divestiture must be highly probable. Non-current assets or disposal groups classified as held for sale are measured at the lower of carrying amounts and fair value less costs to sell.
Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale.
Discontinued operations are presented on a single line of the consolidated statements of loss and comprehensive loss for the periods reported, comprising the earnings after tax of discontinued operations until divestiture and the gain or loss after tax on sale or fair value measurement, less costs to sell the assets and liabilities making up the discontinued operations. In addition, the cash flows generated by the discontinued operations are presented on one separate line of the statement of consolidated cash flows for the periods presented.
(q) Segment reporting
A segment is a distinguishable component of the Company that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
(r) Government grants
Government grants are recognized when it is probable that the grant will be received, and all conditions of the grant are complied with. When the grant is in the form of a forgivable loan, the loan is initially recognized as a deferred income liability. The Company then relieves the deferred income liability on a systematic and rational basis in those periods over which the entity recognizes the expenses that the grant is intended to offset. The Company recognizes the impact of the loan forgiveness as an offset against related expense.
Assistance for operating expenses is recorded as a reduction of expenses when the assistance is receivable.
A forgivable loan from government is treated as government assistance when there is reasonable assurance that the Company will meet the terms for forgiveness of the loan. If there is no reasonable assurance that the entity will meet the terms for forgiveness of the loan, the loan is recognized as a liability in accordance with IFRS 9 Financial Instruments. The liability would become a government grant (forgivable loan) when there is reasonable assurance that the entity will meet the terms for forgiveness.
| Page 24 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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6. Acquisitions
Acquisition of SideQik, Inc
On July 2, 2021, the Company acquired all issued and outstanding shares of SideQik, Inc. (“SideQik”) which was carried out pursuant to a statutory reverse-triangular merger. The Company issued 386,584 shares and 23,939 RSUs in exchange for the SideQik securities exchanged pursuant to the transaction.
SideQik empowers brands to discover and connect with content creating influencers across any content vertical. The acquisition of Sideqik (combined with a prior acquisition of Stream Hatchet) brings technology and customers that are expected to expand Engine’s advertising and media offerings.
All transaction costs associated with this acquisition were expensed. If the acquisition of SideQik had occurred at the beginning of the Company’s fiscal year (September 1, 2020), the loss attributed to SideQik’s operations for the year ended August 31, 2021, would have been $1,130,080, with revenue of $2,148,987. The loss attributed to SideQik’s operations from the acquisition date to August 31, 2021, was $383,167, with revenue of $412,981.
The acquisition was accounted for using the acquisition method of accounting under IFRS 3, Business Combinations, which requires that the Company recognize the identifiable assets acquired and the liabilities assumed at their fair values on the date of acquisition. The estimated fair values are preliminary and based on the information that was available as of that date.
The purchase price allocation is as follows:
Schedule of assets and liabilities assumed in acquisition
| Consideration paid | # Issued | Amount | ||||||
| Common shares | 386,584 | $ | 3,962,000 | |||||
| RSUs | 23,939 | $ | 245,000 | |||||
| $ | 4,207,000 | |||||||
| Fair value of identifiable assets acquired | ||||||||
| Cash | $ | 255,852 | ||||||
| Accounts and other receivables | 817,557 | |||||||
| Prepaid and other current assets | 69,631 | |||||||
| Property and equipment | 12,730 | |||||||
| Intangible assets - Software (Useful life - 5 years) | 910,000 | |||||||
| Intangible assets - Brand (Useful life - 10 years) | 210,000 | |||||||
| Intangible assets - Customer relationships (Useful life - 10 years) | 310,000 | |||||||
| Goodwill | 2,900,193 | |||||||
| Accounts payable | (292,571 | ) | ||||||
| Accrued liabilities | (502,392 | ) | ||||||
| Deferred revenue | (484,000 | ) | ||||||
| $ | 4,207,000 | |||||||
The Company common shares issued for the acquisition of SideQik were subject to lock-up restrictions to be discharged 16 2/3% at 180 days from the closing date, and thereafter another 16 2/3% on the 15th of each subsequent month with the restriction being fully liquidated at the end of the 12th month. The Company’s common shares issued were valued based on the closing price on TSX Venture exchange on July 2, 2021, reduced by a discount for lack of marketability of fifteen percent.
| Page 25 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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Significant judgments and assumptions related to the valuation and useful lives of certain classes of assets acquired are as follows:
| i) | Intangible assets, software |
The fair value of the software intangible asset was determined based on the relief from royalty method under the income approach. The software intangible asset was valued using Level 3 inputs which consisted of the following key inputs: (i) revenue projections; (ii) royalty rate of 7.5%; (iii) tax rate of 25.5% (iv) discount rate of 20%. This asset is amortized on a straight-line basis over the estimated useful life of five years.
| ii) | Intangible assets, brand |
The fair value of the brand intangible asset was determined based on the relief from royalty method under the income approach. The brand intangible asset was valued using Level 3 inputs which consisted of the following key inputs: (i) cash flow projections with long term growth rate of 3%; (ii) royalty rate of 0.5%; (iii) tax rate of 25.5%; and (iv) discount rate of 20.0%. This asset is amortized on a straight-line basis over the estimated useful life of ten years.
| iii) | Intangible assets, customer relationships |
SideQik has created custom partnerships with clients to build out integrations with proprietary brand tools which are expected to result in future sales. The fair value of the customer relationships intangible asset was determined based on the excess earnings method under the income approach. The customer relationships intangible asset was valued using Level 3 inputs which consisted of the following key inputs: (i) cash flow projections with long term growth rate of 3%; (ii) customer attrition rate of 15%; and (iii) discount rate of 22.0%; (iv) tax rate of 25.5%. This asset is amortized on a straight-line basis over the estimated useful life of ten years.
| iv) | Goodwill |
The difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed represents goodwill of $2,900,193. The goodwill is not expected to be deductible for tax purposes.
The goodwill recorded represents the following:
| ● | Cost savings and operating synergies expected to result from combining the operations of SideQik with those of the Company. | |
| ● | Intangible assets that do not qualify for separate recognition such as the assembled workforce. |
7. Revenue
Revenue streams and disaggregation of revenue from contracts with customers
In the following table, revenue from contracts with customers is disaggregated by service lines.
Schedule of revenue from contracts with customers disaggregated
| Increase | |||||||||||||
| For the year ended August 31, | 2022 | 2021 | (decrease) | ||||||||||
| $ | $ | $ | |||||||||||
| Software-as-a-service | 9,220,069 | 7,952,426 | 1,267,643 | ||||||||||
| Advertising | 32,662,544 | 25,392,842 | 7,269,702 | ||||||||||
| Revenue | 41,882,613 | 33,345,268 | 8,537,345 | ||||||||||
$328,461 of the 2021 Software-as-a-service revenue was previously reported as Professional services, it has been reclassified to conform with current year presentation.
| Page 26 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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8. 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 years ended August 31, 2022, and 2021, all outstanding options, RSU’s and warrants were excluded from diluted weighted-average common shares outstanding as their effect was anti-dilutive. Weighted average common shares outstanding for the years ended August 31, 2022, and 2021 were 15,637,418 and 11,874,775, respectively.
9. Accounts and other receivables and publisher advances
| (a) | Accounts and other receivables |
The Company’s accounts and other receivables are comprised of the following:
Schedule of accounts and other receivables
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Trade accounts receivable | 9,750,619 | 9,677,725 | ||||||
| Other receivables | 9,028 | 53,387 | ||||||
| Allowance for doubtful accounts | (1,355,638 | ) | (1,084,305 | ) | ||||
| 8,404,009 | 8,646,807 | |||||||
A continuity of the Company’s allowance for doubtful accounts is as follows:
Schedule of allowance for doubtful accounts
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Balance, August 31, | (1,084,305 | ) | (874,438 | ) | ||||
| Acquisition of SideQik | - | (140,896 | ) | |||||
| Provision, bad debt expense | (473,898 | ) | (72,636 | ) | ||||
| Write-offs | 202,565 | 3,665 | ||||||
| Balance, August 31, | (1,355,638 | ) | (1,084,305 | ) | ||||
| Page 27 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
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| (b) | Publisher advance at FVTPL |
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 August 31, 2022, $6 million had been advanced to the publisher and $4,509,352 had been recouped through the process explained above. As of August 31, 2022, a net amount of $1,490,648 was outstanding on the advance all of which is current and reflects fair value.
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.
10. Promissory notes receivable at FVTPL
Schedule of promissory notes receivable
| Promissory notes receivable | ||||
| $ | ||||
| Balance, August 31, 2021 | - | |||
| Acquisition | 1,585,783 | |||
| Change in fair value | (873,778 | ) | ||
| Effect of foreign exchange | (135,477 | ) | ||
| Balance, August 31, 2022 | 576,528 | |||
To facilitate the sale of Eden Games, under a separate agreement, the Company agreed to purchase Euro- denominated 6% promissory notes amounting to Euro 1,453,154 ($1,585,783) that were due to the former co-founders of Eden Games from third parties. Euro 1,081,081 ($1,181,005) of the consideration was paid on the closing of the sale with the remainder due in two equal payments on April 4, 2023, and October 6, 2023.
The Company assessed the fair value of the promissory notes receivable based on the present value of expected future cash flows of $591,781 and has recognized a fair value write-down of $873,778. The Company is not accruing interest.
The fair value of the Company’s promissory note receivable is estimated at each reporting period, with reference to expected cash flows discounted to present value. Promissory notes receivable is classified with a level 3 in the fair value hierarchy (Note 30).
| Page 28 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
11. Investment at FVTPL
Schedule of investment in associate and investment
| Investment at FVTPL | ||||
| $ | ||||
| Balance, August 31, 2021 | 2,629,851 | |||
| Balance, August 31, 2022 | 2,629,851 | |||
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 share 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 its 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.
The fair value of the Company’s investment in One Up is estimated at each reporting period, with reference to valuations underlying privately placed financing transactions closed by One Up. Key inputs being the number of shares owned by the Company and the underlying share value of the privately placed financing transaction. This investment is classified within level 3 in the fair value hierarchy (Note 30).
| Page 29 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
12. Property and equipment
Disclosure of detailed information about property plant and equipment
| Cost | Leasehold improvements | Computer equipment | Furniture and fixtures | Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2020 | 221,653 | 486,340 | 173,091 | 881,084 | ||||||||||||
| Acquisition of SideQik | - | 11,399 | 1,331 | 12,730 | ||||||||||||
| Additions | - | 170,305 | 17,865 | 188,170 | ||||||||||||
| Disposals | - | (14,244 | ) | - | (14,244 | ) | ||||||||||
| Disposal of Motorsports | (2,631 | ) | (47,645 | ) | (18,118 | ) | (68,394 | ) | ||||||||
| Foreign exchange | (171 | ) | (2,548 | ) | (1,125 | ) | (3,844 | ) | ||||||||
| UMG Asset Sale | - | (59,550 | ) | (35,178 | ) | (94,728 | ) | |||||||||
| Impairment | (153,192 | ) | - | - | (153,192 | ) | ||||||||||
| August 31, 2021 | 218,851 | 603,607 | 173,044 | 995,502 | ||||||||||||
| August 31, 2021 | 218,851 | 603,607 | 173,044 | 995,502 | ||||||||||||
| Additions | - | 77,147 | 1,551 | 78,698 | ||||||||||||
| Impairment | (153,192 | ) | - | - | (153,192 | ) | ||||||||||
| Disposal of Eden Games | (7,407 | ) | (314,440 | ) | (52,460 | ) | (374,307 | ) | ||||||||
| UMG Asset Sale | - | (59,550 | ) | (35,178 | ) | (94,728 | ) | |||||||||
| Foreign exchange | 850 | (35,128 | ) | (4,963 | ) | (39,241 | ) | |||||||||
| August 31, 2022 | 59,102 | 271,636 | 81,994 | 412,732 | ||||||||||||
| Accumulated depreciation | Leasehold improvements | Computer equipment | Furniture and fixtures | Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2020 | 57,517 | 307,508 | 106,670 | 471,695 | ||||||||||||
| Depreciation | 5,949 | 117,092 | 26,150 | 149,191 | ||||||||||||
| Disposals | - | (4,477 | ) | - | (4,477 | ) | ||||||||||
| Disposal of Motorsports | - | (11,068 | ) | (9,910 | ) | (20,978 | ) | |||||||||
| Foreign exchange | (99 | ) | (2,824 | ) | (817 | ) | (3,740 | ) | ||||||||
| UMG Asset Sale | - | (31,619 | ) | (35,178 | ) | (66,797 | ) | |||||||||
| August 31, 2021 | 63,367 | 406,231 | 122,093 | 591,691 | ||||||||||||
| August 31, 2021 | 63,367 | 406,231 | 122,093 | 591,691 | ||||||||||||
| Depreciation | 3,765 | 114,530 | 10,598 | 128,893 | ||||||||||||
| Disposal of Eden Games | (7,202 | ) | (278,569 | ) | (47,404 | ) | (333,175 | ) | ||||||||
| UMG Asset Sale | - | (31,619 | ) | (35,178 | ) | (66,797 | ) | |||||||||
| Foreign exchange | (828 | ) | (29,994 | ) | (4,448 | ) | (35,270 | ) | ||||||||
| August 31, 2022 | 59,102 | 180,579 | 45,661 | 285,342 | ||||||||||||
| Net book value | Leasehold improvements | Computer equipment | Furniture and fixtures | Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2021 | 155,484 | 197,376 | 50,951 | 403,811 | ||||||||||||
| August 31, 2022 | - | 91,057 | 36,333 | 127,390 | ||||||||||||
| Page 30 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
13. Goodwill
Disclosure of detailed information about goodwill
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Balance, beginning of year | 18,495,121 | 18,785,807 | ||||||
| Disposal of Eden Games | (345,150 | ) | - | |||||
| Acquisition of SideQik | - | 2,900,193 | ||||||
| Impairment of goodwill associated with Sideqik | (2,900,193 | ) | - | |||||
| Impairment of goodwill associated with UMG | - | (3,209,045 | ) | |||||
| Effect of foreign exchange | (49,590 | ) | 18,166 | |||||
| Balance, end of year | 15,200,188 | 18,495,121 | ||||||
| a) | Frankly | |
| The Company tested the Frankly CGU goodwill balance of $14,895,595 (2021 - $14,895,595) as of August 31, 2022, for impairment. When assessing whether or not there is an impairment, the recoverable amount of the CGU was determined based on a value in use calculation. The calculation used a five-year projected and terminal period debt-free cash flow model discounted to present value using a discount rate of 21.0% (pre-tax 28.3%), tax rate of 26% and a long-term growth rate of 3%. The recoverable value of $24,500,000 was concluded after making adjustments to the discounted cash flow model for cash or any other non-operating assets or liabilities as of the measurement date. The concluded recoverable value was then compared to carrying value of the CGU. The results of the assessment indicated that the fair value of the Frankly CGU exceeded its carrying value by 43.6% and no impairment charge was determined to be necessary. | ||
| b) | Sideqik | |
| The Company tested the Sideqik CGU goodwill balance of $2,900,193 (2021 - $2,900,193) as of August 31, 2022, for impairment. When assessing whether there is an impairment, the recoverable amount of the CGU was determined based on a value in use calculation. The calculation used a five-year projected and terminal period debt-free cash flow model discounted to present value using a discount rate of 23.5% (pre-tax 31.5%), tax rate of 25.5% and a long-term growth rate of 3%. The recoverable value is concluded after making adjustments to the discounted cash flow model for cash or any other non-operating assets or liabilities as of the measurement date. The concluded recoverable value is then compared to carrying value of the CGU. Based on this impairment assessment, the Company determined that an impairment charge was necessary and recorded a full goodwill impairment charge of $2,900,193 to impairment expense on the Company’s consolidated statement of loss and comprehensive loss. Additionally, resulting from this impairment assessment the Company recorded $972,807 impairment charge to impairment expense in connection with the intangibles within the Sideqik CGU (Note 14). The results for Sideqik were reflected in the Company’s Media segment. | ||
| c) | Stream Hatchet | |
| The Company tested the Stream Hatchett goodwill balance of $304,593 (2021 - $335,650) as of August 31, 2022. The recoverable amounts for the Stream Hatchet CGU below were based on fair value less costs of disposal, estimated using a guideline public company method which is a market-based approach. The fair value measurement was categorized as a Level 3 fair value based on inputs in the valuation technique used. | ||
| Revenue multiples from publicly traded companies operating within the same industry and location and having similar business activities to the Company were utilized, after adjusting for differences in size, margins and growth rates when compared to the Company and Stream Hatchet. These adjusted multiples of 2.5x for Stream Hatchet were applied to the financial metrics of the CGU to determine indicative enterprise values. Recoverable amounts were determined after an adjustment for costs of disposal, estimated at 5% of indicative enterprise values. No impairment charge was determined to be necessary for the Stream Hatchet CGU. |
| Page 31 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
14. Intangible assets
Schedule of detailed information about intangible assets
| Cost | Patents | Application Platforms | Software | Brand | Customer Lists and Contracts | Total | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| 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 | ) | ||||||||||||||
| Acquisition of SideQik | - | - | 910,000 | 210,000 | 310,000 | 1,430,000 | ||||||||||||||||||
| Impairment of UMG | - | (266,731 | ) | - | (263,158 | ) | (146,067 | ) | (675,956 | ) | ||||||||||||||
| Foreign exchange | - | 16,974 | 255,577 | 81,759 | 11,063 | 365,373 | ||||||||||||||||||
| August 31, 2021 | 9,430,265 | 1,073,045 | 8,330,683 | 2,137,449 | 3,624,300 | 24,595,742 | ||||||||||||||||||
| August 31, 2021 | 9,430,265 | 1,073,045 | 8,330,683 | 2,137,449 | 3,624,300 | 24,595,742 | ||||||||||||||||||
| Intangible assets, Cost, Beginning balance | 9,430,265 | 1,073,045 | 8,330,683 | 2,137,449 | 3,624,300 | 24,595,742 | ||||||||||||||||||
| Impairment | (5,029,475 | ) | (50,602 | ) | (586,599 | ) | (218,644 | ) | (230,239 | ) | (6,115,559 | ) | ||||||||||||
| Disposal of Eden Games | - | (269,098 | ) | (4,709,219 | ) | (1,390,134 | ) | (269,010 | ) | (6,637,461 | ) | |||||||||||||
| Disposal of UMG | - | (242,667 | ) | - | (184,167 | ) | (313,933 | ) | (740,767 | ) | ||||||||||||||
| Cost, Disposal | - | (242,667 | ) | - | (184,167 | ) | (313,933 | ) | (740,767 | ) | ||||||||||||||
| Foreign exchange | - | (14,450 | ) | (285,842 | ) | (82,763 | ) | (19,230 | ) | (402,285 | ) | |||||||||||||
| August 31, 2022 | 4,400,790 | 496,228 | 2,749,023 | 261,741 | 2,791,888 | 10,699,670 | ||||||||||||||||||
| Intangible assets, Cost, Ending balance | 4,400,790 | 496,228 | 2,749,023 | 261,741 | 2,791,888 | 10,699,670 | ||||||||||||||||||
| Accumulated amortization | Patents | Application Platforms | Software | Brand | Customer Lists and Contracts | Total | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2020 | 628,684 | 793,041 | 4,909,000 | 1,077,491 | 648,933 | 8,057,149 | ||||||||||||||||||
| Amortization | 1,886,053 | 159,843 | 1,734,064 | 465,398 | 494,825 | 4,740,183 | ||||||||||||||||||
| Disposal of Motorsports | - | - | (532,412 | ) | (201,627 | ) | (222,650 | ) | (956,689 | ) | ||||||||||||||
| Foreign exchange | - | 13,560 | 229,650 | 34,385 | (4,740 | ) | 272,855 | |||||||||||||||||
| August 31, 2021 | 2,514,737 | 966,444 | 6,340,302 | 1,375,647 | 916,368 | 12,113,498 | ||||||||||||||||||
| August 31, 2021 | 2,514,737 | 966,444 | 6,340,302 | 1,375,647 | 916,368 | 12,113,498 | ||||||||||||||||||
| Intangible assets, Accumulated amortization, Beginning balance | 2,514,737 | 966,444 | 6,340,302 | 1,375,647 | 916,368 | 12,113,498 | ||||||||||||||||||
| Amortization | 1,886,053 | 56,000 | 848,672 | 215,676 | 375,250 | 3,381,651 | ||||||||||||||||||
| Disposal of Eden Games | - | (269,098 | ) | (4,709,219 | ) | (1,112,108 | ) | (250,801 | ) | (6,341,226 | ) | |||||||||||||
| Disposal of UMG | - | (242,667 | ) | - | (184,167 | ) | (313,933 | ) | (740,767 | ) | ||||||||||||||
| Accumulated amortization, Disposal | - | (242,667 | ) | - | (184,167 | ) | (313,933 | ) | (740,767 | ) | ||||||||||||||
| Foreign exchange | - | (14,451 | ) | (285,842 | ) | (62,839 | ) | (17,717 | ) | (380,849 | ) | |||||||||||||
| August 31, 2022 | 4,400,790 | 496,228 | 2,193,913 | 232,209 | 709,167 | 8,032,307 | ||||||||||||||||||
| Intangible assets, Accumulated amortization, Ending balance | 4,400,790 | 496,228 | 2,193,913 | 232,209 | 709,167 | 8,032,307 | ||||||||||||||||||
| Net book value | Patents | Application Platforms | Software | Brand | Customer Lists and Contracts | Total | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2021 | 6,915,528 | 106,601 | 1,990,381 | 761,802 | 2,707,932 | 12,482,244 | ||||||||||||||||||
| August 31, 2022 | - | - | 555,110 | 29,532 | 2,082,721 | 2,667,363 | ||||||||||||||||||
For further intangible asset impairment information as it relates to discontinued operations see Note 27.
| Page 32 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
15. Right-of-use assets
Schedule of detailed information about right-of-use assets
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Balance, beginnng of year | 557,022 | 550,478 | ||||||
| Acquired | - | 210,178 | ||||||
| Depreciation | (180,395 | ) | (203,058 | ) | ||||
| Impairment | (346,266 | ) | - | |||||
| Disposal of Eden Games | (16,036 | ) | - | |||||
| Effect of foreign exchange | (3,210 | ) | (576 | ) | ||||
| Balance, end of year | 11,115 | 557,022 | ||||||
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.
16. Income taxes
The Company had no income tax expense or benefit for the year ended August 31, 2022, or 2021.
| (a) | Reconciliation of the effective tax rate |
The reconciliation of the statutory income tax rate of 26.5% (2021 - 26.5%) to the effective tax rate is as follows:
Disclosure of detailed information about components of income tax expense
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Income (loss) before discontinued operations and income taxes | (16,401,604 | ) | (24,551,718 | ) | ||||
| Statutory income tax rate | 26.5 | % | 26.5 | % | ||||
| Expected income tax (benefit) | (4,346,425 | ) | (6,506,205 | ) | ||||
| Reconciling items: | ||||||||
| Foreign rate differential | 986 | (477,761 | ) | |||||
| Stock-based compensation and other non-deductible expenses | (786,187 | ) | 1,299,240 | |||||
| Other | 796,659 | (4,136,359 | ) | |||||
| Deferred tax assets not recognized | 4,334,967 | 9,821,085 | ||||||
| Income tax expense | - | - | ||||||
| Page 33 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (b) | Deferred income taxes |
The Company had the following temporary differences that would ordinarily give rise to deferred taxes:
Disclosure of detailed information about recognized deferred tax assets and liabilities
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Deferred tax assets | ||||||||
| Net operating losses | 1,577,831 | 1,664,801 | ||||||
| Deferred tax liabilities | ||||||||
| Intangible assets | (1,520,569 | ) | (1,391,070 | ) | ||||
| Other - United States | (57,262 | ) | (273,731 | ) | ||||
| Net deferred tax asset | - | - | ||||||
Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and where the Company has the legal right and intent to offset.
Unrecognized Deductible Temporary Differences
Deferred taxes are provided as a result of temporary differences that arise due to the difference between the income tax values and the carrying amount of assets and liabilities. Deferred tax assets have not been recognized in respect of the following deductible temporary differences:
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Intangible assets | 23,737,179 | 28,362,021 | ||||||
| Net operating losses | 172,145,340 | 153,954,414 | ||||||
| Net capital losses | - | 2,156,922 | ||||||
| Property and equipment | - | 483,175 | ||||||
| Share issuance costs | 2,347,823 | 206,655 | ||||||
| Convertible debt | 250,603 | 2,385,606 | ||||||
| Investments | 3,074,356 | - | ||||||
| Other | 2,219,206 | 8,802,009 | ||||||
| 203,774,507 | 196,350,802 | |||||||
The Company’s net operating losses expire in the manner discussed below. The remaining deductible temporary differences may be carried forward indefinitely. Deferred tax assets have not been recognized in respect of these items because it cannot be determined as probable that future taxable profits will be available against which the Company can utilize the benefits therefrom.
As of August 31, 2022, the Company has net operating loss carryforwards related to its domestic and international operations of approximately $173.2 million; $122.4 million of which have expiration periods ranging between 10 to 20 years, and $50.8 million have an indefinite carryforward period. Of these, CAD$44.3 million belong to Canadian entities which expire between 2034 and 2042. Net-capital losses were Nil in the year. Certain of these foreign, federal and state net operating loss carryforwards may be subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization.
| Page 34 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
17. Lease liabilities
Lease liabilities are measured at the present value of the lease payments that were not paid at that financial statement date. The lease payments are discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate. The continuity of the lease liabilities is presented in the table below:
Disclosure of detailed information about continuity of the lease liabilities
| Equipment | Office lease | Total | ||||||||||
| $ | $ | $ | ||||||||||
| Balance, August 31, 2020 | 35,457 | 536,691 | 572,148 | |||||||||
| Acquired | - | 210,178 | 210,178 | |||||||||
| Disposal of Eden Games | - | (17,959 | ) | (17,959 | ) | |||||||
| Interest expense | 1,971 | 32,226 | 34,197 | |||||||||
| Payments | (13,380 | ) | (214,948 | ) | (228,328 | ) | ||||||
| Effect of foreign exchange | - | (644 | ) | (644 | ) | |||||||
| Balance, August 31, 2021 | 24,048 | 563,503 | 587,551 | |||||||||
| Balance, August 31, 2021 | 24,048 | 563,503 | 587,551 | |||||||||
| Beginning balance | 24,048 | 563,503 | 587,551 | |||||||||
| Acquired | - | - | - | |||||||||
| Disposal of Eden Games | - | (17,959 | ) | (17,959 | ) | |||||||
| Interest expense | 1,206 | 22,716 | 23,922 | |||||||||
| Payments | (13,380 | ) | (187,776 | ) | (201,156 | ) | ||||||
| Effect of foreign exchange | - | (3,524 | ) | (3,524 | ) | |||||||
| Balance, August 31, 2022 | 11,874 | 376,960 | 388,834 | |||||||||
| Ending balance | 11,874 | 376,960 | 388,834 | |||||||||
| Equipment | Office lease | Total | ||||||||||
| $ | $ | $ | ||||||||||
| As of August 31, 2022: | ||||||||||||
| Less than one year | 11,874 | 376,960 | 388,834 | |||||||||
| Total lease obligation | 11,874 | 376,960 | 388,834 | |||||||||
The future minimum undiscounted lease payments as of August 31, 2022, are presented below:
Disclosure of detailed information about future minimum undiscounted lease payments
| Equipment | Office lease | Total | ||||||||||
| Less than one year | 12,265 | 404,271 | 416,536 | |||||||||
| Total undiscounted lease obligation | 12,265 | 404,271 | 416,536 | |||||||||
18. 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 August 31, 2022, and 2021, the players liability account balance is the total amount payable if all players were to request closure of their accounts. |
| Page 35 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
19. Promissory notes payable and other borrowings
| (a) | Promissory notes |
| The Company has promissory notes with a balance of $200,000 (August 31, 2021 – $200,000) that are unsecured, due on demand, and bear interest at 18%. As of August 31, 2022, interest of $141,940 has been accrued (August 31, 2021 – $139,644). | |
| 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 August 31, 2022, $429,822 was due under the note (August 31, 2021 – $482,304). The note is secured by the assets of WinView, bears interest at 8%, and is currently due. As of August 31, 2022, and 2021, no interest is accrued on this note. | |
| (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 expects to apply for and receive forgiveness of up to all amounts due under the Notes, in an amount equal to the sum of qualified expenses under the PPP during the twenty-four weeks following disbursement. | |
| Subject to any forgiveness granted under the PPP, the Notes were scheduled to mature in April 2022 and require 18 equal monthly payments of principal and interest beginning November 2020. 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, 2022, 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 August 31, 2022, $209,875 has not been formally forgiven. |
| Page 36 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
20. Convertible debt
The continuity of convertible debt for the year ended August 31, 2022, is as follows:
Schedule of detailed information about continuity of convertible debt
| 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 | ||||||||||||||
| Principal and interest at maturity | ||||||||||||||||||||
| 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 | 54,126 | 398,183 | 138,710 | 250,000 | 841,019 | |||||||||||||||
| Accrued interest on conversion / interest payments | (101,247 | ) | (256,300 | ) | (250,000 | ) | - | (607,547 | ) | |||||||||||
| Effect of foreign exchange | 134,562 | - | - | - | 134,562 | |||||||||||||||
| Change in fair value | 1,308,993 | 5,461,682 | - | (704,081 | ) | 6,066,594 | ||||||||||||||
| Balance, August 31, 2021 | 914,428 | 2,097,127 | - | 6,939,941 | 9,951,496 | |||||||||||||||
| 2019 Series | 2020 Series | Amended EB Loan | EB CD | Total | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Balance, August 31, 2021 | 914,428 | 2,097,127 | - | 6,939,941 | 9,951,496 | |||||||||||||||
| Total convertible debt obligation beginning balance | 914,428 | 2,097,127 | - | 6,939,941 | 9,951,496 | |||||||||||||||
| Interest expense | 23,983 | 200,000 | - | 500,000 | 723,983 | |||||||||||||||
| Accrued interest on conversion / interest payments | - | - | - | (500,000 | ) | (500,000 | ) | |||||||||||||
| Principal and interest at maturity | (509,716 | ) | - | - | - | (509,716 | ) | |||||||||||||
| Effect of foreign exchange | (27,040 | ) | - | - | - | (27,040 | ) | |||||||||||||
| Change in fair value | (401,655 | ) | (29,760 | ) | - | (1,956,705 | ) | (2,388,120 | ) | |||||||||||
| Balance, August 31, 2022 | - | 2,267,367 | - | 4,983,236 | 7,250,603 | |||||||||||||||
| Total convertible debt obligation ending balance | - | 2,267,367 | - | 4,983,236 | 7,250,603 | |||||||||||||||
| 2020 Series | Total | |||||||
| $ | $ | |||||||
| As of August 31, 2022: | ||||||||
| Less than one year | 2,267,367 | 2,267,367 | ||||||
| Greater than one year | - | 4,983,236 | ||||||
| Total convertible debt obligation | 2,267,367 | 7,250,603 | ||||||
| Page 37 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
As of August 31,2022, the 2019 series notes have matured.
| (a) | Conversions during the years ended August 31, 2021 |
2019 Series
During the year ended August 31, 2021, 2019 Series convertible debentures with a principal amount of CAD$1,315,000 were converted into 175,331 units, and as a result, the Company issued 175,331 common shares and 175,331 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; term of 1.36 – 1.90 years; conversion price and warrant exercise price of CAD$7.50; interest rate of 6%; expected volatility of 98.5% – 179%; risk-free interest rate of 0.21% - 0.27%; exchange rate of 0.7651 – 0.8286; and an expected dividend yield of 0%. The fair value assigned to these convertible debentures was $2,603,875.
This value was split between common shares and liability measured warrants as $1,500,214 and $1,103,661, respectively.
2020 Series
During the year ended August 31, 2021, 2020 Series convertible debentures with a principal amount of $11,651,393 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 equity measured warrants as $12,204,391 and $4,256,114, respectively.
| (b) | Issuances during the year ended August 31, 2021 |
| During the year ended August 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 20(e)). 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 20(e)). 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 $1,000,000 of the $5,000,000 principal outstanding. The conversion feature allowed the holder to convert $1,000,000 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 $5,000,000. 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 $5,000,000 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 of $2,428,900. |
| Page 38 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (c) | 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. | |
| (d) | 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. | |
| (e) | 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 remaining $6,000,000 of convertible debentures that are issuable under this facility have substantially similar terms as the 2020 Series debentures, including conversion into units consisting of one share and one-half warrant, provided that the conversion price of any additional convertible debentures will be based on the market price of the common shares at the time of such subscriptions and are subject to TSX-V approval. |
| Page 39 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
As of August 31, 2022, the fair value of the 2020 Series convertible debentures was estimated using the binomial lattice model with the below assumptions:
Disclosure of detailed information about fair value of convertible debentures
| 2020 Series | August 31 2022 (US$) | August 31,
2021 (US$) | ||||||
| Share price | 0.72 | 6.66 | ||||||
| Conversion price | 8.90 | 8.90 | ||||||
| Term, in years | 0.22 | 1.26 | ||||||
| Interest rate | 10 | % | 10 | % | ||||
| Expected volatility | 90.00 | % | 90.00 | % | ||||
| Risk-free interest rate | 2.85 | % | 0.10 | % | ||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| (f) | 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 $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
As of August 31, 2022, the fair value of the EB CD convertible debenture was estimated using the binomial lattice model with the below assumptions:
Disclosure of detailed information about fair value of convertible debentures
| EB CD | August 31 2022 (US$) | August 31,
2021 (US$) | ||||||
| Share price | 0.72 | 6.66 | ||||||
| Conversion price | 10.25 | 10.25 | ||||||
| Warrant exercise price | 15.00 | 15.00 | ||||||
| Term, in years | 1.48 | 1.26 | ||||||
| Interest rate | 10 | % | 10 | % | ||||
| Expected volatility | 90.00 | % | 90.00 | % | ||||
| Risk-free interest rate | 3.45 | % | 0.30 | % | ||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| Page 40 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (g) | Fair value |
The following table gives information about how the fair values of these financial liabilities are determined (in particular, the valuation technique and key inputs used) and sensitivity of unobservable inputs.
Disclosure of key inputs of convertible debt
| Financial assets / financial liabilities | Valuation technique | Key Inputs | Relationship and sensitivity of unobservable inputs to fair value to fair value | |||
| Convertible debt | The fair value of the convertible debentures as of August 31, 2022 has been calculated using a binomial lattice methodology. | Key observable inputs | The estimated fair value would increase (decrease) if: | |||
| Share price CAD $.94 (USD $.72) | The share price was higher (lower) | |||||
| Risk-free interest rate (2.85% to 3.45%) | The risk-free interest rate was higher (lower) | |||||
| Dividend yield (0%) | The dividend yield was lower (higher) | |||||
| Key unobservable inputs | ||||||
| Credit spread (10.13% to 13.56%) | The credit spread was lower (higher) | |||||
| Discount for lack of marketability (0%) | The discount for lack of marketability was lower (higher) | |||||
| Convertible debt | The fair value of the convertible debentures as of August 31, 2021 has been calculated using a binomial lattice methodology. | Key observable inputs | The estimated fair value would increase (decrease) if: | |||
| Share price CAD$8.42 (USD $6.66) | The share price was higher (lower) | |||||
| Risk-free interest rate (0.10% to 0.30%) | The risk-free interest rate was higher (lower) | |||||
| Dividend yield (0%) | The dividend yield was lower (higher) | |||||
| Key unobservable inputs | ||||||
| Credit spread (1.14% to 8.45%) | The credit spread was lower (higher) | |||||
| Discount for lack of marketability (0%) | The discount for lack of marketability was lower (higher) |
| Page 41 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
21. Warrants
Liability measured warrants having CAD exercise price
The following table reflects the continuity of the Company’s liability measured warrants for the years ended August 31, 2022, and 2021:
Schedule of Measured Warrants
| Amount | ||||
| $ | ||||
| Balance at August 31, 2020 | 14,135,321 | |||
| Issued on conversion of convertible debt | 1,103,661 | |||
| Exercised | (2,134,116 | ) | ||
| Issued in private placement of units - transaction costs | ||||
| Issued in private placement of units | ||||
| Issued in private placement of convertible debt | ||||
| Change in fair value | (9,037,108 | ) | ||
| Foreign exchange | 800,945 | |||
| Balance, August 31, 2021 | 4,868,703 | |||
| Amount | ||||
| $ | ||||
| Balance at August 31, 2021 | 4,868,703 | |||
| Change in fair value | (4,748,893 | ) | ||
| Foreign exchange | (69,916 | ) | ||
| Balance, August 31, 2022 | 49,894 | |||
The following table reflects the continuity of the Company’s outstanding liability measured warrants for the years ended August 31, 2022, and 2021:
Schedule of Outstanding Warrants
| Weighted-average | ||||||||
| Number of | exercise price | |||||||
| warrants | CAD | |||||||
| # | $ | |||||||
| Outstanding, August 31, 2020 | 2,405,369 | 9.60 | ||||||
| Issued on conversion of convertible debt | 175,331 | 7.50 | ||||||
| Number of warrants, Issued in private placement of convertible debt | ||||||||
| Weighted average exercise price, Issued in private placement of convertible debt | ||||||||
| Number of warrants, Issued in private placement of units | ||||||||
| Weighted average exercise price, Issued in private placement of units | ||||||||
| Exercised | (901,060 | ) | 9.27 | |||||
| Expired | (226,797 | ) | 13.43 | |||||
| Outstanding as of August 31, 2021 | 1,452,843 | 8.96 | ||||||
| Weighted-average | ||||||||
| Number of | exercise price | |||||||
| warrants | CAD | |||||||
| # | $ | |||||||
| Outstanding, August 31, 2021 | 1,452,843 | 8.96 | ||||||
| Expired | (123,159 | ) | 9.24 | |||||
| Outstanding as of August 31, 2022 | 1,329,684 | 8.93 | ||||||
| Page 42 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The following table reflects the liability measured warrants issued and outstanding as of August 31, 2022:
Schedule of Warrants Issued and Outstanding
| Warrants outstanding | ||||||||||||
| Expiry date | Number outstanding | Average CAD | Average remaining contractual life (years) | |||||||||
| December 20, 2022 | 29,066 | 27.00 | 0.30 | |||||||||
| March 20, 2023 | 27,777 | 13.50 | 0.55 | |||||||||
| March 30, 2023 | 46,909 | 13.50 | 0.58 | |||||||||
| March 31, 2023 | 17,222 | 13.50 | 0.58 | |||||||||
| May 27, 2023 | 130,304 | 13.50 | 0.74 | |||||||||
| July 8, 2024 | 445,982 | 7.50 | 1.85 | |||||||||
| July 25, 2024 | 401,624 | 7.50 | 1.90 | |||||||||
| August 8, 2024 | 230,800 | 7.50 | 1.94 | |||||||||
| 1,329,684 | $ | 8.93 | 1.65 | |||||||||
As of August 31, 2022, the fair value of the 1,329,684 liability measured warrants outstanding (August 31, 2021 – 1,452,843) was determined to be $49,894 (August 31, 2021 – $4,868,703) as calculated using the Black Scholes option pricing model with the following range of assumptions: 0.30 – 1.65 years (August 31, 2021 – 0.53 – 2.94) as expected average life; share price of CAD$8.93 (August 31, 2021 – CAD$8.42); exercise price of CAD$7.50 – CAD$27.00 (August 31, 2021 – CAD$7.50 – CAD$27.00); 90% expected volatility (August 31, 2021 – 70% - 90%); risk free interest rate of 3.61% - 3.87% (August 31, 2021 – 0.28% - 0.63%); and an expected dividend yield of 0%.
If all liability measured warrants outstanding and exercisable as of August 31, 2022, were exercised, the Company would receive cash from exercise of approximately CAD$11.9 million.
| (a) | Liability measured warrants exercised during the year ended August 31, 2021 |
During the year ended August 31, 2021, the holders of 901,060 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 $6,866,735 in cash proceeds and the intrinsic value of the underlying warrants at the date of exercise of $2,134,116 was transferred to share capital, for a total addition to share capital of $9,000,851.
| (b) | Liability measured warrants issued during the year ended August 31, 2021 |
During the year ended August 31, 2021, the Company issued 175,331 warrants in connection with conversion of convertible debt (Note 20(a) – 2019 Series).
2019 Series
During the year ended August 31, 2021, the Company issued 175,331 warrants in conjunction with the conversion of convertible debt. The fair value of the 175,331 warrants issued was determined to be $1,103,661 as calculated using the Black Scholes option pricing model with the following assumptions:
A 3.36 – 3.90 years as expected average life; share price of CAD$9.50 – $12.33; exercise price of CAD$7.50; 98.5% - 136% expected volatility; risk free interest rate of 0.25% - 0.54%; 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 43 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Equity measured warrants having USD exercise price
The following table reflects the continuity of the Company’s equity measured warrants for the years ended August 31, 2022, and 2021.
Schedule of Measured Warrants
| Amount | ||||
| $ | ||||
| Balance at August 31, 2020 | - | |||
| Issued on conversion of convertible debt | 4,256,114 | |||
| Issued in private placement of convertible debt | 618,916 | |||
| Issued in private placement of units | 7,373,806 | |||
| Issued in private placement of units - transaction costs | (582,333 | ) | ||
| Balance, August 31, 2021 | 11,666,503 | |||
| Amount | ||||
| $ | ||||
| Balance at August 31, 2021 | 11,666,503 | |||
| Beginning Balance | 11,666,503 | |||
| Balance, August 31, 2022 | 11,666,503 | |||
The following table reflects the continuity of the Company’s outstanding equity measured warrants for the years ended August 31, 2022, and 2021:
Schedule of Outstanding Warrants
| Weighted-average | ||||||||
| Number of | exercise price | |||||||
| warrants | USD | |||||||
| # | $ | |||||||
| Outstanding, August 31, 2020 | - | - | ||||||
| Issued on conversion of convertible debt | 1,134,305 | 15.00 | ||||||
| Issued in private placement of convertible debt | 224,719 | 15.00 | ||||||
| Issued in private placement of units | 2,377,272 | 15.00 | ||||||
| Outstanding as of August 31, 2021 | 3,736,296 | 15.00 | ||||||
| Weighted-average | ||||||||
| Number of | exercise price | |||||||
| warrants | USD | |||||||
| # | $ | |||||||
| Outstanding, August 31, 2021 | 3,736,296 | 15.00 | ||||||
| Outstanding as of August 31, 2022 | 3,736,296 | 15.00 | ||||||
| Page 44 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The following table reflects the equity measured warrants issued and outstanding as of August 31, 2022:
Schedule of Warrants Issued and Outstanding
| Warrants outstanding | ||||||||||||
| Expiry date | Number outstanding | Average exercise price USD | Average remaining contractual life (years) | |||||||||
| November 20, 2022 | 224,719 | 15.00 | 0.22 | |||||||||
| January 8, 2024 | 1,868,787 | 15.00 | 1.36 | |||||||||
| January 22, 2024 | 522,898 | 15.00 | 1.39 | |||||||||
| February 24, 2024 | 1,058,227 | 15.00 | 1.48 | |||||||||
| August 19, 2024 | 49,999 | 15.00 | 1.97 | |||||||||
| September 15, 2024 | 11,666 | 15.00 | 2.04 | |||||||||
| 3,736,296 | $ | 15.00 | 1.34 | |||||||||
If all equity measured warrants outstanding and exercisable as of August 31, 2022, were exercised, the Company would receive cash from exercise of approximately $56.0 million.
The November 20,2022 warrants expired unexercised subsequent to year end.
| (c) | Equity measured warrants issued during the year ended August 31, 2021 |
During the year ended August 31, 2021, the Company issued 1,134,305 warrants in connection with conversion of convertible debt (Note 20(a) – 2020 Series), 224,719 warrants in connection with the private placement of convertible debentures (Note 20(e)) and 2,377,272 warrants in connection with the private placement of units (Note 21(f)), for a total number of 3,736,296 warrants issued.
| (d) | Equity measured warrants issued on conversion of convertible debt |
2020 Series
During the year ended August 31, 2021, the Company issued 1,134,305 warrants 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 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 and equity measured warrants.
| (e) | Equity measured warrants issued on private placement of standby convertible debentures during the year ended August 31, 2021 |
During the year ended August 31, 2021, the Company issued 224,719 warrants in connection with the private placement of convertible debentures under its standby convertible debenture facility (Note 20(e)). The fair value of the 224,719 warrants issued was determined to be $618,916 as calculated using the Black Scholes option pricing model with the following assumptions:
2 years expected average life; share price of $5.63; exercise price of $15.00; 200% expected volatility; risk free interest rate of 0.16%; 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 45 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (f) | Equity measured warrants issued on private placement of units during the year ended August 31, 2021 |
During the year ended August 31, 2021, the Company issued 2,377,272 warrants 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 the 2,377,272 warrants issued was determined to be $7,373,806 as calculated using the Black Scholes option pricing model with the following assumptions:
A 3.00 year expected average life; share price of $7.79 – $10.00; exercise price of $15.00; 98.5% expected volatility; risk free interest rate of 0.29% - 0.43%; and an expected dividend yield of 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, with $770,563 being the fair value of the 191,387 warrants issued to finders. The amount recorded in contributed surplus of $6,791,473 represents the fair value of warrants issued of $7,373,806 less $582,333 for transaction costs allocated to the warrants issued.
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.
22. Share capital
| (a) | Authorized |
The Company is authorized to issue an unlimited number of no par value common shares and an unlimited number of preference shares.
| Page 46 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (b) | Issued and outstanding, common shares |
Schedule of shares issued and outstanding
| Shares | Consideration | |||||||
| # | $ | |||||||
| Balance, August 31, 2020 | 7,746,136 | 69,380,807 | ||||||
| Shares issued on vesting of RSUs | 277,749 | 1,895,891 | ||||||
| Shares issued under shares for services | ||||||||
| Shares issued under shares for services, shares | ||||||||
| Common shares issued on exercise of options | 20,833 | 290,558 | ||||||
| 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 | 901,060 | 9,000,851 | ||||||
| Shares issued on acquisiton of SideQik | 386,584 | 3,962,000 | ||||||
| Balance, August 31, 2021 | 15,543,309 | 122,741,230 | ||||||
| Shares | Consideration | |||||||
| # | $ | |||||||
| Balance, August 31, 2021 | 15,543,309 | 122,741,230 | ||||||
| Shares issued on vesting of RSUs | 203,537 | 1,489,962 | ||||||
| Shares issued under shares for services | 57,029 | 666,667 | ||||||
| Balance, August 31, 2022 | 15,803,875 | 124,897,859 | ||||||
| (c) | Activity for the year ended August 31, 2022 |
During the year ended August 31, 2022, the Company issued 203,537 common shares upon vesting of an equal number of RSUs, see (Note 24) and 57,029 shares for services provided by certain officers of Sideqik.
| (d) | Activity for the year ended August 31, 2021 |
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.
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.
| Page 47 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
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.
A summary of amounts recorded in connection with private placement and their effect on financial statement line items is noted below:
Schedule of Private Placement
| Proceeds | Shares | Impact on share capital | Warrants | Impact on contributed surplus | ||||||||||||||||
| $ | # | $ | # | $ | ||||||||||||||||
| Units issued in private placement | 32,788,253 | 4,371,767 | 26,185,009 | 2,185,885 | 6,603,244 | |||||||||||||||
| Cash commissions | (1,681,477 | ) | - | (1,345,736 | ) | - | (335,741 | ) | ||||||||||||
| Regulatory and legal fees | (89,402 | ) | - | (71,522 | ) | - | (17,880 | ) | ||||||||||||
| Finders’ units issued | - | 63,666 | 383,720 | 31,833 | 93,775 | |||||||||||||||
| Finders’ units considered as transaction costs | - | - | (383,720 | ) | - | (93,775 | ) | |||||||||||||
| Finders’ warrants issued | - | - | - | 159,554 | 676,787 | |||||||||||||||
| Finders’ warrants considered as transaction costs | - | - | (541,850 | ) | - | (134,937 | ) | |||||||||||||
| 31,017,374 | 4,435,433 | 24,225,901 | 2,377,272 | 6,791,473 | ||||||||||||||||
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 equity measured warrants 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 year ended August 31, 2021, the Company had the following additional activity to share capital: (i) issued 277,749 common shares upon vesting of an equal number of RSUs (Note 24); (ii) issued 20,833 common shares upon the exercise of vested stock options, (iii) issued 1,728,848 common shares in connection with conversion of convertible debt (Note 20(a)), (iv) issued 901,060 common shares in connection with the exercise of warrants (Note 21(a)); (v) issued 40,000 common shares for cancelation of $226,556 of debt (shares for debt); and (vi) 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 the subsequently the EB CD is being accounted for at FVTPL.
23. Stock options
On October 6, 2021, 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 July 15, 2020. 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 stock options shall not exceed 10% of the then issued and outstanding 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. Unvested share-based payments expense is reversed in the period of forfeiture.
| Page 48 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The following table reflects the continuity of stock options for the years ended August 31, 2022, and 2021: Disclosure of Detailed Information About Number and Weighted Average Exercise Prices of Share Options
| Weighted-average | ||||||||||||||||
| Number of stock options | Exercise price | Grant-date fair value | Remaining contractual term | |||||||||||||
| # | $ | $ | (yrs.) | |||||||||||||
| Balance, August 31, 2020 | 253,121 | 12.73 | 4.39 | 4.31 | ||||||||||||
| Granted | 487,466 | 11.77 | 8.16 | |||||||||||||
| Issued on exercise of options | (20,833 | ) | 7.91 | 4.38 | ||||||||||||
| Forefitures | (26,816 | ) | 27.20 | 6.51 | ||||||||||||
| Balance, August 31, 2021 | 692,938 | 11.64 | 7.06 | 4.46 | ||||||||||||
| Balance, August 31, 2021 | 692,938 | 11.64 | 7.06 | 4.46 | ||||||||||||
| Granted | 953,957 | 1.41 | 0.75 | |||||||||||||
| Forefitures | (503,713 | ) | 9.76 | 5.61 | ||||||||||||
| Balance, August 31, 2022 | 1,143,182 | 3.93 | 2.43 | 5.64 | ||||||||||||
| Exercisable as of August 31, 2022 | 555,934 | 3.89 | 2.29 | 5.65 | ||||||||||||
During the year ended August 31, 2022, the Company granted options to purchase 953,957 common shares of the Company. Each option allows the holder to purchase one common share of the Company. The options had exercise prices of CAD$1.15 to CAD $3.90. The fair value of the options granted was estimated at the grant dates based on the Black-Sholes pricing model. Key assumptions include 0% expected dividend yield, Risk-free interest rate of 1.24% to 2.75%, expected life of 5 years and expected volatility of 90%.
During the year ended August 31, 2021, the Company granted options to purchase 487,466 common shares of the Company. Each option allows the holder to purchase one common share of the Company. The options had exercise prices of CAD$7.78 to CAD $15.08. The fair value of the options granted was estimated at the grant dates based on the Black-Sholes pricing model. Key assumptions include 0% expected dividend yield, Risk-free interest rate of .83% to 1.48%, expected life of 5 or 10 years and expected volatility of 90%.
| Page 49 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The following tables reflect the stock options issued and outstanding as of August 31, 2022:
Disclosure of Detailed Information About Options Issued and Outstanding
| Outstanding | Weighted average exercise price | Weighted average remaining contractual term | ||||||||||||||
| Expiry date | options | CAD | USD | (Years) | ||||||||||||
| April 1, 2023 | 47,499 | 11.25 | 7.91 | 0.58 | ||||||||||||
| August 25, 2025 | 340 | 106.50 | 76.43 | 2.99 | ||||||||||||
| February 10, 2026 | 1,338 | 106.50 | 76.43 | 3.45 | ||||||||||||
| May 23, 2026 | 9 | 106.50 | 76.43 | 3.73 | ||||||||||||
| June 24, 2026 | 146,433 | 15.04 | 12.21 | 3.82 | ||||||||||||
| July 2, 2026 | 45,010 | 15.08 | 12.21 | 3.84 | ||||||||||||
| August 20, 2026 | 10,000 | 7.78 | 6.05 | 3.97 | ||||||||||||
| March 3, 2027 | 1,003 | 106.50 | 76.43 | 4.51 | ||||||||||||
| November 3, 2027 | 133 | 106.50 | 76.43 | 5.18 | ||||||||||||
| November 7, 2029 | 30,755 | 7.50 | 5.38 | 7.19 | ||||||||||||
| June 14, 2031 | 10,683 | 14.20 | 11.69 | 8.79 | ||||||||||||
| November 23, 2031 | 10,000 | 12.45 | 9.82 | 9.24 | ||||||||||||
| January 31, 2027 | 15,000 | 3.90 | 3.07 | 4.42 | ||||||||||||
| April 12, 2027 | 100,000 | 2.87 | 2.27 | 4.62 | ||||||||||||
| August 10, 2027 | 100,000 | 1.47 | 1.15 | 4.95 | ||||||||||||
| May 26, 2029 | 624,979 | 1.49 | 1.16 | 6.74 | ||||||||||||
| 1,143,182 | 5.01 | 3.93 | 5.64 | |||||||||||||
Of the 1,143,182 options outstanding as of August 31, 2022 (2021 – 692,938), 555,934 are exercisable as of August 31, 2022 (2021 – 209,950). During the year ended August 31, 2022, share-based payments expense for the Company’s stock options was $3,034,073 (August 31, 2021 – $665,339).
24. 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 1,548,174 common shares.
| Page 50 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The Company’s outstanding RSUs are as follows:
Disclosure of Detailed Information About Restricted Stock Units Outstanding
| Number | ||||
| # | ||||
| Balance, August 31, 2020 | 402,372 | |||
| Issued on acquisition of SideQik | 23,939 | |||
| Granted | 353,467 | |||
| Vested | (277,749 | ) | ||
| Cancelled | (11,855 | ) | ||
| Balance, August 31, 2021 | 490,174 | |||
| Balance, August 31, 2021 | 490,174 | |||
| Granted | 1,086,382 | |||
| Vested | (203,537 | ) | ||
| Cancelled | (176,808 | ) | ||
| Balance, August 31, 2022 | 1,196,211 | |||
Activity for the year ended August 31, 2022
During the year ended August 31, 2022, the Company granted 966,691 RSUs to key management employees, pursuant to the Company’s incentive plan. The fair value of these RSUs was estimated based on the closing price CAD$1.15 for a total fair value of CAD$1,111,695. 159,568 of these RSUs have a performance condition that the Company estimates will not be achieved, no related share-based compensation was recorded for the performance based RSUs during the year ended August 31, 2022. The fair value of the 807,123-service period based RSUs will be recognized as share-based compensation over the vesting period of three years. Also, during the year, the company granted 119,691 RSUs to members of the board of directors. The grant date fair value was estimated based on the closing prices of CAD$1.10 – CAD$4.98 for a total fair value of CAD$538,452. The fair value of these RSUs will be recognized as share-based compensation expense over the vesting period, which is approximately ten - twelve months.
Activity for the year ended August 31, 2021
During the year ended August 31, 2021, the Company granted 353,467 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$7.94 – CAD$14.61 for a total fair value on date of grant of CAD$3,547,104. Of the 377,406 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 Company issued 23,939 RSUs as purchase consideration related to the SideQik, Inc. acquisition with a fair value of $245,000 The remaining RSUs will be recognized as share-based payments expense over the vesting period, which is generally three years.
During the years ended August 31, 2022, and 2021, share-based compensation expense for the Company’s RSUs was $1,654,145 (2021 – $3,037,366).
25. Capital management
The Company considers its capital to be its shareholders’ equity.
As of August 31, 2022, the Company had shareholders’ equity before non-controlling interests of $15,886,591 (2021 – $25,422,165). 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.
| Page 51 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
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 years ended August 31, 2022, and 2021.
26. Commitments and contingencies
Litigation and arbitration
In April 2020, the Company announced its renegotiation of the acquisition of Allinsports. The revised purchase agreement provided for the acquisition of 100% of Allinsports in exchange for the issuance of 966,667 common shares of the Company and other consideration, including payments of $1,200,000 as a portion of the purchase consideration. In September 2020, the Company advised the shareholders of Allinsports that closing conditions of the transaction, including the requirement 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 sought up to US$20,000,000 in damages. As of August 31, 2020, the Company had recorded an impairment against the entire balance of advances to Allinsports, amounting to $2,625,657. A hearing in this matter was held in May of 2021, and by a decision dated September 30, 2021, the Arbitrator determined that the closing of the transaction had previously occurred and directed the Company to issue the 966,667 common shares. The Company is pursuing regulatory approval to issue the shares and is also pursuing relief against the Allinsports shareholders for various alleged breaches of the share purchase agreement. The Company recognized a liability for the arbitration ruling of $692,613, which represents the fair value of the common shares directed to be delivered as of August 31, 2022. The liability is recorded as Arbitration reserve on the Company’s Consolidated Statements of Financial Position. This liability will be adjusted to fair value at the end of each reporting period.
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 of Bleacher’s patents covering an interactive themed baseball game and seeking damages and other relief. The parties have entered into an agreement resolving this matter and in connection therewith, on November 8, 2021, the plaintiff terminated the pending action by filing a notice of voluntary dismissal with prejudice. There was no related expense.
In April of 2021, the Company received a copy of a complaint filed by 3CI Holdings, LLLP 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 $2,890,000. On July 6, 2021, the Company filed motion to dismiss the complaint. On February 17, 2022, 3CI Holdings filed an Amended Complaint, to which the Company filed a motion to dismiss, which was granted pursuant to an order signed by the court on July 5, 2022.
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 defendants have filed a motion to dismiss the claims. By Decision dated March 1, 2022, the Court granted in part and denied in part, the defendants’ Motion to Dismiss the Complaint. 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. By Complaint filed on October 28, 2022, against the defendant directors, the insurance carrier providing directors and officers coverage for the shareholder action is seeking a declaration that the action is not covered under the directors and officers policy issued by it. As of August 31, 2022 it is impossible to estimate a liability or if one is likely.
In July of 2021, Winview Inc. filed separate patent infringement lawsuits against DraftKings Inc. and FanDuel, Inc in the United States District Court for the District of New Jersey, alleging that Sportsbook and Daily Fantasy Sports offerings of DraftKings and FanDuel infringe four of Winview’s patents. These actions seek the recovery of damages and other appropriate relief. Draft Kings and FanDuel have filed motions to dismiss, which are pending. The defendants have also filed petitions for inter partes review with the United States Patent Office, which are expected to commence in the first quarter of 2023. During the quarter ended August 31, 2022, the Company recognized patent impairment expense amounting to $5,029,475. The impairment expense reflects the impact of reductions in estimated future net cash flows for certain portfolios that management determined it would no longer allocate resources to in future periods.
By Order to Continue dated May 5, 2022, the Company was substituted in as the plaintiff in a matter pending in the Ontario Superior Court of Justice, seeking recovery of €1,903,153 of principal and additional amounts of accrued interest under promissory notes acquired by the Company. The matter is in the discovery stage.
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.
| Page 52 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
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.
27. Discontinued operations
Winview
During the fourth quarter of fiscal 2022, The Company executed a plan to discontinue operating the Winview business, following a strategic decision to focus the Company’s resources on the key revenue streams of software-as-a-service and advertising. Winview was previously part of the Company’s Gaming segment.
Accordingly, WinView results for the current and comparative periods have been presented as discontinued operations within the Consolidated Statements of Loss and Comprehensive Loss. Winview revenue was previously categorized as Direct to consumer.
During the quarter ended August 31, 2022, the Company recognized patent impairment expense amounting to $5,029,475. The impairment expense reflects the impact of reductions in estimated future net cash flows for certain portfolios that management determined it would no longer allocate resources to in future periods. The impairment expense consisted of the excess of the asset’s recoverable value over its fair value less costs of disposal. The key assumption in calculating the asset’s recoverable value is cash flow projections of $0. The Company recorded impairment losses of $136,331 to write down the right of use asset to fair value less costs of disposal, the remaining book value of these assets is $0 (Notes 14 and 15). These impairments are recorded in the Gain (loss) from discontinued operations within the Consolidated Statements of Loss and Comprehensive Loss.
| Page 53 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Results from the discontinued operations for Winview and the related cash flows are as follows:
Schedule of discontinued operations
| Revenues | ||||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Revenues | ||||||||
| Revenue | 135,160 | 3,543 | ||||||
| Operating expenses | ||||||||
| Salaries and wages | 1,882,859 | 1,449,744 | ||||||
| Consulting | 945,397 | 524,971 | ||||||
| Professional fees | 468,408 | 584,149 | ||||||
| Sponsorships and tournaments | 150,512 | 15,133 | ||||||
| Advertising and promotion | 416,968 | 69,592 | ||||||
| Office and general | 518,540 | 411,636 | ||||||
| Technology expenses | 47,809 | 25,009 | ||||||
| Amortization and depreciation | 1,948,538 | 1,897,414 | ||||||
| Impairment expense | 5,165,806 | |||||||
| Restructuring Costs | 226,152 | |||||||
| Interest expense | 66,164 | 46,977 | ||||||
| (Gain) loss on foreign exchange | (601 | ) | ||||||
| Non-operational professional fees | 1,613,831 | 846,475 | ||||||
| Net income (loss) from discontinued operations | (13,315,223 | ) | (5,867,557 | ) | ||||
| Net cash provided by (used in) operating activities | 78,772 | 1,097,635 | ||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Net cash provided by (used in) operating activities | 78,772 | 1,097,635 | ||||||
| Disposal of Motorsports | ||||||||
| Net cash used in financing activities | (110,906 | ) | (1,054,503 | ) | ||||
| Change in cash | (32,134 | ) | 43,132 | |||||
| Cash, beginning of period | 52,746 | 9,614 | ||||||
| Cash, end of period | 20,612 | 52,746 | ||||||
UMG
The Company entered into an agreement on June 13, 2022, to sell certain assets of UMG for $100. On June 30, 2022, the Company completed the sale. Concurrently with the sale agreement the Company entered into a transition services agreement with the purchaser for a total value of $300,000 of which $262,000 has been recognized as additional purchase consideration in other receivables, with payments beginning July 31, 2022, and the remainder to be paid in full, 12 months following the first payment.
Accordingly, UMG results for the current and comparative periods have been presented as discontinued operations within the Consolidated Statements of Loss and Comprehensive Loss. UMG revenue was previously categorized as Direct to consumer.
During the quarter ended May 2022, the Company recognized impairment expense relating to assets not disposed of in connection with the UMG asset sale amounting to $476,404. The impairment expense reflects the reductions to $0 of the right of use asset, application platform and brand intangible assets, and a group of fixed assets. The impairment expense consisted of the excess of the asset’s carrying values over their fair values less costs of disposal. (Notes 10, 14 and 15). These impairments are recorded in the Gain (loss) from discontinued operations within the Consolidated Statements of Loss and Comprehensive Loss.
| Page 54 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Consideration transferred for the sale of UMG Games sales and the resulting gain on disposal was as follows:
Schedule of loss on disposal
| Amount | ||||
| $ | ||||
| Consideration received or receivable: | ||||
| Cash consideration | 100 | |||
| Deferred cash consideration | 262,000 | |||
| Total disposal consideration | 262,100 | |||
| Carrying amount of net assets sold | (4,550 | ) | ||
| Gain on disposal of UMG Assets | 257,550 | |||
The net assets of UMG (the disposal group) as of the date of sale were as follows:
Schedule of net asset
| Amount | ||||
| $ | ||||
| Carrying amounts of assets as at the date of sale: | ||||
| Cash and cash equivalents | ||||
| Restricted cash | ||||
| Accounts and other receivables | ||||
| Government remittances | ||||
| Prepaid expenses and other | ||||
| Right-of-use assets | ||||
| Intangible assets | ||||
| Goodwill | ||||
| Property and equipment | 27,931 | |||
| Total assets of disposal group | 27,931 | |||
| Carrying amount of liabilities directly associated with assets as at the date of sale: | ||||
| Long-term debt, current | ||||
| Lease obligation, current | ||||
| Accrued liabilities | ||||
| Accounts payable | ||||
| Players liability account | 23,381 | |||
| Total liabilities of disposal group | 23,381 | |||
| Net assets of disposal group | 4,550 | |||
Results from the discontinued operations for UMG and the related cash flows are as follows:
Schedule of discontinued operations
| Revenues | ||||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Revenues | ||||||||
| Revenue | 596,126 | 449,857 | ||||||
| Operating expenses | ||||||||
| Salaries and wages | 1,119,786 | 1,024,732 | ||||||
| Consulting | - | - | ||||||
| Professional fees | (6,227 | ) | 253,147 | |||||
| Sponsorships and tournaments | 713,031 | 420,537 | ||||||
| Advertising and promotion | 23,790 | 17,869 | ||||||
| Office and general | 97,666 | 145,866 | ||||||
| Technology expenses | 82,189 | 153,312 | ||||||
| Amortization and depreciation | 275,669 | 503,270 | ||||||
| Impairment expense | 476,404 | 3,885,001 | ||||||
| Restructuring Costs | 81,394 | - | ||||||
| Interest expense | 14,553 | 36,107 | ||||||
| (Gain) loss on foreign exchange | 19,974 | (15,733 | ) | |||||
| Net income (loss) from discontinued operations | (2,302,103 | ) | (5,974,251 | ) | ||||
| Page 55 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Schedule of cash flow in discontinued operation
| Net cash provided by (used in) operating activities | 6,491 | 438,394 | ||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Net cash provided by (used in) operating activities | 6,491 | 438,394 | ||||||
| Net cash used in financing activities | (72,409 | ) | (86,117 | ) | ||||
| Change in cash | (65,918 | ) | 352,277 | |||||
| Cash, beginning of period | 175,296 | (176,981 | ) | |||||
| Cash, end of period | 109,378 | 175,296 | ||||||
The Company tested the UMG CGU goodwill balance of $3,209,045 as of August 31, 2021, for impairment. When assessing whether there is an impairment, the recoverable amount of the CGU was determined based on a value in use calculation. The value in use calculation used a ten-year projected and terminal period debt-free cash flow model discounted to present value using a discount rate of 21.0% and a long-term growth rate of 3%. The recoverable value is concluded after making adjustments to the discounted cash flow model for cash or any other non-operating assets or liabilities as of the measurement date. The concluded recoverable value is then compared to carrying value of the CGU. Based on this impairment assessment, the Company determined that an impairment charge was necessary and recorded a full goodwill impairment charge of $3,209,045 (Note 13) on the Company’s consolidated statement of loss and comprehensive loss. Additionally, resulting from this impairment assessment the Company recorded $675,956 impairment charge in connection with the intangibles within the UMG CGU (Note 14). These impairments are recorded in the Gain (loss) from discontinued operations within the Consolidated Statements of Loss and Comprehensive Loss. The results for UMG were reflected in the Company’s Gaming segment prior to becoming a discontinued operation.
Eden Games
The Company committed to a plan to sell Eden Games, S.A. (“Eden Games”) during the second quarter of fiscal 2022, following a strategic decision to focus the Company’s resources on the key revenue streams of software-as-a-service, and advertising. Eden Games was previously part of the Company’s Gaming segment. On April 6, 2022, the Company completed the sale of Eden Games.
Accordingly, Eden Games’ results for the current and comparative periods have been presented as discontinued operations within the Consolidated Statements of Loss and Comprehensive Loss. Eden Games revenue was previously categorized as Games development.
Consideration transferred for the sale of Eden Games sales and the resulting gain on disposal was as follows:
Schedule of loss on disposal
| Amount | ||||
| $ | ||||
| Consideration received or receivable: | ||||
| Cash consideration | 15,357,803 | |||
| Total disposal consideration | 15,357,803 | |||
| Carrying amount of net assets sold | (595,065 | ) | ||
| Carrying amount attributable to non-controlling interests | 208,598 | |||
| Gain on disposal before income tax and reclassification of foreign currency translation reserve | 14,971,336 | |||
| Reclassification of foreign currency translation reserve | 139,122 | |||
| Gain on disposal of Eden Games | 15,110,458 | |||
| Page 56 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The net assets of Eden Games (the disposal group) as of the date of sale were as follows:
Schedule of net asset
| Amount | ||||
| $ | ||||
| Carrying amounts of assets as at the date of sale: | ||||
| Cash | 647,187 | |||
| Accounts and other receivables | 586,309 | |||
| Government remittances | 566,331 | |||
| Prepaid expenses and other | 36,124 | |||
| Right-of-use assets | 16,036 | |||
| Property and equipment | 41,132 | |||
| Intangible assets | 296,235 | |||
| Goodwill | 345,150 | |||
| Total assets of disposal group | 2,534,504 | |||
| Carrying amount of liabilities directly associated with assets as at the date of sale: | ||||
| Accounts payable | 1,168,966 | |||
| Accrued liabilities | 750,388 | |||
| Lease obligation, current | - | |||
| Long-term debt, current | 20,085 | |||
| Total liabilities of disposal group | 1,939,439 | |||
| Net assets of disposal group | 595,065 | |||
Results of discontinued operations for Eden and the related cash flows are as follows:
Schedule of discontinued operations
| Revenues | ||||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Revenues | ||||||||
| Revenue | 4,759,711 | 3,422,202 | ||||||
| Operating expenses | ||||||||
| Salaries and wages | 2,113,180 | 3,384,577 | ||||||
| Consulting | 796,570 | 966,372 | ||||||
| Office and general | 265,125 | 565,340 | ||||||
| Amortization and depreciation | 224,349 | 1,377,550 | ||||||
| Share-based payments | (93 | ) | (49 | ) | ||||
| Interest expense | 7,145 | 41,639 | ||||||
| (Gain) loss on foreign exchange | 39,350 | (135,976 | ) | |||||
| Net income (loss) from discontinued operations | 1,314,085 | (2,777,251 | ) | |||||
| Page 57 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Schedule of cash flow in discontinued operation
| Net cash provided by (used in) operating activities | 509,166 | 444,640 | ||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Net cash provided by (used in) operating activities | 509,166 | 444,640 | ||||||
| Disposal of Eden | (647,187 | ) | - | |||||
| Net cash used in financing activities | (132,550 | ) | (281,647 | ) | ||||
| Change in cash | (270,571 | ) | 162,993 | |||||
| Cash, beginning of period | 270,571 | 107,578 | ||||||
| Cash, end of period | - | 270,571 | ||||||
Motorsport Group
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:
Schedule of loss on disposal
| 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 | ) | ||
| Page 58 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
During the year ended August 31, 2022 the Company determined that $194,268 in receivables retained from the disposal of Motorsports was no longer collectible and those receivables have been expensed in gain (loss) on disposal of subsidiary.
The net assets of the Motorsport Group as of the date of sale were as follows:
Schedule of net asset
| 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 | 508,881 | |||
| Accrued liabilities | 422,139 | |||
| Total liabilities of disposal group | 931,020 | |||
| Net assets of disposal group | 2,334,303 | |||
Results of discontinued operations for the Motorsports Group and PGL Nevada, (together, the “discontinued operations”) and the related cash flows are as follows:
Schedule of discontinued operations
| Revenues | ||||||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Revenues | ||||||||
| Revenue | - | 90,934 | ||||||
| Operating expenses | ||||||||
| Salaries and wages | - | 212,546 | ||||||
| Consulting | - | 267,933 | ||||||
| Professional fees | - | 24,781 | ||||||
| Sponsorships and tournaments | - | 203,637 | ||||||
| Advertising and promotion | - | 1,740 | ||||||
| Office and general | - | 7,374 | ||||||
| Technology expenses | - | 86,590 | ||||||
| Amortization and depreciation | - | 201,335 | ||||||
| Interest expense | - | 572 | ||||||
| (Gain) loss on foreign exchange | 5,256 | 29,535 | ||||||
| Gain on extinguishment of liabilities | (1,105,023 | ) | - | |||||
| Net income (loss) from discontinued operations | 1,099,767 | (945,109 | ) | |||||
| Net cash provided by (used in) operating activities | - | (92,652 | ) | |||||
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Net cash provided by (used in) operating activities | - | (92,652 | ) | |||||
| Disposal of Motorsports | - | 24,348 | ||||||
| Change in cash | - | (68,304 | ) | |||||
| Cash, beginning of period | - | 68,304 | ||||||
| Cash, end of period | - | - | ||||||
| Page 59 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
28. Segmented information
Information reported to the Company’s Co-Chief Executives, the Chief Operating Decision Makers (“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 Gaming, Media, and Corporate and Other. Discontinued operations have been removed from the segment information and prior periods have been rested to conform with current year presentation. The Group’s reportable segments under IFRS 8 Operating Segments are therefore as follows:
| Gaming | - | Services related to competitive organized video gaming or sporting events | |
| Media | - | 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 in fiscal 2022:
Schedule of segment reporting
| Gaming | Media | Corporate and Other | Total | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 1,906,137 | 39,976,476 | - | 41,882,613 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (706,528 | ) | (11,436,185 | ) | - | (12,142,713 | ) | |||||||||
| Central administration costs | - | - | 9,788,532 | 9,788,532 | ||||||||||||
| Other gains and losses | (6,490 | ) | 4,059,247 | (10,312,246 | ) | (6,259,489 | ) | |||||||||
| Finance costs | 57 | 1,193 | 728,598 | 729,848 | ||||||||||||
| Income (loss) before tax | (700,095 | ) | (15,496,625 | ) | (204,884 | ) | (16,401,604 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the period from: | ||||||||||||||||
| Discontinued operations | (12,547,685 | ) | - | 14,535,910 | 1,988,225 | |||||||||||
| Non-controlling interest in net loss | - | - | (65,219 | ) | (65,219 | ) | ||||||||||
| Net income (loss) | (13,247,780 | ) | (15,496,625 | ) | 14,265,807 | (14,478,598 | ) | |||||||||
| Page 60 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
The following is an analysis of the Company’s revenue and results by reportable segment in fiscal 2021:
| Gaming | Media | Corporate and Other | Total | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 1,401,981 | 31,943,287 | - | 33,345,268 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (354,356 | ) | (7,611,679 | ) | - | (7,966,035 | ) | |||||||||
| Central administration costs | - | - | 8,529,166 | 8,529,166 | ||||||||||||
| Other gains and losses | 4,569 | (39,258 | ) | 6,712,278 | 6,677,589 | |||||||||||
| Finance costs | (60 | ) | 512,937 | 762,121 | 1,274,998 | |||||||||||
| Loss before tax | (358,865 | ) | (8,085,358 | ) | (16,003,565 | ) | (24,447,788 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the period from: | ||||||||||||||||
| Share of net loss of associate | - | - | (103,930 | ) | (103,930 | ) | ||||||||||
| Discontinued operations | (14,496,066 | ) | - | (1,747,033 | ) | (16,243,099 | ) | |||||||||
| Non-controlling interest in net loss | - | - | 74,006 | 74,006 | ||||||||||||
| Net loss | (14,854,931 | ) | (8,085,358 | ) | (17,780,522 | ) | (40,720,811 | ) | ||||||||
Segment loss - Segment loss includes total revenue less operating expenses including the following: salaries and wages, consulting, professional fees, revenue sharing expense, advertising and promotion, office and general, technology expenses, amortization and depreciation and share based payments.
Central administration costs - Central administration costs include corporate operating expenses including the following: salaries and wages, consulting, professional fees, advertising and promotion, office and general, technology expenses, amortization and depreciation and share based payments.
Other gains and losses - Other gains and losses includes gain / loss on foreign exchange, loss on extinguishment of debt, gain on retained interest in former associate, transaction costs, arbitration settlement reserve, impairment expense, restructuring costs, change in fair value of investment at FVTPL, change in fair value of warrant liability and change in fair value of convertible debt.
Finance costs - Finance costs include interest expense.
Geographical breakdown
| North America | European Union | Total | ||||||||||
| $ | $ | $ | ||||||||||
| August 31, 2021 | ||||||||||||
| Assets | 64,943,049 | 2,519,798 | 67,462,847 | |||||||||
| Long-term assets | 35,796,241 | 108,924 | 35,905,165 | |||||||||
| August 31, 2022 | ||||||||||||
| Assets | 41,548,305 | 1,146,504 | 42,694,809 | |||||||||
| Long-term assets | 20,635,907 | - | 20,635,907 | |||||||||
29. 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 includes the following:
Schedule of compensation award to key management
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Total compensation paid to key management | 1,390,598 | 2,231,871 | ||||||
| Share based payments | 963,295 | 1,897,855 | ||||||
| Page 61 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Total compensation paid to key management is recorded in consulting fees and salaries and wages in the consolidated statement of loss and comprehensive loss for the years ended August 31, 2022, and 2021.
Amounts due to related parties as of August 31, 2022, with respect to the above fees were $5,588 (2021 – $33,349). The amounts due to related parties are recorded within accounts payable and accrued liabilities on the consolidated statements of loss and comprehensive loss. These amounts are unsecured, non-interest bearing and due on demand.
Commitment to former holders of WinView to proceeds from the patent portfolio enforcement action
Pursuant to the Business Combination agreement dated March 9, 2020, among the Company, Frankly Inc. and Winview Inc., the Company is required to pay to certain former Winview securities holders (“Stubholders”) fifty percent (50%) of the net license fees, damages awards or settlement amounts collected from third parties in connection with the Winview Patent Portfolio, after deduction of certain expenses. Company director, Tom Rogers is among the pool of Stubholders.
While the Company does not believe that the interests of Mr. Rogers, as Stubholder, are sufficiently material or adverse to the Company’s interests to create an actual or potential conflict of interest with respect to the management of the Winview Patent Portfolio, the Company nevertheless has formed a Patent Committee, that excludes Mr. Rogers, to make recommendations to the Company’s Board regarding matters involving the Winview Patent Portfolio.
30. 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, liquidity risk and market risk and other price risk. These financial instrument risks are actively managed by the Company under the policies approved by the Board of Directors. 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. There have been no changes in objectives, policies or how the Company manages these risks.
The Board approves and monitors the risk management processes. The Board’s main objectives for managing risks are to ensure liquidity, the fulfillment of obligations and limited exposure to credit and market risks while ensuring greater returns on any surplus funds.
| (b) | Credit risk |
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation 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.
| Page 62 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
Credit risk arises from cash 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 to 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 allowance for doubtful accounts was $1,155,638 and $1,084,305 as of August 31, 2022, and 2021, respectively.
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 August 31, 2022, one customer (2021 - one) accounted for greater than 10% of the Company’s accounts receivable balance. In total, this one customer (2021 - one) accounted for 16% and 13% of the Company’s accounts and other receivables balance as of August 31, 2022, and 2021, respectively. During the year ended August 31, 2022, one (2021 - one) customer represented 72% (2021 - 60%) 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 August 31, 2022:
Schedule of trade accounts receivable and allowance for doubtful accounts
| Current | 0 - 30 | 31 - 60 | 61 - 90 | 91+ | Total | |||||||||||||||||||
| Trade accounts receivable | 6,805,057 | 202,359 | 428,098 | 305,056 | 2,010,049 | 9,750,619 | ||||||||||||||||||
| Allowance for doubtful accounts | 12,753 | 3,577 | 17,423 | 9,790 | 1,312,095 | 1,355,638 | ||||||||||||||||||
| % Allowance | 2 | % | 4 | % | 3 | % | 65 | % | 14 | % | ||||||||||||||
| (c) | Liquidity risk |
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. 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.
Schedule of funding available from operations and other sources
| < 1 year | 1-2 years | |||||||
| $ | $ | |||||||
| Accounts payable | 12,772,375 | - | ||||||
| Accrued liabilities | 3,756,758 | - | ||||||
| Players liability account | 47,455 | - | ||||||
| Promissory notes payable | 771,762 | - | ||||||
| Convertible debt | 2,267,367 | 4,983,236 | ||||||
| Page 63 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| (d) | Market Risk |
Market risk represents the risk of loss that may impact the Company’s financial position, results of operations, or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, and other relevant market or price risks. The Company does not use derivative instruments to mitigate this risk.
Interest rate risk
Interest rate risk is the risk that the fair value or 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 bears interest at fixed rates.
Currency Risk
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.
| (e) | 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 values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
| ■ | Level 1: unadjusted quoted prices in active markets for identical assets or liabilities; | |
| ■ | Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or | |
| ■ | Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
Schedule of fair value measurement
For the year ended August 31, 2022:
| Carrying value at August 31, 2022 | FVTPL - mandatorily measured | Amortized cost | ||||||
| $ | $ | |||||||
| Financial assets: | ||||||||
| Cash | - | 8,601,706 | ||||||
| Restricted cash | - | 47,455 | ||||||
| Accounts and other receivables | - | 8,404,009 | ||||||
| Government remittances | - | 874,334 | ||||||
| Publisher advance | 1,490,648 | - | ||||||
| Promissory notes receivable | 576,528 | - | ||||||
| Investment at FVTPL | 2,629,851 | - | ||||||
| 4,697,027 | 17,927,504 | |||||||
| Page 64 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
| Carrying value at August 31, 2022 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable | - | - | 12,772,375 | |||||||||
| Accrued liabilities | - | - | 3,756,758 | |||||||||
| Players liability account | - | - | 47,455 | |||||||||
| Long-term debt | - | - | - | |||||||||
| Promissory notes payable | - | - | 771,762 | |||||||||
| Warrant liability | 49,894 | - | - | |||||||||
| Convertible debt | - | 7,250,603 | - | |||||||||
| 49,894 | 7,250,603 | 17,348,350 | ||||||||||
For the year ended August 31, 2021:
| Carrying value at August 31, 2021 | FVTPL - mandatorily measured | Amortized cost | ||||||
| $ | $ | |||||||
| Financial assets: | ||||||||
| Cash | - | 15,305,996 | ||||||
| Restricted cash | - | 331,528 | ||||||
| Accounts and other receivables | - | 8,646,807 | ||||||
| Government remittances | - | 1,070,216 | ||||||
| Publisher advance | 4,534,218 | - | ||||||
| Promissory notes receivable | - | - | ||||||
| Investment at FVTPL | 2,629,851 | - | ||||||
| Financial assets | 7,164,069 | 25,354,547 | ||||||
| Carrying value at August 31, 2021 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable | - | - | 10,403,665 | |||||||||
| Accrued liabilities | - | - | 5,722,470 | |||||||||
| Players liability account | - | - | 331,528 | |||||||||
| Long-term debt | - | - | 96,664 | |||||||||
| Promissory notes payable | - | - | 821,948 | |||||||||
| Warrant liability | 4,868,703 | - | - | |||||||||
| Convertible debt | - | 9,951,496 | - | |||||||||
| Financial liabilities | 4,868,703 | 9,951,496 | 17,376,275 | |||||||||
| Page 65 of 66 |
| Engine
Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) Notes to the Consolidated Financial Statements August 31, 2022 and 2021 (Expressed in United States Dollars) |
|
A summary of instruments, with their classification in the fair value hierarchy is as follows:
Schedule of hierarchy levels of fair value
| Level 1 | Level 2 | Level 3 | Fair value as of August 31, 2022 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Warrant liability | - | 49,894 | - | 49,894 | ||||||||||||
| Convertible debt | - | - | 7,250,603 | 7,250,603 | ||||||||||||
| Publisher advance | - | - | 1,490,648 | 1,490,648 | ||||||||||||
| Promissory notes receivable | - | - | 576,528 | 576,528 | ||||||||||||
| Investment at FVTPL | - | - | 2,629,851 | 2,629,851 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Fair value as of August 31, 2021 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Warrant liability | - | 4,868,703 | - | 4,868,703 | ||||||||||||
| Convertible debt | - | - | 9,951,496 | 9,951,496 | ||||||||||||
| Publisher advance | - | - | 4,534,218 | 4,534,218 | ||||||||||||
| Promissory notes receivable | - | - | - | - | ||||||||||||
| Investment at FVTPL | - | - | 2,629,851 | 2,629,851 | ||||||||||||
During the years ended August 31, 2022, and 2021 there were no transfers of amounts between levels.
31. Restructuring charges
During 2022, a restructuring provision of $485,498 was made primarily to cover employee related costs for headcount reductions at Corporate and at what are now discontinued operations. The remaining restructuring provision on August 31, 2022, is $215,076 and is recorded in accrued liabilities.
32. Subsequent events
The Company has evaluated subsequent events from the balance sheet date through November 29, 2022, the date at which the consolidated financial statements were available to be issued and determined there were no additional items to be disclosed except for the transaction described below.
On September 1, 2022, the Company extended convertible debentures that were due to expire in October and November 2022 with an aggregate principal amount of US$1,250,000. The original convertible debentures had an annual interest rate of 10% per annum and a conversion price of US$8.90 per share.
In place of the expiring convertible debentures, the Company has issued a new convertible debenture with an aggregate principal amount of US$1,250,000 which expires on August 31, 2025, carries an annual interest rate of 7% per annum and is convertible into common shares of the Company at a conversion price of US$1.10 per share.
Each of the expiring convertible debentures and the replacement convertible debenture is beneficially held by a director of the Company. The participation of a director in the amendment of the convertible debentures constitutes a "related party transaction" as such term is defined by Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101"). The Company is relying on an exemption from the formal valuation requirements and the minority shareholder approval requirements under MI 61-101 as the fair market value of the amendment of the convertible debentures does not exceed 25% of the market capitalization of the Company.
Subsequent to year end, the remaining $750,000 principal value of the Company’s 2020 Series convertible debt that was due to mature in November 2022 was either settled by offset against the Company’s promissory notes receivable or amended. Two of the three parties holding the convertible debt agreed to allow the Company to offset principal of $500,000 and interest of $91,781 due at maturity against the Company’s promissory notes receivable. The remaining $250,000 principal value convertible debt was amended to extend the maturity date to February 28, 2023, with all other terms remaining unchanged.
| Page 66 of 66 |
Exhibit 99.3
ENGINE GAMING AND MEDIA, INC.
(formerly Engine Media Holdings, Inc.)
Management’s Discussion and Analysis
For the years ended
August 31, 2022 and 2021
(Expressed in United States Dollars)
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) 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 Gaming and Media, Inc. for the year ended August 31, 2022, and 2021 and should be read in conjunction with the Company’s Fiscal 2022 Consolidated Financial Statements and accompanying notes. The words “we”, “our”, “us”, “Company”, and “Engine” refer to Engine Gaming and Media, Inc., and its subsidiaries and/or the management and employees of the Company (as the context may require).
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; | |
| ● | our intent to complete a private placement of our common shares and common share purchase warrants, and to have a substantial portion of its convertible debt converted to common shares; | |
| ● | 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 the recent acquisition of SideQik, Inc. (“SideQik”); | |
| ● | 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; | |
| ● | 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. |
| Page 2 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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:
| ● | our ability to obtain additional financing to fund near term operating cash flow deficits and to continue as a going concern; | |
| ● | 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; | |
| ● | execution of business plan; | |
| ● | the integration of recent acquisitions; | |
| ● | the management of growth; | |
| ● | reduced cash reserves from future operating losses; | |
| ● | failure to compete successfully in various markets; | |
| ● | the development of high-quality products; | |
| ● | rapid technological changes; | |
| ● | proprietary protection and intellectual property disputes; | |
| ● | transmission of user data; | |
| ● | data collection risk; | |
| ● | the condition of the global economy; | |
| ● | risks inherent in foreign/international operations; | |
| ● | changing governmental regulations; | |
| ● | COVID-19 related risks; | |
| ● | volatility in the market price of the Common Shares; | |
| ● | those risks discussed in this MD&A under the heading “Risk Factors”. |
These factors are not intended to represent a complete list of the factors that could affect the Company. A more detailed assessment of the risks that could cause actual events or results to materially differ from our current expectations can be found under the heading “Risks and Uncertainties” in this MD&A.
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 or in any document incorporated by reference herein.
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 the foregoing cautionary statements.
| Page 3 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Corporate Structure
Engine was formed during the year ended August 31, 2020, with the merger of Torque Esports, Frankly Media and WinView Games, and the acquisition of UMG Media Ltd.(“UMG”). Engine sold its Motorsport Assets in November 2020. Engine acquired SideQik in July 2021. Engine sold Eden Games in April 2022, sold certain assets of UMG in June 2022, and discontinued the operations of the WinView Games business in July 2022.
Corporate Profile
Engine Gaming and Media, Inc. 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 skills-based mobile engagement platform for traditional sports and esports – WinView; (ii) a data intelligence platform – Stream Hatchet; (iii) 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 (iv) a social media influencer marketing platform – SideQik, purchased July 5, 2021. The Company is a publicly traded company listed on the TSX Venture Exchange (“TSXV”) under the symbol “GAME.V”. It is also dual listed in the United States on the NASDAQ market under the symbol “GAME”. The registered head office of the Company is 3000-77 King Street, West, P.O. Box 95, TD Centre North Tower, Toronto, Ontario, Canada M5K 1G8.
Market Opportunity
Digital marketing is centered around identifying media outlets that reflect an organizations customer profile and activating campaigns to drive engagement, conversion, or awareness. Audiences today are incredibly fragmented across numerous devices, publications, and platforms. Therefore, marketers need a plethora of tools and services to identify audiences, activate against them, and measure results to further optimize their campaigns. Marketers have turned to these services at an increased rate, leveraging them in two channels: Programmatic Advertising and Influencer Marketing. Programmatic Advertising and Influencer Marketing are of the fastest growing marketing channels, each with an estimated compound annual growth rate (“CAGR”) of thirteen percent (13%) and twenty-eight percent (28%) from 2021 to 2025 respectively. Influencer marketing has grown at an especially elevated level given the abundance of content and engagement on social media and live-streaming platforms, particularly in the gaming genre. Gaming audiences particularly, are estimated to rise to over 1.4 billion people globally, a fifteen percent (15%) CAGR from 810 million in 2021.With so much growth in digital marketing, the demand for audience discovery, activation, and analytics only continues to increase, representing a large market opportunity for companies participating in this industry.
Monetization
Engine generates revenue through a combination of (i) business-to-business software-as-a-service (“SaaS”) subscription and professional service fees; and (ii) 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. The company participates in large gaming and media industries with strong macro-tailwinds and has positioned itself as a leader and innovator within the space, securing major partnerships with some of the largest organizations in video games, consumer package goods, direct-to-consumer brands, and legacy media providers.
| Page 4 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Our Brands
|
Frankly Media
Frankly Media provides a complete suite of content management, video streaming and engagement solutions that give broadcasters and publishers a unified workflow for the creation, management, publishing and monetization of digital content to any device, while maximizing audience value and revenue. Frankly delivers publishers and their audiences the solutions and services to meet the dynamic challenges of a multi-screen content distribution world. Frankly Media’s products include a groundbreaking online video platform for Live, VOD and Live-to-VOD workflows, a full-featured CMS with rich storytelling capabilities, as well as native apps for iOS, Android, Apple TV, Fire TV and Roku. Additionally, Frankly’s in-house team of digital advertising sales and operations experts monetize billions of monthly display and video advertising impressions through programmatic and direct brand sales across client and owned and operated media properties. Frankly has over 1,200 radio, TV and print media brands, including CNN, Newsweek and Vice Media; TV affiliates of NBC, CBS, FOX and ABC, and radio station groups such as Cumulus. |
|
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. 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.
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, which include streamers, esports organizations and video game producers. 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. Stream Hatchet’s customers include industry leaders such as Microsoft, Allied Esports, Activision and Twitch. |
| Page 5 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
 |
Sideqik
Sideqik is an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content creators. Sideqik’s end-to-end solutions offer marketers advanced capabilities to discover influencers with demographic and content filtering; connect and message influencers; share marketing collateral such as campaign briefs, photos, logos, videos; measure reach, sentiment, and engagement across all major social media platforms; and evaluate earned media value and return on investment across the entire campaign. |
Engine regularly assesses its portfolio to ensure strong alignment with stakeholder needs and priorities. Thus, beyond the sale of non-strategic businesses, the company continues to focus on optimizing growth across its portfolio. In addition, the company has taken aggressive cost actions and is effectuating plans to reduce or eliminate substantial expenditures across the Company, and most substantially to its B2C gaming businesses, which will sharply reduce the future overall cash requirements of the company.
Discontinued the operations of Winview
During the fourth quarter of fiscal 2022, The Company executed a plan to discontinue operating the Winview business, following a strategic decision to focus the Company’s resources on the key revenue streams of software-as-a-service and advertising. Winview was previously part of the Company’s Gaming segment
Completed asset purchase agreement, UMG
The Company entered into an agreement on June 13, 2022, to sell certain assets of UMG for $100. On June 30, 2022, the Company completed the sale. Concurrently with the sale agreement the Company entered into a transition services agreement with the purchaser for a total value of $300,000 of which $262,000 has been recognized as additional purchase consideration, with payments beginning July 31, 2022, and the remainder to be paid in full, 12 months following the first payment.
Disposition of Eden Games
The Company committed to a plan to sell Eden Games, S.A. (“Eden Games”) during the second quarter of fiscal 2022, following a strategic decision to focus the Company’s resources on the key revenue streams of direct-to- consumer, software-as-a-service, and advertising. Eden Games was previously part of the Company’s Gaming segment. On April 6, 2022, the Company completed the sale of Eden Games.
To facilitate the sale of Eden Games, under a separate agreement, the Company agreed to purchase Euro- denominated 6% promissory notes amounting to Euro 1,453,154 ($1,558,319) that were due to the former co-founders of Eden Games from third parties. Euro 1,081,081 ($1,181,005) of the consideration was paid on the closing of the sale with the remainder due in two equal payments on April 4, 2023, and October 6, 2023. The promissory notes receivable were classified at fair value through profit and loss based on management’s expectations about the proposed terms of settlement with the counterparties to the promissory notes and in accordance with the Company’s accounting policies.
| Page 6 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Accordingly, Eden Games’ results for the current and comparative periods have been presented as discontinued operations within the Interim Condensed Consolidated Statements of Income (loss) and Comprehensive Income (loss).
Disposition of Motorsport Assets
In November 2020, following a detailed strategic review in connection with the merger of Torque Esports, Frankly Media and WinView Games, the Company sold IDEAS+CARS, The Race Media, WTF1 and Driver DataBase (collectively the “Motorsport Assets”) 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. These auto-related businesses sold are not focused on gaming but instead, are developing esport and traditional sport racing audiences with the creation and production of auto racing content. While reducing its cost base, Engine will maintain the ability to work with the Motorsports Assets. For the year ended August 31, 2020, the Motorsport Assets had revenue of approximately $0.56 million and an operating loss of $5.86 million.
As part of the disposition of the Motorsport Assets, Darren Cox resigned as co-CEO of the Company, which enabled Engine to reorganize its leadership team by moving to a single CEO role under Lou Schwartz, with Tom Rogers remaining Executive Chairman.
Capital Allocation & Investment
Stream Hatchet - The business continues to invest in developing best in class measurement and analytical tools to serve the gaming live-streaming industry. The business plans to release a series of media valuation and activation solutions, removing major barriers for brands looking to enter the gaming sector and to market behind gaming influencers.
Sideqik - The company continues to invest in integration with Stream Hatchet, including offering the market a best in class, and first of its kind, one-stop-shop solution for influencer marketing activations and measurement across the combination of all major live streaming and social platforms. In addition, the company continues to invest in social commerce technology, enabling additional modes of monetization including campaign performance.
Senior Management Team
Engine has a deep and cohesive executive management team with diverse skillsets and 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.
Tom Rogers
Executive Chairman & Director
Mr. Tom Rogers is a media/technology executive who has shaped the communications industry over the past 40 years. He was the former chairman of Frankly Media, executive chairman of WinView Games and the previous president and CEO of Tivo. Rogers was the founder of CNBC and established MSNBC. He was inducted into the Broadcasting Hall of Fame & the Cable Hall of Fame and an Emmy Award winner for the development of advanced TV.
Lou Schwartz
Chief Executive Officer & Director
Mr. Lou Schwartz is a seasoned technology and digital media executive and pioneer in internet video management and over-the-top (“OTT”) video delivery. At WWE, he oversaw all digital platforms and helped lead the development of the WWE Network. He was also CEO of UUX, where he successfully led the merger of Totalmovie, a leading Latin American retail OTT service, with OTT Networks. Previously, Schwartz was CEO of the Americas and General Counsel for Piksel and he co-founded Multicast Media Technologies, one of the first Internet video platform companies, which sold to Piksel in 2010.
| Page 7 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Mike Munoz
Chief Financial Officer
Mr. Mike Munoz has served as the Chief Financial Officer of the Company from May 2020 to present; Chief Financial Officer of Frankly from April 2018 to May 2020; Controller of Frankly from January 2016 to April 2018; Assistant Controller of Frankly from September 2015 to January 2016.
Update on the effects 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 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. 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.
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 employees to work remotely and thus far have 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.
Presentation of financial information
Unless otherwise specified within, financial results, including historical comparatives, contained in this MD&A are based on Engine’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 metric 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.
| Page 8 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 years ended August 31, 2022, and 2021.
| For the year ended | ||||||||||
| Note | August 31, 2022 | August 31, 2021 | ||||||||
| $ | $ | |||||||||
| Net income (loss) attributable to owners of the Company | (14,478,598 | ) | (40,720,811 | ) | ||||||
| Interest expense | 729,848 | 1,274,998 | ||||||||
| Income tax expense | - | - | ||||||||
| Amortization and depreciation | (a) | 1,242,383 | 1,112,863 | |||||||
| Impairment expense | (a) | 3,873,000 | - | |||||||
| Restructuring costs | 177,952 | - | ||||||||
| Share-based payments | (a) | 4,688,218 | 3,702,754 | |||||||
| Loss on foreign exchange | 400,521 | 1,090,944 | ||||||||
| Loss on extinguishment of debt | (a) | - | 2,428,900 | |||||||
| Gain on retained interest in former associate | (a) | - | (99,961 | ) | ||||||
| Transaction costs | 1,327,990 | 341,702 | ||||||||
| Arbitration settlement reserve | (a) | (5,775,717 | ) | 6,468,330 | ||||||
| Change in fair value of investment at FVTPL | (a) | 873,778 | (581,812 | ) | ||||||
| Change in fair value of warrant liability | (a) | (4,748,893 | ) | (9,037,108 | ) | |||||
| Change in fair value of convertible debt | (a) | (2,388,120 | ) | 6,066,594 | ||||||
| Share of net loss of associate | (a) | - | 103,930 | |||||||
| (Gain) loss on disposal of subsidiary | (a) | (14,934,149 | ) | 678,931 | ||||||
| (Gain) loss on disposal of asssets | (a) | (257,550 | ) | - | ||||||
| (Gain) loss from discontinued operations | 13,203,474 | 15,564,168 | ||||||||
| Adjusted EBITDA | (16,065,863 | ) | (11,605,578 | ) | ||||||
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 non-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.
| Page 9 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Results from operations
Selected Annual Information
| For the year months ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Operating results | ||||||||
| Total revenues | $ | 41,882,613 | $ | 33,345,268 | ||||
| Total expenses | 58,284,217 | 57,793,056 | ||||||
| Total net income (loss) from continuing operations | (16,466,823 | ) | (24,477,712 | ) | ||||
| Total net gain (loss) from discontinued operations | 1,988,225 | (16,243,099 | ) | |||||
| Comprehensive income (loss) | (14,084,670 | ) | (40,710,561 | ) | ||||
| Loss per share – Continuing operations | ||||||||
| Basic income (loss) per share | $ | (1.05 | ) | $ | (2.06 | ) | ||
| Diluted income (loss) per share | $ | (1.05 | ) | $ | (2.06 | ) | ||
The total expenses above for the year ended August 31, 2022, include a non-cash decrease in the fair value of warrant liability of $4.7 million, discussed in more detail below.
Revenue
| Increase | ||||||||||||
| For the year ended August 31, | 2022 | 2021 | (decrease) | |||||||||
| $ | $ | $ | ||||||||||
| Software-as-a-service | 9,220,069 | 7,952,426 | 1,267,643 | |||||||||
| Advertising | 32,662,544 | 25,392,842 | 7,269,702 | |||||||||
| 41,882,613 | 33,345,268 | 8,537,345 | ||||||||||
| ● | Software-as-a-service revenue for the year ended August 31, 2022, was $9,220,069 in comparison to $7,952,426 for the year ended August 31, 2021. The increase of $1,267,643 was primarily due to the full year impact of revenue recognized from the SideQik acquisition and increased SAAS revenue from the Steam Hatchet business, offset to some degree by lower SAAS revenue at Frankly. |
| ● | Advertising revenue for the year ended August 31, 2022, was $32,662,544 in comparison to $25,392,842 for the year ended August 31, 2021. The increase of $7,269,702 was primarily due to growth from Frankly’s largest client, which saw significant growth in traffic to its various digital properties. |
| Page 10 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Expenses
| Increase | ||||||||||||
| For the year ended August 31, | 2022 | 2021 | (decrease) | |||||||||
| $ | $ | $ | ||||||||||
| Salaries and wages | 14,086,955 | 12,161,000 | 1,925,955 | |||||||||
| Consulting | 2,253,836 | 2,223,147 | 30,689 | |||||||||
| Professional fees | 1,920,663 | 1,771,190 | 149,473 | |||||||||
| Revenue sharing expense | 30,090,316 | 22,853,680 | 7,236,636 | |||||||||
| Advertising and promotion | 1,187,161 | 1,299,909 | (112,748 | ) | ||||||||
| Office and general | 5,282,145 | 2,406,678 | 2,875,467 | |||||||||
| Technology expenses | 3,062,181 | 2,309,248 | 752,933 | |||||||||
| Amortization and depreciation | 1,242,383 | 1,112,863 | 129,520 | |||||||||
| Share-based payments | 4,688,218 | 3,702,754 | 985,464 | |||||||||
| Interest expense | 729,848 | 1,274,998 | (545,150 | ) | ||||||||
| (Gain) loss on foreign exchange | 400,521 | 1,090,944 | (690,423 | ) | ||||||||
| Loss on extinguishment of debt | - | 2,428,900 | (2,428,900 | ) | ||||||||
| Gain on retained interest in former associate | - | (99,961 | ) | 99,961 | ||||||||
| Transaction costs | 1,327,990 | 341,702 | 986,288 | |||||||||
| Arbitration settlement reserve | (5,775,717 | ) | 6,468,330 | (12,244,047 | ) | |||||||
| Impairment expense | 3,873,000 | - | 3,873,000 | |||||||||
| Restructuring costs | 177,952 | - | 177,952 | |||||||||
| Change in fair value of promissory notes receivable and investment at FVTPL | 873,778 | (581,812 | ) | 1,455,590 | ||||||||
| Change in fair value of warrant liability | (4,748,893 | ) | (9,037,108 | ) | 4,288,215 | |||||||
| Change in fair value of convertible debt | (2,388,120 | ) | 6,066,594 | (8,454,714 | ) | |||||||
| 58,284,217 | 57,793,056 | 491,161 | ||||||||||
| ● | Salaries and wages for the year ended August 31, 2022, was $14,086,956 in comparison to $12,161,000 for the year ended August 31, 2021. The increase of $1,925,956 was primarily due to the full-year impact of the acquisition of SideQik which increased salaries and wages by $3.7 million from the prior year, the increase was offset somewhat by restructuring actions completed during 2022. |
| ● | Revenue sharing for the year ended August 31, 2022, was $30,090,316 in comparison to $22,853,680 for the year ended August 31, 2021. These costs are the full year share of our gross advertising revenue paid to Frankly’s customers. |
| ● | Office and general for the year ended August 31, 2022, was $5,282,145 in comparison to $2,406,678 for the year ended August 31, 2021. The increase of $2,875,467 was related to the directors’ and officers’ insurance acquired during the NASDAQ up-listing process as well as to a smaller extent, office, and general expenses from the SideQik acquisition, which didn’t impact the comparable period. |
| ● | Technology for the year ended August 31, 2022, was $3,062,181 in comparison to $2,309,248 for the year ended August 31, 2021. The increase of $752,933 was due to the acquisition of SideQik full-year impact, somewhat offset by technology savings at Frankly. |
| ● | Share-based payments expense for the year ended August 31, 2022, was $4,688,218 in comparison to $3,702,754 for the year ended August 31, 2021. The increase of $985,464 was due to a full year of share-based payment expense related to employees from the acquisition of Sideqik as well as stock options and restricted stock units granted to officers and directors, during the year. |
| Page 11 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
| ● | Interest expense for the year ended August 31, 2022, was $729,848 in comparison to $1,274,998 for the year ended August 31, 2021. The decrease of $545,150 was primarily due to significantly lower average principal balance during fiscal 2022 than 2021. |
| ● | Loss on foreign exchange for the year ended August 31, 2022, was $400,521 in comparison to of $1,090,944 for the year ended August 31, 2021. The decrease of $690,423 was due primarily to the weakening of the US dollar versus the Canadian dollar in the comparable period. |
| ● | Loss on extinguishment of debt was $0 for the year ended August 31, 2022, compared to $2,428,900 for the year ended August 31, 2021, as no debt extinguishments occurred in fiscal 2022. |
| ● | Transaction costs for the year ended August 31, 2021, was $1,327,990, in comparison to $341,702 for the year ended August 31, 2021. The increase of $986,288 was related to financing work that didn’t impact the comparable period as well as costs related to the disposal of Eden Games. |
| ● | Arbitration settlement reserve for the year ended August 31, 2022, was a benefit of $5,775,717, in comparison to expense of $6,468,330 for the year ended August 31, 2021. We recognized a liability for an arbitration ruling, relating to AIS, which represents the fair value of the common shares directed to be delivered as of August 31, 2022. This liability was adjusted to fair value at the end of each reporting period. |
| ● | Impairment expense for the year ended August 31, 2022, was $3,873,000 in comparison to $0 for the year ended August 31, 2021. The increase was due to full impairment of Sideqik goodwill, and $972,807 impairment allocated across the related software, brand and customer lists intangibles. The fiscal 2022 impairment was primarily driven by a delay in future forecasted revenue growth. |
| ● | Change in fair value of promissory notes receivable and investment at FVTPL for the year ended August 31, 2022, increased expense by $873,778 in comparison to decreasing expense $581,812 for the year ended August 31, 2021. The change of $1,455,590 was primarily due to a fair value adjustment of promissory notes receivable in 2022, these notes were acquired in 2022. |
| ● | Change in fair value of warrant liability for the year ended August 31, 2022, decreased expense by $4,748,893 in comparison to decreasing expense $9,037,108 for the year ended August 31, 2021. The change of $4,288,215 in the warrant liability is a result of the revaluation of the Company’s warrant obligation at each period end, driven by lower share price. |
| ● | Change in fair value of convertible debt for the year ended August 31, 2022, decreased expense by $2,388,120 in comparison to an increase in expense of $6,066,594 for the year ended August 31, 2021. The change of $8,454,714 is a result of the revaluation of the Company’s convertible debt at each period end, with a lower share price on August 31, 2022, than the comparable year. In addition, the change was impacted by a substantial decrease in outstanding convertible debt as of August 31, 2022. |
| Page 12 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Other items
| For the year ended August 31, | Increase | |||||||||||
| 2022 | 2021 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Share of net loss of associate | - | 103,930 | (103,930 | ) | ||||||||
| Gain (loss) on disposal of subsidiary | 14,934,149 | (678,931 | ) | 15,613,080 | ||||||||
| Gain (loss) on disposal of asssets | 257,550 | - | 257,550 | |||||||||
| Gain (loss) from discontinued operations | (13,203,474 | ) | (15,564,168 | ) | 2,360,694 | |||||||
| Net loss attributable to non-controlling interest | (65,219 | ) | 74,006 | (139,225 | ) | |||||||
| Foreign currency translation differences | 393,928 | 10,250 | 383,678 | |||||||||
| ● | The Gain (loss) on disposal of subsidiary for the year ended August 31, 2022, was a gain of $14,934,149 in comparison to a loss of $678,931 for the year ended August 31, 2021. The increase of $15,613,080 was primarily due to the gain on the sale of Eden that closed in 2022. The $678,931 loss on the disposal of Motorsports was a fiscal 2021 event. |
| ● | The Loss from discontinued operations for the year ended August 31, 2022, was $13,203,474 in comparison to $15,564,168. 2022 period primarily includes losses from Winview of $13.3 million and UMG of $2.3 million, offset by a gain of $1.3 million from Eden Games discontinued operations and a $1.1 million gain on disposal of a liability from the Motorsports discontinued operation. 2021 period primarily includes the losses from UMG of $5.9 million, Winview losses of $5.8 million, Eden losses of $2.7 million and losses of $.9 million from the Motorsports discontinued operation. |
| ● | Foreign currency translation differences for the year ended August 31, 2022, was a gain of $ $393,928 in comparison to $10,250 for the year ended August 31, 2021. The increase of $383,678 was due to fluctuations in trading foreign currencies against the US dollar. Primarily the Euro at our Stream Hatchet business have Euro functional currencies. As such, when translating into US dollars, any changes resulting from change in foreign currency exchange rates are recorded within the foreign currency translation reserve. |
| Page 13 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Segmented analysis
For the year ended August 31, 2022
| Gaming | Media | Corporate and Other | Total | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 1,906,137 | 39,976,476 | - | 41,882,613 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (706,528 | ) | (11,436,185 | ) | - | (12,142,713 | ) | |||||||||
| Central administration costs | - | - | 9,788,532 | 9,788,532 | ||||||||||||
| Other gains and losses | (6,490 | ) | 4,059,247 | (10,312,246 | ) | (6,259,489 | ) | |||||||||
| Finance costs | 57 | 1,193 | 728,598 | 729,848 | ||||||||||||
| Income (loss) before tax | (700,095 | ) | (15,496,625 | ) | (204,884 | ) | (16,401,604 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the period from: | ||||||||||||||||
| Discontinued operations | (12,547,685 | ) | - | 14,535,910 | 1,988,225 | |||||||||||
| Non-controlling interest in net loss | - | - | (65,219 | ) | (65,219 | ) | ||||||||||
| Net income (loss) | (13,247,780 | ) | (15,496,625 | ) | 14,265,807 | (14,478,598 | ) | |||||||||
For the year ended August 31, 2021
| Gaming | Media | Corporate and Other | Total | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 1,401,981 | 31,943,287 | - | 33,345,268 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (354,356 | ) | (7,611,679 | ) | - | (7,966,035 | ) | |||||||||
| Central administration costs | - | - | 8,529,166 | 8,529,166 | ||||||||||||
| Other gains and losses | 4,569 | (39,258 | ) | 6,712,278 | 6,677,589 | |||||||||||
| Finance costs | (60 | ) | 512,937 | 762,121 | 1,274,998 | |||||||||||
| Loss before tax | (358,865 | ) | (8,085,358 | ) | (16,003,565 | ) | (24,447,788 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the period from: | ||||||||||||||||
| Share of net loss of associate | - | - | (103,930 | ) | (103,930 | ) | ||||||||||
| Discontinued operations | (14,496,066 | ) | - | (1,747,033 | ) | (16,243,099 | ) | |||||||||
| Non-controlling interest in net loss | - | - | 74,006 | 74,006 | ||||||||||||
| Net loss | (14,854,931 | ) | (8,085,358 | ) | (17,780,522 | ) | (40,720,811 | ) | ||||||||
Segment loss - Segment loss includes total revenue less operating expenses including the following: salaries and wages, consulting, professional fees, revenue sharing expense, advertising and promotion, office and general, technology expenses, amortization and depreciation and share based payments.
Central administration costs - Central administration costs include corporate operating expenses including the following: salaries and wages, consulting, professional fees, advertising and promotion, office and general, technology expenses, amortization and depreciation and share based payments.
Other gains and losses - Other gains and losses includes gain / loss on foreign exchange, loss on extinguishment of debt, gain on retained interest in former associate, transaction costs, arbitration settlement reserve, impairment expense, restructuring costs, change in fair value of investment at FVTPL, change in fair value of warrant liability and change in fair value of convertible debt.
Finance costs - Finance costs includes interest expense.
| ● | Gaming net loss for the year ended August 31, 2022, was $13,247,781 in comparison to $14,854,931 for the year ended August 31, 2021. The decrease of $1,607,150 was primarily due to the year over year decrease in loss from discontinued operations. |
| Page 14 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
| ● | Media net loss for the year ended August 31, 2022, was $15,496,625 in comparison to $8,085,358 for the year ended August 31, 2021. The increase was primarily due to the inclusion full-year results of operations from the Sideqik acquisition, somewhat offset by operating efficiencies in the Frankly business. |
| ● | Corporate and Other income for the year ended August 31, 2022, was $14,265,807 in comparison to net loss of $17,780,522 for the year ended August 31, 2021. The increase of $32,046,329 was primarily due the $15.1 million gain on the disposal of Eden Games, the change in fair value of convertible debt of $8.5 million, a decrease in the arbitration reserve of $12.2 million, a $2.5 million decrease in loss on extinguishment of debt, a decrease in amortization and depreciation expense of $1.1 million, a $.6 million decrease in professional fees, a $.4 million decrease in share-based payments, a $.4 million decrease in advertising and promotion expense, and a decrease in (gain) loss on foreign exchange of $.5 million. This was somewhat offset by the change in fair value of warrants of $4.3 million, a $1.7 million increase in office and general expenses, a $1.5 million increase in change in fair value of investment at FVTPL, and a increase in transaction costs of $1.0 million. |
| From continuing operations | ||||||||||||||||
| Three-month period ended | Total revenue | Total income (loss) | Basic income (loss) per share | Total assets | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2022 | 11,459,973 | (10,306,365 | ) | (0.66 | ) | 42,694,808 | ||||||||||
| May 31, 2022 | 9,210,112 | (4,066,518 | ) | (0.26 | ) | 58,530,202 | ||||||||||
| February 28, 2022 | 8,998,026 | (4,204,897 | ) | (0.27 | ) | 54,403,352 | ||||||||||
| November 30, 2021 | 12,214,502 | 2,110,957 | 0.14 | 61,138,576 | ||||||||||||
| August 31, 2021 | 10,863,340 | (7,620,364 | ) | (0.50 | ) | 67,462,847 | ||||||||||
| May 31, 2021 | 8,000,790 | 3,174,086 | 0.22 | 71,339,843 | ||||||||||||
| February 28, 2021 | 7,564,534 | (18,687,327 | ) | (1.85 | ) | 70,344,899 | ||||||||||
| November 30, 2020 | 6,916,604 | (1,344,107 | ) | (0.17 | ) | 47,362,028 | ||||||||||
For the quarter ended February 28, 2021, the loss was much larger due to the change in fair value of the warrant liability and convertible debt as compared to the quarter ended November 30, 2020. For the quarter ended May 31, 2021, the profit was much larger due to the change in fair value of the warrant liability as compared to the quarter ended February 28, 2021. For the quarter ended August 31, 2021, the loss was significantly higher due to changes in the fair value of warrant liability and an accrual for the AIS related arbitration liability. For the quarter ended November 30, 2021, the profit was significantly higher due to fair value adjustment to the accrual for the AIS related arbitration liability. For the quarter ended February 28, 2022, the loss was significantly higher due the fair value adjustment to the accrual for the AIS related arbitration liability and change in fair value of warrant liability and convertible debt. The loss for the quarter ended May 31, 2022 was comparable to the loss for the quarter ended February 28, 20022. For the quarter ended August 31, 2022, the loss was significantly higher due impairment of goodwill and intangibles at our Sideqik subsidiary, fair value adjustment to the accrual for the AIS related arbitration liability, change in fair value of our promissory notes receivable and change in fair value of warrant liability.
| Page 15 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 is dependent upon the ability of the Company to raise financing in the near term, and ultimately the achievement of profitable operations.
As of August 31, 2022, the Company had current assets of $22,058,901 (August 31, 2021: $31,557,682) and current liabilities of $21,824,981 (August 31, 2021: $32,495,266). This represents a working capital surplus of $233,920 (August 31, 2021: deficiency of $937,584) which is comprised of current assets less current liabilities. The Company has not yet realized profitable operations and has incurred significant losses to date resulting in a cumulative deficit of $127,293,571 as of August 31, 2022 (August 31, 2021: $112,814,973).
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.
The Company announced on October 6, 2022, that it has commenced a process to explore and evaluate strategic options to enhance and preserve shareholder value. Potential strategic options to be explored or evaluated as part of this process may include, but are not limited to, merger, reverse merger, acquisition, other business combination, sale of assets, partnerships, joint ventures, licensing, or other strategic transactions involving Engine. The Company has not set a timetable for completion of this process and does not expect to disclose developments with respect to this process unless and until the evaluation of strategic alternatives has been completed or the Company’s Board of Directors has concluded disclosure is appropriate or legally required.
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.
| Page 16 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Share consolidations
Share consolidations occurred during the period from September 1, 2020, to the date of this MD&A:
On August 13, 2020, the Company consolidated its common shares on a 15 to 1 basis.
Capital management framework
The Company considers its capital to be its shareholders’ equity. As of August 31, 2022, the Company had shareholders’ equity of $15,886,591 (August 31, 2021: shareholders’ equity of $25,422,165).
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 year ended August 31, 2021.
Financing
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
Activity for the year ended August 31, 2022
During the year ended August 31, 2022, the Company issued 203,537 common shares upon vesting of an equal number of RSUs, and 57,029 shares for services provided by certain officers of Sideqik.
Activity for the year ended August 31, 2021
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.
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.
| Page 17 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 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 equity measured warrants note for discussion of the key assumptions used in valuation of the warrants as part of the relative fair value allocation.
During the year ended August 31, 2021, the Company had the following additional activity to share capital: (i) issued 277,749 common shares upon vesting of an equal number of RSUs; (ii) issued 20,833 common shares upon the exercise of vested stock options, (iii) issued 1,728,848 common shares in connection with conversion of convertible debt, (iv) issued 901,060 common shares in connection with the exercise of warrants ; (v) issued 40,000 common shares for cancelation of $226,556 of debt (shares for debt); and (vi) 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 the subsequently the EB CD is being accounted for at FVTPL.
Debt
Promissory Notes
The Company has promissory notes with a balance of $200,000 (August 31, 2021 – $200,000) that are unsecured, due on demand, and bear interest at 18%. As of August 31, 2022, interest of $141,940 has been accrued (August 31, 2021 – $139,644).
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 August 31, 2022, $429,822 was due under the note (August 31, 2021 – $482,304). The note is secured by the assets of WinView, bears interest at 8%, and is currently due. As of August 31, 2022, and 2021, no interest is accrued on this note.
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 expects to apply for and receive forgiveness of up to all amounts due under the Notes, in an amount equal to the sum of qualified expenses under the PPP during the twenty-four weeks following disbursement.
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. 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.
| Page 18 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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, 2022, 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 August 31, 2022, $209,875 has not been formally forgiven.
Convertible debt
| (a) | Conversions during the years ended August 31, 2021 |
2019 Series
During the year ended August 31, 2021, 2019 Series convertible debentures with a principal amount of CAD$1,315,000 (2020 – CAD$13,047,122) were converted into 175,331 units (2020 – 1,739,615), and as a result, the Company issued 175,331 common shares and 175,331 warrants (2020 – 1,739,615 common shares and 1,739,615 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 – 1.85 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 – 0.7651); and an expected dividend yield of 0% for both years.. The fair value assigned to these convertible debentures was $2,603,875 (2020 – $10,189,558).
This value was split between common shares and warrants as $1,500,214 (2020 – $5,152,023) and $1,103,661 (2020 – $5,037,535), respectively.
2020 Series
During the year ended August 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.
| (b) | Issuances during the year ended August 31, 2021 |
During the year ended August 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.
| Page 19 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
On December 1, 2020, the EB Loan was amended. The amendment extended the maturity date by one year and added a conversion feature to $1,000,000 of the $5,000,000million principal outstanding. The conversion feature allowed the holder to convert $1,000,000 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 $5,000,000. 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 $5,000,000 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 of $2,428,900.
| (c) | 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 20 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
| (d) | 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.
| (e) | 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 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.
$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.
| (f) | 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.
Commitments and contingencies
Litigation and arbitration
In April 2020, the Company announced its renegotiation of the acquisition of Allinsports. The revised purchase agreement provided for the acquisition of 100% of Allinsports in exchange for the issuance of 966,667 common shares of the Company and other consideration, including payments of $1,200,000 as a portion of the purchase consideration. In September 2020, the Company advised the shareholders of Allinsports that closing conditions of the transaction, including the requirement 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 sought up to US$20,000,000 in damages. As of August 31, 2020, the Company had recorded an impairment against the entire balance of advances to Allinsports, amounting to $2,625,657. A hearing in this matter was held in May of 2021, and by a decision dated September 30, 2021, the Arbitrator determined that the closing of the transaction had previously occurred and directed the Company to issue the 966,667 common shares. The Company is pursuing regulatory approval to issue the shares and is also pursuing relief against the Allinsports shareholders for various alleged breaches of the share purchase agreement. The Company recognized a liability for the arbitration ruling of $899,569, which represents the fair value of the common shares directed to be delivered as of May 31, 2022. The liability is recorded as Arbitration reserve on the Company’s Consolidated Statements of Financial Position. This liability will be adjusted to fair value at the end of each reporting period.
| Page 21 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 of Bleacher’s patents covering an interactive themed baseball game and seeking damages and other relief. The parties have entered into an agreement resolving this matter and in connection therewith, on November 8, 2021, the plaintiff terminated the pending action by filing a notice of voluntary dismissal with prejudice. There was no related expense.
In April of 2021, the Company received a copy of a complaint filed by 3CI Holdings, LLLP 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 $2,890,000. On July 6, 2021, the Company filed motion to dismiss the complaint. On February 17, 2022, 3CI Holdings filed an Amended Complaint, to which the Company filed a motion to dismiss, which was granted pursuant to an order signed by the court on July 5, 2022
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 defendants have filed a motion to dismiss the claims. By Decision dated March 1, 2022, the Court granted in part and denied in part, the defendants’ Motion to Dismiss the Complaint. 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. By Complaint filed on October 28, 2022, against the defendant directors, the insurance carrier providing directors and officers coverage for the shareholder action is seeking a declaration that the action is not covered under the directors and officers policy issued by it. As of August 31, 2022 it is impossible to estimate a liability or if one is likely
In July of 2021, Winview Inc. filed separate patent infringement lawsuits against DraftKings Inc. and FanDuel, Inc in the United States District Court for the District of New Jersey, alleging that Sportsbook and Daily Fantasy Sports offerings of DraftKings and FanDuel infringe four of Winview’s patents. These actions seek the recovery of damages and other appropriate relief. Draft Kings and FanDuel have filed motions to dismiss, which are pending. The defendants have also filed petitions for inter partes review with the United States Patent Office, which are expected to commence in the first quarter of 2023. During the quarter ended August 31, 2022, the company recognized patent impairment expense amounting to $5,029,475. The impairment expense reflects the impact of reductions in estimated future net cash flows for certain portfolios that management determined it would no longer allocate resources to in future periods.
By Order to Continue dated May 5, 2022, the Company was substituted in as the plaintiff in a matter pending in the Ontario Superior Court of Justice, seeking recovery of €1,903,153 of principal and additional amounts of accrued interest under promissory notes acquired by the Company. The matter is in the discovery stage.
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 22 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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. 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. There have been no changes in objectives, policies or how the Company manages these risks.
| (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 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 to 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 allowance for doubtful accounts was $1,155,638 and $1,084,305 as of August 31, 2022, and 2021, respectively.
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 August 31, 2022, one customer (2021 - one) accounted for greater than 10% of the Company’s accounts receivable balance. In total, this one customer (2021 - one) accounted for 16% and 13% of the Company’s accounts and other receivables balance as of August 31, 2022, and 2021, respectively. During the year ended August 31, 2022, one (2021 - one) customer represented 72% (2021 - 60%) 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 August 31, 2022:
| Current | 0 - 30 | 31 - 60 | 61 - 90 | 91+ | Total | |||||||||||||||||||
| Trade accounts receivable | 6,805,057 | 202,359 | 428,098 | 305,056 | 2,010,049 | 9,750,619 | ||||||||||||||||||
| Allowance for doubtful accounts | 12,753 | 3,577 | 17,423 | 9,790 | 1,312,095 | 1,355,638 | ||||||||||||||||||
| % Allowance | 2 | % | 4 | % | 3 | % | 65 | % | 14 | % | ||||||||||||||
| Page 23 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
| (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 | |||||||
| $ | $ | |||||||
| Accounts payable | 12,772,375 | - | ||||||
| Accrued liabilities | 3,756,758 | - | ||||||
| Players liability account | 47,455 | - | ||||||
| Promissory notes payable | 771,762 | - | ||||||
| Convertible debt | 2,267,367 | 4,983,236 | ||||||
| (d) | Market Risk |
Market risk represents the risk of loss that may impact the Company’s financial position, results of operations, or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, and other relevant market or price risks. The Company does not use derivative instruments to mitigate this risk.
Interest rate risk
Interest rate risk is the risk that the fair value or 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 bears interest at fixed rates.
Currency Risk
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.
| (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. |
| Page 24 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Fair value hierarchy levels 1 to 3 are based on the degree to which the fair value is observable.
For the year ended August 31, 2022:
| Carrying value at August 31, 2022 | FVTPL - mandatorily measured | Amortized cost | ||||||
| $ | $ | |||||||
| Financial assets: | ||||||||
| Cash | - | 8,601,706 | ||||||
| Restricted cash | - | 47,455 | ||||||
| Accounts and other receivables | - | 8,404,009 | ||||||
| Government remittances | - | 874,334 | ||||||
| Publisher advance | 1,490,648 | - | ||||||
| Promissory notes receivable | 576,528 | - | ||||||
| Investment at FVTPL | 2,629,851 | - | ||||||
| 4,697,027 | 17,927,504 | |||||||
| Carrying value at August 31, 2022 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable | - | - | 12,772,375 | |||||||||
| Accrued liabilities | - | - | 3,756,758 | |||||||||
| Players liability account | - | - | 47,455 | |||||||||
| Long-term debt | - | - | - | |||||||||
| Promissory notes payable | - | - | 771,762 | |||||||||
| Warrant liability | 49,894 | - | - | |||||||||
| Convertible debt | - | 7,250,603 | - | |||||||||
| 49,894 | 7,250,603 | 17,348,350 | ||||||||||
For the year ended August 31, 2021:
| Carrying value at August 31, 2021 | FVTPL - mandatorily measured | Amortized cost | ||||||
| $ | $ | |||||||
| Financial assets: | ||||||||
| Cash | - | 15,305,996 | ||||||
| Restricted cash | - | 331,528 | ||||||
| Accounts and other receivables | - | 8,646,807 | ||||||
| Government remittances | - | 1,070,216 | ||||||
| Publisher advance | 4,534,218 | - | ||||||
| Promissory notes receivable | - | - | ||||||
| Investment at FVTPL | 2,629,851 | - | ||||||
| 7,164,069 | 25,354,547 | |||||||
| Carrying value at August 31, 2021 | FVTPL
- mandatorily measured | FVTPL
- designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable | - | - | 10,403,665 | |||||||||
| Accrued liabilities | - | - | 5,722,470 | |||||||||
| Players liability account | - | - | 331,528 | |||||||||
| Long-term debt | - | - | 96,664 | |||||||||
| Promissory notes payable | - | - | 821,948 | |||||||||
| Warrant liability | 4,868,703 | - | - | |||||||||
| Convertible debt | - | 9,951,496 | - | |||||||||
| 4,868,703 | 9,951,496 | 17,376,275 | ||||||||||
| Page 25 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 August 31, 2022 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Warrant liability | - | 49,894 | - | 49,894 | ||||||||||||
| Convertible debt | - | - | 7,250,603 | 7,250,603 | ||||||||||||
| Publisher advance | - | - | 1,490,648 | 1,490,648 | ||||||||||||
| Promissory notes receivable | - | - | 576,528 | 576,528 | ||||||||||||
| Investment at FVTPL | - | - | 2,629,851 | 2,629,851 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Fair value as of August 31, 2021 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Warrant liability | - | 4,868,703 | - | 4,868,703 | ||||||||||||
| Convertible debt | - | - | 9,951,496 | 9,951,496 | ||||||||||||
| Publisher advance | - | - | 4,534,218 | 4,534,218 | ||||||||||||
| Promissory notes receivable | - | - | - | - | ||||||||||||
| Investment at FVTPL | - | - | 2,629,851 | 2,629,851 | ||||||||||||
| Page 26 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
| Financial assets / financial liabilities | Valuation technique | Key Inputs | Relationship and sensitivity of unobservable inputs to fair value to fair value | |||
| Convertible debt | The fair value of the convertible debentures as of August 31, 2022 has been calculated using a binomial lattice methodology. | Key observable inputs | The estimated fair value would increase (decrease) if: | |||
| Share price CAD $.94 (USD $.72) | The share price was higher (lower) | |||||
| Risk-free interest rate (2.85% to 3.45%) | The risk-free interest rate was higher (lower) | |||||
| Dividend yield (0%) | The dividend yield was lower (higher) | |||||
| Key unobservable inputs | ||||||
| Credit spread (10.13% to 13.56%) | The credit spread was lower (higher) | |||||
| Discount for lack of marketability (0%) | The discount for lack of marketability was lower (higher) | |||||
| Convertible debt | The fair value of the convertible debentures as of August 31, 2021 has been calculated using a binomial lattice methodology. | Key observable inputs | The estimated fair value would increase (decrease) if: | |||
| Share price CAD$8.42 (USD $6.66) | The share price was higher (lower) | |||||
| Risk-free interest rate (0.10% to 0.30%) | The risk-free interest rate was higher (lower) | |||||
| Dividend yield (0%) | The dividend yield was lower (higher) | |||||
| Key unobservable inputs | ||||||
| Credit spread (1.14% to 8.45%) | The credit spread was lower (higher) | |||||
| Discount for lack of marketability (0%) | The discount for lack of marketability was lower (higher) |
| Page 27 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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.
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 parson 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 financial statements and management’s discussion and analysis
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 includes the following:
Compensation awarded to key management includes the following:
| For the year ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| $ | $ | |||||||
| Total compensation paid to key management | 1,390,598 | 2,231,871 | ||||||
| Share based payments | 963,295 | 1,897,855 | ||||||
Total compensation paid to key management is recorded in consulting fees and salaries and wages in the statement of loss and comprehensive loss for the years ended August 31, 2022, and 2021.
Related party balances
Amounts due to related parties as of August 31, 2022, with respect to the above fees were $5,588 (2021 - $33,349). These amounts are unsecured, non-interest bearing and due on demand.
Commitment to former holders of WinView to proceeds from the patent portfolio enforcement action
Pursuant to the Business Combination agreement dated March 9, 2020, among the Company, Frankly Inc. and Winview Inc., the Company is required to pay to certain former Winview securities holders (“Stubholders”) fifty percent (50%) of the net license fees, damages awards or settlement amounts collected from third parties in connection with the Winview Patent Portfolio, after deduction of certain expenses. Company directors, Tom Rogers and Hank Ratner, are among the pool of Stubholders.
While the Company does not believe that the interests of Messrs. Rogers and Ratner, as Stubholders, are sufficiently material or adverse to the Company’s interests to create an actual or potential conflict of interest with respect to the management of the Winview Patent Portfolio, the Company nevertheless has formed a Patent Committee, that excludes Messrs. Rogers and Ratner, to make recommendations to the Company’s Board regarding matters involving the Winview Patent Portfolio.
| Page 28 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Changes in accounting policies
Future accounting pronouncements
The following standards have not yet been adopted and are being evaluated to determine their impact on the Company:
Amendments to IAS 1 - Classification of liabilities as current or non-current
Amendments to IAS 1 - Non-current Liabilities with Covenants
Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of Accounting Policies
Amendments to IAS 8 - Definition of Accounting Estimates
Amendments to IAS 12 Income Taxes - Deferred Tax Related to Assets and liabilities Arising from a Single Transaction
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.
Current global financial conditions and trends
Securities of gaming and technology companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments globally and market perceptions of the attractiveness of particular industries.
The price of the securities of companies is also significantly affected by short-term currency exchange fluctuation and the political environment in the countries in which the Company does business. As of August 31, 2021, the global economy continues to be in a period of significant economic volatility, in large part due to the COVID-19 pandemic discussed previously, as well US and European economic and political concerns which have impacted global economic growth.
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.
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.
| Page 29 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 SideQik, Frankly, WinView, 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.
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.
| Page 30 of 37 |
Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 for the provision of services using these new technologies, we may lose market share, and our results of operations would be adversely affected.
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Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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, and 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 and 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 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. At this time these actions are a nuisance rather than 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.
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.
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Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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.
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:
| ● | 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.
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Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 are able to 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.
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Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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 Canada. 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, labor 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.
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.
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Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
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.
Subsequent events
The Company has evaluated subsequent events from the balance sheet date through November 29, 2022, the date of this MD&A, and determined there were no additional items to be disclosed except for the transaction described below.
On September 1, 2022, the Company extended convertible debentures that were due to expire in October and November 2022 with an aggregate principal amount of US$1,250,000. The original convertible debentures had an annual interest rate of 10% per annum and a conversion price of US$8.90 per share.
In place of the expiring convertible debentures, the Company has issued a new convertible debenture with an aggregate principal amount of US$1,250,000 which expires on August 31, 2025, carries an annual interest rate of 7% per annum and is convertible into common shares of the Company at a conversion price of US$1.10 per share.
Each of the expiring convertible debentures and the replacement convertible debenture is beneficially held by a director of the Company. The participation of a director in the amendment of the convertible debentures constitutes a “related party transaction” as such term is defined by Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”). The Company is relying on an exemption from the formal valuation requirements and the minority shareholder approval requirements under MI 61-101 as the fair market value of the amendment of the convertible debentures does not exceed 25% of the market capitalization of the Company.
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Engine Gaming and Media, Inc. (formerly Engine Media Holdings, Inc.) Management’s Discussion and Analysis (Expressed in United States Dollars) | |
Subsequent to year end, the remaining $750,000 principal value of the Company’s 2020 Series convertible debt that was due to mature in November 2022 was either settled by offset against the Company’s promissory notes receivable or amended. Two of the three parties holding the convertible debt agreed to allow the Company to offset principal of $500,000 and interest of $91,781 due at maturity against the Company’s promissory notes receivable. The remaining $250,000 principal value convertible debt was amended to extend the maturity date to February 28, 2023, with all other terms remaining unchanged.
Management’s Responsibility for Financial Information
The Company’s financial statements and the other financial information included in this management report are the responsibility of the Company’s management and have been examined and approved by the Company’s audit committee and Board of Directors. The accompanying financial statements are prepared by management in accordance with IFRS and include certain amounts based on management’s best estimates using careful judgment. The selection of accounting principles and methods is management’s responsibility.
Management recognizes its responsibility for conducting the Company’s affairs in a manner to comply with the requirements of applicable laws and established financial standards and principles, and for maintaining proper standards of conduct in its activities. The Board of Directors supervises the financial statements and other financial information through its audit committee, which is comprised of four non-management directors.
This committee’s role is to examine the financial statements and recommend that the Board of Directors approve them, to examine the internal control and information protection systems and all other matters relating to the Company’s accounting and finances. In order to do so, the audit committee meets annually with the external auditors, with or without the Company’s management, to review their respective audit plans and discuss the results of their examination. This committee is responsible for recommending the appointment of the external auditors or the renewal of their engagement.
Additional information
This MD&A, as well as additional information regarding Engine, have 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 and the Securities Exchange Commission (“SEC”) and may be accessed through the SEC’s website EDGAR at www.sec.gov.
| Page 37 of 37 |
Exhibit 99.4
FORM 52-109F1
CERTIFICATION OF ANNUAL FILINGS
FULL CERTIFICATE
I, Louis Schwartz, Chief Executive Officer of Engine Gaming and Media, Inc., certify the following:
1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”) of Engine Gaming and Media, Inc. (the “issuer”) for the financial year ended August 31, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual 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, for the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual 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 annual filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the financial year end
| a. | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| i. | material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and |
| ii. | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| b. | designed ICFR, or caused it to be designed under our supervision, 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. |
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 ICFR – material weakness relating to design: N/A.
5.3 Limitation on scope of design: N/A
6. Evaluation: The issuer’s other certifying officer(s) and I have
| a. | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer’s DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and | |
| b. | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer’s ICFR at the financial year end and the issuer has disclosed in its annual MD&A |
| i. | our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and | |
| ii. | N/A. |
7. Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer’s ICFR that occurred during the period beginning on September 1, 2021 and ended on August 31, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
8. Reporting to the issuer’s auditors and board of directors or audit committee: The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of ICFR, to the issuer’s auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer’s ICFR.
Date: November 29, 2022.
| /s/ “Louis Schwartz” | |
Louis Schwartz Chief Executive Officer |
Exhibit 99.5
FORM 52-109F1
CERTIFICATION OF ANNUAL FILINGS
FULL CERTIFICATE
I, Michael Munoz, Chief Financial Officer of Engine Gaming and Media, Inc., certify the following:
1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”) of Engine Gaming and Media, Inc. (the “issuer”) for the financial year ended August 31, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual 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, for the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual 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 annual filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the financial year end
| a. | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| i. | material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and |
| ii. | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| b. | designed ICFR, or caused it to be designed under our supervision, 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. |
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 ICFR – material weakness relating to design: N/A.
5.3 Limitation on scope of design: N/A
6. Evaluation: The issuer’s other certifying officer(s) and I have
| a. | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer’s DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and |
| b. | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer’s ICFR at the financial year end and the issuer has disclosed in its annual MD&A |
| i. | our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and |
| ii. | N/A. |
7. Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer’s ICFR that occurred during the period beginning on September 1, 2021 and ended on August 31, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
8. Reporting to the issuer’s auditors and board of directors or audit committee: The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of ICFR, to the issuer’s auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer’s ICFR.
Date: November 29, 2022.
| /s/ “Michael Munoz” | |
| Michael Munoz | |
| Chief Financial Officer |
Exhibit 99.6
 |
Baker Tilly WM LLP 1500 - 401 Bay Street Toronto, Ontario Canada M5H 2Y4 T: +1 416.368.7990 F: +1 416.368.0886
toronto@bakertilly.ca www.bakertilly.ca |
Consent of Independent Auditor
We hereby consent to the incorporation by reference into Amendment No. 1 to the Registration Statement on Form F-10/A (No.333-254709) of Engine Gaming and Media, Inc. (formerly, Engine Media Holdings, Inc.) (the “Company”) of our report dated November 29, 2022, relating to the consolidated financial statements of the Company as at and for the years ended August 31, 2022 and 2021, being furnished by the Company to the United States Securities and Exchange Commission pursuant to a Form 6-K dated November 29, 2022.
| Chartered Professional Accountants, Licensed Public Accountants | |
| /s/ Baker Tilly WM LLP | |
| Toronto, Canada | |
| November 29, 2022 | |