UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________
FORM 20-F
_________________________
q
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
November 30, 2019
OR
q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT v,vOF 1934
For the transition period from
to
OR
q
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission File Number 0-19884
LIQUID MEDIA GROUP LTD.
(formerly known as LEADING BRANDS, INC.)
(Exact Name of Registrant as Specified in Its Charter)
British Columbia, Canada
(Jurisdiction of Incorporation or Organization)
#202, 5626 Larch Street
Vancouver, BC V6M 4E1
(Address of Principal Executive Offices)
Daniel Cruz, Chief Financial Officer
#202, 5626 Larch Street
Vancouver, BC V6M 4E1
Telephone: 1.604.602.0001
Email: daniel@liquidmediagroup.co
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Common Shares, without Par Value | YVR | NASDAQ Capital Market |
(Title of Class) | Trading Symbol | Name of Each Exchange on Which Registered |
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 5,727,558 common shares (as of February 28, 2020).
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 2.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or emerging growth company. See definition of “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging Growth Company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐
International Financial Reporting Standards as issued
Other ☐
by the International Accounting Standards Board ☒
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Company has elected to follow.
| Item 17 ☐ | Item 18 ☐ |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
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Index
PART I
Item 1. – Identity of Directors, Senior Management and Advisers
5
Item 2. – Offer Statistics and Expected Timetable
5
Item 3. – Key Information
5
Item 4. – Information on the Company
21
Item 4A. – Unresolved Staff Comments
27
Item 5. – Operating and Financial Review and Prospects
28
Item 6. – Directors, Senior Management and Employees
41
Item 7. – Major Shareholders and Related Party Transactions
49
Item 8. – Financial Information
51
Item 9. – The Offer and Listing.
52
Item 10. – Additional Information.
52
Item 11. – Quantitative and Qualitative Disclosures About Market Risk.
54
Item 12. – Description of Securities Other than Equity Securities.
55
PART II
Item 13. – Defaults, Dividend Arrearages and Delinquencies.
55
Item 14. – Material Modifications to the Rights of Security Holders and Use of Proceeds.
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Item 15. – Controls and Procedures.
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Item 16A. – Audit Committee Financial Expert.
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Item 16B. – Code of Ethics.
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Item 16C. – Principal Accountant Fees and Services.
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Item 16D. – Exemptions from the Listing Standards for Audit Committees.
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Item 16E. – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
59
Item 16F. – Change in Registrant’s Certifying Accountant
59
Item 16G. – Corporate Governance
59
Item 16H. – Mine Safety Disclosure
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PART III
Item 17. – Financial Statements.
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Item 18. – Financial Statements.
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Item 19. – Exhibits.
109
3
INTRODUCTION
The terms the “Company”, “LMG”, “Liquid”, “we”, “us” and “our” as used in this Annual Report on Form 20-F, or “Annual Report,” refer to Liquid Media Group Ltd. and its consolidated subsidiaries or predessesor entities (including Leading Brands, Inc.), except where the context requires otherwise.
Unless otherwise specified, all references to “dollars” or “$” in this Annual Report are expressed in Canadian dollars (“C$”), unless otherwise indicated, and all references to “U.S. dollars,” or “US$” are expressed in the currency of the United States of America.
Forward-Looking Statements.
This Annual Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements which are not historical facts are forward-looking statements. The Company, through its management, makes forward-looking statements concerning its expected future operations, performance, results and other developments. The words “may,” “continue,” “plan,” “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict” and similar expressions are also intended to identify forward-looking statements. Forward-looking statements relate to, among other things:
¨
Our business plan to create a vertically-integrated cloud-based global content production studio;
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Our expectations regarding market acceptance of our gaming, tv and film offerings;
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Our intention to make strategic acquisitions to grow our business;
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Our expectations regarding litigation risks and outcomes;
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Our plan to raise capital through a crowd-funding portal;
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The effectiveness of steps taken to protect our intellectual property and our beliefs about non-infringement of the intellectual property of others; and
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Our status as a foreign private issuer and our belief that we are not a Passive Foreign Investment Company.
Such forward-looking statements are estimates reflecting the Company’s judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. It is impossible to identify all such factors. Factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those listed under “Item 3.D. Risk Factors,” as well as general economic conditions, changing trends in the film and gaming media industries, pricing, economic uncertainties (including currency exchange rates), government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other factors which may be identified from time to time in the Company’s public announcements. Events may occur in the future that the Company is unable to accurately predict, or over which it has no control. If one or more of those uncertainties materialize, or if the underlying assumptions prove incorrect, actual outcomes may vary materially from those forward-looking statements included in this Annual Report.
All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
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SPECIAL NOTE REGARDING LINKS TO EXTERNAL WEBSITES
Links to external, or third-party websites, are provided solely for convenience. We take no responsibility whatsoever for any third-party information contained in such third-party websites, and we specifically disclaim adoption or incorporation by reference of such information into this report.
FOREIGN PRIVATE ISSUER FILINGS
We are considered a “foreign private issuer” pursuant to Rule 405 promulgated under the Securities Act. In our capacity as a foreign private issuer, we are exempt from certain rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our shares. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information.
For as long as we are a “foreign private issuer” we intend to file our annual financial statements on Form 20-F and furnish our quarterly financial statements on Form 6-K to the SEC for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act. However, the information we file or furnish may not be the same as the information that is required in annual and quarterly reports on Form 10-K or Form 10-Q for U.S. domestic issuers. Accordingly, there may be less information publicly available concerning us than there is for a company that files as a domestic issuer.
We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We are required to determine our status as a foreign private issuer on an annual basis at the end of our second fiscal quarter. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by United States residents and any of the following three circumstances applies: (1) the majority of our executive officers or directors are United States citizens or residents; (2) more than 50% of our assets are located in the United States; or (3) our business is administered principally in the United States. If we lose our “foreign private issuer status” we would be required to comply with Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirement for “foreign private issuers”.
PART I
Item 1. – Identity of Directors, Senior Management and Advisers
This item is not applicable for an Annual Report.
Item 2. – Offer Statistics and Expected Timetable
This item is not applicable for an Annual Report.
Item 3. – Key Information
A.
Selected financial data.
The following table sets forth certain selected consolidated financial information with respect to LMG for the periods indicated. It should be read in conjunction with this Annual Report and the Company’s consolidated financial statements listed in “Item 18 – Financial Statements” of this Annual Report. The following table is derived from, and is qualified by, the Company’s financial statements and the notes thereto which have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
5
Exchange Rates
Exchange Rate – February 28, 2020: 1.3307 |
Exchange rates for the previous six months: US$1 equivalent to the following in Canadian dollars:
6
| February 2020 | January 2020 | December 2019 | November 2019 | October 2019 | September 2019 |
High | 1.3319 | 1.3233 | 1.3302 | 1.3307 | 1.3330 | 1.3343 |
Low | 1.3224 | 1.2970 | 1.2988 | 1.3148 | 1.3056 | 1.3153 |
Average exchange rates for each of the five most recent fiscal years: US$1equivalent to the following in Canadian dollars:
| Year ended November 30, 2019 | Year ended November 30, 2018 | Year ended November 30, 2017 | Year ended November 30, 2016 | Year ended November 30, 2015 |
Average | 1.3290 | 1.2907 | 1.3030 | 1.3276 | 1.2603 |
B.
Capitalization and indebtedness.
This item is not applicable for an Annual Report.
C.
Reasons for the offer and use of proceeds.
This item is not applicable for an Annual Report.
D.
Risk factors.
Risks Related To Our Business
Our business and operations are subject to numerous risks. The following risks should be considered in conjunction with “Item 5. Operating and Financial Review and Prospects”. These risks may affect our operating results and, individually or in the aggregate, could cause our actual results to differ materially from past and anticipated future results. Additional risks not currently known by us or that we consider immaterial at the present time may also impair our business, financial condition, prospects or results of operations. If any of the following risks occur, our business, financial condition, prospects or results of operations would likely be materially adversely affected. In that case, the trading price of our common shares could decline and you may lose all or part of the money you paid to buy our common shares. The risks set out below are not the only risks and uncertainties we currently face; other risks may arise in the future. The following discussion of risks may contain forward-looking statements as may be required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk Related to Our Business and Our Industry
Our limited operating history and our evolving business make it difficult to evaluate our results of operations and prospects.
Our company was created on August 8, 2018 as the resulting issuer of a business combination by plan of arrangement between Liquid Media Group (Canada) Ltd. (fka Liquid Media Group Ltd.) (“Liquid Canada”) and Leading Brands, Inc. (“LBIX”). We cannot assure you that our revenue will increase, or that we will be able to operate profitably in future periods. Our limited operating history and evolving business make the prediction of future results of operations difficult and, therefore, past results should not be taken as indicative of our future performance. You should consider our business and prospects in light of the risks, uncertainties, expenses and challenges that we will face as an early-stage gaming, TV, film media and entertainment company operating in highly competitive, rapidly evolving, and challenging markets. If we fail to address the risks and challenges that we face, including those described elsewhere in this “Risk Factors” section, our business, financial condition and results of operations could be adversely affected.
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We are in the initial phase of executing our business plan and we cannot guarantee that our intended business will be successful.
We are in an early phase of development and are just beginning to implement our business plan. We cannot guarantee that our vision for a vertically-integrated, cloud-based global studio, producing content for all platforms through a network of shared services will be successful, or that we will be able to develop our gaming and media content as we intend to do, acquire additional content for development and franchising, and create the cloud-based network for global content development that form parts of our business plan. We also may not be successful in raising the financing that we are hoping to raise through our planned crowdfunding portal for funding of our projects in the gaming, film and TV industry segments.
Our business is intensely competitive and “hit” driven. If we do not deliver “hit” products and services, or if consumers prefer our competitors’ products or services over our own, our operating results could suffer.
Competition in our industry is intense and we expect new competitors to continue to emerge throughout the world. Our competitors range from large established companies to emerging start-ups. In our industry, though many new products and services are regularly introduced, only a relatively small number of “hit” titles accounts for a significant portion of total revenue for the industry. We do not yet have a significant number of titles that we develop and the underperformance of a title may have a large adverse impact on our financial results. Also, hit products or services offered by our competitors may take a larger share of consumer spending than we anticipate, which could cause revenue generated from our products and services to fall below expectations.
In addition, both the online and mobile games marketplaces are characterized by frequent product introductions, relatively low barriers to entry, and new and evolving business methods, technologies and platforms for development. We expect competition in these markets to intensify. If our competitors develop and market more successful products or services, offer competitive products or services at lower price points or based on payment models perceived as offering a better value proposition (such as free-to-play or subscription-based models), or if we do not continue to develop consistently high-quality and well-received products and services, our revenue, margins, and profitability will decline.
We have a history of operating losses and negative cash flow and we may never achieve profitability.
We have a history of operating losses and negative cash flows. Indeed, we only began generating revenue in fiscal year 2018. We anticipate that our operating expenses will increase substantially in the foreseeable future as we increase our sales and marketing activities, and continue to develop our technology, products, projects, and services. For example, we will need additional funds to add to our content library and for development costs incurred to develop new games and redevelop our retro games, for production costs incurred in connection with the development of film and tv projects, costs related to our cloud-based network initiative, and for licensing and distribution expenses. These efforts may prove more expensive than we currently anticipate and we may incur significant additional costs and expenses in connection with our business development activities. In addition, our film and gaming content creation operations are relatively capital intensive while revenue-generating opportunities depend on the availability of projects in the market. During periods of low project volumes, fixed costs can result in operating losses. All of these costs and expenses could prevent us from achieving or maintaining profitability in future periods.
We lack adequate financing and may not be able to obtain financing on acceptable terms, or at all, which would have a material adverse effect on our business, results of operations, financial condition and prospects.
We have limited capital and we may require funds in excess of our existing cash resources to fund operating deficits, develop new products or services, establish and expand our marketing capabilities, and finance general
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and administrative activities. We do not currently generate sufficient cash from our businesses to fund our operations. We do not have any bank credit facility or other working capital credit line under which we may borrow funds for working capital or other general corporate purposes. We have plans to implement a crowdfunding portal through which we may raise money from investors to fund our operations in the gaming, film and TV industry segments, but we cannot guarantee that we will be successful in raising the funds we need in that manner. If we do not have, or are not able to obtain, sufficient funds, we may have to delay strategic opportunities, investments, or projects. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of, or eliminate some or all of our creative work. Any of these actions could have a material adverse effect on our business, results of operations or financial condition.
We are subject to product development risks which could result in delays and additional costs, and we must adapt to changes in software technologies.
We depend on our internal development studios and third-party software developers to develop new interactive entertainment software within anticipated release schedules and cost projections. The development cycle for emulated titles generally ranges from 3 months to 12 months and for new titles 6 months to 2 years . Therefore our development costs can be substantial. If we or our third party developers experience unanticipated development delays, financial difficulties or additional costs, we may not be able to release titles according to our schedule and at budgeted costs. There can be no assurance that our products will be sufficiently successful so that we can recoup these costs or make a profit on these products.
In addition, there are substantial risks that there will be no or an insufficient market for the titles developed. In such event, we will likely suffer losses, and to the extent that we are unable to develop any games or film titles which generate a sufficient interest in the market to provide profits, funding, capital or a return. In such event, we may suffer significant losses.
Additionally, in order to stay competitive, our internal development studios must anticipate and adapt to rapid technological changes affecting software development. Any inability to respond to technological advances and implement new technologies could render our products obsolete or less marketable. Further, the failure to pursue the development of new technology, platforms, or business models that obtain meaningful commercial success in a timely manner may negatively affect our business, resulting in increased production costs and more strenuous competition.
Programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games, which would harm our operating results.
Our games may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch, particularly as we launch new games and rapidly release new features to existing games under tight time constraints. We believe that if our players have a negative experience with our games, they may be less inclined to continue, or resume playing our games or recommend our games to other potential players. Undetected programming errors, game defects and data corruption can disrupt our operations, adversely affect the game experience of our players by allowing players to gain unfair advantage, harm our reputation, cause our players to stop playing our games, divert our resources and delay market acceptance of our games, any of which could result in legal liability to us or harm our operating results.
Competition within, and to, the media and entertainment industries is intense, and our competitors may be able to draw upon a greater depth and breadth of resources than those available to us.
We operate in highly competitive markets characterized by pressure to innovate, expand feature sets and functionality, accelerate new product releases and reduce prices. Within the video game segment of the entertainment industry, we compete with other publishers of entertainment software developed for use on the PC, video game consoles and handheld, mobile and tablet devices or social networking sites. Our competitors
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include very large corporations with significantly greater financial, marketing and product development resources than we have. A relatively small number of titles account for a significant portion of net revenues, and an even greater portion of net profit, in the game entertainment industry, and the availability of significant financial resources is a major competitive factor in the production of high-quality products and in the marketing of products that are ultimately well-received. Our larger competitors may be able to deliver greater innovation, respond more quickly to new or emerging technologies and changes in market demand, devote more resources to the development, marketing and sale of their products, successfully expand into emerging and other international markets, or price their products more aggressively than we can. If our competitors are more successful than we are in developing products, or in attracting and retaining customers, our financial condition and operating results could be adversely affected.
Our growth relies on market acceptance.
While we believe that there will be significant customer demand for our game, tv, and film offerings and services, there is no assurance that there will be broad market acceptance of our offerings. There also may not be broad market acceptance of our offerings if our competitors offer products or services that are preferred by prospective customers. Customers consider many factors when evaluating our products relative to those of our competitors, including innovation, ease of use, price, feature sets, functionality, reliability, performance, reputation, and training and support, and we may not compare favorably against our competitors in all respects. There can be no assurance that our efforts will be successful in the near future, or at all, or that our competitors will not take significant market share in similar efforts. If we fail to develop new products and to manage new product introductions and transitions properly, or if our offerings do not receive market acceptance, our financial condition and operating results could be harmed.
We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
We receive, store and process personal information and other player data, and we enable our players to share their personal information with each other and with third parties, including on the internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other player data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to players or other third parties, or our privacy related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our players to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as players, vendors or developers, violate applicable laws or our policies, such violations may also put our players' information at risk and could in turn have an adverse effect on our business.
In the area of information security and data protection, many states have passed laws requiring notification to players when there is a security breach for personal data, such as the 2002 amendment to California's Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in
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the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.
In operating our media and entertainment business, we may fail to launch new products according to our timetable, and our new products may not be commercially successful.
In order for our media and entertainment business strategy to succeed over time, we will need to license, acquire, or develop new digital entertainment products that can generate additional revenue and diversify our revenue sources. A number of factors, including technical difficulties, government approvals and licenses of intellectual property right required for launching new products, lack of sufficient development personnel and other resources, and adverse developments in our relationship with the licensors of our new licensed products could result in delay in launching our new products. Therefore, we cannot assure you that we will be able to meet our timetable for development of our business.
There are many factors that may adversely affect the popularity of our new products. For example, we may fail to anticipate and adapt to future technical trends and new business models, fail to satisfy consumer preferences and requirements, fail to effectively plan and organize marketing and promotion activities, fail to effectively detect and prevent programming errors or defects in the products, and fail to operate our new products at acceptable costs. We cannot assure you that our new products will gain market acceptance and become commercially successful. If we are not able to license, develop or acquire additional digital entertainment products that are commercially successful, our future revenues and profitability may decline. If our games and other entertainment offerings do not meet consumer expectations, whether because they fail to function as advertised or otherwise, our sales may suffer. If our games and services do not function as consumers expect, it may negatively impact our business.
Our industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our new resources among, emerging technologies and business models, our business may be negatively impacted.
The entertainment industry in general, and the gaming, tv and film segments thereof in particular, are rapidly evolving, primarily as a result of free content, minimal entry costs for creation and distribution, and expanded use of mobile devices. We must continually anticipate and adapt our products to emerging technologies, delivery platforms and business models in order to stay competitive and try to predict and prepare for rapid changes in consumer demand that could materially alter public preferences for different forms of entertainment and leisure activities. The rapid growth of technology and shifting consumer tastes prevent us from being able to accurately predict the overall effect that technological growth may have on our potential revenue and profitability. When we choose to incorporate a new technology into a product or to develop a product for a new platform, operating system or media format, we often are required to make a substantial investment prior to the introduction of the product. If we invest in the development of products incorporating a new technology or for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than we anticipated and may not cover our development costs. Further, our competitors may adapt to an emerging technology or business model more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers, or both. If, on the other hand, we elect not to pursue the development of products incorporating a new technology or for new platforms, or otherwise elect not to pursue a new business model, that achieves significant commercial success, it may have adverse consequences. It may take significant time and resources to shift product development resources to that technology, platform or business model, as the case may be, and may be more difficult to compete against existing products incorporating that technology or for that platform or against companies using that business model. Any failure to successfully adapt to, and appropriately allocate resources among, emerging technologies and to keep pace with rapid technological change could negatively impact our business and prevent us from achieving profitability or sustaining a meaningful market position.
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Our business is subject to our ability to develop commercially successful products for the current video game platforms.
We are a provider of video game products primarily for the casual-game consumer and have published video games for interactive entertainment hardware platforms, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. The success of our business is subject to the continued popularity of these platforms and our ability to develop commercially successful products for these platforms.
Companies and governmental agencies may restrict access to our website, other websites that carry our products, mobile applications or the internet, generally, which could lead to losses or slower growth due to the effects such restrictions may have on our player base.
In general, players need to access the internet and platforms such as Facebook, Apple, Google, Liquid’s website, the websites of our partners or entities controlled by us or mobile applications in order to play the games we offer or will offer. Companies and governmental entities may block or restrict access to these sites or applications or the internet generally for a number of reasons, for example, confidentiality, security, a determination that greater regulatory oversight is required, or they may adopt policies that restrict the access of employees to access the sites and applications. If companies or governmental entities block, limit or otherwise adopt restrictive policies or regulations which materially interfere with the ability of players to play our games, our business and operations will likely be negatively affected and could lead to losses or slower growth than anticipated.
The video game hardware manufacturers set the royalty rates and other fees that we must pay to provide games for their platforms, and therefore have significant influence on our costs. If one or more of these manufacturers change their fee structure, our profitability will be materially impacted.
In order to provide products and service for a video game system such as Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One, we must take a license from Nintendo, Sony and Microsoft, respectively, which give these companies the opportunity to set the fee structure that we must pay in order to provide games for that platform. Similarly, these companies have retained the flexibility to change their fee structures, or adopt different fee structures for online purchases of games, online gameplay and other new features for their consoles. The control that hardware manufacturers have over the fee structures for their platforms and online access could adversely impact our costs, profitability and margins. Because providing products for video game systems is the largest portion of our business, any increase in fee structures would significantly harm our ability to generate profits.
Acquisitions we pursue in our industry and related industries could result in operating difficulties, dilution to our shareholders and other consequences harmful to our business.
As part of our growth strategy, we may selectively pursue strategic acquisitions in our industry and related industries. We may not be able to consummate such acquisitions, which could adversely impact our growth. If we do consummate acquisitions, integrating an acquired company, business or technology may result in unforeseen operating difficulties and expenditures, including:
·
increased expenses due to transaction and integration costs;
·
potential liabilities of the acquired businesses;
·
potential adverse tax and accounting effects of the acquisitions;
·
diversion of capital and other resources from our existing businesses;
·
diversion of our management’s attention during the acquisition process and any transition periods;
·
loss of key employees of the acquired businesses following the acquisition; and
·
inaccurate budgets and projected financial statements due to inaccurate valuation assessments of the
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acquired businesses.
Our evaluations of potential acquisitions may not accurately assess the value or prospects of acquisition candidates and the anticipated benefits from our future acquisitions may not materialize. In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.
Changes in tax laws or tax rulings could materially affect our effective tax rates, financial position and results of operations.
The tax regimes to which we are subject or under which we operate is unsettled and may be subject to significant change. Changes in tax laws or tax rulings, or changes in interpretations of existing laws, could cause us to be subject to additional income based taxes, non-income taxes (such as payroll, sales, use, value-added, net worth, property and goods and services taxes), or tariffs related to the import or export of our offerings, could materially affect our financial position and results of operations. Any significant changes to our effective tax rate or the imposition of significant tariffs on our products may result in a material adverse consequence on our business, financial condition, results of operations, and cash flows.
Risks Related to the Film Industry
Our results of operations may fluctuate significantly as to its film operations depending upon the timing of television shows and films delivered or made available to various media
Results of operations with respect to our production and distribution of film and television operations for any periods are significantly dependent upon the number and timing of television programs and films delivered or made available to various media. Consequently, our results of operations may fluctuate materially from period to period and the results of any one period are not necessarily indicative of results for future periods. Cash flows may also fluctuate and are not necessarily closely correlated with revenue recognition. Although traditions are changing, due in part to increased competition from new channels, industry practice is that broadcasters make the most of their annual programming commitments between February and June, such that new programs can be ready for telecast at the start of the broadcast season in September, or a mid-season replacements in January. Because of this annual production cycle, our film revenues may not be earned on an even basis throughout the year. Results from operations may fluctuate materially from quarter to quarter and the results for any one quarter are not necessarily indicative or results for future quarters.
Our entertainment programming may not be accepted by the public which would result in a portion of our costs not being recouped or anticipated profits not neing realized.
The entertainment industry involves a substantial degree of risk. Acceptance of entertainment programming represents a response not only to the production's artistic components, but also the quality and acceptance of other competing programs released into the marketplace at or near the same time. The availability of alternative forms of entertainment and leisure time activities, general economic conditions, public tastes generally and other intangible factors, all of which could change rapidly or without notice und cannot be predicted with certainty.
There is a risk that some or all or of our programming will not be purchased or accepted by the public generally, resulting in a portion of costs not being recouped or anticipated profits not being realized. There can be no assurance that revenue from existing or future programming will replace loss of revenue associated with the cancellation or unsuccessful commercialization of any particular production.
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Our film and television productions may not receive favorable reviews or ratings or perform well in ancillary markets, broadcasters may not license the rights to our film and television programs and distributors may not distribute or promote our films and television programs, any of which could have a material adverse effect on our results of operations or financial condition.
Because the performance of television and film programs in ancillary markets, such as home video and pay and free television is often directly related to reviews from critics and/or television ratings, poor reviews from critics or poor television ratings may negatively affect future revenue. Our results of operations will depend, in part on the experience and judgment of our management to select and develop new investment and production opportunities. We cannot make assurances that our films and television programs will obtain favorable reviews or ratings or that its films and television programs will perform well in ancillary markets or that broadcasters will license the rights to broadcast any of our film and television programs in development or renew licenses to broadcast film and television programs in our library. The failure to achieve any or the foregoing could have a material adverse effect on our business, results or operations or financial condition.
Licensed distributors’ decisions regarding the timing or release of and promotional support for our films, television programs and related products are important in determining the success of these films, programs and related products. We do not control the timing and manner in which our licensed distributors distribute our films, television programs or related products. Any decision by those distributors not to distribute or promote one of our films, television programs or related products or to promote competitors’ films, programs or related products to a greater extent than they promote us could have a material adverse effort on our business, operations or financial condition.
We are dependent upon certain key personnel.
We are dependent upon the services of key executives, including our Chair, Joshua Jackson, and our CFO, Daniel Cruz. The loss of our executive officers or our other key personnel, particularly with little or no notice, could cause delays on projects and could have an adverse impact on our client and industry relationships, our business, operating results or financial condition.
Due to the relatively small size of our company, the loss of key persons or our inability to attract and retain additional highly-skilled employees may adversely affect our business and future operations. The loss of one or more key employees or contractors, if not replaced, could adversely affect Liquid’s project exploration and development programs, consolidated operations and financial condition.
Our success depends in part on our ability to hire and retain competent and skilled management and technical, sales and other personnel.
Our success depends to a significant extent on our ability to identify, hire, and retain qualified creative, technical and managerial personnel in a competitive job market. We expect competition for personnel with the specialized creative and technical skills needed to create our products and provide our services will continue to intensify in future. Our competitors may be able to offer a work environment with higher compensation or more opportunities to work with cutting-edge technology than we can. If we are unable to retain our key personnel or appropriately match skill sets with our needs, we would be required to expend significant time and financial resources to identify and hire new qualified personnel and to transfer significant internal historical knowledge, which might significantly delay or prevent the achievement of our business objectives.
We may be involved in legal proceedings that may result in adverse outcomes.
From time to time, we may be involved in claims, suits, government investigations, audits and proceedings arising from the ordinary course of our business. Such claims, suits, government investigations, audits and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the
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outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources and other factors.
Declines in consumer spending and other adverse changes in the economy could have a material adverse effect on our business, financial condition and operating results.
Most of our products and services involve discretionary spending on the part of consumers. We believe that consumer spending is influenced by general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to general economic conditions and economic cycles as consumers are generally more willing to make discretionary purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. Adverse economic conditions such as a prolonged general economic downturn, including periods of increased inflation, unemployment levels, tax rates, interest rates, energy prices or declining consumer confidence could also reduce consumer spending. Reduced consumer spending may result in reduced demand for our products and may also require increased selling and promotional expenses, which may have an adverse effect on our business, financial condition and operating results. In addition, uncertainty and adverse changes in the economy could also increase costs associated with developing and publishing our products, increase the cost and availability of sources of financing, and increase our exposure to material losses from bad debts, any of which could have a material adverse effect on our business, financial condition and operating results. If economic conditions worsen, our business, financial condition and operating results could be adversely affected.
Our business is subject to a variety of other U.S. and foreign laws, many of which are unsettled and still developing, and which could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and abroad, including laws regarding consumer protection, intellectual property, export and national security, that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States. For example, laws relating to the liability of providers of on line services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. It is also likely that as our business grows and evolves and our games are played in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. In addition, certain of our games may become subject to gambling-related rules and regulations and expose us to civil and criminal penalties if we do not comply.
It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly banned, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to modify our games, which would harm our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.
It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States and elsewhere that could restrict the on line and mobile industries, including player privacy, advertising, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt calls for more stringent consumer protection laws that may
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impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase, and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the regulation of currency and banking institutions may be interpreted to cover virtual currency or goods. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding these activities may lessen the growth of social game services and impair our business.
Our management team has limited experience managing a public company.
Members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws, rules and regulations that govern public companies. These obligations will require significant attention from our management and could divert their attention away from the day-to-day management of our business. In the event that our management team are not successful or efficient as managers of a public company, this could have a material adverse effect on our business, results of operations, or financial condition.
We may not be able to manage our potential growth.
For us to succeed, our business needs to experience significant expansion. There can be no assurance that it will achieve this expansion. This expansion, if accomplished, may place a significant strain on our management, operational and financial resources. To manage any material growth, we will be required to implement operational and financial systems, procedures and controls. We will also be required to expand our finance, administrative and operations staff. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations at any increased level. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
Our business will suffer if we are unable to successfully integrate acquired companies into our business or otherwise manage the growth associated with multiple acquisitions.
We have acquired businesses, personnel and technologies in the past and we intend to continue to pursue acquisitions that are complementary to our existing business and expand 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, our ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions. Since we expect the social game 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, 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. Integration of a new company’s operations, assets and personnel into ours will require significant attention from our management. The diversion of our management's attention away from our business and any difficulties encountered in the integration process could harm our ability to manage our business. Future acquisitions will also expose us to potential risks, including risks associated with any acquired liabilities, the integration of new operations, technologies and personnel, unforeseen or hidden liabilities and unanticipated, information security vulnerabilities, the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, our relationships with employees, players, and other suppliers as a result of integration of new businesses.
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We use a limited number of suppliers.
We rely on a limited number of suppliers for hardware, software, and film and gaming production equipment. While other sources of supply do exist for this equipment, an unexpected disruption in supply or an increase in pricing could have a negative impact on our earnings.
Risks Related to Intellectual Property
We depend on protection afforded by trademarks and copyrights to protect our intellectual property.
We hold a number of trademarks and copyrights relating to certain significant products. We rely on trademark laws and contractual provisions to protect these trademarks and copyrights, and there can be no assurance that third parties will not infringe or misappropriate our trademarks and copyrights. Existing trade secret, copyright and trademark laws offer only limited protection and do not account for common law claims. Furthermore, the monitoring and enforcement against the unauthorized use of our intellectual property rights could entail significant expenses and could prove difficult or impossible. As well, the laws of other countries in which we may choose to market our products may afford little or no effective protection of our intellectual property. If we lose some or all of our intellectual property rights, our business may be materially adversely affected.
Intellectual property claims may increase our costs or require us to cease selling affected products, which could adversely affect our financial condition and results of operations.
Development of original content, including publication and distribution, sometimes results in claims of intellectual property infringement. Although we make efforts to ensure our products do not violate the intellectual property rights of others, it is possible that third parties may still allege infringement. These claims and any litigation resulting from these claims may be time consuming and costly to defend, divert management attention, and result in damage awards payable by us. They could also prevent us from selling the affected product; or require us to redesign the affected product to avoid infringement or obtain a license for future sales of the affected product or prevent us from utilizing important technologies, ideas or formats.
Security breaches involving the source code for our products or other sensitive and proprietary information could adversely affect our business.
We securely store the source code for our interactive entertainment software products as it is created. A breach, whether physical, electronic or otherwise, of the systems on which such source code and other sensitive data are stored could lead to damage or piracy of our software. In addition, certain parties with whom we do business are given access to our sensitive and proprietary information in order to provide services and support our team. These third parties may misappropriate our information and engage in unauthorized use of it. If we are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures which could materially and adversely affect our business, financial condition and operating results. Any theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive position, reputation, brand, and future sales of our products. Our business could be subject to significant disruption, and we could suffer monetary and other losses and reputational harm, in the event of such incidents and claims.
Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business and operating results.
We regard the protection of our trade secrets, copyrights, trademarks, trade dress, domain names and other product rights as critical to our success. We strive to protect our intellectual property rights by relying on
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federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
We pursue the registration of our domain names, trademarks, and service marks in the United States and in certain locations outside the United States. We are seeking to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced.
Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. 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. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.
The proliferation of "cheating" programs and scam offers that seeks to exploit our games anti players affects the game-playing experience and may lead players to stop playing our games.
Unrelated third parties have developed, and may continue to develop, "cheating" programs that enable players to exploit our games, play them in an automated way or obtain unfair advantages over other players who do play fairly. These programs harm the experience of players who play fairly and may disrupt the virtual economy of our games. In addition, unrelated third parties attempt to scam our players with fake offers for virtual goods. We devote significant resources to discover and disable these programs and activities, and if we are unable to do so quickly our operations may be disrupted, our reputation damaged and players may stop playing our games. This may lead to lost revenue from paying players, increased cost of developing technological measures to combat these programs and activities, legal claims relating to the diminution in value of our virtual currency and goods, and increased customer service costs needed to respond to dissatisfied players.
Risk Related to Our Stock
We may not be able to maintain our listing on the NASDAQ Capital Market.
Our common shares currently trades on the NASDAQ Capital Market. Following our business combination in August 2018, we were required to establish compliance with the NASDAQ initial listing requirements, which we did in October 2018. NASDAQ has continued listing requirements that we must maintain to avoid delisting. The standards include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of $35 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three fiscal years. Our results of operations and our fluctuating shares price directly impact our ability to satisfy these listing standards. If we are unable to maintain these listing standards, we may be subject to delisting.
A delisting from NASDAQ would result in our common shares being eligible for quotation on the over-the-counter market which is generally considered to be a less efficient system than listing on markets such as NASDAQ or other national exchanges because of lower trading volumes, transaction delays, and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common shares. Additionally, trading of our common shares on the OTCBB may make us less desirable to institutional investors and may, therefore, limit our future equity funding options and
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could negatively affect the liquidity of our shares.
If we make a significant acquisition that requires the issuance of our common shares, we may be required to reapply for NASDAQ listing.
Reapplying for NASDAQ listing may require us to satisfy the more stringent original listing standards of the NASDAQ Capital Market, which has substantially higher standards than the continuing listing standards. If any such application is not approved, our shares of common shares could be delisted from the NASDAQ Capital Market.
Additional capital raising efforts in future periods may be dilutive to our then current shareholders or result in increased interest expense in future periods.
In order to finance our operations, we have raised funds through the issuance of common shares and securities convertible into common shares and may do so again in future. We cannot predict the size of future issuances of common shares or the size or terms of future issuances of debt instruments or other securities convertible into common shares, or the effect, if any, that future issuances and sales of our securities will have on the market price of our common shares. Sales or issuances of substantial numbers of common shares, or the perception that such sales could occur, may adversely affect the market price of our common shares. With any additional sale or issuance of common shares, or securities convertible into common shares, our investors will suffer dilution to their voting power.
We could lose our “foreign private issuer” status in the future, which could result in significant additional costs and expenses to us.
In order to maintain our current status as a “foreign private issuer” (as defined in Rule 405 under the United States Securities Act of 1933), where more than 50% of our outstanding voting securities are directly or indirectly owned by residents of the United States, we must not have any of the following: (i) a majority of our executive officers or directors being U.S. citizens or residents, (ii) more than 50% of our assets being located in the United States, or (iii) our business being principally administered in the United States. If we were to lose our foreign private issuer status:
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we would no longer be exempt from certain of the provisions of U.S. securities laws, such as Regulation FD and the Section 16 short swing profit rules;
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we would be required to commence reporting on forms required of U.S. companies, such as Forms l0-K, 10-Q and 8-K, rather than the forms currently available to us, such as Forms 20-F and 6-K;
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we would be subject to additional restrictions on offers and sales of securities outside the United States, including in Canada;
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we might lose the ability to rely upon exemptions from the NASDAQ corporate governance requirements that are available to foreign private issuers; and
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if we engage in capital raising activities after losing our foreign private issuer status, there is a higher likelihood that investors may require the Company to file resale registration statements with the Securities and Exchange Commission (“SEC”) as a condition to any such financing.
If we are characterized as a passive foreign investment company for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), our U.S. shareholders may suffer adverse tax consequences.
If 75% or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign, in which we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income, then we will be a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes. Alternatively, we will be considered to be a PFIC if at least 50% of our assets in a taxable
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year, averaged over the year and ordinarily determined based on fair market value and including our pro-rata share of the assets of any company in which we are considered to own, directly or indirectly, 25% or more of the shares by value, are held for the production of, or produce, passive income. Once treated as a PFIC, for any taxable year, a foreign corporation will generally continue to be treated as a PFIC for all subsequent taxable years for any shareholder who owned shares of the foreign corporation when it was treated as a PFIC. If we were to be a PFIC, and a U.S. holder does not make an election to treat us as a “qualified electing fund,” or QEF, or a “mark-to-market” election, “excess distributions” to a U.S. holder, and any gain recognized by a U.S. holder on a disposition of our ordinary shares, would be taxed in an unfavorable way. Among other consequences, our dividends, to the extent that they constituted excess distributions, would be taxed at the regular rates applicable to ordinary income, rather than the 20% maximum rate applicable to certain dividends received by an individual from a qualified foreign corporation, and certain “interest” charges may apply. In addition, gains on the sale of our ordinary shares would be treated in the same way as excess distributions.
The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is unclear whether we would be permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income in the calculation of gross income. Although we do not expect that we will be a PFIC in the future, in light of the periodic asset and income tests applicable in making this determination, no assurance can be given that we will not become a PFIC. If we do become a PFIC in the future, U.S. holders who hold ordinary shares during any period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to exceptions for U.S. holders who made a timely QEF or mark-to-market election, or certain other elections. We do not currently intend to prepare or provide the information that would enable our shareholders to make a QEF election.
We have never paid cash dividends on our common shares, and we do not anticipate paying cash dividends in the foreseeable future.
We have never declared or paid any cash dividends on our common shares and do not intend to pay any cash dividends in the foreseeable future. We currently intend to retain any future earnings to fund the growth of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our common shares will be the sole source of gain for the foreseeable future.
Sales of a substantial number of our common shares into the public market could result in significant downward pressure on our share price.
Our common shares are traded on the NASDAQ under the symbol “YVR.” As of November 30, 2019, there were 5,345,660 common shares issued and outstanding. The concurrent sale of a substantial number of our common shares in the public market could cause a reduction in the market price of our common shares.
We are incorporated in British Columbia, Canada, and all but one of our directors and officers live in Canada, and all of the Company’s assets, with the exception of Majesco, are in Canada; therefore, investors may have difficulty initiating legal claims and enforcing judgments against us and our directors and officers.
We are a company incorporated under the laws of British Columbia, all but one of our directors and officers are residents of Canada and all our assets and operations, with the exception of our 51% held subsidiary Majesco Entertainment Company ("Majesco”), are located outside of the United States. It may not be possible for shareholders to enforce in Canada judgments against the Company obtained in the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws.
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While reciprocal enforcement of judgment legislation exists between Canada and the United States, we and our insiders may have defenses available to avoid in Canada the effect of U.S. judgments under Canadian law, making enforcement difficult or impossible. There is uncertainty as to whether Canadian courts would enforce (a) judgments of U.S. courts obtained against us or our insiders predicated upon the civil liability provisions of the U.S. federal and state securities laws or (b) in original actions brought in Canada, liabilities against us or our insiders predicated upon the U.S. federal and state securities laws. Therefore, our shareholders in the United States may have to avail themselves of remedies under Canadian corporate and securities laws for any perceived oppression, breach of fiduciary duty and like legal complaints. Canadian law may not provide for remedies equivalent to those available under U.S. law.
Item 4. – Information on the Company
A.
History and development of the Company.
1.
The legal name of the Company is “Liquid Media Group Ltd.”
2.
The Company was incorporated under the Company Act (British Columbia) on February 4, 1986 under the name “2060 Investments Ltd.” On May 21, 1986, the Company changed its name to “Camfrey Resources Ltd.” On March 16, 1993, the Company changed its name to “Brio Industries Inc.,” and on October 25, 1999, the Company changed its name to Leading Brands, Inc. On August 10, 2018, the Company changed its name to “Liquid Media Group Ltd.”
On August 9, 2018, the Company consummated a business combination with Liquid Canada by way of plan of arrangement under the Business Corporations Act (British Columbia) (the "Arrangement"). Pursuant to the Arrangement, Liquid Canada was acquired by and became a wholly-owned subsidiary of the Company. As part of the Arrangement, on August 10, 2018, the Company changed its name to Liquid Media Group Ltd. and Liquid Canada changed its name to Liquid Media Group (Canada) Ltd. At the time of completion of the Arrangement, the Company had 1,848,980 common shares issued and outstanding which included 1,288,497 common shares issued to former Liquid Canada shareholders, representing 69.69% of the Company’s issued and outstanding shares. Initially, the common shares of the Company issued in connection with the Arrangement were listed on NASDAQ under the ticker symbol “LBIX”. Effective August 10, 2018, the trading symbol of the Company was changed to “YVR”.
3.
The Company is a corporation incorporated under the laws of the province of British Columbia, Canada, and is governed by the Business Corporations Act (British Columbia). The head office of the Company is located at #202, 5626 Larch Street, Vancouver, BC, V6M 4E1; Tel: 604-602-0001
4.
During the Company’s fiscal year ended November 30, 2019, the Company realized several material changes to both its organizational structure as well as the nature of its business.
On January 22, 2019, the Company changed its auditor from Charlton & Company to Davidson & Company LLP.
In February 2019, the Company closed its private placement offering of unsecured convertible debentures raising US$2,678,000. Each debenture will mature two years from closing, will bear interest at 2% per annum, and will be convertible into units at a price of US$1.50 per unit. Each unit will consist of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 for a period of two years from the closing date of the offering. At the time of the closing of the Debenture offering, the Company also converted US$255,000 of accounts payable to non-related parties into 113,334 common shares at a price of US$2.62.
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In February 2019, the Company granted 461,500 stock options to certain officers, directors, and consultants of the Company with an exercise price of US$2.55 per share and a term of five years.
In February 2019, the Company issued 113,334 common shares valued at $391,013 to settle debt of $335,792.
In April 2019, the Company issued 46,539 common shares valued at $243,162 to settle debt of $199,896 and issued 17,222 common shares valued at $73,980 to various consultants of the Company for consulting and public relations services provided to the Company.
In April 2019, the Company entered into an Assignment and Assumption Agreement whereby the vendor assigned all of its rights and obligations under a Master Services Agreement with A&E Television Networks, LLC. (“A&E”) and it’s Statements of Work for Ancient Aliens: The Game® with A&E to the Company.
In May 2019, the Company announced that it was expanding the scope of its relationship with A&E, becoming the official operator of the free-to-play, card collecting strategy game Knightfall™: Rivals, available on iTunes and Google Play.
In May 2019, the Company entered into a Collaboration Agreement with YDX Innovation Corp. (“YDX”) whereby the Company plans to leverage YDX technology to bring classic and future games to life in YDX’s Arkave Virtual Reality (VR) Arenas. The companies also plan to collaborate on new IP, content, products, and technology. In November 2019, the Company announce that it had selected ‘Romans from Mars’ as the first title from its library of games for adaptation into an immersive virtual reality (VR) experience through its partnership with YDX.
In May 2019, the Company appointed Nancy Basi to its Board of Directors. Ms. Basi is Executive Director of the Media & Entertainment Centre for the Vancouver Economic Commission and Vice President of the VR/AR Association’s Vancouver Chapter.
In June 2019, the Company showcased Ancient Aliens: The Game® live at AlienCon in Los Angeles.
In June 2019, the Company announced the selection of Miss Kwirk as the first gaming intellectual property for development within its Studio-as-a-Service offering. Miss Kwirk is the first title in the Company’s retro reboot initiative, a five title series designed to expand the franchise potential of popular retro titles owned by the Company.
In October 2019, the Company announced the repricing of a total of 1,142,598 share purchase warrants issued on or prior to October 15, 2018 to US$1.20 per share.
In November 2019, the Company announced that it was launching an initiative in partnership with the Whistler Film Festival (“WFF”). To mark the countdown to WFF’s 20th anniversary in 2020, Liquid confirmed support of WFF’s new 20x2020 campaign for 2019 and 2020 that will directly support vetted Canadian creators with IP in development to participate in WFF’s slate of talent development programs, which serve to advance projects from script to screen and connect storytellers and dealmakers across borders and on all platforms.
In November 2019, the Company restructured its debt with RDL Realisation, PLC (“RDL”) to extend the maturity date of the loan to November 30, 2020. Additionally, the Company agreed to make quarterly payments of $250,000 beginning on March 31, 2020 and has pledged 215,000 common shares as security against the loan. RDL also released the previously held security interest over the Company’s shares of Waterproof Studios Inc.
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During the year ended November 30, 2019, various lenders converted $1,795,455 (US$1,133,761) worth of net convertible debentures into 1,000,167 units of the Company, with each unit consisting of one common share and one share purchase warrant to purchase one additional common share at an exercise price of US$1.75 per share on or before February 26, 2021.
Subsequent to the year ended November 30, 2019:
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The Company announced in December 2019, the upcoming launch of Iridion 3D and its sequel, Iridion II, December 12, 2019 on Steam for PC through its subsidiary Majesco.
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In January 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company for approximately $400,000 for unpaid consulting fees, US$500,000 for the unpaid cash consideration for the purchase of 51% interest in Majesco, and a payment for the difference between US$500,000 and the value of the Company’s shares issued on the purchase of the 51% interest in Majesco. The Company has accrued $1,064,450 in the Annual Financial Statements. Management is currently seeking legal advice on this lawsuit.
·
The Company held its annual shareholder meeting on February 4, 2020, at which the Class III directors were elected and Davidson & Company LLP were appointed as the auditors for the ensuing year. Accordingly, the Company’s violation of the NASDAQ listing require regarding the holding of an annual shareholder meeting was remedied.
·
In January 2020, the Company issued 57,125 common shares to settle debt of $193,582 and 11,674 common shares for $33,058 in services included in commitment to issue shares at November 30, 2019.
·
In February 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company in relation to the issuance of a share certificate for 59,706 common shares of the Company, 32,149 of which the consultant states is owing to him and general and special damages in relation to the shares. Management is currently seeking legal advice on this lawsuit. No provision has been included in the financial statements as of November 30, 2019.
·
In February 2020, the Company signed an asset purchase agreement with a vendor to acquire a portfolio of assets including certain streaming platforms for US$3,325,000.
·
Subsequent to November 30, 2019, the Company issued 98,004 common shares for total proceeds of $204,891 (US$154,181) in connection with: (1) the exercise of 66,500 share purchase warrants at US$1.75 per warrant for proceeds of $154,651 (US$116,375), of which $104,651 (US$78,750) wasa included in the commitment to issue shares as at November 30, 2019; and (2) 31,504 share purchase warrants at US$1.20 per warrant for proceeds of $50,240 (US$37,806).
5.
The Company expended $Nil on the purchase of property, plant and equipment in the fiscal years ended November 30, 2019, 2018 and 2017.
6.
Capital expenditures that are planned for the fiscal year ending November 30, 2020 are in Canada and will be funded with cash on hand.
7.
There have been no indications of public takeover offers by third parties in respect of the Company’s shares or by the Company in respect of other companies’ shares during the last and current fiscal year.
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8.
The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies, including the Company, that file electronically with the SEC. The Company’s website is https://liquidmediagroup.co/.
B.
Business overview.
1.
During the fiscal years ended November 30, 2019, November 30, 2018 and November 30, 2017, the Company’s primary business is aggregating mature gaming and film production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution.
2.
Gaming Content Creation and Distribution Business
The Company (through Liquid Canada) holds a 51% interest in Majesco, a proven gaming publisher. Majesco is the developer of mobile, console, and desktop downloadable games including such hits as “A Boy and his Blob” and “Gone Home.” Majesco holds various assests acquired through a spin-out entity of a publicly traded company called PolarityTE, Inc. (NASDAQ: PTE), whose principal business operations were previously those of Majesco.
Majesco develops and publishes a wide range of video games on digital networks, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. Majesco has sold video games to distributors and through digital distribution for platforms such as Xbox Live Arcade, PlayStation Network, or PSN, and Steam, and for mobile devices and online platforms. Majesco’s titles are targeted at various demographics at a range of various price points. Majesco focuses on publishing lower-cost games targeting casual-game consumers and independent game developer fans. In some instances, Majesco’s titles are based on licenses of well-known properties and, in other cases, original properties. Majesco enters into agreements with content providers and video game development studios for the creation of video games sold domestically and internationally.
The Company also holds a series gaming titles in its portfolio acquired from Throwback, Zift and Lightning Man.
Video Game Industry
The video game software market is comprised of two primary sectors: (i) dedicated console software for systems such as the Xbox, PlayStation, Wii, and handheld gaming systems, such as the Nintendo DS and Nintendo 3DS; and (ii) software for multipurpose devices such as personal computers (“PCs”) and mobile devices such as smartphones and tablets. In recent years an increasing amount of software has been made available digitally through online networks such as Microsoft’s Xbox Live Arcade, and Sony’s PlayStation Network.
Gaming Product Development
Majesco primarily uses third party development studios to develop its games. However, Majesco may employ game-production and quality-assurance personnel to manage the creation of the game and its ultimate approval by the first party hardware manufacturer. Majesco carefully selects third parties to develop video games based on their capabilities, suitability, availability and cost. Majesco typically has broad rights to commercially utilize products created by the third party developers it works with. Development contracts are structured to provide developers with incentives to provide timely and satisfactory performance by associating payments with the achievement of substantive development milestones, and by providing for the payment of royalties to them based on sales of the developed
24
product, only after Majesco recoups development costs.The process for producing video games also involves working with platform manufacturers from the initial game concept phase through approval of the final product. During this process, Majesco works closely with the developers and manufacturers to ensure that the title undergoes careful quality assurance testing. Each platform manufacturer requires that the software and a prototype of each title, together with all related artwork and documentation, be submitted for its pre-publication approval. This approval is generally discretionary.
Intellectual Property
Majesco’s business is dependent upon intellectual property rights in numerous respects. Majesco typically owns the copyright to our software code and content and register copyrights and trademarks in the United States as appropriate.
a.
Platform Licenses
Hardware platform manufacturers require that publishers obtain a license from them to publish titles for their platforms. Majesco currently has non-exclusive licenses from Nintendo, Microsoft and Sony for each of the popular console and handheld platforms. Each license generally extends for a term of between two to four years and is terminable under a variety of circumstances. Each license allows it to create one or more products for the applicable system, and requires Majesco to pay a per-unit license fee and/or royalty payment from the title produced and may include other compensation or payment terms. All of the hardware manufacturers approve each of the titles Majesco submits for approval on a title-by-title basis, at their discretion. Majesco is also dependent on approvals from distributors for its video game software for PCs and mobile devices.
b.
Licenses from Third Parties
Most of Majesco’s titles are based on rights, licenses and properties, including copyrights and trademarks, owned by third parties. Majesco’s original titles may require rights to properties from third parties, such as rights to music or content. License agreements with third parties generally extend for a term of between two to four years, are limited to specific territories or platforms and are terminable under a variety of circumstances. Several of our licenses are exclusive within particular territories or platforms. The licensors often have strict approval and quality control rights. Typically, Majesco is obligated to make minimum guaranteed royalty payments over the term of these licenses and advance payments against these guarantees, but other compensation or payment terms, such as milestone payments, are also common. From time to time, Majesco may also license other technologies from third party developers for use in its products, which also are subject to royalties and other types of payment.
Customers
Majesco focuses on the download business, where games are downloaded from servers maintained by game companies, such as Valve, Microsoft, Sony and Nintendo. Accordingly, currently Majesco’s customers are substantially users of games on those platforms. Majesco continues to explore new distribution channels for its games
Competition
The computer generated (“CG”) animation business is highly competitive. Liquid competes with a number of North American studios that provide 3D CG animation as well as foreign companies in locations such as China, India and other countries in Asia where the wage levels are significantly below those of North American companies. Liquid attempts to differentiate itself from its competition through
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its high quality level of CG animation, production processes and training of skilled employees. Each of these factors permits it to create unique CG animation in a timely and cost-efficient manner.
Animation Production Services
The Company (through Liquid Canada) holds a 49% interest in Waterproof Studios Inc. (“Waterproof”), an animation studio based in Vancouver, BC. Waterproof is a Vancouver based content creation studio founded in 2011, providing industry leading creative development, computer generated production, visual effects and animation content. Through Waterproof, the Company’s animation production business provides animation services on a work-for-hire basis. Waterproof’s principal customers consist of majour video game publishers, traditional film and television studios, distributors, broadcasters, and other streaming service providers.
Production services-for-hire work has been the basis of Waterproof’s animation business. Since inception, Waterproof has built out a production facility, developed its production pipeline, and hired a talented and experienced work force. By establishing a consistent production service-for-hire model, Liquid can selectively search for proprietary properties that warrant production based on distribution potential.
Growth Strategy
With the goal of becoming a global competitor in gaming and film content creation, the Company is forging relationships with an extensive network of industry partners to integrate cutting edge technology into its portfolio of gaming and film products. Initial growth efforts in this regard are intended to consolidate the city of Vancouver’s fragmented film and entertainment market, where more than $3.4 billion is spent annually on film and television production services.(1) Vancouver’s fragmented media and entertainment sector is ripe for consolidation. The Company believes more entertainment assets that build upon its model of the studio of the future can be attracted to generate growth for shareholders. The ability to produce intellectual property across silos such as gaming and TV/ Film with the Company’s existing sales channel and distribution channels is core to its growth.
3.
Seasonality
Liquid’s operating results for any period are subject to cyclical or season fluctuations and dependent on factors such as the number and timing of film and television programs delivered, the budgets and financing cycles of broadcasters, overall demand for content, general advertising revenues and retail cycles associated with consumer spending activity, and the timing and level of success achieved by merchandise licenced and royalties paid in respect thereof, none of which can be predicted with certainty. Consequently, Liquid’s results from operations may fluctuate materially from period-to-period and the results of any one period are not necessarily indicative of results for future periods
4.
The Company makes no statements concerning its competitive position.
C.
Organizational structure.
The following is a list of the Company’s significant subsidiaries as of November 30, 2019:
1() “Activity Report 2017-2018” CreativeBC (16 July 2018), online: <https://www.creativebc.com/database/files/library/FINAL___Creative_BC___2017_18_Tax_Credits_Release(1).pdf>
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·
Liquid Media Group (Canada) Ltd. (“Liquid Canada”)
-
Incorporated in British Columbia, Canada;
-
100% owned by the Company; and
-
Principal operating subsidiary of the Company.
·
Majesco Entertainment Company (“Majesco”)
-
Incorporated in Nevada, USA;
-
51% owned by the Company; and
-
Operating a video gaming developer and publishing studio.
D.
Property, plant and equipment.
The Company’s head office is located at #202, 5626 Larch Street, Vancouver, BC, V6M 4E1. Majesco’s head office is located at 53 West 36th Street, Suite 205, New York, NY 10018. All office premises are leased space.
Item 4A. – Unresolved Staff Comments
None.
Item 5. – Operating and Financial Review and Prospects
A.
Operating results.
Introduction
The Company’s primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution.
During the year ended November 30, 2018, pursuant to the closing of the Transaction, the Company underwent a fundamental change in business from beverage co-packing and distribution to film and gaming content production and distribution.
Overall Performance - Fiscal Year Ended November 30, 2019
During the year ended November 30, 2019, the Company’s primary focus was securing financing through the issuance of convertible debentures and on developing relationships through which the Company could expand its current gaming content.
Gross Profit (Loss)
Gross profit (loss) decreased by $1,485,200 to $(1,556,568) for the year ended November 30, 2019 from $(71,368) for the comparable period in 2018. The decrease in gross profit is attributable to: (1) lower sales earned in Majesco; and (2) the Company entering into license agreements for video games and platforms during the fourth quarter of fiscal 2018, which are being amortized over the term of the agreements.
Operating Expenses
For the year ended November 30, 2019, operating expenses increased by $3,768,949 from $2,077,766 in the year ended November 30, 2018 to $5,846,715 in the year ended November 30, 2019 primarily as a result of:
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Operating Expense | Increase / Decrease in Expenses | Explanation for Change |
Accretion expense | Increase of $211,155 | Increased due to the requirement to accrete the equity portion of the convertible debentures. No accretion was required in the comparative year. |
Amortization | Increase of $82,480 | Increased due to the Company amortizing its game catalogues over a 15 year period. No amortization was required in the comparative year. |
Consulting and directors fees | Increase of $584,011 | Increased due to more consultants being engaged due to the acquisition of Majesco and the Company focusing on future growth. |
Insurance | Increase of $40,884 | Increased due to an increase in the premium associated with Directors and Officers policy. |
Interest expense | Increase of $44,852 | Increased due interest being charged on the convertible debentures received at the end of the first quarter in fiscal 2019. |
Investor relations, filing, and compliance fees | Increase of $142,335 | Increased due to the Company becoming publicly traded on the NASDAQ during the Q3 of fiscal 2018. |
Marketing | Increase of $1,166,568 | Increased due to the Company entering into a digital marketing campaign to increase awareness of the Company. |
Other general and administrative expenses | Increase of $45,735 | Increased due to increased corporate activity. |
Professional fees | Increase of $409,062 | Increase due to: (1) legal fees incurred in relation to the lawsuit brought on by the former President and director or the Company; (2) increased legal and accounting fees associated with filing the Company’s 2018 YE and 2019 Q1 during; and (3) increased bookkeeping fees due to increased corporate activity. |
Share-based compensation | Increase of $1,062,377 | Increased due to more options being issued in the current year. |
Other Income (Expenses)
The following occurred during the year ended November 30, 2019 as compared to the year ended November 30, 2018:
·
The Company recorded an increase in the share of profit of equity investment of $315,380 from its investment in Waterproof.
·
The Company recorded a decrease in the write-off of associate of $310,484 as the Company decided to write-off its investment in Household Pests during fiscal 2018. There were no write-offs during fiscal 2019.
·
The Company recorded a decrease in the write off of intangible assets of $116,352 as the Company decided not to proceed with the development of one video game. There were no write-offs during fiscal 2019.
·
The Company recorded an increase in the write-off of licenses of $717,125 as the Company decided not to proceed with the license with World of Wireless UK Limited. There were no write-offs during fiscal 2018.
·
The Company recorded a decrease in listing expenses of $4,130,557 in relation to the Arrangement between the Company and Liquid Canada during fiscal 2018.
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·
The Company recorded a decrease in project investigation of $166,989 in relation to the Arrangement between the Company and Liquid Canada during fiscal 2018. Fiscal 2019 included some additional costs associated with the legacy beverage business.
·
The Company recorded a decrease in derivative liability – warrants of $1,557,086 as no new derivatives were setup in fiscal 2019.
·
The Company recorded a decrease in gain on derivative liability of $1,479,847 due to the revaluation of the derivative liabilities at the end of the fiscal 2019.
·
The Company recorded an increase in the gain on settlement of debt of $271,303 in relation to the settling of various debt through the issuance of the Company’s common shares during the fiscal 2019 as compared to the settlements recorded in fiscal 2018.
·
The Company recorded an increase in the unrealized gains on equity instruments of $953,961 relating to the revaluation of the Company’s investment in Waterproof in fiscal 2019. No revaluation was done in fiscal 2018 as the investment was previously held as an equity investment.
·
The Company recorded an increase in the allowance for credit loss of $145,431 as management determined it was prudent to allow for a portion of the loans receivable in fiscal 2019. No allowance was recorded in fiscal 2018.
Overall Performance - Fiscal Year Ended November 30, 2018
The major developments during the year ended November 30, 2018 included:
The Company’s operations presented for the 2018 fiscal year represent the results of the parent company, Liquid Media Group Ltd., and its subsidiaries Liquid Canada and Majesco. The operations presented for the 2017 fiscal year represent the results of Liquid Canada.
Loss increased by $5,571,363 to $7,500,233 for the year ended November 30, 2018 from a loss of $1,928,870 in the comparable period last year. Of the total loss, $7,537,749 is attributable to shareholders of the Company and a profit of $37,516 is attributable to non-controlling interests. This change principally occurred due to the listing fees expensed on the Arrangement between LBIX and Liquid .
Comprehensive loss increased by $5,172,471 to $7,101,341 for the year ended November 30, 2018 from a comprehensive loss of $1,928,870 in the comparable period last year. Of the total comprehensive loss, $7,255,667 is attributable to shareholders of the Company and a profit of $154,326 is attributable to non-controlling interests. Comprehenvise loss includes the foreign currency translation adjustment on converting from the Company’s functional currency of USD to its reporting currency of CAD.
Sales
The Company’s sales increased by $687,381 to $687,381 for the year ended November 30, 2018 from sales of $Nil in the last two fiscal years. The increase in sales was due to the Company acquiring a 51% interest in Majeco during the year ended November 30, 2018.
Cost of Sales
The Company’s cost of sales increased by $758,749 to $758,749 for the year ended November 30, 2018 from sales of $Nil in the last two fiscal years. The increase in cost of sales was due to the Company acquiring a 51% interest in Majeco and the Company entering into license agreements for video games and platforms during the year ended November 30, 2018.
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Operating Expenses
For the fiscal year ended November 30, 2018, operating expenses increased by $523,555 from $1,554,211 in the fiscal year ended November 30, 2017 to $2,077,766 in the year ended November 30, 2018 primarily as a result of:
Operating Expense | Increase / Decrease in Expenses | Explanation for Change |
Consulting and directors fees | Increase of $346,238 | Increased due to more consultants being engaged due to the acquisition of Majesco and the Company focusing on future growth. |
Foreign exchange loss | Increase of $67,361 | Increased as the Company started incurring more US$ expenses. |
Interest expense | Decrease of $81,789 | Decreased due to the reduction in interest-bearing loans outstanding during the year. |
Investor relations, filing, and compliance fees | Increase of $99,009 | Increased due to the Company becoming listed on the NASDAQ during the year and the Company increasing the amount of shareholder communication. |
Professional fees | Increase of $479,028 | Increased due to the Arrangement between LBIX and Liquid and the acquisition of Majesco. |
Share-based compensation | Decrease of $464,865 | Decreased due to fewer options being issued in the current year. |
Salaries and benefits | Increase of $95,121 | Increased due to Majesco having employees |
Travel | Decrease of $58,387 | Decreased as the prior year included increased travel in relation to the acquisition of Majesco. |
Other Income (Expenses)
The Company recorded an increase in the share of loss of equity investment of $94,618 from its investment in Waterproof for the year ended November 30, 2018 as compared the year ended November 30, 2017.
During the year ended November 30, 2018, the Company recorded a write-off of associate of $310,484 as the Company decided to write-off its investment in Household Pests. There were no write-offs in during fiscal 2017.
During the year ended November 30, 2018, the Company recorded an increase in the write off of intangible assets of $116,352 as the Company decided not to proceed with the development of one video game.
During the year ended November 30, 2018, the Company recorded listing expenses of $4,130,557 in relation to the Arangement between LBIX and Liquid. There were no listing expenses during fiscal 2017.
During the year ended November 30, 2018, the Company recorded derivative liability – warrants of $1,557,086 upon the change of the Company’s functional currency from CAD to USD. Additionally, the Company recorded a gain on derivative liability of $1,030,328 during the year ended November 30, 2018 due to the revaluation of the derivative liability at the year-end date. The revaluation of the derivative liability in fiscal 2017 did not require adjustment as the fair value recorded approximated the revalued amount.
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During the year ended November 30, 2018, the Company recorded gain on debt settlements of $172,383 in relation to the settling of various debts through the issuance of the Company’s common shares. There were minimal debt settlements in fiscal 2017.
B.
Liquidity and Capital Resources.
Fiscal Year Ended November 30, 2019
As at November 30, 2019, the Company has current assets of $6,349,663 and current liabilities of $5,805,314, which results in working capital of $544,349 (2018 - $710,406).
The Company does not have adequate operating revenue to finance its existing obligations and therefore must continue to rely on external financing to generate capital to maintain its capacity to meet working capital requirements. The Company has relied on debt and equity raises to finance its operating activities since incorporation. The Company intends to continue to rely on debt and the issuance of shares to finance its operations. However, there is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company.
Cash Flows
The table below sets forth a summary of cash flow activity and should be read in conjunction with the Company’s cash flow statements:
| Year ended November 30, | |
| 2019 | 2018 |
| $ | $ |
Cash inflows (outflows) used in operating activities | (4,026,634) | 326,256 |
Cash flows used in investing activities | (213,702) | (138,262) |
Cash flows provided by financing activities | 4,456,019 | 3,994,886 |
Effect of foreign exchange on cash | 44,391 | 90,144 |
Increase in cash during the year | 260,074 | 4,273,024 |
Cash, beginning of year | 4,327,331 | 54,307 |
Cash, end of year | 4,587,405 | 4,327,331 |
The cash flow used in operating activities increased by $4,352,890 to $(4,026,634) for the year ended November 30, 2019 from $326,256 compared to the comparative year. The decline in cash flow from operating activities represents the effect on cash flows from net losses adjusted for items not affecting cash, principally: accrued interest income and expenses, amortization and accretion, share-based compensation expense, changes in the value of derivatives, gains and losses on the settlement of debt, unrealized foreign exchange, the share of profit of its equity investment, the unrealized gains on the revaluation of equity instruments, and the write off of various items, in addition to net changes in non-cash balances relating to operations.
Cash used by investing activities for year ended November 30, 2019 decreased by $75,440 compared to the comparative year mostly due to the Company receiving cash from the Arrangement between the Company and Liquid Canada during fiscal 2018.
Cash provided by financing activities for year ended November 30, 2019 improved by $461,133 compared to the comparative year. During the year ended November 30, 2019, the financing activities mostly increased because the Company closed its private placement offering of unsecured convertible debentures by raising $3,502,793, received loan proceeds of $812,933, and raised $368,617 from the exercise of warrants. The comparative year included the closing of a private placement for $4,157,760, raising $167,500 in loan proceeds, and raising $156,615 from the exercise of warrants.
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Fiscal Year Ended November 30, 2018
As of November 30, 2018, the Company had working capital of $710,406 compared to a working capital deficit of $950,981 at the prior fiscal year end. The Company held $4,901,841 in cash account balances (including restricted cash) at November 30, 2018 compared with $54,307 at the prior fiscal year end.
Considering the positive working capital position, including the cash on hand at November 30, 2018, the Company believes that it has sufficient working capital to continue operations for the next twelve months.
Cash provided by (used in): | Fiscal Year ended November 30, 2018 ($) | Fiscal Year ended November 30, 2017 ($) | Change ($) |
Operating Activities | 326,256 | (1,155,954) | 1,482,210 |
Investing Activities | (138,262) | (553,499) | 415,237 |
Financing Activities | 3,994,886 | (736,961) | 4,731,847 |
The cash flow generated from operating activities improved by $1,482,210 to $326,256 for the year ended November 30, 2018 from $(1,155,954) compared to the prior year. The cash flow improvement from operating activities represents the effect on cash flows from net losses adjusted for items not affecting cash, principally: accrued interest income and expenses, amortization, share-based compensation expense, listing expenses, changes in the value of derivatives, write off of intangible assets, gains on the settlement of debt, unrealized foreign exchange, and the share of loss of its equity investment, in addition to net changes in non-cash balances relating to operations.
Cash used by investing activities for year ended November 30, 2018 improved by $415,237 compared to the prior year mostly due to the Company spending more on its associates and issuing loans during the year ended November 30, 2017. In the current year, the Company also acquired cash from the acquisition of Majesco and the reverse acquisition with LBIX.
Cash provided by (used by) financing activities for year ended November 30, 2018 improved by $4,731,847 compared to the prior year. During the year ended November 30, 2018, the Company closed a private placement netting proceeds of $3,711,189 after the payment of share issuance costs and received loan proceeds of $182,500 from third parties and related parties. During the year ended November 30, 2017, the Company closed a private placement for $592,427 and repaid $1,756,721 on their credit facility agreement.
Other sources of financing are more fully described in the consolidated financial statements appearing in “Item 18 – Financial Statements” of this Annual Report.
The Company generally maintains cash or cash equivalents in Canadian and U.S. funds and does not use financial instruments for hedging purposes.
The Company has no material commitments for capital expenditures in the fiscal year ending November 30, 2019.
C.
Research and development, patents and licenses, etc.
The Company does not have a formal research and development program. It develops video games as and when it sees fit by working with existing staff and outside consultants, where appropriate.
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Majesco has numerous licensing/royalty agreements whereby Majesco is given the right to sell various video games in exchange for royalty payments based on various percentages ranging from 10% to 85% of selling prices.
The Company has a license agreement with Lightning Man for license to market and distribute six video games owned by Lightning Man, including: Bunny Boom, Bar Crasher, Nyctophobia, Resurgence, Clowns and Machetes, and Piggy Pals, over a two year period. As part of the Lightning Man agreement, the Company has agreed to pay a total of $100,000 (in three tranches) to Lightning Man over a 6-month period for the rights to two future video game titles that will be jointly developed by the Company and Lightning Man.
D.
Trend Information.
During the fiscal years ended November 30, 2016 and 2017, the Company was focused on its film content and distribution business. In fiscal 2018, through the acquisition of Majesco, the Company added gaming content and distribution to its business.
The Company believes that growing demand in the gaming content production and distribution business, as well as the accelerated industry adoption of cloud-based gaming, represent growth opportunities for the Company and its shareholders.
E.
Off-balance sheet arrangements.
The Company had no off balance sheet arrangements during the fiscal years ended November 30, 2019, 2018 and 2017.
F.
Tabular disclosure of contractual obligations.
There were no contractual obligations as of November 30, 2019:
The Company’s annual financial statements have been prepared in accordance with IFRS. Some accounting policies have a significant impact on the amount reported in these financial statements. A summary of those significant accounting policies can be found in the Summary of Significant Accounting Policies in the annual financial statements. Note that the preparation of this Annual Report requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes, as explained below, that the most critical accounting policies cover the following areas: foreign currency translation, financial instruments, investment in associates, intangible assets, goodwill, derivative liability, convertible debentures, share capital, share-based compensation, revenue recognition, royalties and licenses, and income taxes.
Foreign currency translation
The functional currency of an entity is the currency of the primary economic environment in which the entity operates. The functional currency of the Company and Liquid Canada changed from the CAD to the USD dollar effective September 1, 2018. The functional currency of Majesco is the USD. The functional currency of Waterproof is the CAD. The functional currency determinations were conducted through an analysis of the consideration factors identified in IAS 21, The Effects of Changes in Foreign Exchange Rates.
Transactions in currencies other than USD are recorded at exchange rates prevailing on the dates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated at the period end exchange rate while non-monetary assets and liabilities in foreign
33
currencies are translated at historical rates. Revenues and expenses are translated at the average exchange rates approximating those in effect during the reporting period.
For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s USD operations are translated into CAD at the exchange rate at the reporting date. The income and expenses are translated using average rate. Foreign currency differences that arise on translation for consolidation purposes are recognized in other comprehensive income (loss).
Financial instruments
Financial assets
On initial recognition, financial assets are recognized at fair value and are subsequently classified and measured at: (i) amortized cost; (ii) fair value through other comprehensive income (“FVOCI”); or (iii) fair value through profit or loss (“FVTPL”). The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at fair value net of transaction costs that are directly attributable to its acquisition except for financial assets at FVTPL where transaction costs are expensed. All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. On initial recognition of an equity instrument that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income.
The classification determines the method by which the financial assets are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Receivables and loans receivable are measured at amortized cost with subsequent impairments recognized in profit or loss. Cash, restricted cash, and investment in equity instruments are classified as FVTPL.
Impairment
An ‘expected credit loss’ impairment model applies which requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in profit or loss for the period.
In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
For the years presented, the Company did not record an expected credit loss on its accounts receivable; however, an expected credit loss of $145,431 was recorded on its loans receivable as at November 30, 2019 (2018 - $Nil).
Financial liabilities
Financial liabilities are designated as either: (i) fair value through profit or loss; or (ii) other financial liabilities. All financial liabilities are classified and subsequently measured at amortized cost except for financial liabilities at FVTPL. The classification determines the method by which the financial liabilities are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Accounts payable and accrued liabilities, due to related parties, loans payable, and convertible debentures are classified as other financial liabilities and carried on the statement of financial position at amortized cost. Derivative liabilities are measured at FVTPL.
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Investment in associates
The Company’s investment in associates was accounted for using the equity method of accounting. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the statement of financial position at cost. The statement of loss reflects the share of the results of operations of the associate until significant influence ceases. Where there has been a change recognized directly in the equity of the associate, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of changes in shareholders’ equity (deficiency). Profits and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.
Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The financial statements include the Company’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company from the date that significant influence or joint control commences, until the date that significant influence or joint control ceases. When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued, except to the extent that the Company has obligations, or has made payments on behalf of the investee. The Company used the equity method of accounting for its 49% investment in Waterproof until significant influence ceased on March 1, 2019 and for its 50% investment in Household Pests.
Equipment
Equipment is stated at historical cost less accumulated depreciation and accumulated impairment losses.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in profit or loss.
Assets under construction are not depreciated until available for their intended use.
Depreciation is charged over the estimated useful lives using the declining balance method as follows:
Computer equipment
30%
Intangible assets
The Company has intangible assets from business acquisitions and development of gaming content. The amortization method, useful life and residual values are assessed annually and the assets are tested for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Amortization expense is recorded on a straight-line basis beginning with the month the corresponding assets are available for use and over the estimated useful lives provided below:
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Video game catalogues
15 years
Brands
indefinite
Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the accounts and any gain or loss is reflected in profit and loss. Expenditures for repairs and maintenance are expensed as incurred.
Video game catalogues
The video game catalogues are made up of a diverse variety of games, ranging in age and popularity. The catalogues are unique due to the diverse nature of the products within the catalogues, making it difficult to assign a useful life. The useful life of 15 years represents management’s view of the expected period over which the Company expects benefits from the acquired gaming content packaged as catalogues. The election of this useful life is supported by internal game titles still producing revenue at this age.
Video game development expenditures, including the cost of material, direct labour, and other direct costs are recognized as an intangible asset when the following recognition requirements are met:
·
the development costs can be measured reliably;
·
the project is technically and commercially feasible;
·
the Group intends to and has sufficient resources to complete the project;
·
the Group has the ability to use or sell the software, and
·
the software will generate probable future economic benefits.
Video games being developed are amortized once development is complete and the game starts to generate income.
Brand
Through the acquisition of Majesco, the Company acquired the “Majesco Entertainment” brand which was determined to have an indefinite life.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized but is subject to, at a minimum, annual impairment tests. The Company assesses the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value is less than its carrying value. Impairment is tested at the cost center level by comparing the fair value of a cost center with its carrying amount including goodwill. If the carrying amount of the cost center exceeds its fair value, goodwill of the cost center is considered impaired and the second step of the test is performed to determine the amount of impairment loss, if any.
Impairment of non-financial assets
The carrying amount of the Company’s non-financial assets is reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in profit or loss.
The recoverable amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount, however, not to an amount
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higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years.
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable new assets. Acquisition costs incurred are expensed.
Derivative liability
Share purchase warrants outstanding during the years ended November 30, 2019 and 2018 met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed” criteria. As a result, the Company was required to separately account for the warrants as a derivative instrument liability recorded at fair value and marked-to-market each period with the changes in the fair value each period charged or credited to loss. Changes in fair value are recognized as gain/loss on derivative liability until the warrants are exercised or expire.
Convertible debentures
The Company’s convertible debenture was classified as a liability, less the portion relating to the conversion feature which is classified as a component of equity. As a result, the recorded liability to repay the convertible notes is lower than its face value. The liability was initially recorded at fair value and subsequently at amortized cost using the effective interest rate method; the liability is accreted to the face value over the term of the convertible debenture.
Share capital
Financial instruments issued by the Company are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Company’s common shares, share warrants, and options are classified as equity instruments.
Incremental costs directly attributable to the issue of new shares or options are recognized as a deduction from equity, net of tax.
Valuation of equity units issued in private placements:
The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.
The fair value of the common shares issued in private placements is determined to be the more easily measurable component as they are valued at their fair value which is determined by the closing price on the issuance date. The remaining balance, if any, is allocated to the attached warrants. Any fair value attributed to the warrants is recorded to reserves.
Loss per share
Basic and diluted loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of shares outstanding during the reporting period. If applicable, diluted income per share is computed similar to basic income per share except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of share options, warrants, and convertible debentures, if dilutive. The number of additional shares is calculated by assuming that outstanding share
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options and warrants were exercised and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting periods. For the years presented, this calculation proved to be anti-dilutive.
Share-based compensation
The Company grants stock options to buy common shares of the Company to directors, officers and consultants.
All share-based payments made to employees and non-employees are measured and recognized using the Black-Scholes option pricing model. For employees, the fair value of the options is measured at grant date. For non-employees, the fair value of the options is measured on the earlier of the date at which the counterparty performance is complete, the date the performance commitment is reached, or the date at which the equity instruments are granted if they are fully vested and non-forfeitable. Share-based payments to non-employees are measured at the fair value of the goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. Stock options that vest over time are recognized using the graded vesting method. Share based compensation is recognized as an expense with a corresponding increase in reserves. At each financial reporting period, the amount recognized as expense is adjusted to reflect the number of share options expected to vest. If and when the stock options are ultimately exercised, the applicable amounts of reserves are transferred to share capital.
Where the terms of a stock option are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the stock-based compensation arrangement or is otherwise beneficial to the employee as measured at the date of modification over the remaining vesting period.
Revenue recognition
Animation production services
Revenue from animation production services provided is recognized when the services have been provided and control of the deliverable has been transferred to the customer. Revenue collected prior to it being earned is recorded as deferred revenue and recognized as the related services are provided. Management estimates the pace of revenue recognition based on contract milestones and determination of when it considered the revenue to be earned. The Company’s arrangements with customers are evidenced by contracts with customers. Any costs incurred to secure a contract will be capitalized and amortized over the period in which the revenue is recognized.
Software games
Revenue from sales of interactive software games on game consoles and PCs are recognized as revenue when games are purchased by a customer.
Sales of the Company’s games are made by third party gaming platform companies pursuant to license agreements, and these gaming platform companies retain an agreed upon portion of sales as fees. The Company reports revenues related to these arrangements net of the fees retained by the gaming platform companies, as the Company has determined that the gaming platform companies are considered the primary obligors to the end consumers for the sale of the games.
Royalties and licenses
Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of sales at the contractual rate based on a percentage of the revenue earned.
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Income taxes
Current income tax
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the country where the Company operates and generates taxable income.
Deferred income tax
Deferred income tax is provided for based on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Current income and deferred tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Accounting pronouncements not yet adopted
A number of new standards, amendments to standards and interpretations applicable to the Company are not yet effective for the year ended November 30, 2019 and have not been applied in preparing these consolidated financial statements.
a)
IFRS 16 – Leases: specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard was issued in January 2016 and is effective for annual periods beginning on or IFRSfter January 1, 2019. Management does not anticipate this standard will have a significant impact on the Company’s consolidated financial statements.
b)
IFRIC 23 – Uncertainty Over Income Tax Treatments: clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. It is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. Management does not anticipate this standard having a material effect on the Company’s consolidated financial statements.
Other accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant impact on the Company’s consolidated financial statements.
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G.
Safe Harbor
The Company seeks safe harbor for our forward-looking statements. Please see the section titled “Forward-Looking Statements” above.
Item 6. – Directors, Senior Management and Employees
A.
Directors and Senior Management
The following is a list of the current directors and senior officers of the Company, their municipalities of residence, their current positions with the Company, areas of experience, and principal business activities performed outside the Company:
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Nancy Basi | Ms. Basi is Executive Director of the Media & Entertainment Centre (VMEC) for the Vancouver Economic Commission, where she works strategically to grow and support the screen-based entertainment industries for the City of Vancouver and surrounding areas. Included in her portfolio are features, series, visual efforts and animation, games and virtual/augmented reality. With her move to the VMEC in 2011, Ms. Basi brought her 20 years of experience in the feature film, television and commercial industry in physical production, visual effects and animation. Clients included Walt Disney Studios, Columbia Pictures, Warner Bros., 20th Century Fox, Nike and Mercedes. Ms. Basis currently serves on the Executive Board of Women in Animation (WIM) Vancouver Chapter and as Vice President of the VRARA Vancouver Chapter (Virtual Reality/Augmented Reality Association), and is a member of numerous digital entertainment societies and member-based organizations. |
Donna M. Moroney | Ms. Moroney has been Corporate Secretary of the Company since November 12, 2019. She has over 30 years of extensive experience in regulatory and corporate compliance in both Canada and the United States, and as a senior officer for various public companies, and has instructed and provided training in regulatory compliance. As President and owner of Wiklow Corporate Services Inc. since 2008, she assists companies in the resource, financial and technology sectors in maintaining the securities and exchange demands on public companies, as well as keeping them up-to-date on relevant issues, policies and working practices. Ms. Moroney assists companies reporting in the U.S. in preparing registration statements, quarterly and annual financial filings and other various facets of meeting U.S. securities requirements. |
There are no arrangements or understandings pursuant to which any of the above was selected as a director or executive officer. There are no family relationships between any of the persons named above.
B.
Compensation
Compensation Principles
The Company is committed to the philosophy of sharing the benefits of success with those who help the Company grow and prosper. The Company's strength and ability to sustain growth is based on an organization that perceives people as its single most important asset. The Company's philosophy is to provide sufficient compensation opportunities in order to attract and retain key executive officers critical to the Company's long-term success. The Company has developed an informal employee share option plan to increase the risk/reward ratio of its executive compensation program, to focus management on long-term strategic issues, and to align management's interests with those of the shareholders of the Company in the sustained growth of shareholder value.
The Company does not have a formal compensation committee. The Company relies on the independent members of the Board for determining executive compensation. The Board may, from time to time, retain independent consultants to advise on compensation matters.
Compensation Program
The Company's executive compensation program includes base salary, annual cash or short-term incentives (bonuses) and long-term incentive compensation in the form of stock options.
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The compensation program is designed to:
·
promote an ownership mentality among key leadership and the Board of Directors;
·
enhance the overall performance of the Company; and
·
recognize and reward individual performance and responsibility.
Base Compensation
The Company determines base salary based on a combination of factors, including comparable market data, experience, expertise and job responsibilities. The Company's process for determining executive compensation is relatively simple and does not include formal targets, criteria or analysis. Salary levels are reviewed periodically and adjustments may be made, if warranted, after an evaluation of executive and Company performance, salary trends in the Company's business sector, and any increase in responsibilities assumed by the executive.
Short-Term Incentives
Bonuses for senior management are, with limited exceptions, discretionary and are intended to reward senior managers for exceptional performance that positively impacts the profitability and growth of the Company. Depending on the Company's financial and operating performance, performance-based bonuses may be awarded.
Long-Term Incentives
The long-term incentives are intended to align executive and shareholder interests by creating a strong and direct link between executive compensation and shareholder return, and to enable executive officers to develop and maintain a significant, long-term stock ownership position in the Company's common shares. Long-term incentives may be granted in the form of stock options which generally vest over several years of service with the Company. Further discussion follows in the section titled "Option-Based Awards".
Risk Considerations
As the Company does not have a bonus program in place for its employees generally, and any significant bonuses for the Named Executive Officers (as defined below in the section "Summary Compensation Table") must be approved by the Board, the Board has not considered the implications of risks associated with the Company's compensation policies and practices. While the Board of Directors does not formally analyse risks associated with the Company's compensation policies and practices, these policies and practices do not include structural inconsistencies that are likely to unduly encourage or cause an executive officer to expose the Company to inappropriate or excessive risks.
Financial Instruments
No Named Executive Officer or director is permitted to purchase financial instruments to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the Named Executive Officer or director.
Option-Based Awards
The Company does not have a formal stock option plan. Options for the purchase of common shares of the Company are granted from time to time to directors, officers and employees as an incentive. These options are long-term incentives that generally vest over several years of service with the Company. The options granted
42
are exercisable at a price which is equal to or greater than the fair market value of the common shares at the date the options are granted. Options are granted in consideration of the level of responsibility of the employee as well as his or her impact or contribution to the long-term operating performance of the Company. In determining the amount and frequency of such grants, a variety of factors are evaluated, including job level, and past, current and prospective services rendered. The Board also takes into account the number of options, if any, previously granted, and the exercise price of any outstanding options to ensure that such grants are in accordance with all applicable regulatory policies.
Compensation Governance
Please see the sections above titled "Base Compensation", "Short-Term Incentives", and "Long Term Incentives" for a discussion of the practices adopted by the Board to determine compensation for directors and executive officers. The Company does not have a formal compensation committee.
Summary Compensation Table
The following table (presented in accordance with Canada's National Instrument Form 51-102F6 Statement of Executive Compensation) sets forth all annual and long term compensation for services in all capacities to the Company for the three most recently completed financial years of the Company in respect of:
(a)
each individual who acted as the Chief Executive Officer ("CEO") or the Chief Financial Officer ("CFO") or acted in a similar capacity for all or any portion of the most recently completed financial year,
(b)
each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and the CFO, at the end of the most recently completed financial year whose total compensation was, individually, more than $150,000 for that financial year, and
(c)
each individual who would have satisfied the criteria under paragraph (b) but for the fact that the individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of the most recently completed financial year.
(collectively the "Named Executive Officers" or "NEOs").
The Company completed the Transaction on August 8, 2018. Its first financial year end after the Transaction was November 30, 2018. Information for the 2017 financial year reflects information for Liquid Canada, as the predecessor entity.
NEO | Fiscal Year | Salary | Share- based awards ($) | Option- based awards (1) | Non-equity Incentive plan compensation | All Other Compen- sation | Pension Value | Total compen- sation | |
Annual incentive plans | Long- term incentive plans | ||||||||
Daniel Cruz | 2019 | 155,000 (2) | Nil | 369,468 | Nil | Nil | 6,000 | Nil | 530,468 |
Jesse Sutton | 2019 | 266,000 (3) | Nil | Nil | Nil | Nil | Nil | Nil | 266,000 |
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Charlie Brezer | 2019 | 155,000 (4) | Nil | 369,468 | Nil | Nil | 6,000 | Nil | 530,468 |
(1)
The value of option awards reflects the grant date fair value of option based awards in the 2017, 2018 and 2019 fiscal years. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model. The options are granted in U.S. dollars and are converted into Canadian dollars at the Bank of Canada closing rate as of the date of the options grant for accounting purposes.
(2)
Mr. Cruz charged consulting fees from Wawel Den Inc., a company controlled by Mr. Cruz.
(3)
Mr. Sutton charged consulting fees from Zift Interactive LLC., a company controlled by Mr. Sutton.
(4)
Mr. Brezer charged consulting fees from Ispani Holdings Inc., a company controlled by Mr. Brezer.
(5)
Includes directors fees chared to the Company.
During fiscal 2017, Liquid Canada entered into formal consulting agreements with Wawel Den Inc., a company controlled by Mr. Cruz, and Ispani Holdings Inc., a company controlled by Mr. Brezer, which expired on December 31, 2017. In January 2018, new agreements with Wawel Den Inc. and Ispani Holdings Inc. were entered into which expired on December 31, 2018. In January 2019, new agreements with Wawel Den Inc. and Ispani Holdings Inc. were entered into which expired on December 31, 2019. In May 2019, new agreements with Wawel Den Inc. and Ispani Holdings Inc. were entered into which continue on a month-to-month basis.
Outstanding Option-Based Awards for Named Executive Officers
The following table sets forth particulars of all option-based and share-based awards outstanding for each Named Executive Officer at November 30, 2019:
| Option-based Awards | Share-based Awards | |||||
Name | Number of Securities underlying unexercised options (#) | Option exercise price ($) | Option Expiration Date | Value of unexercised in-the-money-options ($)(1) | Number of shares or units of shares that have not vested (#) | Market or payout value of share awards that have not vested ($) (2) | Market or payout value of vested share-based awards not paid out or distributed ($) |
Daniel Cruz | 150,000 | US$2.55 | Feb 28, 2024 | 159,468 | N/A | N/A | N/A |
Charlie Brezer | 150,000 | US$2.55 | Feb 28, 2024 | 159,468 | N/A | N/A | N/A |
TOTAL | 300,000 |
|
|
|
|
|
|
(1)
Based on the difference between the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year) of US$3.35 and the stock option exercise price, multiplied by the number of Shares under option converted at the exchange November 30, 2019 foreign exchange rate of 1.3289:1.
(2)
Based on the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year) of US$3.35.
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Option Exercises During the Most Recently Completed Fiscal Year
No stock options were exercised by the Named Executive Officers during the most recently completed fiscal year.
Option Repricing
The Company did not reprice any stock options during the most recent fiscal year.
Value Vested or Earned During the Year
The following table sets forth particulars of the value of option-based awards and share awards which vested during the year ended November 30, 2019, and the value of non-equity incentive plan compensation earned during the year ended Novemebr 30, 2019 for each Named Executive Officer:
Name | Option-based awards-Value vested during the year ($) (1) | Share awards – Value during the year on vesting ($) (2) | Non-equity incentive plan compensation-Pay-out during the year ($) (3) |
Daniel Cruz | 159,468 | N/A | N/A |
Charlie Brezer | 159,468 | N/A | N/A |
(1)
This amount is the aggregate dollar value that would have been realized if the options under option based awards had been exercised on the vesting date. It is determined by the difference between the exercise price of the option and the market price on November 30, 2019 converted to Canadian dollars at the exchange rate of 1.3289. If the option was not-in-the-money then a NIL value was assigned.
(2)
The Company has not granted any share-based awards.
(3)
The Company did not pay any non-equity incentive plan compensation during the year ended November 30, 2019.
The Company does not have a formal stock option plan. Stock options generally vest on grant date. The value vested during the year varies according to the vesting date and the market price of the underlying securities on a selected exercise date.
Further details regarding stock options may be found in the sections above titled "Option-Based Awards for Named Executive Officers" and below titled "Outstanding Option-Based Awards for Directors".
Pension Plan Benefits
The Company does not have a pension plan or defined contribution plan that provides for payments or benefits to the Named Executive Officers at, following, or in connection with retirement.
Termination of Employment, Change in Responsibilities and Employment Contracts
The Company and its subsidiaries have no arrangements that provide for payments to a Named Executive Officer at, following or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, change in control of the Company or change in a Named Executive Officer's responsibilities.
Director Compensation
Reference is made to the Summary Compensation Table above for details of compensation paid to directors who are also Named Executive Officers, in their capacity as executive officers of the Company. Directors are also compensated for their services in their capacity as directors by the granting from time to time of incentive stock options.
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The following table sets forth all amounts of compensation provided to the directors, who are not Named Executive Officers, for the Company's most recently completed fiscal year:
Director | Fees Earned ($) | Share-based Awards ($) | Option-Based Awards ($) (1) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) |
Joshua Jackson | 6,000 | Nil | 28,326 | Nil | Nil | 34,326 |
Stephen Jackson | 6,000 | Nil | 123,156 | Nil | Nil | 129,156 |
Nancy Basi (2) | 3,500 | N/A | N/A | N/A | N/A | N/A |
(1)
The value of option awards reflects the grant date fair value of option based awards in the 2019 fiscal year. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model. The options are granted in U.S. dollars and are converted into Canadian dollars at the Bank of Canada closing rate as of the date of the options grant for accounting purposes.
(2)
Ms. Basi was appointed as a director of the Company on May 28, 2019.
Outstanding Option-Based Awards for Directors
Options for the purchase of common shares of the Company are granted from time to time to directors under the same terms as those granted to employees, and described above in "Option-Based Awards".
The following table sets forth particulars of all option-based and share-based awards outstanding for each director, who was not a Named Executive Officer, at November 30, 2019:
| Option-based Awards | Share-based Awards | |||||
Name | Number of Securities underlying unexercised options (#) | Option exercise price ($) | Option Expiration Date | Value of unexercised in-the-money-options ($)(1) | Number of shares or units of shares that have not vested (#) | Market or payout value of share awards that have not vested ($) (2) | Market or payout value of vested share-based awards not paid out or distributed ($) |
Joshua Jackson | 11,500 | US$2.55 | Feb 28, 2024 | 12,226 | N/A | N/A | N/A |
Stephen Jackson | 50,000 | US$2.55 | Feb 28, 2024 | 53,156 | N/A | N/A | N/A |
Nancy Basi | Nil | N/A | N/A | N/A | N/A | N/A | N/A |
TOTAL | 61,500 |
|
|
|
|
|
|
(1)
Based on the difference between the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year) of US$3.35 and the stock option exercise price, multiplied by the number of Shares under option converted at the exchange November 30, 2019 foreign exchange rate of 1.3289:1.
(2)
Based on the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year) of US$3.35.
No stock options were exercised by the directors during the most recently completed fiscal year, nor were any of the stock options repriced during that period.
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Value Vested or Earned During the Year
The following table sets forth particulars of the value of option-based awards and share-based awards which vested during the year ended November 30, 2019, and the value of non-equity incentive plan compensation earned during the year ended November 30, 2019 for each director of the Company who was not a Named Executive Officer:
Name | Option-based awards-Value vested during the year ($) (1) | Share awards – Value during the year on vesting ($) (2) | Non-equity incentive plan compensation-Pay-out during the year ($) (3) |
Joshua Jackson | 12,226 | N/A | N/A |
Stephen Jackson | 53,156 | N/A | N/A |
Nancy Basi | N/A | N/A | N/A |
(1)
This amount is the aggregate dollar value that would have been realized if the options under option based awards had been exercised on the vesting date. It is determined by the difference between the exercise price of the option and the market price on November 30, 2019 converted to Canadian dollars at the exchange rate of 1.3289. If the option was not-in-the-money then a NIL value was assigned.
(2)
The Company has not granted any share-based awards.
(3)
The Company did not pay any non-equity incentive plan compensation during the year ended November 30, 2019.
The Company does not have a formal stock option plan. Stock options generally vest on grant date. The value vested during the year varies according to the vesting date and the market price of the underlying securities on a selected exercise date.
Further details regarding stock options may be found in the sections above titled "Option-Based Awards for Named Executive Officers" and "Outstanding Option-Based Awards for Directors".
C.
Board Practices
1.
The Company’s Board of Directors has been set at five directors and is divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three-year terms of office. Any director whose term has expired is eligible for re-election subject to Board approval.
The following table lists the classes of directors and remaining terms of office for the directors and the period during which the directors have served:
Name | Class of Director | Director Since | Expiry Term |
Joshua Jackson | Class III | January 2014 | 2021 annual general meeting (“AGM”) |
Daniel Cruz | Class I | May 2017 | 2022 AGM |
Charles Brezer | Class II | October 2015 | 2020 AGM |
Stephen Jackson | Class III | July 2018 | 2021 AGM |
Nancy Basi | Class I | May 2019 | 2022 AGM |
Three of the five current directors are independent based upon the tests for independence set forth in applicable Canadian and U.S. securities legislation. Daniel Cruz is not independent as he is the Chief
47
Financial Officer of the Company and Charlie Brezer is not independent based on the compensation received by him.
2.
There are no directors’ service contracts with the Company or any of its subsidiaries providing for benefits upon termination of service.
3.
Audit Committee
The members of the Company’s Audit Committee are:
Joshua Jackson
Stephen Jackson
Nancy Basi
All of the Audit Committee are independent directors, are financially literate, and are considered “financial experts” as defined by the SEC. For details on their professional careers, see “Item 6 - A. Directors, Senior Management and Employees”.
The Audit Committee has a written charter which specifies the scope of its authority and responsibility. A copy of the Audit Committee Charter was previously filed as an exhibit to the Company’s Annual Report on Form 20-F, filed on May 30, 2008, and is incorporated by reference. The Audit Committee reviews and re-assesses the adequacy of its written charter on an annual basis. The function of the Audit Committee is one of review and oversight. The committee also is responsible for monitoring the independence, qualifications and performance of the Company’s external auditors, overseeing the audits of the Company’s financial statements and approving any non-audit services. The committee reports to the Board of Directors from time to time with respect to its activities and its recommendations and provides background and supporting information as may be necessary for the Board of Directors to make an informed decision.
Nomination of Directors
The Board has adopted a charter for the Nominating and Corporate Governance Committee. The committee is currently comprised of three independent directors :
Joshua Jackson
Stephen Jackson
Nancy Basi
Pursuant to its charter, the responsibilities, powers and operation of the committee include : identifying and recommending new candidates for Board nomination; evaluating the effectiveness of the Board, its committees and its directors; monitoring and reviewing the Company’s corporate governance practices and policies and making recommendations for changes when appropriate; and ensuring that a comprehensive orientation is received by new directors and that continuing education opportunities are available.
In connection with its responsibilities relating to Board nominations, the committee is responsible for identifying and recommending new candidates for nomination to the Board based upon: (i) the competencies and skills necessary for the Board as a whole to possess; (ii) the competencies and skills necessary for each individual director to possess; (iii) the competencies and skills which each new nominee to the Board is expected to bring; and (iv) whether the proposed nominee to the Board will be able to devote sufficient time and resources to the Company. Other members of the Board and representatives of the food and beverage industry are consulted for possible candidates.
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The size of the Board is reviewed on a regular basis by the committee and the Board. The committee and the Board will take into account the number of directors required to carry out the Board’s duties effectively, and to maintain a diversity of view and experience.
Compensation of Directors and the CEO
The independent directors have the responsibility for determining and reviewing compensation for the directors and senior management of the Company. Reference is made to the Compensation section above for further information.
Assessments
The Board conducts informal assessments of the Board's effectiveness, the individual directors and each of its committees on a regular basis. As part of the assessments, the Board reviews the mandates or charters and conducts reviews of applicable corporate policies.
As of November 30, 2019, the executive officers of Liquid Media Group Ltd. are:
Daniel Cruz | Chief Financial Officer, Director |
Charlie Brezer | Director |
D.
Employees
Following are the number of employees of the Company and its subsidiaries for the past three fiscal years as at the end of each fiscal year:
| November 30, 2019 | November 30, 2018 | November 30, 2017 |
Canada | 0 | 0 | 0 |
United States | 2 | 2 | 0 |
E.
Share ownership
Options to purchase common shares from the Company are granted from time to time to directors, officers and employees of the Company on terms and conditions acceptable to the Board of Directors.
As of November 30, 2019, the Company had 461,500 issued and outstanding options, with a weighted average exercise price of $3.39.
All of the total stock options were fully vested and are available for exercise as of November 30, 2019.
The following table provides share ownership information with respect to the directors and officers listed in “Item 6 – Directors, Senior Management and Employees" above, as at February 28, 2020.
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(1)
The information as to number of shares beneficially owned (directly or indirectly or over which control or direction is exercised) is not within the direct knowledge of the management of the Company and has been furnished by the respective director or officer. Percentages of ownership are based on 5,727,558 common shares of the Company issued and outstanding as at February 28, 2020.
(2)
The Debentures will mature two years from closing and will bear interest at 2% per annum. Each Debenture is convertible into Debenture Units at a price of US$1.50 per unit. Each Debenture Unit consists of one common share and one Debenture Warrant. Each Debenture Warrant will entitle the holder to acquire one common share of the Company for US$1.75 for a period of two years from the closing date of the Debenture offering.
(3)
18,338 of these shares are held by Wawel Den Inc., a company controlled by Mr. Cruz.
Further information regarding stock options with respect to the directors and officers may be found in the sections above, titled “Outstanding Option-Based Awards for Named Executive Officers” and “Outstanding Awards for Directors.”
There are no other arrangements involving the employees in the capital of the Company.
Item 7. – Major Shareholders and Related Party Transactions
A.
Major shareholders
As at February 28, 2020, the Company had 5,757,558 common shares without par value issued and outstanding.
1.
Following are the shareholders that are the beneficial owners of 5% or more of the Company’s voting securities, as of February 28, 2020:
(a)
Shareholder | Number of Shares | Percentage of Issued Capital |
Joshua Jackson | 930,306 | 16.24% |
(1)
Includes 263,640 common shares currently held, as well as 333,333 units issuable upon conversion the convertible debenture, consisting of 333,333 common shares and 333,333 common share purchase warrants, which, if fully exercised would be 333,333 common shares.
(b)
To the best of the Company's knowledge, there has been no significant change in the percentage ownership held by any major shareholders during the past three fiscal years.
(c)
The Company’s major shareholders do not have different voting rights than other shareholders.
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2.
The Company’s register of 66 registered shareholders showed that as of February 28, 2020, 1,163,455 of the Company’s common shares, or 20.31%, were held by 24 registered shareholders residing in the United States. The register includes Cede and Co., an American depository holding shares on behalf of beneficial shareholders. However, since the Company meets the Business Contacts Test of the definition of a Foreign Private Issuer, the Company’s status as a Foreign Private Issuer has not changed.
3.
To the Company’s knowledge, the Company is not owned or controlled, directly or indirectly, by another corporation, any foreign government, or by any other natural or legal persons.
4.
To the Company’s knowledge, there are no arrangements the operation of which at a subsequent date may result in a change in control of the Company. A substantial number of common shares of the Company are held by depositories, brokerage firms and financial institutions in “street form”.
B.
Related party transactions
1.
The Company has not at any time during the period since the beginning of the last fiscal year to November 30, 2019 been a party to any material transactions in which any director or officer of the Company, or any relative or spouse, or any relative of any such spouse, has any direct or indirect material interest except as follows:
(a)
Incurred consulting and directors fees of $161,000 (2018 - $120,182) to Ispani Holdings Inc. (“Ispani”), a company controlled by Charlie Brezer, a director of the Company, and interest expense of $5,174 (2018 - $17,780) and share-based compensation of $369,468 (2018 - $Nil) to Mr. Brezer. During the year ended November 30, 2018, the Company issued 23,027 common shares to settle $150,682 in outstanding debt, accrued interest, and accounts payable owing to Mr. Brezer and Ispani. During the year ended November 30, 2019, Mr. Brezer advanced $23,930 (US$18,000) to the Company for the convertible debenture offering. In July 2019, Mr. Brezer converted his debenture into 12,000 units of the Company with each unit consisting of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 28, 2021. As at November 30, 2019, $207,625 (2018 - $49,595) was included in accounts payable and accrued liabilities as owing to Mr. Brezer and Ispani. Additionally, as at November 30, 2019, $Nil (2017 - $172,204) was included in loans payable for the principal portion of loans advanced to the Company which incurred interest at 8% per annum.
(b)
Incurred consulting and director fees of $161,000 (2018 - $120,182) to Wawel Den Inc. (“Wawel”), a company controlled by Daniel Cruz, the CFO and a director of the Company, and share-based compensation of $369,468 (2017 - $Nil) to Mr. Cruz. During the year ended November 30, 2018, the Company issued 18,338 common shares to settle $120,000 in outstanding accounts payable owing to Wawel. During the year ended November 30, 2019, Mr. Cruz advanced $93,060 (US$70,000) to the Company for the convertible debenture offering. In July 2019, Mr. Cruz converted his debenture into 46,667 units of the Company with each unit consisting of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 28, 2021. As at November 30, 2019, $20,460 (2017 - $47,578) was included in accounts payable and accrued liabilities as owing to Mr. Cruz and Wawel.
(c)
Incurred consulting fees of $266,000 (2018 - $60,000) to Zift, a company controlled by Jesse Sutton, the director of Majesco. As at November 30, 2019, $908,970 (2018 - $1,128,324) was included in accounts payable and accrued liabilities as owing to Zift.
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(d)
Incurred consulting fees of $nil (2018 - $107,162) to Five Zoo C&D Inc. (“Five Zoo”), a company controlled by Krysanne Katsoolis, the former president, chief executive officer and a director of the Company. As at November 30, 2019, $318,937 (2018 - $159,617) was included in accounts payable and accrued liabilities as owing to Five Zoo.
(e)
Incurred directors fees of $6,000 (2018 - $Nil) and share-based compensation of $28,326 (2018 - $nil) to Joshua Jackson, Chair and a director of the Company. During the year ended November 30, 2019, Mr. Jackson advanced $664,717 (US$500,000) to the Company for the convertible debenture offering. As at November 30, 2019, $144,900 (2018 - $36,018) was included in accounts payable and accrued liabilities as owing to Mr. Jackson.
(f)
Incurred directors fees of $6,000 (2018 - $Nil) and share-based compensation of $123,156 (2018 - $Nil) to Stephen Jackson, a director of the Company. As at August 31, 2019, $6,000 (2018 - $Nil) was included in accounts payable and accrued liabilities as owing to Mr. Jackson.
(g)
Incurred directors fees of $3,500 (2018 - $Nil) to Nancy Basi, a director of the Company. As at November 30, 2019, $3,500 (2018 - $Nil) was included in accounts payable and accrued liabilities as owing to Ms. Basi.
(h)
Earned interest income of $8,137 (2017 – $8,116) from a loan receivable issued to Waterproof. As at November 30, 2019, Waterproof owed the Company $94,882 (2018 - $104,553) for the outstanding balance of principal and interest on the loan.
The Company believes that the services described above were provided to the Company on a basis not less favorable than would be provided to an unrelated third party.
C.
Interest of experts and counsel
This Item is not applicable for an Annual Report.
Item 8. – Financial Information
A.
Consolidated Statements and Other Financial Information.
Please see “Item 18 - Financial Statements” for a list of the financial statements filed as part of this Annual Report.
Legal Proceedings
The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business, none of which are expected to have significant effects on the Company’s financial position, profitability, or cash flows.
In October 2018, the former president and chief executive officer of Liquid Canada (the “Claimant”) filed a lawsuit with the United States District Court Southern District of New York against the Company for approximately $11,800,000 for breach of contract, defamation, and violation of human rights (the “Action”). The Claimant asserts the existence of an unwritten contract which, if it was entered, increased her base compensation from US$120,000 to US$400,000 per year. Such contract was not executed by any party and is not, the Company states, a contract the Company would have contemplated at the time. The Company’s counsel applied to the court seeking dismissal of the Action. As at November 30, 2019, the violation of human rights claim was dismissed. In February 2020, the Company settled with the Claimant for US$240,000 which has been recorded as at November 30, 2019.
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In January 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company for approximately $400,000 for unpaid consulting fees, US$500,000 for the unpaid cash consideration for the purchase of 51% interest in Majesco, and a payment for the difference between US$500,000 and the value of the Company’s shares issued on the purchase of the 51% interest in Majesco. The Company has accrued $1,064,450 as at November 30, 2019. Management is currently seeking legal advice on this lawsuit.
In February 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company in relation to the issuance of a share certificate for 59,706 common shares of the Company, 32,149 of which the consultant states is owing to him and general and special damages in relation to the shares. Management is currently seeking legal advice on this lawsuit. No provision has been included in the financial statements as of November 30, 2019.
Dividend Distributions
The Company intends to consider dividend distributions when it determines that it cannot realize better returns to investors by investing internally.
B.
Significant Changes
There have been no significant changes since the date of the annual financial statements.
Item 9. – The Offer and Listing
A.
Offer and listing details.
This item is not applicable for an Annual Report.
B.
Plan of Distribution
This item is not applicable for an Annual Report.
C.
Markets
The Company’s common shares have been quoted on the NASDAQ (formerly called the NASDAQ Small-cap Market) since August 3, 1993. The ticker symbol is YVR.
D.
Selling Shareholders
This item is not applicable for an Annual Report.
E.
Diliution
This item is not applicable for an Annual Report.
F.
Expense of the Issue
This item is not applicable for an Annual Report.
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Item 10. – Additional Information
A.
Share capital
This item is not applicable for an Annual Report.
B.
Memorandum and articles of association.
The Notice of Articles relating to the consolidation of the Company’s common shares and the increase in authorized share capital that were filed with the British Columbia Registry Services on February 1, 2010 were filed on a Form 6-K on February 3, 2010.
All other information required by this “Item 10.B” was previously reported to the SEC in the Company’s registration statement on Form F-3, filed on September 24, 2007, and is incorporated by reference.
C.
Material contracts.
On September 17, 2017, the Company entered into the Arrangement Agreement to acquire 100% of Liquid Canada pursuant to the Transaction. On January 15, 2018, the Company announced an amendment to the Arrangement Agreement by entering into the Amended and Restated Arrangement Agreement with Liquid Canada relating to the Transaction whereby the original agreed valuation of existing Company shares was increased from US$1.50 per share to US$1.78 per share. At the time of completion of the Transaction on August 8, 2018, the Company had 9,244,898 common shares issued and outstanding, including 6,442,486 issued to former Liquid Canada shareholders, representing 69.69% of the Company’s issued and outstanding shares.
D.
Exchange controls.
Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends, interest, royalties and similar payments, management fees, loan repayments, settlement of trade debts, or the repatriation of capital. Any such remittances to U.S. residents, however, may be subject to withholding tax.
E.
Taxation.
A brief and general description is included below of certain taxes, including withholding taxes, to which U.S. security holders may be subject under the existing tax laws and regulations of Canada. The consequences, if any, of provincial taxes are not considered.
Please note that the following information is a brief summary only and security holders should seek the advice of their own tax advisors with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any U.S. federal, state or local taxes.
Taxation on Dividends
Generally, cash dividends paid or deemed to be paid by a Canadian-corporation to non-resident shareholders are subject to a withholding tax of 25% (unless an income tax convention applies to reduce the withholding tax rate to some other amount). Dividends paid to U.S. residents are subject to a withholding tax of 15%, and dividends paid to a U.S. resident company which owns 10% or more of the voting shares of the Canadian corporation are subject to a withholding tax of 5%. Dividends paid by a Canadian corporation to shareholders residing in Canada are not subject to withholding tax.
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Taxation on Capital Gains
Generally, the disposition by a non-resident of shares of a Canadian public corporation is not subject to Canadian income tax, unless such shares are “taxable Canadian property” within the meaning of the Income Tax Act (Canada) and no relief is afforded under any applicable tax treaty. The shares of the Company would be taxable Canadian property of a non-resident purchaser if the non-resident purchaser used the shares in carrying on a business in Canada, or if the non-resident, together with persons with whom he does not deal at arm’s length, owned 25% or more of the issued shares of any class of the capital stock of the Canadian corporation at any time during the five-year period immediately preceding the disposition.
In addition, Canada may tax capital gains realized by an individual resident in the United States on the disposition of shares of a Canadian corporation if the following conditions are met:
·
the individual was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition of shares; and
·
the individual owned the shares when he ceased to be resident in Canada.
Holders of common shares of the Company should seek independent advice from their own professional tax advisers with respect to the income tax consequences arising from the holding of common shares of the Company.
F.
Dividends and paying agents.
This item is not applicable for an Annual Report.
G.
Statement by experts.
This item is not applicable for an Annual Report.
H.
Documents on display.
Copies of documents concerning the Company, which are referred to in this Annual Report, are available for inspection at the head office of the Company located at #202, 5626 Larch Street, Vancouver, BC, V6M 4E1.
I.
Subsidiary Information.
This item is not applicable for an Annual Report.
Item 11. – Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of financial risks by virtue of its activities including currency, credit, interest rate, and liquidity risk.
(a)
Currency risk
Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. The Company’s operations are carried out in Canada and the United States. As at November 30, 2019, the Company had current assets totaling C$364,145 and current liabilities totalling C$2,356,044. These factors expose the Company to foreign currency exchange rate risk, which could have an adverse effect on the profitability of the Company. A 1% change in the
55
exchange rate would change other comprehensive income/loss by approximately US$15,000. At this time, the Company currently does not have plans to enter into foreign currency future contracts to mitigate this risk, however it may do so in the future.
(b)
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
The Company’s cash is held in a large Canadian financial institution and a Bahamas based financial institution. The Company maintains certain cash deposits with Schedule I financial institutions, which from time to time may exceed federally insured limits. The Company has not experienced any significant credit losses and believes it is not exposed to any significant credit risk. The Company’s restricted cash is held with a law firm in trust in which credit risk exposure is low. The Company’s sales tax receivable is due from the Government of Canada; therefore, the credit risk exposure is low.
The maximum exposure to credit risk as at November 30, 2019 and 2018 is the carrying value of the loans receivable. The Company has allowed for an expected credit loss of $145,431 on the loans receivable.
(c)
Interest rate risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. As at November 30, 2019, the loans included in loans payable and convertible debentures bear interest at rates ranging from 3.5% to 14.4% per annum and are due on demand. The Company does maintain bank accounts which earn interest at variable rates but it does not believe it is currently subject to any significant interest rate risk.
(d)
Liquidity risk
The Company’s ability to continue as a going concern is dependent on management’s ability to raise required funding through future equity issuances and through short-term borrowing. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. As at November 30, 2019, the Company had a cash balance, including restricted cash, of $5,260,068 to settle current financial liabilities of $5,805,314. Additionally, as there is no assurance the convertible debentures will be converted into common shares of the Company, the Company is exposed to liquidity risk.
Item 12. – Description of Securities Other than Equity Securities
This item is not applicable for an Annual Report, except for “Item 12.D.3” and “Item 12.D.4.” The Company does not have securities represented by American Depositary Receipts.
PART II
Item 13. – Defaults, Dividend Arrearages and Delinquencies
None.
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Item 14. – Material Modifications to the Rights of Security Holders and Use of Proceeds
A.
On October 15, 2018, a 5:1 consolidation of the Company’s common shares, also known as a reverse stock split, became effective. Fractional shares were rounded to the nearest whole number. The documents relating to the share consolidation were filed with the SEC on a Form 6-K on October 15, 2018 and are incorporated by reference.
On June 16, 2015, LBIX’s shareholders approved a Further Amended and Restated Shareholder Rights Plan Agreement (the "Rights Plan"). A copy of the Rights Plan was filed with the SEC on Form 6-K on July 7, 2015 and is incorporated by reference. Liquid assumed the Rights Plan following the Arrangement and it will expire at the termination of the Company's annual general meeting in 2020. LBIX has had a shareholders rights plan in place since 1991.
On February 2, 2010, a 5:1 consolidation of the LBIX common shares became effective. Fractional shares were rounded to the nearest whole number. In connection with the share consolidation, LBIX increased its authorized number of common shares to 500,000,000 common shares. The documents relating to the share consolidation were filed with the SEC on a Form 6-K on February 3, 2010 and are incorporated by reference.
There were no material modifications to any other class of securities during the fiscal year ended November 30, 2019, other than a repricing of an aggregate of 1,142,598 share purchase warrants to US$1.20 per share.
B.
There has been no material withdrawal or substitution of assets securing any class of registered securities of the Company.
C.
There has been no change of trustee or paying agent for any registered securities.
D.
This item is not applicable.
Item 15. – Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Financial Officer, evaluated our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 20-F. Based on this evaluation, our management concluded that as of the end of the period covered by this Annual Report on Form 20-F, our disclosure controls and procedures were not effective, because of a material weakness in our internal control over financial reporting, as discussed below.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s system of internal controls is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Our management, with the participation of our interim principal executive officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of November 30, 2019. Our management’s evaluation of our internal control over financial reporting was based on the framework in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over
57
financial reporting was not effective as of November 30, 2019. The ineffectiveness of our internal control over financial reporting was due to the existence of a material weakness.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management identified the following material weakness:
(a)
We lack adequate oversight related to the development and performance of internal controls. Due to the limited number of personnel in the Company, there are inherent limitations to segregation of duties amongst personnel to perform adequate oversight.
To address this material weakness, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented
Remediation
Effective for the fiscal year ended November 30, 2018, management retained an external accounting firm to provide financial and accounting services to the Company to mitigate the risks relating to the lack of segragation of duties.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and are committed to taking further action and implementing additional improvements as necessary and as funds allow.
Limitations on Effectiveness of Controls
Our chief executive officer does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additional controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
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Changes in Internal Control over Financial Reporting
Due to increased administrative demands of financial reporting in the US and Canada following completion of the Arrangement, management hired an external accounting firm to provide financial and accounting services to the Company for the financial years ended November 30, 2019 and 2018.
Item 16A. – Audit Committee Financial Expert
The Company’s Board of Directors has determined that all three members of its Audit Committee, Stephen Jackson, Joshua Jackson, and Nancy Basi, satisfy the requirements of “audit committee financial expert”. Stephen Jackson, Joshua Jackson and Nancy Basi are independent directors. For details on their professional careers, and for further information regarding the Company’s Audit Committee, see “Item 6.A” and “Item 6.C” above.
Item 16B. – Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to the Company’s directors, officers and employees. A copy of this Code of Ethics was filed with the SEC on June 1, 2005 and is incorporated by reference. Copies will be provided at no charge upon request to the Company at #202, 5626 Larch Street, Vancouver, BC, V6M 4E1, or electronically to info@liquidmediagroup.co.
There were no amendments or waivers to the Code of Ethics during the most recently completed fiscal year.
Item 16C. – Principal Accountant Fees and Services
The Company’s independent auditor for the fiscal year ended November 30, 2019 and November 30, 2018 was Davidson & Company LLP, Chartered Professional Accountants.
The Audit Committee approves all audit, audit-related services, tax services and other services provided by the auditor. Any services provided by auditor that are not specifically included within the scope of the audit must be pre-approved by the Audit Committee in advance of any engagement. Under the Sarbanes-Oxley Act of 2002, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimus exception prior to the completion of an audit engagement. None of the fees paid to Davidson & Company LLP were approved pursuant to the de minimus exception.
The aggregate fees billed by the Company’s external auditors for each of the last two fiscal years for audit fees are as follows:
Fiscal Year | Audit Fees | Audit Related Fees | Tax Fees | All Other Fees |
November 30, 2019 | $153,004 | Nil | Nil | Nil |
November 30, 2018 | $260,000 | Nil | Nil | Nil |
Item 16D. – Exemptions from the Listing Standards for Audit Committees
None.
Item 16E. – Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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Item 16F. – Change in Registrant’s Certifying Accountant
None.
Item 16G. – Corporate Governance
The Company is a foreign private issuer and our common shares are listed on NASDAQ. NASDAQ Marketplace Rule 5615(a)(3) permits a foreign private issuer to follow its home country practices in lieu of most of the requirements of the 5600 Series of the NASDAQ Marketplace Rules. In order to claim such an exemption, the Company must disclose the significant differences between its corporate governance practices and those required to be followed by U.S. domestic issuers under NASDAQ’s corporate governance requirements. Set forth below is a brief summary of such differences.
Shareholder Approval Requirements
NASDAQ Marketplace Rule 5635 requires each issuer to obtain shareholder approval prior to certain dilutive events, including a transaction other than a public offering involving the sale of 20% or more of the issuer’s common shares outstanding prior to the transaction for less than the greater of book or market value of the stock. The Company does not follow this NASDAQ Marketplace Rule. Instead, and in accordance with the NASDAQ exemption, the Company complies with British Columbia corporate and securities laws, which do not require shareholder approval for dilutive events unless the Company were to dispose of all or substantially all of its undertaking.
In addition, Section 5635 requires shareholder approval of most equity compensation plans and material revisions to such plans, as well as with respect to the sale of our securities at a discount to their market value to an officer, director, employee or consultant. We do not follow this NASDAQ Marketplace Rule. Instead, and in accordance with the NASDAQ exemption, we comply with with British Columbia corporate and securities laws, which do not require shareholder approval of equity compensation plans or most discount to market offerings of securities unless otherwise indicated in the articles of the Company.
Compensation Committee Requirements
NASDAQ Marketplace Rule 5605(d) requires that all companies must have a compensation committee charter and a compensation committee consisting of at least two members, and each compensation committee member must be an independent director. The Company currently does not have a compensation committee or a compensation committee charter as it follows British Columbia corporate and securities laws with respect to the compensation of the officers of the Company.
Board of Director Nomination Requirements
NASDAQ Marketplace Rule 5605(e) requires Board of Director nominations must be either selected, or recommended for the Board's selection, by either a nominating committee comprised solely of independent directors or by a majority of the independent directors. The Company currently has a nominating committee and follows British Columbia corporate and securities laws with respect to the nomination and selection of directors. The directors of the Company are divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three-year terms of office, with a class renewed at the each annual general meeting of the shareholders of the Company or until their successors in office are duly elected or appointed.
Item 16H. – Mine Safety Disclosure
Not applicable.
60
PART III
Item 17. – Financial Statements
Not applicable.
Item 18. – Financial Statements
61
LIQUID MEDIA GROUP LTD.
Consolidated Financial Statements
For the years ended November 30, 2019, 2018, and 2017
(Expressed in Canadian Dollars)
62
![[f191130yvrform20ffinal001.jpg]](f191130yvrform20ffinal001.jpg)
63
Liquid Media Group Ltd.
Consolidated Statements of Financial Position
(Expressed in Canadian Dollars)
| Note | November 30, | November 30, 2018 |
|
| $ | $ |
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
Cash |
| 4,587,405 | 4,327,331 |
Restricted cash | 4 | 672,663 | 574,510 |
Receivables | 6 | 698,361 | 182,067 |
Prepaids | 7 | 296,352 | 18,921 |
Loans receivable | 8 | 94,882 | 431,295 |
|
| 6,349,663 | 5,534,124 |
Loans receivable | 8 | 233,837 | - |
Licenses | 9 | 1,840,836 | 4,382,598 |
Investment in associates | 10 | - | 397,629 |
Investment in equity instruments | 11 | 1,551,324 | - |
Equipment | 12 | 123,305 | - |
Intangible assets | 13 | 1,707,959 | 1,676,822 |
Goodwill | 5,14 | 3,582,548 | 3,585,883 |
|
| 15,389,472 | 15,577,056 |
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
Accounts payable and accrued liabilities | 15 | 4,367,381 | 3,887,847 |
Corporate income taxes payable |
| - | 1,668 |
Loans payable | 16,19 | 1,437,933 | 934,203 |
|
| 5,805,314 | 4,823,718 |
Convertible debentures | 17,19 | 1,388,402 | - |
Deferred income taxes | 25 | 23,163 | 23,184 |
Derivative liability | 18 | 1,102,277 | 652,758 |
|
| 8,319,156 | 5,499,660 |
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
Share capital | 18 | 21,118,940 | 18,032,601 |
Commitment to issue shares | 18 | 137,197 | 12,550 |
Reserves | 18 | 2,166,098 | 771,623 |
Accumulated other comprehensive income |
| 303,465 | 282,082 |
Accumulated deficit |
| (18,441,785) | (10,860,401) |
Equity attributable to shareholders of the company |
| 5,283,915 | 8,238,455 |
Non-controlling interest | 20 | 1,786,401 | 1,838,941 |
|
| 7,070,316 | 10,077,396 |
|
| 15,389,472 | 15,577,056 |
Nature and continuance of operations (Note 1)
Subsequent events (Note 27)
Approved on behalf of the Board of Directors on February 28, 2020:
“Charlie Brezer”
“Daniel Cruz”
Director
Director
The accompanying notes are an integral part of these consolidated financial statements.
64
Liquid Media Group Ltd.
Consolidated Statements of Loss
(Expressed in Canadian Dollars)
|
|
| Year ended November 30, | ||
|
| Note | 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
|
|
|
|
|
|
Sales |
| 429,236 | 687,381 | - | |
Cost of sales | 9 | 1,985,804 | 758,749 | - | |
Gross profit (loss) |
| (1,556,568) | (71,368) | - | |
|
|
|
|
|
|
Operating expenses |
|
|
|
| |
| Accretion expense | 17 | 211,155 | - | 1,900 |
| Amortization | 13 | 100,202 | 17,722 | - |
| Bad debts |
| - | 10,020 | - |
| Consulting and director fees | 19 | 1,467,406 | 883,395 | 537,157 |
| Depreciation | 12 | 1,553 | - | - |
| Foreign exchange (gain) loss |
| 16,833 | 65,612 | (1,749) |
| Insurance |
| 58,452 | 17,568 | - |
| Interest expense | 16,17,19 | 178,767 | 133,915 | 215,704 |
| Investor relations, filing, and compliance fees |
| 268,679 | 126,344 | 27,335 |
| Marketing |
| 1,166,568 | - | - |
| Other general and administrative expenses |
| 80,103 | 34,368 | 35,939 |
| Professional fees |
| 979,070 | 570,008 | 90,980 |
| Share-based compensation | 18,19 | 1,173,512 | 111,135 | 576,000 |
| Salaries and benefits |
| 114,379 | 95,121 | - |
| Travel |
| 30,036 | 12,558 | 70,945 |
|
|
| 5,846,715 | 2,077,766 | 1,554,211 |
|
| (7,403,283) | (2,149,134) | (1,554,211) | |
|
|
|
|
|
|
| Interest income | 8 | 68,867 | 53,548 | 37,579 |
| Share of profit (loss) of equity investment | 10 | 195,726 | (119,654) | (25,036) |
| Write-off of associate | 10 | - | (310,484) | - |
| Write-off of investment in films |
| - | (12,447) | - |
| Write-off of intangible assets | 13 | - | (116,352) | - |
| Write-off of licenses | 9 | (717,125) | - | - |
| Listing expense | 3 | - | (4,130,557) | - |
| Project investigation | 3 | (192,601) | (359,590) | (362,655) |
| Write-off of deposit |
| - | - | (25,000) |
| Derivative liability - warrants | 18 | - | (1,557,086) | - |
| Gain (loss) on derivative liability | 18 | (449,519) | 1,030,328 | - |
| Gain (loss) on settlement of debt | 6,15,18 | (98,487) | 172,816 | 453 |
| Unrealized gains on equity instruments | 11 | 953,961 | - | - |
| Allowance for credit loss | 8 | (145,431) | - | - |
|
|
| (384,609) | (5,349,478) | (374,659) |
Loss before income taxes |
| (7,787,892) | (7,498,612) | (1,928,870) | |
| Deferred income tax expense (recovery) | 17 | (160,917) | - | - |
| Income tax expense (recovery) | 25 | (1,659) | 1,621 | - |
Loss for the year |
| (7,625,316) | (7,500,233) | (1,928,870) | |
The accompanying notes are an integral part of these consolidated financial statements.
65
Liquid Media Group Ltd.
Consolidated Statements of Loss
(Expressed in Canadian Dollars)
|
|
| Year ended November 30, | ||
|
| Note | 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
Loss attributable to: |
|
|
|
| |
| Shareholders of the Company |
| (7,581,384) | (7,537,749) | (1,928,870) |
| Non-controlling interest | 20 | (43,932) | 37,516 | - |
Loss for the year |
| (7,625,316) | (7,500,233) | (1,928,870) | |
Loss per common share (Note 18)
The accompanying notes are an integral part of these consolidated financial statements.
66
Liquid Media Group Ltd.
Consolidated Statements of Comprehensive Loss
(Expressed in Canadian Dollars)
|
|
| Year ended November 30 | ||
|
| Note | 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
|
|
|
|
|
|
Loss for the year |
| (7,625,316) | (7,500,233) | (1,928,870) | |
Other comprehensive income |
|
|
|
| |
| Foreign currency translation adjustment |
| 12,775 | 398,892 | - |
Comprehensive loss for the year |
| (7,612,541) | (7,101,341) | (1,928,870) | |
|
|
|
|
|
|
Comprehensive loss attributable to: |
|
|
|
| |
| Shareholders of the company |
| (7,560,001) | (7,255,667) | (1,928,870) |
| Non-controlling interest | 20 | (52,540) | 154,326 | - |
Comprehensive loss for the year |
| (7,612,541) | (7,101,341) | (1,928,870) | |
The accompanying notes are an integral part of these consolidated financial statements.
67
Liquid Media Group Ltd.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
|
|
| Year ended November 30, | ||
|
|
| 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
Cash flows provided by (used in) operating activities |
|
| |||
| Loss for the year | (7,625,316) | (7,500,233) | (1,928,870) | |
| Items not affecting cash: |
|
|
| |
|
| Accretion expense | 211,155 | - | 1,900 |
|
| Accrued interest income | (60,662) | (49,404) | (37,572) |
|
| Accrued interest expense | 162,152 | 126,360 | 211,460 |
|
| Accrued income taxes | - | 1,668 | - |
|
| Allowance for credit loss | 145,431 | - | - |
|
| Amortization - intangibles | 100,202 | 17,722 | - |
|
| Amortization – licenses | 1,819,596 | 603,718 | - |
|
| Depreciation | 1,553 | - | 200 |
|
| Bad debts | - | 10,020 | - |
|
| Change in value of derivatives | 449,519 | 526,758 | - |
|
| Commitment to issue shares | 33,058 | - | - |
|
| Deferred income tax recovery | (160,917) | - | - |
|
| (Gain) loss on settlement of debt | 98,487 | (172,816) | (453) |
|
| Non-cash listing expense | - | 4,130,557 | - |
|
| Share of (profit) loss on equity investment | (195,726) | 119,654 | 25,036 |
|
| Share-based compensation | 1,173,512 | 111,135 | 576,000 |
|
| Shares issued for services | 73,980 | - | - |
|
| Unrealized foreign exchange | (6,722) | (155,943) | - |
|
| Unrealized gains on equity instruments | (953,961) | - | - |
|
| Write-off of intangible assets | - | 116,352 | - |
|
| Write-off of investments in associates | - | 310,484 | - |
|
| Write-off of investments in film | - | 12,447 | - |
|
| Write-off of license fees | 717,125 | - | - |
| Changes in non-cash working capital: |
|
|
| |
|
| Receivables | (516,294) | (99,469) | (32,035) |
|
| Prepaids | (204,840) | 172,815 | (154,604) |
|
| Accounts payable and accrued liabilities | 713,702 | 2,044,431 | 182,984 |
|
| Corporate income taxes payable | (1,668) | - | - |
|
|
| (4,026,634) | 326,256 | (1,155,954) |
Cash flows provided by (used in) investing activities |
|
| |||
| Cash acquired from reverse acquisition | - | 579,279 | - | |
| Cash received prior to reverse acquisition | - | 124,561 | - | |
| Cash acquired for Majesco | - | 11,060 | - | |
| Payment for consideration of Majesco | - | (196,505) | - | |
| Investment in film | - | - | (12,447) | |
| Investment in associate | - | (2,339) | (275,805) | |
| Investment in intangibles | (133,356) | (79,808) | - | |
| Loan receivable issued | - | - | (278,619) | |
| Loan receivable received | 10,000 | - | 13,372 | |
| Interest received on loans | 7,807 | - | - | |
| Restricted cash from reverse acquisition | - | (574,510) | - | |
| Restricted cash received | 574,510 | - | - | |
| Purchase of restricted deposit certificate | (672,663) | - | - | |
|
|
| (213,702) | (138,262) | (553,499) |
The accompanying notes are an integral part of these consolidated financial statements.
68
Liquid Media Group Ltd.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
|
|
| Year ended November 30, | ||
|
|
| 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
Cash flows provided by (used in) financing activities |
|
| |||
| Loan proceeds | 812,933 | 167,500 | 2,000 | |
| Loan repayments | (137,000) | (27,500) | (1,756,721) | |
| Loan proceeds from related parties | - | 37,582 | 291,368 | |
| Loan repayments to related parties | (172,203) | (50,500) | - | |
| Interest paid on loans | (23,260) | - | (160,585) | |
| Convertible debentures issued | 3,502,793 | - | - | |
| Shares issued for cash | - | 4,157,760 | 592,427 | |
| Share issuance costs | - | (446,571) | - | |
| Commitment to issue shares | 104,139 | - | 168,550 | |
| Warrants issued for cash | 368,617 | 156,615 | 126,000 | |
|
|
| 4,456,019 | 3,994,886 | (736,961) |
Effect of foreign exchange on cash | 44,391 | 90,144 | - | ||
Change in cash during the year | 260,074 | 4,273,024 | (2,446,414) | ||
Cash, beginning of year | 4,327,331 | 54,307 | 2,500,721 | ||
Cash, end of year | 4,587,405 | 4,327,331 | 54,307 | ||
|
|
|
| ||
Supplemental cash-flow disclosure: |
|
|
| ||
Interest received | 7,807 | 3,963 | - | ||
Interest paid | 23,260 | 1,161 | 159,306 | ||
Supplemental disclosure with respect to cash flows (Note 23)
The accompanying notes are an integral part of these consolidated financial statements.
69
Liquid Media Group Ltd.
Consolidated Statements of Changes in Shareholders’ Equity (Deficiency)
(Expressed in Canadian Dollars)
| Shares | Amount | Commitment to Issue Shares | Reserves | Accumulated Other Comprehensive Income | Deficit | Non-controlling interest | Total |
|
| $ | $ | $ | $ | $ | $ | $ |
|
|
|
|
|
|
|
|
|
Balance, November 30, 2016 | 1,845,237 | 1,081,000 | - | 14,397 | - | (1,393,782) | - | (298,385) |
Shares issued for private placement - cash | 124,434 | 499,615 | - | - | - | - | - | 499,615 |
Shares issued to settle debt | 179,294 | 642,973 | - | - | - | - | - | 642,973 |
Shares issued for finder fees | 4,000 | 24,600 | - | - | - | - | - | 24,600 |
Share issue costs | - | (24,600) | - | - | - | - | - | (24,600) |
Shares issued pursuant to exercise of warrants | 4,750 | 17,812 | - | - | - | - | - | 17,812 |
Shares issued pursuant to exercise of stock options | 20,000 | 123,000 | - | (48,000) | - | - | - | 75,000 |
Share subscription received | - | - | 168,550 | - | - | - | - | 168,550 |
Share-based compensation | - | - | - | 576,000 | - | - | - | 576,000 |
Loss for the year | - | - | - | - | - | (1,928,870) | - | (1,928,870) |
Balance, November 30, 2017 | 2,177,715 | 2,364,400 | 168,550 | 542,397 | - | (3,322,652) | - | (247,305) |
Shares issued pursuant to acquisition agreement | 66,667 | 415,000 | - | - | - | - | - | 415,000 |
Non-controlling interest acquired | - | - | - | - | - | - | 1,684,615 | 1,684,615 |
Eliminate capital stock of Liquid Media Group (Canada) Ltd. | (2,244,381) | - | - | - | - | - | - | - |
Opening balance of Liquid Media Group Ltd. | 560,410 | - | - | - | - | - | - | - |
Issuance of shares to former shareholders of Liquid Canada | 1,288,497 | 4,277,319 | - | 96,303 | - | - | - | 4,373,622 |
Shares issued for cash | 800,000 | 4,157,760 | - | - | - | - | - | 4,157,760 |
Shares issued for license fees | 888,000 | 4,880,639 | - | - | - | - | - | 4,880,639 |
Shares issued to settle debt | 113,764 | 623,771 | - | - | - | - | - | 623,771 |
Shares issued for intangible assets | 268,000 | 1,469,456 | - | - | - | - | - | 1,469,456 |
Shares issued for commitment | 28,451 | 156,000 | (156,000) | - | - | - | - | - |
Shares issued for share issuance costs | 10,000 | (448,145) | - | 24,774 | - | - | - | (423,371) |
Share issuance costs | - | (23,200) | - | - | - | - | - | (23,200) |
Warrants exercised for cash | 52,985 | 159,601 | (4,000) | (2,986) | - | - | - | 152,615 |
Warrants exercised for shares to be issued | - | - | 4,000 | - | - | - | - | 4,000 |
Share-based compensation | - | - | - | 111,135 | - | - | - | 111,135 |
Foreign exchange on translation | - | - | - | - | 282,082 | - | 116,810 | 398,892 |
Loss for the year | - | - | - | - | - | (7,537,749) | 37,516 | (7,500,233) |
Balance, November 30, 2018 | 4,010,108 | 18,032,601 | 12,550 | 771,623 | 282,082 | (10,860,401) | 1,838,941 | 10,077,396 |
The accompanying notes are an integral part of these consolidated financial statements.
70
Liquid Media Group Ltd.
Consolidated Statements of Changes in Shareholders’ Equity (Deficiency)
(Expressed in Canadian Dollars)
| Shares | Amount | Commitment to Issue Shares | Reserves | Accumulated Other Comprehensive Income | Deficit | Non-controlling interest | Total |
|
| $ | $ | $ | $ | $ | $ | $ |
|
|
|
|
|
|
|
|
|
Balance, November 30, 2018 | 4,010,108 | 18,032,601 | 12,550 | 771,623 | 282,082 | (10,860,401) | 1,838,941 | 10,077,396 |
Shares issued to settle debt | 159,873 | 634,175 | - | - | - | - | - | 634,175 |
Units issued for conversion of convertible debentures | 1,000,167 | 2,040,346 | - | (244,890) | - | - | - | 1,795,456 |
Residual value of warrants issued for conversion of convertible debentures | - | (30,779) | - | 30,779 | - | - | - | - |
Shares issued for services | 17,222 | 73,980 | - | - | - | - | - | 73.980 |
Commitment to issue shares | - | - | 137,197 | - | - | - | - | 137,197 |
Warrants exercised for cash | 158,291 | 368,617 | - | - | - | - | - | 368,617 |
Subscriptions reclassified to payables | - | - | (12,550) | - | - | - | - | (12,550) |
Share-based compensation | - | - | - | 1,173,512 | - | - | - | 1,173,512 |
Convertible debenture - equity portion | - | - | - | 435,074 | - | - | - | 435,074 |
Foreign exchange on translation | - | - | - | - | 21,383 | - | (8,608) | 12,775 |
Loss for the year | - | - | - | - | - | (7,581,384) | (43,932) | (7,625,316) |
Balance, November 30, 2019 | 5,345,661 | 21,118,940 | 137,197 | 2,166,098 | 303,465 | (18,441,785) | 1,786,401 | 7,070,316 |
The accompanying notes are an integral part of these consolidated financial statements.
71
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
1.
NATURE AND CONTINUANCE OF OPERATIONS
Liquid Media Group Ltd. (“Liquid” or the “Company”), formerly Leading Brands Inc. (“LBIX”), is the parent company of Liquid Media Group (Canada) Ltd. (“Liquid Canada”), formerly Liquid Media Group Ltd. The Company is an entertainment company with a strong portfolio of content IP spanning creative industries. The Company’s mission is to empower storytellers worldwide to develop, produce and distribute content across channels and platforms. The head office and registered records office of the Company is Suite 202 – 5626 Larch Street, Vancouver, British Columbia, V6M 4E1. The Company’s shares trade on the Nasdaq Stock Market (“Nasdaq”) under the trading symbol “YVR”.
On August 9, 2018, the Company announced the successful closing of the proposed business combination with Liquid Canada by way of plan of arrangement under the Business Corporations Act (British Columbia) (the "Arrangement"). Pursuant to the Arrangement, Liquid Canada was acquired by and became a wholly-owned subsidiary of LBIX. As part of the Arrangement, on August 10, 2018, LBIX changed its name to Liquid Media Group Ltd. and Liquid Canada changed its name to Liquid Media Group (Canada) Ltd. At the time of completion of the Arrangement, LBIX had 1,848,980 common shares issued and outstanding which included 1,288,497 common shares issued to former Liquid Canada shareholders, representing 69.69% of the Company’s issued and outstanding shares. Initially, the common shares of the Company issued in connection with the Arrangement were listed on NASDAQ under the ticker symbol “LBIX”. Effective August 10, 2018, the trading symbol of LBIX was changed to “YVR”.
Upon closing of the transaction, the shareholders of Liquid Canada owned 69.69% of the common shares of the Company, and as a result, the transaction is considered a reverse acquisition of the Company by Liquid Canada. All previous common shares and warrants were exchanged at a ratio of one share of Liquid Canada for 0.5741 of LBIX (“Conversion Rate”). For accounting purposes, Liquid Canada is considered the acquirer and the Company, the acquiree. Accordingly, the consolidated financial statements are in the name of Liquid Media Group Ltd; however, they are a continuation of the financial statements of Liquid Canada (Note 3).
These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. As at November 30, 2019, the Company has generated losses since inception and has an accumulated deficit of $18,441,785 (2018 - $10,860,401). The continued operations of the Company are dependent on its ability to generate future cash flows or obtain additional financing. Management has estimated that it does have sufficient working capital to meet the Company’s liabilities and commitments as they become due for the upcoming 12 months. These material uncertainties cast substantial doubt upon the Company’s ability to continue as a going concern within one year of the approval of these financial statements. There is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company. These consolidated financial statements do not reflect any adjustments that may be necessary if the Company is unable to continue as a going concern.
72
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies used in the preparation of these consolidated financial statements.
Statement of compliance
These consolidated financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).
Financial instruments
On December 1, 2018, the Company adopted IFRS 9 Financial Instruments which replaced IAS 39, Financial Instruments: Classification and Measurement. IFRS 9 provides a revised model for recognition and measurement of financial instruments and a single, forward-looking ‘expected loss’ impairment model. IFRS 9 also includes significant changes to hedge accounting. The Company adopted the standard retrospectively. IFRS 9 did not impact the Company’s classification and measurement of financial assets and liabilities.
The following summarizes the significant changes in IFRS 9 compared to the previous standard:
·
IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or fair value. The classification and measurement of financial assets is based on the Company’s business models for managing its financial assets and whether the contractual cash flows represent solely payments for principal and interest. The change did not impact the carrying amounts of any of the Company’s financial assets on the transition date. Prior periods were not restated and no material changes resulted from adopting this new standard.
·
The adoption of the new “expected credit loss” impairment model under IFRS 9, as opposed to an incurred credit loss model under IAS 39, had no impact on the carrying amounts of our financial assets on the transition date.
Revenue Recognition
On December 1, 2018, the Company adopted IFRS 15, Revenue from Contracts with Customers which replaced IAS 18, Revenue, IAS 11, Construction Contracts, and related interpretations, and establishes a comprehensive framework for determining whether revenue should be recognized, and if so, how much and when revenue should be recognized.
The Company has adopted IFRS 15 using the cumulative effect method (without practical expedients), which requires that the effect of initially applying this standard be recognized at the date of initial application, which is December 1, 2018, and that the information for the year ended November 30, 2018 is presented as previously reported. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements, and as a result, there was no adjustment made to deficit on December 1, 2018.
73
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Statement of compliance (continued)
Although no adjustments were required in applying IFRS 15 to prior periods, the new standard is expected to impact the manner in which revenue is recognized in the future. Under IFRS 15, revenue is recognized when a customer obtains control of the goods or services. Accounting policies have been updated to reflect the terminology required by IFRS 15, however, the content and the application thereof has not changed. The Company’s main source of revenue continues to be derived from software games; however, due to IFRS 15, the Company is changing its revenue recognition policy in regards to any revenue it may derive from animation production services.
The details of the nature of the changes to previous accounting policies in relation to the Company’s various revenue generating arrangements are set out below:
Type of service or products | Nature, timing of satisfaction of performance obligations, significant payment terms | Nature of change in accounting policy |
Animation production services | The Company has determined that for animation production service work, the customer controls the output throughout the production process. Every production is made to the individual customer’s specifications and if the contract is terminated by the customer, the Company is entitled to be reimbursed for any costs incurred to date, and any prepaid commitments made plus the agreed contractual mark up. As a result, revenue from such contracts and the associated costs are recognized over time - i.e. as the project is being produced, prior to it being delivered to the customer. The Company may choose to incur costs in order to secure a contract. Such costs will be capitalized and amortized over the period in which revenue is recognized. | The Company previously recognized revenue on a percentage of completion basis over time based on costs incurred to total expected costs, and will continue to do so. In the event that costs to secure a contract are incurred, the policy will be updated to reflect the appropriate treatment of the contract asset. |
Basis of presentation
The consolidated financial statements of the Company have been prepared on an accrual basis and are based on historical costs, except for certain financial assets and liabilities, including derivative instruments that are measured at fair value. The consolidated financial statements are presented in Canadian dollars unless otherwise noted.
74
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries at the end of the reporting period as follows:
| Incorporation | Percentage owned | |
| 2019 | 2018 | |
Liquid Media Group (Canada) Ltd. (“Liquid Canada”) | Canada | 100% | 100% |
Companies owned by Liquid Canada: |
|
|
|
Majesco Entertainment Company (“Majesco) | USA | 51% | 51% |
On January 9, 2018, Liquid Canada acquired 51% of the shares of Majesco Entertainment Company (“Majesco”), a Nevada corporation. The Company is a provider of video game products primarily for the mass-market consumer. (Note 5)
All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated upon consolidation.
Non-controlling interest represents the portion of a subsidiary’s earnings and losses and net assets that is not held by the Company. If losses in a subsidiary applicable to a non-controlling interest exceed the non-controlling interest in the subsidiary’s equity, the excess is allocated to the non-controlling interest except to the extent that the majority has a binding obligation and is able to cover the losses.
Use of estimates
The preparation of financial statements in conformity with IFRS requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported revenues and expenses during the period.
Although management uses historical experience and its best knowledge of the amount, events or actions to form the basis for judgments and estimates, actual results may differ from these estimates.
The most significant accounts that require estimates as the basis for determining the stated amounts include the valuation of convertible debentures, the valuation of investments in films and intangible assets including goodwill, the valuation of investments in equity instruments, the valuation of share-based compensation and other equity based payments and derivative liability, and the valuation of expected credit loss.
Significant judgements includes the determination of functional currency, assessments over level of control or influence over companies, and the recoverability and measurement of deferred tax assets.
Critical judgment exercised in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is as follows:
Level of control or influence over companies
The accounting for investments in other companies can vary depending on the degree of control and influence over those other companies. Management is required to assess at each reporting date the Company’s control and influence over these other companies. Management has used its judgment to determine which companies are controlled and require consolidation and those which are significantly influenced and require equity accounting. The Company has considered its ownership position in Waterproof Studios Inc. (“Waterproof”) to constitute significant influence up to February 28, 2019 and thereafter does not have the ability to influence the key operating activities of the entity due to ongoing disputes. Accordingly, as of March 1, 2019 the Company has accounted for its investment under fair value through profit or loss (Note 10 and 11).
75
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates (continued)
Functional currency
The functional currency of the Company and its subsidiaries is the United States dollar (“USD”); however, determination of functional currency may involve certain judgments to determine the primary economic environment which is re-evaluated for each new entity or if conditions change. The Company’s functional currency changed from the Canadian dollar (“CAD”) on September 1, 2018 as a result of the Company being listed on the Nasdaq and management determining that all future financings will be completed in USD.
Income taxes
In assessing the probability of realizing income tax assets, management makes estimates related to expectation of future taxable income, applicable tax opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments are as follows:
Valuation of share-based compensation, derivatives, and convertible features
The Company uses the Black-Scholes Option Pricing Model for valuation of share-based compensation and other equity based payments. Option pricing models require the input of subjective assumptions including expected price volatility, interest rate, and forfeiture rate. Changes in the input assumptions can materially affect the fair value estimate and the Company’s earnings and equity reserves.
Valuation of intangible assets including goodwill
Goodwill and intangible assets are tested for impairment at each reporting date. Management first reviews qualitative factors in determining if an impairment needs to be recorded. Quantitative factors are then used to calculate the amount of impairment, if needed. Goodwill and intangibles resulted from a business acquisition. Intangibles were valued based on estimated discounted cash flows.
Valuation of investment in equity instrument
The Company values its equity instruments in private companies at fair value at each reporting date. The determination of fair value is based on estimates made by management on the expected earnings before income, taxes, and amortization multiplied by a reasonable factor for the appropriate industry applicable to the private company.
Valuation of expected credit loss
Loans receivables are assessed for an estimated credit loss at each reporting date. The estimated loss is determined based on management’s knowledge of the debtor and their ability to repay the loan. As the current debtors’ are private entities, management must rely on assertions provided to them from the debtor to make their estimates.
Valuation of convertible debentures
The equity portion of the convertible debenture is calculated using a discounted cash flow method which requires management to make an estimate on an appropriate discount rate.
76
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The functional currency of an entity is the currency of the primary economic environment in which the entity operates. The functional currency of the Company and Liquid Canada changed from the CAD to the USD dollar effective September 1, 2018. The functional currency of Majesco is the USD. The functional currency of Waterproof is the CAD. The functional currency determinations were conducted through an analysis of the consideration factors identified in IAS 21, The Effects of Changes in Foreign Exchange Rates.
Transactions in currencies other than USD are recorded at exchange rates prevailing on the dates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated at the period end exchange rate while non-monetary assets and liabilities in foreign currencies are translated at historical rates. Revenues and expenses are translated at the average exchange rates approximating those in effect during the reporting period.
For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s USD operations are translated into CAD at the exchange rate at the reporting date. The income and expenses are translated using average rate. Foreign currency differences that arise on translation for consolidation purposes are recognized in other comprehensive income (loss).
Financial instruments
Financial assets
On initial recognition, financial assets are recognized at fair value and are subsequently classified and measured at: (i) amortized cost; (ii) fair value through other comprehensive income (“FVOCI”); or (iii) fair value through profit or loss (“FVTPL”). The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at fair value net of transaction costs that are directly attributable to its acquisition except for financial assets at FVTPL where transaction costs are expensed. All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. On initial recognition of an equity instrument that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income.
The classification determines the method by which the financial assets are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Receivables and loans receivable are measured at amortized cost with subsequent impairments recognized in profit or loss. Cash, restricted cash, and investment in equity instruments are classified as FVTPL.
Impairment
An ‘expected credit loss’ impairment model applies which requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in profit or loss for the period.
In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
For the years presented, the Company did not record an expected credit loss on its accounts receivable; however, an expected credit loss of $145,431 was recorded on its loans receivable as at November 30, 2019 (2018 - $Nil).
77
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments (continued)
Financial liabilities
Financial liabilities are designated as either: (i) fair value through profit or loss; or (ii) other financial liabilities. All financial liabilities are classified and subsequently measured at amortized cost except for financial liabilities at FVTPL. The classification determines the method by which the financial liabilities are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Accounts payable and accrued liabilities, due to related parties, loans payable, and convertible debentures are classified as other financial liabilities and carried on the statement of financial position at amortized cost. Derivative liabilities are measured at FVTPL.
Investment in associates
The Company’s investment in associates was accounted for using the equity method of accounting. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the statement of financial position at cost. The statement of loss reflects the share of the results of operations of the associate until significant influence ceases. Where there has been a change recognized directly in the equity of the associate, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of changes in shareholders’ equity (deficiency). Profits and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.
Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The financial statements include the Company’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company from the date that significant influence or joint control commences, until the date that significant influence or joint control ceases. When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued, except to the extent that the Company has obligations, or has made payments on behalf of the investee. The Company used the equity method of accounting for its 49% investment in Waterproof until significant influence ceased on March 1, 2019 and for its 50% investment in Household Pests (Note 10).
Equipment
Equipment is stated at historical cost less accumulated depreciation and accumulated impairment losses.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in profit or loss.
Assets under construction are not depreciated until available for their intended use.
78
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Equipment (continued)
Depreciation is charged over the estimated useful lives using the declining balance method as follows:
Computer equipment
30%
Intangible assets
The Company has intangible assets from business acquisitions and development of gaming content. The amortization method, useful life and residual values are assessed annually and the assets are tested for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Amortization expense is recorded on a straight-line basis beginning with the month the corresponding assets are available for use and over the estimated useful lives provided below:
Video game catalogues
15 years
Brands
indefinite
Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the accounts and any gain or loss is reflected in profit and loss. Expenditures for repairs and maintenance are expensed as incurred.
Video game catalogues
The video game catalogues are made up of a diverse variety of games, ranging in age and popularity. The catalogues are unique due to the diverse nature of the products within the catalogues, making it difficult to assign a useful life. The useful life of 15 years represents management’s view of the expected period over which the Company expects benefits from the acquired gaming content packaged as catalogues. The election of this useful life is supported by internal game titles still producing revenue at this age.
Video game development expenditures, including the cost of material, direct labour, and other direct costs are recognized as an intangible asset when the following recognition requirements are met:
·
the development costs can be measured reliably;
·
the project is technically and commercially feasible;
·
the Group intends to and has sufficient resources to complete the project;
·
the Group has the ability to use or sell the software, and
·
the software will generate probable future economic benefits.
Video games being developed are amortized once development is complete and the game starts to generate income.
Brand
Through the acquisition of Majesco (Note 5), the Company acquired the “Majesco Entertainment” brand which was determined to have an indefinite life.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized but is subject to, at a minimum, annual impairment tests. The Company assesses the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value is less than its carrying value. Impairment is tested at the cost center level by comparing the fair value of a cost center with its carrying amount including goodwill. If the carrying amount of the cost center exceeds its fair value, goodwill of the cost center is considered impaired and the second step of the test is performed to determine the amount of impairment loss, if any.
79
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of non-financial assets
The carrying amount of the Company’s non-financial assets is reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in profit or loss.
The recoverable amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount, however, not to an amount higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years.
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable new assets. Acquisition costs incurred are expensed.
Derivative liability
Share purchase warrants outstanding during the years ended November 30, 2019 and 2018 met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed” criteria. As a result, the Company was required to separately account for the warrants as a derivative instrument liability recorded at fair value and marked-to-market each period with the changes in the fair value each period charged or credited to loss. Changes in fair value are recognized as gain/loss on derivative liability until the warrants are exercised or expire.
Convertible debentures
The Company’s convertible debenture was classified as a liability, less the portion relating to the conversion feature which is classified as a component of equity. As a result, the recorded liability to repay the convertible notes is lower than its face value. The liability was initially recorded at fair value and subsequently at amortized cost using the effective interest rate method; the liability is accreted to the face value over the term of the convertible debenture.
Share capital
Financial instruments issued by the Company are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Company’s common shares, share warrants, and options are classified as equity instruments.
Incremental costs directly attributable to the issue of new shares or options are recognized as a deduction from equity, net of tax.
80
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Share capital
Valuation of equity units issued in private placements:
The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.
The fair value of the common shares issued in private placements is determined to be the more easily measurable component as they are valued at their fair value which is determined by the closing price on the issuance date. The remaining balance, if any, is allocated to the attached warrants. Any fair value attributed to the warrants is recorded to reserves.
Loss per share
Basic and diluted loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of shares outstanding during the reporting period. If applicable, diluted income per share is computed similar to basic income per share except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of share options, warrants, and convertible debentures, if dilutive. The number of additional shares is calculated by assuming that outstanding share options and warrants were exercised and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting periods. For the years presented, this calculation proved to be anti-dilutive.
Share-based compensation
The Company grants stock options to buy common shares of the Company to directors, officers and consultants.
All share-based payments made to employees and non-employees are measured and recognized using the Black-Scholes option pricing model. For employees, the fair value of the options is measured at grant date. For non-employees, the fair value of the options is measured on the earlier of the date at which the counterparty performance is complete, the date the performance commitment is reached, or the date at which the equity instruments are granted if they are fully vested and non-forfeitable. Share-based payments to non-employees are measured at the fair value of the goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. Stock options that vest over time are recognized using the graded vesting method. Share based compensation is recognized as an expense with a corresponding increase in reserves. At each financial reporting period, the amount recognized as expense is adjusted to reflect the number of share options expected to vest. If and when the stock options are ultimately exercised, the applicable amounts of reserves are transferred to share capital.
Where the terms of a stock option are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the stock-based compensation arrangement or is otherwise beneficial to the employee as measured at the date of modification over the remaining vesting period.
81
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
Animation production services
Revenue from animation production services provided is recognized when the services have been provided and control of the deliverable has been transferred to the customer. Revenue collected prior to it being earned is recorded as deferred revenue and recognized as the related services are provided. Management estimates the pace of revenue recognition based on contract milestones and determination of when it considered the revenue to be earned. The Company’s arrangements with customers are evidenced by contracts with customers. Any costs incurred to secure a contract will be capitalized and amortized over the period in which the revenue is recognized.
Software games
Revenue from sales of interactive software games on game consoles and PCs are recognized as revenue when games are purchased by a customer.
Sales of the Company’s games are made by third party gaming platform companies pursuant to license agreements, and these gaming platform companies retain an agreed upon portion of sales as fees. The Company reports revenues related to these arrangements net of the fees retained by the gaming platform companies, as the Company has determined that the gaming platform companies are considered the primary obligors to the end consumers for the sale of the games.
Royalties and licenses
Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of sales at the contractual rate based on a percentage of the revenue earned.
Income taxes
Current income tax
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the country where the Company operates and generates taxable income.
Deferred income tax
Deferred income tax is provided for based on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Current income and deferred tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
82
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting pronouncements not yet adopted
A number of new standards, amendments to standards and interpretations applicable to the Company are not yet effective for the year ended November 30, 2019 and have not been applied in preparing these consolidated financial statements.
c)
IFRS 16 – Leases: specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard was issued in January 2016 and is effective for annual periods beginning on or after January 1, 2019. Management does not anticipate this standard will have a significant impact on the Company’s consolidated financial statements.
d)
IFRIC 23 – Uncertainty Over Income Tax Treatments: clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. It is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. Management does not anticipate this standard having a material effect on the Company’s consolidated financial statements.
Other accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant impact on the Company’s consolidated financial statements.
3.
REVERSE ACQUISITION
As described in Note 1, on August 9, 2018, pursuant to an Arrangement between LBIX and Liquid Canada, LBIX acquired all of the issued and outstanding shares of Liquid Canada. The former shareholders of Liquid Canada received an aggregate of 1,288,497 common shares of LBIX for all of the outstanding common shares of Liquid Canada. LBIX shareholders retained 560,410 common shares on completion of the transaction and the former LBIX stock option holders were granted 117,000 stock options.
The transaction constituted a reverse acquisition of LBIX and had been accounted for as a reverse acquisition transaction in accordance with the guidance provided under IFRS 2, Share-based Payment and IFRS 3, Business Combinations. As LBIX did not qualify as a business according to the definition in IFRS 3, Business Combination, this reverse acquisition did not constitute a business combination; rather the transaction was accounted for as an asset acquisition by the issuance of shares of the Company, for the net assets of LBIX and its public listing. Accordingly, the transaction had been accounted for at the fair value of the equity instruments granted by the shareholders of Liquid Canada to the shareholders and option holders of LBIX. The sum of the fair value of the consideration paid (based on the fair value of the LBIX shares just prior to the reverse acquisition) less the LBIX net assets acquired, has been recognized as a listing expense in profit or loss for the year ended November 30, 2018.
For accounting purposes, Liquid Canada was treated as the accounting parent company (legal subsidiary) and LBIX had been treated as the accounting subsidiary (legal parent) in these consolidated financial statements. As Liquid Canada was deemed to be the acquirer for accounting purposes, its assets, liabilities and operations since incorporation are included in these consolidated financial statements at their historical carrying value. The results of operations of LBIX are included in these consolidated financial statements from the date of the reverse acquisition of August 9, 2018.
83
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
3.
REVERSE ACQUISITION (continued)
The following represents management's estimate of the fair value of the LBIX net assets acquired as at August 9, 2018 as a result of the reverse acquisition and is subject to final valuation adjustments.
| Total |
| $ |
Cost of acquisition: |
|
Shares retained by public company shareholders - 560,410 shares at US$5.85 x 1.3047 | 4,277,319 |
Fair value of stock options | 96,303 |
| 4,373,622 |
|
|
Allocated as follows: |
|
Cash | 4,769 |
Restricted cash | 574,510 |
Prepaid expenses | 37,132 |
Receivables | 124,561 |
Liabilities | (497,907) |
| 243,065 |
Allocated to listing expense | 4,130,557 |
| 4,373,622 |
Stock options granted were valued using the Black Scholes model using the following assumptions: risk free rate of 2.09%, volatility of 127%, dividend yield of $Nil, and expected life of 0.94 years.
Within the liabilities assumed as part of the Arrangement, the Company has $nil of liabilities attributable to discontinued operations of LBIX as at November 30, 2019 (2018 - $250,000) as part of the disposal of LBIX’s legacy beverage assets. Upon consolidation, these liabilities were included in accounts payable and accrued liabilities.
During the year ended November 30, 2019, the Company incurred costs of $192,601 (2018 - $359,590; 2017 - $362,655) related to the reverse acquisition that were recorded as project investigation costs.
4.
RESTRICTED CASH
As at November 30, 2019, the Company held $672,663 (US$506,179) in restricted cash (2018 - $574,510) as follows:
a)
$574,510 of restricted cash was held by the Company’s legal counsel as at November 30, 2018, in a trust account pursuant to the terms of an escrow agreement arising from the disposition of LBIX’s legacy beverage business. These funds were held aside for the purpose of existing claims, excluded liabilities and financial lease liabilities during the escrow period as specified in the terms of the sale agreement in relation to LBIX’s legacy beverage business. During the year ended November 30, 2019, the funds were released.
b)
As at November 30, 2019, the Company had a $672,663 (US$506,179) deposit certificate which earns interest at 1.49% per annum and matures and renews monthly. The deposit certificate has been assigned as security to City National Bank for a revolving bank loan (Note 16).
84
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
5.
ACQUISITION OF MAJESCO ENTERTAINMENT COMPANY
On January 9, 2018, the Company acquired 51% of the issued and outstanding shares of Majesco Entertainment Company, a U.S. corporation. As consideration, the Company issued 66,667 common shares with a value of $415,000 and is required to pay cash consideration of up to US$1,000,000 (paid US$350,000 during the year ended November 30, 2019 (2018 - US$150,000) and accrued $664,450 (US$500,000) as at November 30, 2019 (2018 – $1,190,476 (US$850,000))).
In connection with the acquisition of Majesco, the Company agreed to pay a finder’s fee of 5% of the total purchase price for a total fee of $99,668 (US$75,000). As at November 30, 2019, the Company owes $33,223 (US$25,000) (2018 - $59,854 (US$45,000)) which is included in accounts payable.
The acquisition has been accounted for using the acquisition method pursuant to IFRS 3, Business Combinations. Under the acquisition method, assets and liabilities are recorded at their fair values on the date of acquisition and the total consideration is allocated to the assets acquired and liabilities assumed. The excess consideration given over the fair value of the net assets acquired has been recorded as goodwill.
|
| Total |
|
| $ |
Consideration: |
|
|
Common shares |
| 415,000 |
Estimated cash payment on acquisition |
| 1,245,000 |
Finder’s fee |
| 93,375 |
Total consideration provided |
| 1,753,375 |
|
|
|
Allocated as follows: |
|
|
Cash |
| 11,060 |
Accounts payable |
| (67,320) |
Due from former shareholder |
| 56,260 |
Intangible assets – brand |
| 103,335 |
Goodwill |
| 3,356,355 |
Deferred income taxes |
| (21,700) |
Non-controlling interest (Note 20) |
| (1,684,615) |
|
| 1,753,375 |
The intangible assets - brand include the Majesco Entertainment brand.
6.
RECEIVABLES
| 2019 | 2018 |
| $ | $ |
Accounts receivable | 25,299 | 151,362 |
Sales tax receivable | 14,293 | 30,705 |
Other receivables | 658,769 | - |
|
|
|
| 698,361 | 182,067 |
During the year ended November 30, 2018, the Company agreed to settle a developer royalty receivable of $70,108 (US$52,707) for $33,254 (US$25,000). The settlement resulted in a loss of $36,854 which is included in gain (loss) on debt settlements.
85
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
7.
PREPAIDS
As at November 30, 2019, prepaids includes $208,066 (US$156,570) for a marketing campaign that is being expensed as costs are incurred.
8.
LOANS RECEIVABLE
Current amounts
As at November 30, 2019, the current loans receivable including accrued interest is as follows:
| Waterproof | Participant Games | Installment Entertainment | Total |
| $ | $ | $ | $ |
Balance November 30, 2017 | 100,399 | 172,135 | 109,357 | 381,891 |
Accrued interest revenue | 8,116 | 27,671 | 17,580 | 53,367 |
Repayments received | (3,963) | - | - | (3,963) |
|
|
|
|
|
Balance November 30, 2018 | 104,552 | 199,806 | 126,937 | 431,295 |
Reclassified as long-term | - | (199,806) | (126,937) | (326,743) |
Accrued interest revenue | 8,137 | - | - | 8,137 |
Repayments received | (17,807) | - | - | (17,807) |
|
|
|
|
|
Balance November 30, 2019 | 94,882 | - | - | 94,882 |
During fiscal 2016, the Company entered into a revolving credit facility agreement with Waterproof and advanced $100,000 to Waterproof. The revolving credit facility is unsecured, bears interest at 8% per annum and was due on July 21, 2017. If there is a default or an event of default has occurred and is continuing, all amounts outstanding shall bear interest, after as well as before judgment, at a rate per annum equal to 2% plus the applicable rate. Interest is payable on the first business day of each month. As at November 30, 2019, the Company had accrued interest receivable of $11,651 (2018 - $11,322). Subsequent to November 30, 2019, the Company received payment in full.
Long-term amounts
Loans receivable are classified as long-term when management has determined that they will not be receiving payment on these loans within the next twelve months. As at November 30, 2019, the long-term loans receivable including accrued interest are as follows:
| Participant Games | Installment Entertainment | Total |
| $ | $ | $ |
Balance November 30, 2018 | - | - | - |
Reclassified from current | 199,806 | 126,937 | 326,743 |
Accrued interest revenue | 32,120 | 20,405 | 52,525 |
Expected credit loss | (115,963) | (29,468) | (145,431) |
|
|
|
|
Balance November 30, 2019 | 115,963 | 117,874 | 233,837 |
86
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
8.
LOANS RECEIVABLE (continued)
Long-term amounts (continued)
During fiscal 2017, the Company entered into a subordinated convertible note with Participant Games Inc. in the amount of $150,000. The convertible note is unsecured, bears interest at 15% per annum and was due on demand on or before December 21, 2017. The loan was convertible into shares, at any time prior to December 21, 2018 and accordingly the value of the conversion feature remaining from the convertibility feature was nominal as at November 30, 2018. As at November 30, 2019, the Company has accrued interest receivable of $81,926 (2018 - $49,806) and has recorded an allowance for credit loss of $115,963 (2018 - $Nil) as the note remains unpaid.
During fiscal 2017, the Company entered into a convertible note with Installment Entertainment Inc. in the amount of $100,000. The convertible note is unsecured, bears interest at 15% per annum and was payable on demand on or before April 21, 2018. The loan was convertible into shares, at any time prior to April 21, 2018. As at November 30, 2019, the Company has accrued interest receivable of $47,342 (2018 - $26,937) and has recorded an allowance for credit loss of $29,468 (2018 - $Nil) as the note remains unpaid.
9.
LICENSES
Licenses were acquired during the year ended November 30, 2018 through the issuance of 888,000 common shares valued at $4,880,639 which are being amortized over the term of the corresponding agreements ranging from one year to ten years. During the year ended November 30, 2019, amortization, included in cost of sales, amounted to $1,819,596 (2018 - $603,718). Additionally, one license with an unamortized balance of $717,125 was written off at November 30, 2019. The currency translation adjustment at November 30, 2019 was $100,636 (2018 - $105,677).
10.
INVESTMENT IN ASSOCIATES
Waterproof
On April 15, 2015, the Company acquired a 49% interest in Waterproof by paying $475,000 and issuing 100,000 common shares with a fair value of $125,001. The Company also issued 40,000 common shares as a finder’s fee with a fair value of $50,000 during the year ended November 30, 2015.
The Company owns 49% of Waterproof and previously held significant influence over the investment causing the Company to account for its investment using the equity method. As at March 1, 2019, the Company no longer had the ability to exert significant influence over Waterproof’s operating activities due to ongoing disputes, therefore causing the Company to reclassify the investment as FVTPL (Note 11).
The following table is a reconciliation of the investment in Waterproof:
| 2019 | 2018 | 2017 |
| $ | $ | $ |
Balance, beginning of year | 397,629 | 509,857 | 534,893 |
Share of profit (loss) of equity investment | 195,726 | (119,654) | (25,036) |
Currency translation adjustment | (6,081) | 7,426 | - |
Derecognition to investment in equity instruments (Note 11) | (587,274) | - | - |
|
|
|
|
Balance, end of year | - | 397,629 | 509,857 |
87
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
10.
INVESTMENT IN ASSOCIATES (continued)
Waterproof (continued)
The following table summarizes Waterproof’s statements of financial position for the comparative year:
|
|
| 2018 |
|
|
| $ |
Current assets |
|
| 563,806 |
Non-current assets |
|
| 255,904 |
Current liabilities |
|
| (678,258) |
Non-current liabilities |
|
| (36,787) |
|
|
|
|
Net assets |
|
| 104,665 |
The following table summarizes Waterproof’s revenue, expenses and losses for the comparative years:
|
| 2018 | 2017 |
|
| $ | $ |
Revenue |
| 4,999,395 | 2,358,268 |
Cost of sales |
| (3,951,861) | (1,768,559) |
Expenses |
| (1,291,786) | (640,815) |
|
|
|
|
Loss for the year |
| (244,252) | (51,106) |
Household Pests
The Company held a 50% interest in Household Pests Holdings Inc. (“Household Pests”) and accounted for its investment as a joint operation as the Company did not have the ability to control the key operating activities of the entity.
On May 3, 2017, Household Pests entered into a letter of understanding with Household Pests, LLC in connection with the development, financing, production and exploitation of the proposed animated feature film currently entitled Household Pests (the “Film”).
On August 31, 2017, Household Pests entered in to an option agreement with Pigmental, LLC (“Owner”) with respect to the purchase of all rights, titles, and interests in the Animation Work Purchase Agreement dated as of July 2, 2014 by and between Sergio Animation Studios, S.L. and the Owner for a sum of US$625,000.
During the year ended November 30, 2017, the Company paid $125,500 (US$100,000) as acquisition costs and incurred $181,872 in deferred costs.
As at November 30, 2018, Household Pests let the options lapse and as such, management wrote-off its $310,484 investment in Household Pests.
88
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
11.
INVESTMENT IN EQUITY INSTRUMENTS
Until February 28, 2019, the Company accounted for the investment in Waterproof (Note 10) using the equity method resulting in a carrying value of $587,274 at March 1, 2019, however, the Company no longer exerts significant influence over Waterproof’s operating activities resulting in the investment being reclassified as FVTPL.
The fair value as at March 1, 2019 was determined to be $1,649,362 resulting in a gain of $1,062,088 on derecognition from the equity accounting carrying value.
As at November 30, 2019, the value of Waterproof’s common shares were estimated to be $1,551,324 resulting in an unrealized gain on equity instruments of $953,961. The currency translation adjustment as at November 30, 2019 was $10,089.
12.
EQUIPMENT
|
| Computer Equipment |
|
| $ |
Cost: |
|
|
At November 30, 2018 |
| - |
Additions |
| 125,143 |
Net exchange differences |
| (277) |
At November 30, 2019 |
| 124,866 |
|
|
|
Amortization: |
|
|
At November 30, 2018 |
| - |
Additions |
| 1,553 |
Net exchange differences |
| 8 |
At November 30, 2019 |
| 1,561 |
|
|
|
Net book value: |
|
|
At November 30, 2018 |
| - |
At November 30, 2019 |
| 123,305 |
89
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
13.
INTANGIBLE ASSETS
| Video Game Catalogues | Brands | Total |
| $ | $ | $ |
Cost: |
|
|
|
At November 30, 2017 | - | - | - |
Additions - shares | 1,469,456 | 103,335 | 1,572,791 |
Additions - paid or accrued | 196,160 | - | 196,160 |
Write-offs | (116,352) | - | (116,352) |
Net exchange differences | 39,994 | 1,951 | 41,945 |
At November 30, 2018 | 1,589,258 | 105,286 | 1,694,544 |
Additions - paid or accrued | 133,356 | - | 133,356 |
Net exchange differences | (7,053) | 5,013 | (2,040) |
At November 30, 2019 | 1,715,561 | 110,299 | 1,825,860 |
|
|
|
|
Amortization: |
|
|
|
At November 30, 2017 | - | - | - |
Additions | 17,722 | - | 17,722 |
At November 30, 2018 | 17,722 | - | 17,722 |
Additions | 100,202 | - | 100,202 |
Net exchange differences | (23) | - | (23) |
At November 30, 2019 | 117,901 | - | 117,901 |
|
|
|
|
Net book value: |
|
|
|
At November 30, 2018 | 1,571,536 | 105,286 | 1,676,822 |
At November 30, 2019 | 1,597,660 | 110,299 | 1,707,959 |
As at November 30, 2019, included in video game catalogues is $212,625 (2018 - $79,808) of development costs which the Company has not begun amortizing. Brands were acquired during the year ended November 30, 2018 pursuant to the acquisition of Majesco (Note 5).
14.
GOODWILL
Goodwill of $3,356,355 was acquired during the year ended November 30, 2018 pursuant to the acquisition of Majesco (Note 5). The currency translation adjustment as at November 30, 2019 was $226,193 (2018 - $229,528).
Goodwill is tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. At November 30, 2019, the Company performed its impairment review of goodwill by comparing each cost center’s fair value to the net book value including goodwill. The Company has determined that it has one cost center: Majesco. The fair value of the cost center was determined by management based on a valuation using the income approach. The income approach uses future projections of cash flows from the cost center and includes, among other estimates, projections of future revenue and operating expenses, market supply and demand, projected capital spending and an assumption of the weighted average cost of capital. Management’s evaluation of fair values includes analysis based on the future cash flows generated by the underlying assets, estimated trends and other relevant determinants of fair value for these assets. Management has determined that no events have occurred subsequent to the date of the assessment that would require a further impairment review of goodwill.
90
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
15.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| 2019 | 2018 |
| $ | $ |
Accounts payable | 2,845,308 | 1,084,852 |
Accounts payable on legacy beverage assets | - | 250,000 |
Accrued liabilities | 821,014 | 1,277,345 |
Payroll taxes payable | 474 | 842 |
Sales tax payable | 2,911 | - |
Developer royalties payable | - | 84,332 |
Payable on Majesco acquisition (Note 5) | 697,674 | 1,190,476 |
|
|
|
| 4,367,381 | 3,887,847 |
During the year ended November 30, 2019, the Company issued 159,873 (2018 - $81,937) common shares valued at $634,175 (2018 - $449,291) to settle accounts payable of $535,688 (2018 - $595,045) resulting in a loss of $98,487 (2018 – gain of $145,764) which is included in gain (loss) on settlement of debt.
16.
LOANS PAYABLE
A summary of loans payable balances and transactions is as follows:
| Related party | Third party | Credit Facility | Bank Loan | Total |
| $ | $ | $ | $ | $ |
Balance, November 30, 2017 | 291,368 | 2,000 | 750,000 | - | 1,043,368 |
Advance | 37,582 | 167,500 | - | - | 205,082 |
Repayment - cash | (50,500) | (27,500) | - | - | (78,000) |
Repayment - shares | (106,247) | (130,000) | - | - | (236,247) |
|
|
|
|
|
|
Balance, November 30, 2018 | 172,203 | 12,000 | 750,000 | - | 934,203 |
Advance | - | 150,000 | - | 662,933 | 812,933 |
Repayment - cash | (172,203) | (137,000) | - | - | (309,203) |
|
|
|
|
|
|
Balance, November 30, 2019 | - | 25,000 | 750,000 | 662,933 | 1,437,933 |
Related party loans
Related party loans consist of amounts advanced by directors or companies controlled by them. Several of the loans have been secured by assets of the Company with due dates ranging from demand loans to periods of one year and interest rates ranging from 0.0% to 8.0% per annum. As at November 30, 2019, all loans have been paid in full. Interest of $39,747 (2018 - $42,911) remains outstanding and is included in accounts payable and accrued liabilities.
Third party loans
Third party loans included loans secured by assets of the Company with due dates ranging from demand loans to periods of one year and interest rates ranging from 0.0% to 14.4% per annum. As at November 30, 2019, the amount outstanding is due on demand and incurs interest of 14.4% per annum. Interest of $2,192 (2018 - $1,945) remains outstanding and is included in accounts payable and accrued liabilities.
91
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
16.
LOANS PAYABLE (continued)
Credit facility
In fiscal 2016 a $2,500,000 Credit facility was secured by assets of the Company under a general security agreement with a due date of November 30, 2018 and an interest rate of 14.4% per annum. A fee of $60,000 was settled through the issuance of shares during the year ended November 30, 2017. The Company repaid $1,750,000 of principal and $147,945 of interest during the year ended November 30, 2017.
In June 2018, a new lender acquired the remaining $750,000 loan and under new terms, the loan was due on August 20, 2018. The new lender obtained a Limited Power of Attorney over the Company’s 49% interest in Waterproof (“Waterproof POA”). In December 2018, the lender registered a general security agreement over all the Company’s current and future assets.
In November 2019, the new lender signed a Forebearance Agreement which extended the maturity date of the loan to November 30, 2020 and required the Company to make quarterly payments of $250,000 commencing on March 31, 2020 until the principal and interest on the loan have been paid in full. In accordance with the Forebarance Agreement, the Company issued 215,000 treasury shares of the Company as security for the loan which will be transferred to the lender upon any default of the loan. Additionally, the new lender released the Waterproof POA and amended their general security agreement to exclude the Company’s investment in Waterproof.
Interest of $289,282 (2018 - $181,282) remains outstanding and is included in accounts payable and accrued liabilities.
Bank loan
In May 2019, the Company entered into a revolving note for US$500,000 with City National Bank which bears interest at 3.49% per annum and is secured by a deposit certificate of US$500,000 (Note 4(b)). As at November 30, 2019, the Company had received advances of $662,933 (US$498,857) against this loan.
17.
CONVERTIBLE DEBENTURES
| Liability component | Equity component | Total |
| $ | $ | $ |
Balance, November 30, 2018 | - | - | - |
Proceeds | 2,930,477 | 595,991 | 3,526,468 |
Deferred income tax liability | - | (160,917) | (160,917) |
Interest expense and accretion | 259,885 | - | 259,885 |
Settlement of convertible debentures | (1,795,455) | (244,890) | (2,040,345) |
Reallocation of interest to accounts payable | (25,156) | - | (25,156) |
Currency translation adjustment | 18,651 | - | 18,651 |
|
|
|
|
Balance, November 30, 2019 | 1,388,402 | 190,184 | 1,578,586 |
On February 28, 2019, the Company closed its private placement offering of unsecured convertible debentures raising $3,526,468 (US$2,678,000). Each debenture will mature two years from closing, will bear interest at 2% per annum, and can be converted into units at a price of US$1.50 per unit. Each unit will consist of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 26, 2021.
92
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
17.
CONVERTIBLE DEBENTURES (continued)
For accounting purposes, the convertible debentures are separated into their liability and equity components by first valuing the liability component. The fair value of the liability component at the time of issue was calculated as the discounted cash flows for the convertible debentures assuming a 12% discount rate, which was the estimated rate for a similar debenture without a conversion feature. The fair value of the equity component (conversion feature) was determined at the time of issue as the difference between the face value of the convertible debentures and the fair value of the liability component, less a deferred income tax adjustment to reflect the book to tax difference in value of the convertible debentures at the time of issuance. As the Company has excess tax assets to offset the deferred tax liability, which was created from the book to tax difference in value of the convertible debentures, the deferred tax liability was reversed, resulting in a deferred tax recovery of $160,917.
During the year ended November 30, 2019, net debentures of $1,795,455 (US$1,133,761) were converted into 1,000,167 units of the Company of which $30,779 was allocated to reserves relating to the value of the warrants issued. As a result, the Company transferred $244,890 from reserves to share capital representing the proportionate balance of the unamortized equity component.
Interest and accretion expense for the year ended November 30, 2019 was $259,885.
18.
SHARE CAPITAL AND RESERVES
Authorized share capital
The Company is authorized to issue 500,000,000 common shares without par value.
The Company is authorized to issue the following preferred shares:
|
|
|
Preferred shares without par value |
| 9,999,900 |
Series “A” preferred shares |
| 1,000,000 |
Series “B” preferred shares |
| 100 |
Series “C” preferred shares |
| 1,000,000 |
Series “D” preferred shares |
| 4,000,000 |
Series “E” preferred shares |
| 4,000,000 |
|
|
|
|
| 20,000,000 |
Issued share capital
Common shares
During the year ended November 30, 2019:
a)
On February 28, 2019, the Company issued 113,334 common shares valued at $391,013 to settle debt of $335,792 resulting in a loss of $55,221 which is included in loss on debt settlements.
b)
On April 30, 2019, the Company issued 46,539 common shares valued at $243,162 to settle debt of $199,896 resulting in a loss of $43,266 which is included in loss on debt settlements.
c)
On April 30, 2019, the Company issued 17,222 common shares valued at $73,980 to various consultants of the Company for consulting and public relations services provided to the Company.
93
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Issued share capital (continued)
Common shares (continued)
d)
In November 2019, the Company issued 158,291 common shares valued at $368,617 for the exercise of warrants with an exercise price of US$1.75.
e)
During the year, the Company issued 1,000,167 units on the conversion of $1,795,455 (US$1,133,761) worth of convertible debentures (Note 17). As a result, the Company transferred $244,890 from reserves to share capital representing the proportionate balance of the unamortized equity component. Additionally, the Company allocated $30,779 to reserves representing the value of the warrants issued. Each unit comprised of one common share and one warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 28, 2021.
During the year ended November 30, 2018:
a)
On January 9, 2018, the Company issued 66,667 common shares valued at $415,000 pursuant to the December 12, 2017 share purchase agreement for Majesco (Note 5).
b)
On August 9, 2018, a reverse acquisition transaction was completed whereby LBIX issued 1,288,497 common shares valued at $4,277,319 in exchange for all of the issued and outstanding shares of Liquid Canada (Note 3). Warrants held by Liquid Canada were transferred to the Company as part of the Arrangement valued at $96,303.
c)
On October 15, 2018, the Company completed a brokered private placement which consisted of the issuance of 800,000 units at a price of US$4.00 per unit for gross proceeds of $4,157,760 (US$3,200,000). Each unit consisted of one common share and one share purchase warrant exercisable for a three-year period at an exercise price of US$5.00 per warrant. The Company incurred agents’ fees of $410,218, legal fees of $36,353, issued 10,000 common shares valued at $41,531 to an agent, and issued 8,000 agents warrants valued at $24,774 in connection with the closing of this private placement.
d)
On October 15, 2018 the Company issued 888,000 common shares valued at $4,880,639 for licences (Note 9).
e)
On October 15, 2018, the Company issued 113,764 common shares valued at $623,771 to settle debt of $833,487 resulting in a gain of $209,716 which is included in gain on debt settlements and issued 28,451 common shares valued at $156,000 for a commitment to issue shares.
f)
On October 15, 2018, the Company issued 268,000 common shares valued at $1,469,456 for the purchase of video games in connection with two separate purchase agreements (Note 13).
g)
During the year, the Company issued 51,148 common shares in connection with the exercise of share purchase warrants for proceeds of $154,320. As a result, the Company transferred $23,854 representing the fair value of the exercised share purchase warrants from reserves to share capital.
h)
During the year, the Company issued 1,837 common shares in connection with the exercise of 1,837 agents’ warrants at $1.25 per warrant for proceeds of $2,296. As a result, the Company transferred $2,985 representing the fair value of the exercised share purchase warrants from reserves to share capital.
94
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Issued share capital (continued)
During the year ended November 30, 2017:
a)
On March 14, 2017, the Company issued 117,750 units valued at $353,250 to settle debt. Each unit was comprised of one common share and 0.287 of a share purchase warrant of the Company. Each whole warrant entitles the holder to purchase one additional common share at a price of $3.75 per share for a term of five years from closing.
b)
On April 6, 2017, the Company closed a non-brokered private placement and issued 89,833 units at a price of $3.00 per unit for gross proceeds of $269,500 of which $16,500 was settled for debt. Each unit consisted of one common share and 0.287 of a share purchase warrant of the Company. Each whole warrant entitles the holder to purchase one additional common share at a price of $3.75 per share for a term of five years from closing.
c)
On May 19, 2017, the Company issued 22,854 common shares to settle debts totaling $69,100.
d)
On September 6, 2017, the Company closed a non-brokered private placement and issued 73,291 common shares at $6.15 per share to settle debt totaling $204,123 and for cash totaling $246,615. A finders’ fee of 4,000 shares was issued with a value of $24,600 in connection with the private placement and has been recorded as a share issuance cost.
e)
On September 12, 2017, the Company issued 20,000 common shares pursuant to the exercise of stock options for total proceeds of $75,000. As a result, the Company transferred $48,000 representing the fair value of the exercised stock options from reserves to share capital.
f)
On October 23, 2017, the Company issued 4,750 common shares pursuant to the exercise of share purchase warrants for total proceeds of $17,812.
Preferred shares
As at November 30, 2019 and 2018, no preferred shares were issued and outstanding.
Treasury shares
On November 27, 2019, the Company issued 215,000 common shares into treasury as security against a loan in accordance with a Forebarance Agreement (Note 16).
Commitment to issue shares
As at November 30, 2019, the Company was committed to issuing $137,197 (2018 – $12,500) worth of common shares of which $33,058 is for services received and $104,139 is for 45,000 common shares to be issued in relation to the exercise of warrants.
95
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Loss per share
The basic and diluted loss per share attributable to the Company for the year ended November 30, 2019 was $1.78 (2018 - $3.14; 2017 - $0.96) and was based on the loss attributable to common shareholders and the weighted average number of common shares outstanding of 4,255,297 (2018 – 2,397,117; 2017 – 2,001,832).
The basic and diluted profit (loss) per share attributable to the non-controlling interests for the year ended November 30, 2019 was $(0.01) (2018 – $0.02) and was based on the profit (loss) attributable to non-controlling interests and the weighted average number of common shares outstanding of 4,255,297 (2018 – 2,397,117).
Stock options
Prior to the Arrangement described in Note 3, the Company had a stock option plan whereby the Company could grant share options to directors, officers, employees, and consultants enabling them to acquire up to 15% of the issued common shares of the Company.
The exercise price of each option is set by the Board of Directors at the time of grant subject to a minimum price of $0.10 per share but cannot be less than the market price (less permissible discounts) on the Canadian Stock Exchange. Options can have a maximum term of five years and typically terminate ninety days following the termination of the optionee’s employment or engagement (thirty days for options granted for investor relations services), except in the case of retirement or death. Vesting of options is at the discretion of the Board of Directors at the time the options are granted.
All stock options outstanding in Liquid Canada were cancelled upon the completion of the Arrangement.
Following the Arrangement, the Company does not have a formal stock option plan. The Company occasionally grants stock options to its employees, officers, directors and consultants to purchase common shares of the Company. The options granted are exercisable at a price which is equal to or greater than the fair market value of the common shares at the date the options are granted. The options are granted with varied vesting periods including immediately, one and five years. Options granted generally have a life of 10 years.
During fiscal 2018 and in connection with the Arrangement, the Company granted 117,000 stock options, with a total fair value of $236,345, to former option holders of LBIX of which 89,000 stock options vest 25% on grant date, 25% on October 2, 2018, 25% on January 2, 2019, and 25% on April 2, 2019. Of the total fair value granted, $96,303 was considered to be part of the cost of acquisition of LBIX (Note 3). During the year ended November 30, 2019, the Company recorded share-based compensation of $36,781 (2018 - $111,135) in relation to these options.
During the year ended November 30, 2019, the Company granted 461,500 stock options with a total fair value of $ 1,136,731 that vested immediately on grant.
96
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Stock options (continued)
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the valuation of the stock options granted:
| 2019 | 2018 | 2017 |
Risk-free interest rate | 1.82% | 2.09% | 1.28% |
Dividend yield | Nil | Nil | Nil |
Expected life | 5.0 years | 0.94 years | 5 years |
Volatility | 92% | 127% | 120% |
Weighted average fair value per option | $2.46 | $2.08 | $2.40 |
Stock option transactions are summarized as follows:
| Number of Stock Options | Weighted Average Exercise Price |
|
| $ |
Balance, November 30, 2016 | - | - |
Granted | 240,000 | 3.75 |
Exercised | (20,000) | 3.75 |
Balance, November 30, 2017 | 220,000 | 3.75 |
Cancelled – Plan of Arrangement | (220,000) | 3.75 |
Granted | 117,000 | 17.67 (USD$13.30) |
Balance, November 30, 2018 | 117,000 | 17.67 (USD$13.30) |
Granted | 461,500 | 3.39 (USD$2.55) |
Cancelled | (117,000) | 17.67 (USD$13.30) |
|
|
|
Balance, November 30, 2019 | 461,500 | 3.39 |
A summary of the share options outstanding and exercisable at November 30, 2019 is as follows:
Number of Stock Options | Exercise Price | Expiry Date | |
| $ |
| |
461,500 | 3.39 (USD$2.55) | February 28, 2024 | |
461,500 |
|
| |
The weighted average life of share options outstanding at November 30, 2019 was 4.25 years.
97
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Warrants
Agents’ warrants
During the year ended November 30, 2018, the Company issued 8,000 agents’ warrants with an exercise price of US$4.00 per warrant with a total fair value of $24,774 in connection with the October 15, 2018 private placement.
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the valuation of the agents’ warrants granted:
|
| 2018 |
Risk-free interest rate |
| 2.30% |
Dividend yield |
| Nil |
Expected life |
| 2 years |
Volatility |
| 105% |
Weighted average fair value per warrant |
| $3.10 |
Agents’ warrant transactions are summarized as follows:
| Number of Agents’ Warrants | Weighted Average Exercise Price |
|
| $ |
Balance, November 30, 2016 and 2017 | 4,574 | 1.25 |
Issued | 8,000 | 5.32 (USD$4.00) |
Exercised | (1,837) | 1.25 |
Balance, November 30, 2018 | 10,737 | 4.35 |
Cancelled | 2,737 | 1.25 |
|
|
|
Balance, November 30, 2019 | 8,000 | 5.32 |
A summary of the agents’ warrants outstanding and exercisable at November 30, 2019 is as follows:
Number of Agent’s Warrants | Exercise Price | Expiry Date | |
| $ |
| |
8,000 | 5.32 (USD$4.00) | October 15, 2020 | |
8,000 |
|
| |
The weighted average life of agent’s warrants outstanding at November 30, 2019 was 0.88 years.
98
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Warrants (continued)
Share purchase warrants
During the year ended November 30, 2018, the Company issued 800,000 share purchase warrants with an exercise price of US$5.00 per warrant in connection with the October 15, 2018 private placement.
The Company provided an anti-dilution clause on 132,043 warrants issued during the year ended November 30, 2017 that are triggered on exercise of such warrants. During the year ended November 30, 2018, 72,800 additional warrants with an exercise price of US$2.50 were issued under this provision.
During the year ended November 30, 2019, the Company issued 1,000,167 share purchase warrants with an exercise price of USD$1.75 per warrant in connection with the conversion of various convertible debentures.
On October 18, 2019, the Company repriced six tranches of share purchase warrants to US$1.20.
Share purchase warrant transactions are summarized as follows:
| Number of Share Purchase Warrants | Weighted Average Exercise Price |
|
| $ |
Balance, November 30, 2016 | - | - |
Issued | 323,673 | 4.36 |
Exercised | (2,727) | 3.75 |
Balance, November 30, 2017 | 320,946 | 4.36 |
Granted | 800,000 | 6.65 |
Granted on anti-dilution clause | 72,800 | 3.32 (USD$2.50) |
Exercised | (51,148) | 3.01 |
Balance, November 30, 2018 | 1,142,598 | 6.05 |
Granted | 1,000,167 | 2.33 (USD$1.75) |
Exercised | (158,291) | 2.33 (USD$1.75) |
|
|
|
Balance, November 30, 2019 | 1,984,474 | 1.92 |
A summary of the share purchase warrants outstanding and exercisable at November 30, 2019 is as follows:
Number of Share Purchase Warrants | Exercise Price | Expiry Date | |
| $ |
| |
31,504 | 1.59 (USD$1.20) | March 14, 2022 | |
24,208 | 1.59 (USD$1.20) | April 6, 2022 | |
286,886 | 1.59 (USD$1.20) | August 30, 2020 | |
800,000 | 1.59 (USD$1.20) | October 15, 2021 | |
841,876 | 2.33 (USD$1.75) | February 26, 2021 | |
1,984,474 |
|
| |
99
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Warrants (continued)
Share purchase warrants (continued)
The weighted average life of share purchase warrants outstanding at November 30, 2019 was 1.46 years.
Derivative liability
a)
On August 30, 2017, the Company completed a non-brokered private placement of 132,043 units for cash proceeds of $126,000. Each unit consisted of one “A” share purchase warrant and one “B” share purchase warrant. Each “A” warrant entitles the holder to purchase one share of the Company for a period of three years from closing at a price of $3.00 per warrant. Each “B” warrant entitles the holder to purchase one share of the Company for a period of three years from closing at a price of $6.00. The warrant agreement provides an anti-dilution clause for each of the A and B warrants that, upon exercise of the warrants, will cause the Company to issue additional warrants sufficient to entitle the warrant holder to acquire 10% of the issued and outstanding common shares of the Company. Such right is limited to one exercise of either of the A and B warrants and all of the A warrants must be exercised prior to exercising any of the class B warrants.
The anti-dilution right for the A and B share purchase warrants was valued at $126,000 as at November 30, 2017 as the acquisition price approximated fair value due to the recency of the transaction. During the year ended November 30, 2018, certain A warrants were exercised causing the rights to expire resulting in a decrease to the liability. As at November 30, 2019, the rights attached to the B warrants were valued at $1,102,277 (2018 - $100,912) resulting in a derivative loss of $1,001,365 for the year ended November 30, 2019 (2018 - gain of $25,088).
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the revaluation of the derivative liability as at November 30, 2019 and November 30, 2018
| 2019 | 2018 |
Risk-free interest rate | 1.70% | 2.16% |
Dividend yield | Nil | Nil |
Expected life | 0.75 year | 1.75 years |
Volatility | 106% | 114% |
Probability of exercise | 75% | 20% |
b)
Due to the Company changing its functional currency from the CAD to the USD during the year ended November 30, 2018, a derivative liability occurred on the date of change on the Company’s previously issued share purchase warrants with CAD exercise prices. During the year ended November 30, 2019, the share purchase warrants with a CAD exercise price was repriced to USD resulting in the elimination of the derivative liability.
On initial recognition, the Company recorded a loss of $1,557,086 to set up the derivative liability. As at November 30, 2018, the Company revalued the derivative liability to $551,846 and recorded a gain of $1,005,240. As at November 30, 2019, the Company revalued the derivative liability to $nil and recorded a gain of $551,846.
100
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Derivative liability (continued)
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the revaluation of the derivative liability as at November 30, 2019 and November 30, 2018:
| 2019 | 2018 |
Risk-free interest rate | - | 2.08% |
Dividend yield | - | Nil |
Expected life | - | 2.25 years |
Volatility | - | 102% |
19.
RELATED PARTY TRANSACTIONS
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. Key management personnel include the Company’s executive officers and Board of Director members.
A summary of related party loans and related transactions is included in Note 16. Interest paid or accrued to related parties during the year ended November 30, 2019 was $5,174 (2018 - $18,537; 2017 – $9,147).
Accounts payable and accrued liabilities at November 30, 2019 includes $945,940 (2018 - $556,541) owing to directors, officers, and a former director and officer of the Company or to companies controlled by common directors for unpaid consulting fees, expense reimbursements, and loan interest. Additionally, accounts payable and accrued liabilities includes $664,452 (2018 - $864,592) payable to a director of Majesco relating to the purchase of the Company’s 51% interest in Majesco.
During the year ended November 30, 2019, the Company received $781,395 (US$588,000) for convertible debentures detailed in Note 17 from three directors of the Company. In July 2019, two directors converted their debentures worth $116,944 (US$88,000) into 58,667 units of the Company.
As at November 30, 2019, a loan was due from Waterproof, which included accrued interest receivable, amounting to $94,882 (2018 - $104,553). During the year ended November 30, 2019, the Company recorded interest income of $8,137 (2018 - $8,116; 2017 - $6,070) in connection to this loan receivable. (Note 8).
During the year ended November 30, 2019, the Company recorded a gain on settlement of debt of which $Nil (2018 - $87,761, 2017 - $Nil) was with related parties.
Summary of key management personnel compensation:
| For the years ended November 30, | ||
| 2019 | 2018 | 2017 |
| $ | $ | $ |
Consulting and directors fees | 603,500 | 407,525 | 379,890 |
Share-based compensation | 890,418 | - | 576,000 |
Interest expense | 5,174 | 18,537 | 9,147 |
|
|
|
|
| 1,499,092 | 426,062 | 965,037 |
101
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
20.
NON-CONTROLLING INTEREST
The following table presents the changes in equity attributable to the 49% non-controlling interest in Majesco:
| 2019 | 2018 |
| $ | $ |
Balance, beginning of year | 1,838,941 | - |
Non-controlling interest on acquisition of Majesco (Note 5) | - | 1,684,615 |
Share of income (loss) for the year | (43,932) | 37,516 |
Foreign exchange on translation | (8,608) | 116,810 |
|
|
|
Balance, end of year | 1,786,401 | 1,838,941 |
The following table presents the non-controlling interest as at November 30, 2019 and 2018:
| 2019 | 2018 |
| $ | $ |
Assets |
|
|
Current | 33,770 | 243,660 |
Non-current | 3,905,471 | 3,776,093 |
| 3,939,241 | 4,019,753 |
|
|
|
Liabilities |
|
|
Current | 270,362 | 243,630 |
Non-current | 23,163 | 23,184 |
| 293,525 | 266,814 |
|
|
|
Net assets | 3,645,716 | 3,752,939 |
Non-controlling interest | 1,786,401 | 1,838,941 |
The following table presents the loss and comprehensive loss attributable to non-controlling interest:
| Year ended | |
| 2019 | 2018 |
| $ | $ |
|
|
|
Profit (loss) attributable to non-controlling interest | (43,932) | 37,516 |
Foreign exchange translation adjustment | (8,608) | 116,810 |
|
|
|
Comprehensive loss attributable to non-controlling interest | (52,540) | 154,326 |
102
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
21.
CAPITAL DISCLOSURE AND MANAGEMENT
The Company defines its capital as shareholders’ equity. The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern. The Company manages its capital structure to maximize its financial flexibility making adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets and business opportunities. The Company does not presently utilize any quantitative measures to monitor its capital. The Company is not subject to externally imposed capital requirements other than disclosed in Note 16.
22.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:
·
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
·
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
·
Level 3 – Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumption that market participants would use in pricing.
The Company’s financial instruments consist of cash, restricted cash, receivables, loans receivable, investment in equity instruments, accounts payable and accrued liabilities, due to related parties, loans payable, convertible debentures, and derivative liability. The fair value of receivables, loans receivable, accounts payable and accrued liabilities, due to related parties, and loans payable approximates their carrying values. Cash and restricted cash are measured at fair value using level 1 inputs. Convertible debentures and derivative liability are measured using level 2 inputs. The investment in equity instruments is measured at fair value using level 3 inputs.
As at November 30, 2019, the fair value of the level 3 asset was $1,551,324 based on a multiple of 6.9 times management’s estimate of Waterproof’s expected earnings before interest, taxes, and expected amortization. The Company’s investment in Waterproof does not have a quoted market price on an active market and the Company has assessed the fair value of the investment based on Waterproof’s unobservable earnings. As a result, the fair value is classified as level 3 of the fair value hierarchy. The process of estimating the fair value of Waterproof is based on inherent measurement uncertainties and is based on techniques and assumptions that emphasize both qualitative and quantitative information. There is no reasonable quantitative basis to estimate the potential effect of changing the assumptions to reasonably possible alternative assumptions on estimated fair value of the investment.
103
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
22.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
The Company is exposed to a variety of financial risks by virtue of its activities including currency, credit, interest rate, and liquidity risk.
(e)
Currency risk
Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. The Company’s operations are carried out in Canada and the United States. As at November 30, 2019, the Company had current assets totaling CAD$364,147 and current liabilities totalling CAD$2,356,044. These factors expose the Company to foreign currency exchange rate risk, which could have an adverse effect on the profitability of the Company. A 1% change in the exchange rate would change other comprehensive income/loss by approximately US$15,000. At this time, the Company currently does not have plans to enter into foreign currency future contracts to mitigate this risk, however it may do so in the future.
(f)
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
The Company’s cash is held in a large Canadian financial institution and a Bahamas based financial institution. The Company maintains certain cash deposits with Schedule I financial institutions, which from time to time may exceed federally insured limits. The Company has not experienced any significant credit losses and believes it is not exposed to any significant credit risk. The Company’s restricted cash is held with a law firm in trust in which credit risk exposure is low. The Company’s sales tax receivable is due from the Government of Canada; therefore, the credit risk exposure is low.
The maximum exposure to credit risk as at November 30, 2019 and 2018 is the carrying value of the loans receivable. The Company has allowed for an expected credit loss of $145,431 on the loans receivable.
(g)
Interest rate risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. As at November 30, 2019, the loans included in loans payable and convertible debentures bear interest at rates ranging from 3.5% to 14.4% per annum and are due on demand. The Company does maintain bank accounts which earn interest at variable rates but it does not believe it is currently subject to any significant interest rate risk.
(h)
Liquidity risk
The Company’s ability to continue as a going concern is dependent on management’s ability to raise required funding through future equity issuances and through short-term borrowing. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. As at November 30, 2019, the Company had a cash balance, including restricted cash, of $5,260,068 to settle current financial liabilities of $5,805,314. Additionally, as there is no assurance the convertible debentures will be converted into common shares of the Company, the Company is exposed to liquidity risk.
104
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
23.
SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS
| For the years ended November 30, | ||
| 2019 | 2018 | 2017 |
| $ | $ | $ |
Supplemental non-cash disclosures |
|
|
|
Reallocation of value of options upon exercise | - | - | 48,000 |
Reallocation of value of warrants upon exercise | - | 2,986 | - |
Shares issued for the acquisition of Majesco (Note 5) | - | 415,000 | - |
Shares issued for intangible assets | - | 1,469,456 | - |
Shares issued for licenses | - | 4,880,639 | - |
Shares issued for debt settlements | 634,175 | 623,771 | 357,750 |
Warrants issued for share issue costs | - | 24,774 | - |
Net assets acquired on RTO (Note 3) | - | 243,065 | - |
Shares issued for commitment | - | 156,000 | - |
Investment in associates in accounts payable | - | - | 31,567 |
Acquisition of equipment in accounts payable | 125,143 | - | - |
Units issued for conversion of convertible debentures | 2,040,346 | - | - |
Accounts payable applied to convertible debentures | 23,675 | - | - |
Derecognition of investment in associate | 587,274 | - | - |
Loans receivable allocated to long-term | 379,268 | - | - |
Residual value of warrants on conversion of convertible debentures | 30,779 | - | - |
24.
CONTINGENCIES
In October 2018, the former president and chief executive officer of Liquid Canada (the “Claimant”) filed a lawsuit with the United States District Court Southern District of New York against the Company for approximately $11,800,000 for breach of contract, defamation, and violation of human rights (the “Action”). The Claimant asserts the existence of an unwritten contract which, if it was entered, increased her base compensation from US$120,000 to US$400,000 per year. Such contract was not executed by any party and is not, the Company states, a contract the Company would have contemplated at the time. The Company’s counsel applied to the court seeking dismissal of the Action. As at November 30, 2019, the violation of human rights claim was dismissed. In February 2020, the Company settled with the Claimant for US$240,000 which has been recorded as at November 30, 2019.
105
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
25.
INCOME TAXES
A reconciliation of income taxes at statutory rates with the reported taxes is as follows:
| 2019 | 2018 | 2017 |
| $ | $ | $ |
|
|
|
|
Loss before income taxes | (7,787,892) | (7,498,612) | (1,928,870) |
Expected income tax expense (recovery) at statutory rates | (2,103,000) | (2,025,000) | (502,000) |
Change in statutory, foreign tax, foreign exchange rates and other | (44,576) | (75,379) | (13,000) |
Permanent difference | 356,000 | 1,439,000 | 163,000 |
Share issue cost | - | (132,000) | - |
Adjustment to prior years provision versus statutory tax returns and expiry of non-capital losses | (123,000) | - | - |
Change in unrecognized deferred tax assets | 1,752,000 | 795,000 | 352,000 |
|
|
|
|
Income tax expense (recovery) | (162,576) | 1,621 | - |
The significant components of the Company’s deferred tax liability is as follows:
|
| 2019 | 2018 |
|
| $ | $ |
Deferred tax assets (liabilities) |
|
|
|
Intangible assets |
| (23,163) | (23,184) |
Investment in associates |
| (122,000) | - |
Debt with accretion |
| (41,000) | - |
Non-capital losses |
| 163,000 | - |
|
|
|
|
Net deferred tax liability |
| 23,163 | 23,184 |
No deferred tax asset has been recognized in respect of the following losses and temporary differences as it is not considered probable that sufficient future taxable profit will allow the deferred tax asset to be recovered:
| 2019 | Expiry Date Range | 2018 | Expiry Date Range | 2017 | Expiry Date Range |
| $ |
| $ |
| $ |
|
Property and equipment | 2,675,000 | No expiry date | 437,000 | No expiry date | 36,000 | No expiry date |
Cumulative eligible capital | - | No expiry date | - | No expiry date | 35,000 | No expiry date |
Share issue costs | 305,000 | 2020-2022 | 414,000 | 2019-2022 | 44,000 | 2018-2022 |
Investment in associates | - | No expiry date | 56,000 | No expiry date | - | No expiry date |
Allowable capital losses | 323,000 | No expiry date | 11,000 | No expiry date | 13,000 | No expiry date |
Non-capital losses | 8,194,000 | 2026-2039 | 4,503,000 | 2026-2038 | 2,452,000 | 2026-2037 |
Tax attributes are subject to review, and potential adjustment, by tax authorities.
106
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
26.
SEGMENTED INFORMATION
During the years ended November 30, 2019 and 2018, the Company had two offices: a head-office in Vancouver, BC, and Majesco’s office in New York, New York. In evaluating performance, management does not distinguish or group its sales and cost of sales on a geographic basis. The Company has determined it had one reportable operating segment during the year ended November 30, 2019: the investment in video games. During the year ended November 30, 2018, the Company had two reportable operating segments: the investment in the production of films and the investment in video games
Below summarizes the Company’s reportable operating segments for the year ended November 30, 2019.
| Film | Video Games | Total |
| $ | $ | $ |
Segment Information |
|
|
|
Revenue | - | 429,236 | 429,236 |
Cost of sales | - | (1,985,804) | (1,985,804) |
Operating expenses | - | (445,396) | (445,396) |
Other expenses | - | 195,726 | 195,726 |
Taxes | - | 1,659 | 1,659 |
Segment loss | - | (1,804,579) | (1,804,579) |
|
|
|
|
Corporate expenses: |
|
|
|
Operating expenses |
|
| (5,401,319) |
Other expenses |
|
| (580,335) |
Tax recovery |
|
| 160,917 |
Foreign currency translation |
|
| 12,775 |
Total corporate expenses |
|
| (5,807,962) |
|
|
|
|
Comprehensive loss for the year |
|
| (7,612,541) |
|
|
|
|
Capital expenditures: |
|
|
|
Equipment | - | 125,143 | 125,143 |
107
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
26.
SEGMENTED INFORMATION (continued)
Below summarizes the Company’s reportable operating segments for the year ended November 30, 2018.
| Film | Video Games | Total |
| $ | $ | $ |
Segment Information |
|
|
|
Revenue | - | 687,381 | 687,381 |
Cost of sales | - | (758,749) | (758,749) |
Operating expenses | - | (318,682) | (318,682) |
Other expenses | (442,585) | (153,206) | (595,791) |
Taxes | - | (1,621) | (1,621) |
Segment loss | (442,585) | (544,877) | (987,462) |
|
|
|
|
Corporate expenses: |
|
|
|
Operating expenses |
|
| (1,759,084) |
Other expenses |
|
| (4,753,687) |
Foreign currency translation |
|
| 398,892 |
Total corporate expenses |
|
| (6,113,879) |
|
|
|
|
Comprehensive loss for the year |
|
| (7,101,341) |
|
|
|
|
Capital expenditures: |
|
|
|
Intangible assets | - | 79,808 | 79,808 |
Goodwill | - | 3,585,883 | 3,585,883 |
Revenue derived in the Company’s video games segment is earned from a large number of customers located throughout the world. No one customer exceeds 5% of the Company’s sales.
27.
SUBSEQUENT EVENTS
a)
In January 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company for approximately $1,150,000 for unpaid consulting fees, the unpaid cash consideration for the purchase of 51% interest in Majesco, and a payment for the difference between US$500,000 and the value of the Company’s shares issued on the purchase of the 51% interest in Majesco. The Company has accrued $1,064,450 in these financial statements. Management is currently seeking legal advice on this lawsuit.
b)
In January 2020, the Company issued 57,125 common shares to settle debt of $193,582 and 11,674 common shares for $33,058 in services included in commitment to issue shares at November 30, 2019.
c)
In February 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company for the issuance of a share certificate for 59,706 common shares of the Company which the consultant states is owing to him and general and special damages in relation to the shares. Management is currently seeking legal advice on this lawsuit. No provision has been included in the financial statements as of November 30, 2019.
d)
In February 2020, the Company signed an asset purchase agreement with a vendor to acquire a portfolio of assets including certain streaming platforms for US$3,325,000. This agreement is subject to approval by NASDAQ.
108
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
27.
SUBSEQUENT EVENTS (continued)
e)
Subsequent to November 30, 2019, the Company issued 98,004 common shares for total proceeds of $205,072 (US$154,182) in connection with: (1) the exercise of 66,500 share purchase warrants at US$1.75 per warrant for proceeds of $154,651 (US$116,375) of which $104,139 (US$78,750) was included in commitment to issue shares as at November 30, 2019; and (2) 31,504 share purchase warrants at US$1.20 per warrant for proceeds of $50,308 (US$37,806).
109
Item 19. – Exhibits
110
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Date
February 28, 2020
INDEX TO EXHIBITS
Exhibit No. | Description |
1.1 | Certificate of Incorporation and Articles and amendments to the Articles and Memorandum of the Company, incorporated by reference from prior filing as Exhibit 3.1 to the Form F-3, filed with the SEC on September 24, 2007. https://www.sec.gov/Archives/edgar/data/884247/000106299307003713/formf3.htm |
1.2 | Notice of Articles, incorporated by reference from prior filing as Exhibits 99.1 https://www.sec.gov/Archives/edgar/data/884247/000106299310000325/exhibit99-1.htm and 99.2 https://www.sec.gov/Archives/edgar/data/884247/000106299310000325/exhibit99-2.htm to the Form 6-K filed with the SEC on February 3, 2010. |
4.1 | Further Amended and Restated Shareholder Rights Plan Agreement, incorporated by reference from prior filing on Form 6-K filed with the SEC on July 7, 2015. https://www.sec.gov/Archives/edgar/data/884247/000106299315003721/form6k.htm |
4.2 | Share Purchase Agreement dated September 15, 2017 between the Company and 1133438 B.C. Ltd. Relating to the disposition of the Company’s subsidiaries, incorporated by reference from prior filing as Exhibit 4.2 to the Annual Report on Form 20-F filed with the SEC on June 1, 2018. https://www.sec.gov/Archives/edgar/data/884247/000119312518181963/d409843dex42.htm |
4.3 | Amended and Restated Arrangement Agreement dated January 14, 2018 between the Company and Liquid Canada (fka Liquid Media Group Ltd.), incorporated by reference from prior filing as Exhibit 4.3 to the Annual Report on Form 20-F filed with the SEC on June 1, 2018. https://www.sec.gov/Archives/edgar/data/884247/000119312518181963/d409843dex43.htm |
8.1* | Subsidiaries of the Registrant |
11.1 | Code of Ethics, incorporated by reference from the prior filing as Exhibit 11.1 to the Annual Report of Form 20-F, filed with the SEC on June 1, 2005 https://www.sec.gov/Archives/edgar/data/884247/000106299305001265/exhibit11-1.htm |
12.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
12.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
13.1* | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |