AI assistant
EvokAI Creative Labs Inc. — Management Reports 2024
Nov 28, 2024
46741_rns_2024-11-28_75271128-763c-4499-a113-dbd729079bda.pdf
Management Reports
Open in viewerOpens in your device viewer
EvokN
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the nine months ended September 30, 2024 and 2023
Dated November 28, 2024
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Dated: November 28, 2024
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
This interim management's discussion and analysis ("MD&A") reports on the operating results and financial condition of EvokAI Creative Labs Inc. ("EvokAI" or the "Company") for the nine months ended September 30, 2024 and is prepared as at November 28, 2024. This MD&A should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2023, and the notes thereto which were prepared in accordance with IFRS Accounting Standards ("IFRS"), together with the unaudited condensed consolidated interim financial statements as at and for the nine months ended September 30, 2024, which were prepared in accordance with IFRS and in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting (collectively, referred to as the "Financial Statements"). Other information contained in this document has also been prepared by management and is consistent with the data contained in the Financial Statements. All dollar amounts referred to in this MD&A are expressed in United States ("US") dollars except where indicated otherwise.
The Company's certifying officers, based on their knowledge, having exercised reasonable diligence, are also responsible to ensure that these filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by these filings. These unaudited condensed consolidated interim financial statements together with the other financial information included in these filings fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented in these filings. The Board of Directors approves the Financial Statements and MD&A and ensures that management has discharged its financial responsibilities. The Board's review is accomplished principally through the Audit Committee, which meets periodically to review all financial reports, prior to filing.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
This MD&A includes "forward-looking statements", within the meaning of applicable securities legislation, which are based on the opinions and estimates of management and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith, and reflect the Company's current judgment regarding the direction of its business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein.
Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar words suggesting future outcomes or statements regarding an outlook. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. These forward-looking statements include but are not limited to statements concerning:
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
- The Company's success at completing future financings;
- The Company's ability to continue as a going concern;
- The Company's strategies and objectives;
- The Company's cost controls and other financial operating objectives;
- The availability of qualified employees for business operations;
- General business and economic conditions;
- The Company's ability to meet its financial obligations as they become due;
- The positive cash flows and financial viability of its business;
- The Company's ability to manage growth with respect to its business and new business opportunities; and
- The Company's tax position, anticipated tax refunds and the tax rates applicable to the Company.
Readers are cautioned that the preceding list of risks, uncertainties, assumptions, and other factors are not exhaustive. Events or circumstances could cause actual results to differ materially from those estimated or projected and expressed in or implied by these forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements.
OVERVIEW AND OUTLOOK
EvokAI was incorporated on July 7, 2021 in the British Virgin Islands. The Company's head office address in Canada is 515 – 701 West Georgia Street, Vancouver, British Columbia, V7Y 1C6, and the registered and records office is located at 2200 - 885 West Georgia Street, Vancouver, British Columbia, V6C 3E8. The Company also has a corporate office in Finland at Liljasaarentie 4 a, 00340 Helsinki, Finland.
The Company has the following subsidiaries:
| Name of Subsidiary | Country of Incorporation | Percentage Ownership | Functional Currency |
|---|---|---|---|
| EvokAI Innovation Corp. (“EvokAI Innovation”) | BVI | 100% | US |
| EvokAI Creative Labs Finland Oy (“EvokAI Oy”) | Finland | 100% | EURO |
| Advancience AG(1) | Switzerland | 96%(2) | EURO |
| Head Instruments Oy (“Head”) | Finland | 100% | EURO |
| NeuroCarrier Oy (“NeuroCarrier”) | Finland | 100% | EURO |
| Rehaboo Oy (“Rehaboo”) | Finland | 100% | EURO |
(1) Inactive and in process of dissolution as it is no longer required for current operations.
(2) University of Basel (Switzerland) owns 4%.
EvokAI is a MedTech artificial-intelligence-powered company dedicated to the development of transformational and innovative technologies for the modern health care sector. It deploys machine learning models to search medical data and uncover insights to help improve health outcomes, patient experiences, drug development, preclinical and clinical decisions, and provide more accurate diagnoses. EvokAI tailors its AI algorithms across the whole health care system, from hospitals, private clinics, research institutions, pharmaceutical companies, contract research organizations, to medical professionals, patients, healthy individuals aiming at preventing any kind of disease and beyond, protecting the aging genome.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Reverse Take-Over Transaction
On April 11, 2023, Sebastiani Ventures Corp. ("Sebastiani") completed the acquisition of all of the outstanding shares of EvokAI Creative Labs Inc. ("EvokAI Privco"), which constituted a reverse takeover under the policies of the TSX Venture Exchange (the "Exchange") (the "RTO Transaction"), with the Company becoming the legal parent and EvokAI being the accounting acquirer (see Reverse Take-Over Transaction section).
Upon closing of the RTO Transaction, the Company's name changed from Sebastiani Ventures Corp. to EvokAI Creative Labs Inc., and on April 14, 2023, the Company graduated to Tier 2 of the Exchange and its trading symbol changed to OKAI. Subsequent to the closing of the RTO Transaction, EvokAI Privco changed its name to EvokAI Innovation Corp.
On July 21, 2023, the Company's common shares were listed for trading on the OTCQB Venture Market in the United States, under the trading symbol "OKAIF", and the Company received eligibility for book-entry delivery and depository services of the Depository Trust Corporation, to facilitate electronic settlement of the transfers of its common shares in the United States.
Acquisition of Head Instruments Oy
On May 30, 2023, pursuant to a definitive agreement dated effective April 21, 2023 (the "Head Agreement"), the Company acquired 100% of the outstanding securities of Head Instruments Oy ("Head") (the "Head Acquisition"). Head is a Finnish based MedTech company that develops medical devices. Pursuant to the terms of the Head Agreement, holders of 100% of Heads' common shares ("Head Shares") were issued an aggregate of 3,724,674 common shares of the Company having an aggregate value of $3,802,924. Up to an additional 1,769,406 common shares of the Company were issuable to the previous holders of Head Shares upon Head achieving certain milestones on or before March 30, 2025. The Company attributed a value of $466,461 to the contingently issuable common shares. The first and second milestones were not met and therefore 884,703 common shares were not issued, leaving up to 884,703 common shares issuable upon achievement of the remaining milestone.
Heads' advanced technologies and solutions provide means for accurate analysis of the magnitude of movement disorders and their response to medication. Other causes of movement disorders include dystonia, various diseases causing tremors, Tourette's syndrome, congenital CP (Cerebral Palsy) or MS (Multiple Sclerosis). Already used in university hospitals and by renowned neurosurgeons across Europe, the novel device and AI-based solution is also meant to be wirelessly connected to deep brain stimulation equipment, so that the monitor can automatically control brain synchronization based on observed symptoms. Involuntary movement of a body region, which may be oscillatory and can often be considered tremor, is a common and frustrating disorder. Visual observation by a neurologist dominates an assessment of the movement of a body region in clinical practice. All people, healthy or disordered, have tremor at some extent and determination of its development over time or under treatment is not possible, because a movement of a body region of a person at one moment cannot reliably be compared with that of another moment. Although technical measurements of the movement of a body region have been attempted, they are complicated, inefficient and insufficient.
Heads' MDM Flex Sensor, which has received the CE Mark (European certification) approval, is a micro sensor that is being integrated into EvokAI's Movement Disorder Monitor ("MDM") and offers a comprehensive and precise assessment of movement disorders, enabling health care professionals to monitor patients' progress with unparalleled accuracy.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Acquisition of NeuroCarrier Oy
On June 15, 2023, pursuant to the terms of a definitive agreement dated May 16, 2023 between the Company and NeuroCarrier Oy (“NeuroCarrier”) (the “NeuroCarrier Agreement”), the Company acquired 100% of the outstanding securities of NeuroCarrier (the “NeuroCarrier Acquisition”). NeuroCarrier is a Finnish based MedTech company that combines cognitive neuroscience, extended reality, and artificial intelligence technologies for enhanced screening and spatial perception of a person as well as risk behaviour. Pursuant to the terms of the NeuroCarrier Agreement, holders of 100% of NeuroCarriers’ common shares (“NeuroCarrier Shares”) were issued an aggregate of 2,202,000 common shares of the Company having an aggregate value of $2,255,740. Up to an additional 367,000 common shares of the Company were issuable to the previous holders of NeuroCarrier Shares upon NeuroCarrier achieving MDR (European Medical Device Regulation) Class I approval on or before November 16, 2023. The Company attributed a value of $581,570 to the contingently issuable common shares. The milestone was not met and therefore the 367,000 common shares were not issued.
NeuroCarriers’ unique combination that merges the power of AI algorithms, extended reality and eye movement with deep understanding of human cognition allows EvokAI to create highly intuitive and immersive experiences, unlocking new possibilities for various industries, including healthcare, rehabilitation, risk behavior prediction, sports, gaming, and more.
Acquisition of Rehaboo Oy
On June 23, 2023, pursuant to the terms of a definitive agreement dated May 2, 2023 between the Company and Rehaboo Oy (“Rehaboo”) (the “Rehaboo Agreement”), the Company acquired 100% of the outstanding securities of Rehaboo (the “Rehaboo Acquisition”). Rehaboo is a Finnish based MedTech company that has developed a cloud-based AI gaming platform that analyzes, learns, improves, and predicts from users’ movement and cognitive activation, that is used at hospitals, elderly care homes, and as a home care solution. Pursuant to the terms of the Rehaboo Agreement, holders of 100% of Rehaboo’s common shares (“Rehaboo Shares”) were issued an aggregate of 3,547,321 common shares of the Company having an aggregate value of $4,246,592.
Rehaboos’ Active cloud-based AI gaming platform is a solution that analyzes, learns, improves, and predicts from users’ movement and cognitive activation. It is currently being used at hospitals, elderly care homes, and as a home care solution in tens of locations in Finland and Denmark, also in research pilots in Singapore and Oslo, Norway. Rehaboos’ platform has the potential to tackle the burden of several diseases associated with cognitive functions and inactivity. In addition, the platform provides vast improvement in home care through accessibility and by creating a sort of metaverse for elderly generation, where users can exercise while joining a playful competition with an avatar.
Rehaboos’ platform improves blood flow to the brain and cognitive functions, whilst promoting the growth of new brain cells. Its uniqueness, easy to scale and novel algorithms provide data analytics, real-time feedback and progress tracking. Most relevant is the platform’s ability to adapt according to users’ capabilities. It analyzes movements and provides personalized feedback on form and technique, also adjusting the difficulty level based on the user’s performance.
The integration of Rehaboos’ technology and know-how within EvokAI’s ecosystem will open up new avenues for innovation and disruption in the gamification era, further driving advancements in the early detection of neurological disorders.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Key features and differentiators that make EvokAI unique:
- Immersive Experiences: EvokAI offers an unparalleled level of immersion, blurring the boundaries between the digital and physical worlds. Through its advanced technologies, users can engage in realistic simulations and interact with virtual environments to assessing cognitive performance in ways that were previously unimaginable.
- Customizable Solutions: Understanding that each industry has unique requirements, EvokAI provides fully customizable solutions tailored to specific needs. Whether it is designing personalized rehabilitation programs or creating interactive training modules, our platform adapts to the diverse demands of our customers.
- Seamless Integration: EvokAI’s solutions seamlessly integrate with existing infrastructures and technologies, making the adoption process smooth and hassle-free. By eliminating compatibility issues, we ensure a faster time to market and quicker realization of benefits for our customers.
- Unmatched Performance: Our cognitive computing platform leverages state-of-the-art AI algorithms and advanced neuroscientific principles to deliver unparalleled performance. This enables faster decision-making, precise data analysis, and superior user experiences.
The Company has a history of losses and anticipates future losses in the development of its business. The Company’s ability to continue as a going concern is dependent upon its ability to obtain sufficient additional funding and to generate sufficient revenues and positive cash flows from its operating activities to meet its obligations and fund its planned investment and operations.
REVERSE TAKE-OVER TRANSACTION
On April 11, 2023, Sebastiani, Sebastiani Mergerco, and EvokAI Privco, completed the RTO Transaction whereby Sebastiani Mergerco and EvokAI Privco merged, and the resulting company became a wholly owned subsidiary of the Company and named EvokAI Innovation, and Sebastiani changed its name to EvokAI Creative Labs Inc. As a result of the RTO Transaction, the Company issued to the shareholders of EvokAI Privco 51,500,000 post-consolidation common shares of the Company in exchange for all EvokAI Privco shares outstanding. Immediately prior to the completion of the RTO Transaction, an aggregate of 3,892,909 EvokAI Privco shares were returned to treasury and cancelled for no consideration.
The RTO constituted a reverse acquisition of Sebastiani and has 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 Sebastiani 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 acquisition by EvokAI Privco of the net assets of Sebastiani and its public listing. The fair value of the consideration paid less the Sebastiani net assets acquired, has been recognized as a listing expense in the consolidated statements of loss and comprehensive loss for the year ended December 31, 2023.
For accounting purposes, EvokAI Privco was treated as the accounting parent company (legal subsidiary) and Sebastiani has been treated as the accounting subsidiary (legal parent) in these consolidated financial statements. As EvokAI Privco 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
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
carrying values. The assets, liabilities and results of operations of Sebastiani are included in these condensed consolidated interim financial statements from the date of the acquisition on April 11, 2023.
The RTO Transaction was measured at the fair value of the shares that EvokAI Privco would have to issue to shareholders of Sebastiani to give shareholders of Sebastiani the same percentage equity interest in the combined entity that results from the reverse acquisition had it taken the legal form of EvokAI Privco acquiring Sebastiani.
The number of shares which results in the estimated fair value of shares of the Company retained by Sebastiani's shareholders is 8,414,268 and therefore the fair value is $2,683,571, which is based upon $0.32 (CAD $0.43) per common share. In addition, the deemed acquisition cost includes Sebastiani's share purchase warrants existing at the time of the RTO Transaction or 1,251,791 post-consolidated share purchase warrants. The fair value of the warrants was calculated to be $158,606 using the Black-Scholes pricing model which requires the input of highly subjective assumptions; changes in the subjective input assumptions can materially affect the fair value estimate. The following assumptions were used in the option model: share price of $0.32 (CAD $0.43), expected life of 0.14 years, expected volatility of 100%, risk free interest rate of 3.78%, and dividend yield of 0%.
The acquisition of the net assets of Sebastiani by EvokAI Privco is summarized as follows:
| 8,414,268 shares issued | $ 2,683,571 |
|---|---|
| 1,251,791 Sebastiani share purchase warrants | 158,606 |
| Transaction costs | 79,292 |
| Total consideration | 2,921,469 |
| Fair value of net assets acquired: | |
| Cash | 3,757,886 |
| Receivables | 10,182 |
| Subscriptions received in advance | (3,708,500) |
| Accounts payable and accrued liabilities | (252,272) |
| (192,704) | |
| Listing expense | $ 3,114,173 |
A listing expense of $3,114,173 has been included in deficit to reflect the difference between the fair value of the amount paid and the fair value of the net assets acquired in accordance with IFRS 2 – Share-based payment for the year ended December 31, 2023.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
SUMMARY OF QUARTERLY RESULTS¹
| 3rd Quarter Ended September 30, 2024 | 2nd Quarter Ended June 30, 2024 | 1st Quarter Ended March 31, 2024 | 4th Quarter Ended December 31, 2023 | |
|---|---|---|---|---|
| Revenue | $ Nil | $ Nil | $ Nil | $ Nil |
| Loss and comprehensive loss | $ 240,420 | $ 303,958 | $ 421,620 | $ 12,245,433 |
| Loss per share | $ 0.00 | $ 0.00 | $ 0.01 | $ 0.16 |
| 3rd Quarter Ended September 30, 2023 | 2nd Quarter Ended June 30, 2023 | 1st Quarter Ended March 31, 2023 | 4th Quarter Ended December 31, 2022 | |
| Revenue | $ Nil | $ Nil | $ Nil | $ Nil |
| Loss and comprehensive loss | $ 238,108 | $ 3,667,403 | $ 470,931 | $ 400,910 |
| Loss per share | $ 0.01 | $ 0.06 | $ 0.06 | $ 0.03 |
¹ Unaudited financial information prepared in accordance with IFRS.
Results for the quarters reported in the table above reflect the Company's operating costs as it focused its efforts on the research and development and commercialization of its AI platform. The increased costs in Q2 – 2023 principally related to completion of the RTO Transaction, share-based compensation expenses related to the grant of options during the period, and to the costs associated with the Company's acquisition of Head, NeuroCarrier, and Rehaboo. Due to delays in development and the integration of the acquired platforms, during Q4 – 2023 the Company recognized a full impairment on its intangible assets.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
The following is an analysis of the Company's operating results for the three and nine months ended September 30, 2024 and includes a comparison against the comparable periods in the previous year.
Advertising and promotion expenses for the three and nine months ended September 30, 2024 were $22 and $3,898, respectively, compared to $11,378 and $15,934 for the three and nine months ended September 30, 2023, respectively.
Consulting fees for the three and nine months ended September 30, 2024 were $52,603 and $206,880, respectively, compared to $77,544 and $167,329 for the three and nine months ended September 30, 2023, respectively. Consulting fees included fees paid to the Company's CEO and management fees paid to a company with a director in common with the Company.
Finance costs for the three and nine months ended September 30, 2024 were $7,738 and $14,573, respectively, compared to $7,928 and $10,080 for the three and nine months ended September 30, 2023, respectively. Finance expense is related to the loans acquired during 2023.
Foreign exchange for the three and nine months ended September 30, 2024 was a gain of $nil and $31, respectively, compared to a loss of $44 and $2,141 for the three and nine months ended September 30, 2023, respectively.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
General and administrative expenses for the three and nine months ended September 30, 2024 were $13,059 and $43,337, respectively, compared to $28,179 and $239,741 for the three and nine months ended September 30, 2023, respectively. The significantly higher general and administrative expenses in the prior period principally related to office and general administrative overhead expenditures incurred in preparation for the Company's RTO Transaction.
Professional fees for the three and nine months ended September 30, 2024 were $14,183 and $106,215, respectively, compared to $172,052 and $225,529 for the three and nine months ended September 30, 2023, respectively. Professional fees are principally related to audit and legal fees.
Research and development expenses for the three and nine months ended September 30, 2024 were a recovery of $702 and expense of $39,004, respectively, compared to $29,046 and $353,619 for the three and nine months ended September 30, 2023, respectively. Research and development expenses are principally related to the ongoing development of the Company's AI platform, and to integration of the technologies acquired in the Head, NeuroCarrier, and Rehaboo acquisitions.
Rent expense for the three and nine months ended September 30, 2024 was $11,393 and $43,538, respectively, compared to $18,329 and $44,722 for the three and nine months ended September 30, 2023, respectively. Rent expense for the current period relates to the Company's office in Finland.
Salaries and wages for the three and nine months ended September 30, 2024 were $32,017 and $149,320, respectively, compared to $100,317 and $113,501 for the three and nine months ended September 30, 2023, respectively. Salaries and wages are for the Company's staff based in Finland.
Shareholder communications for the three and nine months ended September 30, 2024 were $nil and $nil, respectively, compared to $nil and $3,248 for the three and nine months ended September 30, 2023, respectively.
Share-based payments expense for the three and nine months ended September 30, 2024 was $63,836 and $273,425, respectively, compared to $209,252 and $456,903 for the three and nine months ended September 30, 2023, respectively. Share-based payments expenses related to stock options and RSUs vested during the period.
Transfer agent and filing fees for the three and nine months ended September 30, 2024 were $5,991 and $30,042, respectively, compared to $28,090 and $73,650 for the three and nine months ended September 30, 2023, respectively.
Travel and accommodation expenses for the three and nine months ended September 30, 2024 were $4,421 and $29,134, respectively, compared to $13,261 and $38,077 for the three and nine months ended September 30, 2023, respectively.
Listing expense relating to the Company's RTO transaction for the three and nine months ended September 30, 2024 was $nil and $nil, respectively, compared to $nil and $3,114,173 for the three and nine months ended September 30, 2023, respectively.
9
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Fair value adjustment of contingent share consideration for the three and nine months ended September 30, 2024 was $nil and $nil, respectively, compared to $466,461 and $466,461 for the three and nine months ended September 30, 2023, respectively. During the prior period, the milestones related to the contingently issuable shares in the Head acquisition were not met.
LOSS AND COMPREHENSIVE LOSS
As a result of the activities discussed above, the Company experienced a net loss and comprehensive loss of $240,420 and $965,998 for the three and nine months ended September 30, 2024, respectively, compared to a net loss and comprehensive loss of $238,108 and $4,370,178 for the three and nine months ended September 30, 2023, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines capital that it manages as cash and equity, consisting of issued common shares, share-based payments reserve, commitment to issue shares, and stock options and RSUs. The Company manages its capital structure and adjusts it based on the funds available to the Company, in order to fund existing operations, search for new business opportunities and thereby provide returns to its shareholders. The Company does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain the future development of the business.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. As at September 30, 2024, the Company is not subject to any externally imposed capital requirement or debt covenants. There was no change to the Company's approach to capital management during the period ended September 30, 2024.
As at September 30, 2024, the Company had a working capital deficiency of $269,125 (December 31, 2023 – positive working capital of $394,063) including cash that totaled $2,952 (December 31, 2023 - $774,491). As at September 30, 2024, the Company did not have any significant sources of revenue and has a history of losses. In connection with the RTO Transaction (see Reverse Take-Over Transaction section), the Company completed a financing for aggregate gross proceeds of $3,708,500. The Company expects to incur further losses in its business and as such, the Company will require additional financing to accomplish its long-term strategic objectives. There can be no certainty of the Company's ability to raise additional financing. If the Company is unable to finance itself, it is possible that the Company will be unable to continue as a going concern. These factors raise doubt as to the ability of the Company to continue as a going concern.
10
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
A summary of the Company's cash flows during the nine months ended September 30, 2024 and 2023 is as follows:
| For the nine months ended September 30, | ||
|---|---|---|
| 2024 | 2023 | |
| Cash flows used in operating activities | $ (780,077) | $ (2,086,697) |
| Cash flows provided from investing activities | - | 3,401,102 |
| Cash flows provided used in financing activities | 29,460 | (20,692) |
| Translation adjustment | (20,922) | 3,062 |
| Increase/(decrease) in cash for the period | (771,539) | 1,296,775 |
| Cash, beginning of the period | 774,491 | 4,064 |
| Cash, end of the period | $ 2,952 | $ 1,300,839 |
Cash flows used in operating activities were $780,077 during the nine months ended September 30, 2024 compared to $2,086,697 during the nine months ended September 30, 2023. The cash was used to maintain the administrative and reporting needs of the Company, for accounts payable and accrued liabilities existing at closing of the RTO Transaction, and to fund the development and commercialization of the Company's AI platform.
Cash flows provided from investing activities were $nil during the nine months ended September 30, 2024 compared to $3,401,102 for the nine months ended September 30, 2023. During the period ended September 30, 2023, the Company generated $3,678,594 from the RTO transaction, less $108,015 from the acquisition of Head, $81,063 on the acquisition of NeuroCarrier and $88,414 on the acquisition of Rehaboo.
Cash flows generated by financing activities were $29,460 during the nine months ended September 30, 2024 compared to $20,692 used by financing activities for the nine months ended September 30, 2023 and related to loans received in the current period and loan payments made in the comparative period.
As a result of the above activities, at September 30, 2024, the Company has $2,952 of cash to settle current liabilities of $349,343.
The Company's financial statements have been prepared in accordance with IFRS under the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than a process of forced liquidation. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
11
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
OUTSTANDING SHARE DATA
As at the date of this MD&A, the following common shares, options and share purchase warrants were outstanding (no preferred shares are outstanding):
| # of Shares | |
|---|---|
| Issued and Outstanding Common Shares at November 28, 2024 | 76,054,930 |
| Stock Options | 3,475,000 |
| Warrants | 3,333,333 |
| RSUs | 425,000 |
| Fully diluted at November 28, 2024 | 83,288,263 |
Authorized
Unlimited common shares and preferred shares without par value.
Issued and Outstanding
There were no shares issued during or subsequent to the period ended September 30, 2024.
Escrow Shares
Following closing of the RTO Transaction during the year ended December 31, 2023, an aggregate of 39,704,938 common shares were subject to escrow, with 5% released on April 11, 2023, and the balance to be released over a period of 36 months. An additional 9,153,176 common shares are subject to additional pooling restrictions, with 10% released on April 11, 2023, and the balance to be released over a period of 36 months. As at the date of this MD&A, 27,793,456 common shares are subject to escrow and 4,118,930 common shares are subject to pooling restrictions.
Omnibus Incentive Plan
On April 11, 2023, the Company adopted a new security-based compensation plan (the "Omnibus Incentive Plan") that allows the Company to implement a stock option plan ("Option Plan"), deferred share unit plan ("DSU Plan"), and a restricted share unit plan ("RSU Plan"). The Omnibus Incentive Plan is a hybrid plan (10% rolling and fixed up to 10%). The Company has implemented an Option Plan and an RSU Plan.
Stock Options
Pursuant to the Option Plan, the Company can grant incentive stock options to directors, officers, employees, and technical consultants of the Company. The maximum numbers of shares that may be reserved for issuance under the Option Plan is limited to 10% of the issued common shares of the Company at any time. The vesting period for all options is at the discretion of the Board of Directors. The exercise price will be set by the Board of Directors at the time of grant and cannot be less than the discounted market price of the Company's common shares.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
The Option Plan provides that the number of common shares that may be reserved for issuance to any one individual upon exercise of all stock options held by such an individual may not exceed 5% of the issued common shares, if the individual is a director or officer, or 2% of the issued common shares, if the individual is a consultant or engaged in providing investor relations services, on a yearly basis. All options granted under the Option Plan will expire not later than the date, that is ten years from the date that such options are granted. Options terminate earlier as follows: (i) immediately in the event of dismissal with cause; (ii) 90 days from date of termination other than for cause; or (iii) one year from the date of death or disability. Options granted under the Option Plan are not transferable or assignable other than by will or other testamentary instrument or pursuant to the laws of succession.
A summary of the Company's stock option activity is as follows:
| Number of Options | Weighted Average Exercise Price (CAD) | |
|---|---|---|
| Balance, as at December 31, 2023, September 30, 2024 and the date of this MD&A | 3,475,000 | $ 1.03 |
As at the date of this MD&A, stock options outstanding and exercisable are as follows:
| Grant Date | Number of Options | Options Exercisable | Exercise Price (CAD) | Expiry Date | Remaining Contractual Life (Years) (from date of this MD&A) |
|---|---|---|---|---|---|
| April 11, 2023 | 3,325,000 | 2,493,750 | $ 1.00 | April 11, 2028 | 3.37 |
| June 1, 2023 | 50,000 | 37,500 | $ 2.14 | June 1, 2028 | 3.51 |
| June 5, 2023 | 50,000 | 37,500 | $ 2.15 | April 11, 2028 | 3.37 |
| December 5, 2023 | 50,000 | 18,750 | $ 1.00 | October 18, 2028 | 4.02 |
| Total | 3,475,000 | 2,587,500 |
During the period ended September 30, 2024, the Company granted an aggregate of nil (year ended December 31, 2023 – 3,775,000) stock options with a weighted average fair value of CAD $nil (year ended December 31, 2023 - $0.31) per stock option. During the period ended September 30, 2024, the Company recognized share-based payments of $224,640 (2023 - $415,813) related to stock options granted.
The fair value of stock options at date of grant was estimated using the Black-Scholes Option Pricing Model using the following weighted average assumptions:
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| Weighted average share price | N/A | CAD $0.48 |
| Risk-free interest rate | N/A | 3.09% |
| Expected life of option | N/A | 5.00 years |
| Expected annualized volatility | N/A | 100% |
| Expected dividend rate | N/A | Nil |
Restricted Share Units
The Company has implemented a restricted share unit plan (the "RSU Plan") whereby the board of directors may, from time to time, grant RSUs to employees, consultants, officers or directors of the Company. The board
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
of directors may determine the time during which the RSUs shall vest and the method of vesting, or that no vesting restriction shall exist.
On April 11, 2023, the Company granted 425,000 RSUs to certain directors, officers and a consultant of the Company. The RSUs vest by one quarter one year from grant date, and the one quarter every six months thereafter. During the period ended September 30, 2024, the Company recognized $48,785 (2023 - $41,090) for RSUs granted. During the period ended September 30, 2024, 106,250 RSUs vested and remain unissued as at the date of these financial statements.
A summary of the RSU activity during the nine months ended September 30, 2024 is as follows:
| Number of RSUs | |
|---|---|
| Outstanding balance, December 31, 2023, September 30, 2024 and the date of this MD&A | 425,000 |
The combined maximum number of common shares authorized for issuance under RSU and DSU Plans (DSU Plan has not been implemented) is 6,658,095.
Warrants
A summary of the Company's warrant activity is as follows:
| Number of Warrants | Weighted Average Exercise Price (CAD) | |
|---|---|---|
| Balance, December 31, 2023, September 30, 2024 and the date of this MD&A | 3,333,333 | $ 1.25 |
As at the date of this MD&A, a summary of warrants outstanding and exercisable are as follows:
| Number of Warrants Outstanding | Exercise Price (CAD) | Expiry Date | Remaining Contractual Life (Years) (from the date of this MD&A) |
|---|---|---|---|
| 3,333,333 | $ 1.25 | April 11, 2025 | 0.36 |
RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operation decisions. Related parties may be individuals or corporate entities.
A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
Key Personnel Compensation
Key management personnel include those persons having authority and responsibility for planning, directing and controlling the activities of the Company as a whole. The Company has determined that key management personnel consist of executive and non-executive members of the Company's Board of Directors and corporate officers.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Key management compensation for the period ended September 30, 2024 and 2023 is as follows:
| Type of Service | Nature of Relationship | For the nine months ended September 30, | |
|---|---|---|---|
| 2024 | 2023 | ||
| Non-cash share-based payments | Directors and officers | $ 135,887 | $ 288,719 |
| Consulting and management fees | Officer and a company with a Director in common with the Company | 157,500 | 105,000 |
| Total | $ 293,387 | $ 393,719 |
During the period ended September 30, 2024, the Company made payments of $nil (2023 - $299,912) for research & development and $nil (2023 - $171,077) for general & administrative expenses and recognized share-based payments of $7,546 (2023 - $16,327) to Union Group Ventures Limited ("Union"), the former controlling shareholder of EvokAI Privco, and significant shareholder of the Company.
The following table comprises amounts due to related parties included in accounts payable and accrued liabilities:
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| Alejandro Antalich (CEO & Director) | $ 41,233 | $ - |
| Emprise Capital Corp. (related to CFO & Director) | 7,817 | - |
| Voulu Ventures Oy (subsidiary of Union) | - | 13,642 |
| $ 49,050 | $ 13,642 |
As at September 30, 2024, $42,520 (December 31, 2023 - $12,140) in loans payable were due to a Director of the Company (Note 9). As at September 30, 2024, $37,744 (December 31, 2023 - $nil) was due from Voulu Ventures Oy.
FINANCIAL INSTRUMENTS
The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board of Directors approves and monitors the risk management processes. The type of risk exposure and the way in which such exposure is managed is provided as follows:
Market Risk
Market risk is the risk that the fair value or future cash flows from a financial instrument will fluctuate because of changes in market prices or prevailing conditions. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk and are disclosed as follows:
(i) Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company's functional currency is the US dollar. At September 30, 2024, cash balances were held primarily in Canadian and Euros. Changes in the exchange rate between foreign currencies and the US dollar could have an impact on the Company's financial position, results of operations and cash flows. The Company does not use derivative instruments to reduce its exposure to foreign currency risk, however, exchange rates are continually monitored for
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
any significant changes. At September 30, 2024, the Company is mainly exposed to foreign currency risk on financial instruments (consisting of trade payables) denominated in Canadian dollars and Euros.
At September 30, 2024 and December 31, 2023, the Company had the following foreign currency denominated trade payables:
| Canadian Dollars | Euros | |||
|---|---|---|---|---|
| September 30, 2024 | December 31,2023 | September 30, 2024 | December 31, 2023 | |
| Financial Assets | ||||
| Cash | $ 45 | $ 612,366 | $ 2,768 | $ 154,275 |
| Receivable | 8,223 | 2,476 | 38,724 | 65,822 |
| Financial Liabilities | ||||
| Accounts payable | $ 121,475 | $ 195,193 | $ 85,314 | $ 169,068 |
| Loans payable | - | - | 841,102 | 787,068 |
It is estimated that a 10% fluctuation in the Canadian dollar and Euro against the US dollar would affect net loss at September 30, 2024 by approximately $99,813 (December 31, 2023 - $31,460).
(ii) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in interest rates. The Company's sensitivity to interest rates relative to its cash balances is currently immaterial. The Company also has no long-term debt with variable interest rates, so it has no negative exposure to changes in the market interest rate.
(iii) Price rate risk
The Company is exposed to price risk with respect to equity prices. Equity price risk is defined as the potential adverse impact on the Company's earnings due to movements in individual equity prices or general movements in the level of the stock market. The Company closely monitors individual equity movements and the stock market to determine the appropriate course of action to be taken by the Company.
Credit Risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company's credit risk is primarily attributable to its liquid financial assets, which consists entirely of cash. The Company limits the exposure to credit risk by only investing its cash with high-credit quality financial institutions. The Company's secondary exposure to risk is on its receivables. Management believes that the credit risk related to its cash and receivables is minimal.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. At September 30, 2024, the Company has a cash balance of $2,952 (December 31, 2023 - $774,491) to settle current liabilities of $348,343 (December 31, 2023 - $479,640).
At September 30, 2024, the Company has no significant sources of revenue to fund its operating and research and development expenditures and has historically relied on equity financings and loans from its shareholders
16
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
to fund its operations. Future funding may be obtained by means of issuing share capital and/or debt financing. There can be no certainty of the Company's ability to raise additional financing through these means. If the Company is unable to continue to finance itself through these means, it is possible that the Company will be unable to continue as a going concern. Consequently, the Company is exposed to liquidity risk as at September 30, 2024.
Fair Value Measurements
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 – Inputs that are not based on observable market date. The fair value of cash is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets.
As at September 30, 2024 the Company's financial instruments consist of cash, receivables, accounts payable and accrued liabilities, and loans payable. Cash and receivables are classified as amortized cost. Accounts payable and accrued liabilities, and loans payable are also classified as amortized cost. The fair values of these financial instruments approximate their carrying values because of their short-term nature and/or the existence of market related interest rates on the instruments.
SEGMENTED INFORMATION
Operating segments are components of an entity whose operating results are regularly reviewed by officers of the Company in deciding how to allocate resources and in assessing performance and for which separate financial information is available.
The Company has one operating segment, which is involved in the research and development, and commercialization of artificial intelligence-based products and services for the MedTech sector.
CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGMENTS
The preparation of financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities and expenses. Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
A. Critical accounting estimates
Critical accounting estimates are estimates and assumptions made by management that may result in a material adjustment to the carrying amount of assets and liabilities within the next financial year and are, but are not limited to, the following:
(i) Deferred income tax
Provisions for income taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these income tax provisions at the end of each reporting period. However, it is possible that at some future date an additional liability could result from audits by tax authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Deferred tax assets are recognized when it is determined that the Company is likely to recognize their recovery from the generation of taxable income.
(ii) Share-based payments
The fair value of the estimated number of stock options, and RSUs, that will eventually vest is recognized as share-based compensation expense over the vesting period of the stock options and RSUs with the corresponding increase in equity.
Determining the fair value of stock options and RSUs requires the exercise of judgment related to the choice of a pricing model, the estimation of stock price volatility, the expected forfeiture rate, and the expected term of the underlying instruments. Option pricing models require the input of highly subjective assumptions including the expected price volatility and expected life. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company's options and RSUs at the date of grant. Any changes in the estimates or inputs utilized to determine fair value could result in a significant impact on the Company's future operating results or on other components of equity.
B. Critical accounting judgments
Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the statements are, but are not limited to, the following:
(i) Going concern
The assessment of the Company's ability to continue as a going concern as discussed in Note 1 of the Condensed Consolidation Interim Financial Statements involves judgment regarding future funding available for its operations and working capital requirements.
(ii) Functional currency
The functional currency of an entity is assessed on a standalone basis to determine the economic substance of the currency in which each entity performs its operations. The functional currency of EvokAI Creative
18
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
Labs Inc. is the Canadian Dollar. The functional currency of EvokAI Innovation is the US dollar. The functional currency of Head, NeuroCarrier, EvokAI Oy, and Rehaboo is the Euro.
(iii) Business combinations
Management determines whether assets acquired, and liabilities assumed constitute a business. A business consists of inputs and processes applied to those inputs that have the ability to create outputs. During the year ended December 31, 2023, the Company completed a reverse takeover and three acquisitions (see Overview and Outlook section) and concluded that the transactions did not qualify as business combinations under IFRS 3, "Business Combinations."
(iv) Impairment of intangible assets
Intangible assets that have a definite useful life are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the full amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs of disposal and value in use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
During the year ended December 31, 2023, management determined that the Company's intangible assets required full impairment.
(v) Contingent share consideration
The financial liability is calculated by taking the Company's share price at period end and the expected number of shares to be issued. Management applies judgement when determining the likelihood of achieving certain milestones associated with the earnout of the shares.
NEW AND AMENDED IFRS STANDARDS THAT ARE EFFECTIVE IN THE CURRENT YEAR
There were no new accounting policies adopted during the period ended September 30, 2024.
Risks and Uncertainties
Ongoing Need for Financing
It is intended that the Company will continue to make investments to support business growth and may require additional funds to respond to business challenges, including the need to develop new services or enhance existing services, enhance operating infrastructure and acquire complementary businesses and technologies. Accordingly, the Company may need to engage in equity or debt financings to secure additional funds. If additional funds are raised through further issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of holders of common shares. Any debt financing secured in the
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, additional financing may not be available on favourable terms, if at all. If the Company is unable to obtain adequate financing or financing on terms satisfactory to them, when they require it, their ability to continue to support business growth and to respond to business challenges could be significantly limited.
Company's Limited Operating History upon which its Business can be Evaluated
The Company's business and prospects must be considered in light of the risk, expenses and difficulties frequently encountered by technology companies in the early stage of product development. Such risks include the unpredictable nature of the Company's business, its ability to anticipate and adapt to a dynamic market and the ability to identify, attract and retain qualified personnel. There can be no assurance that the Company will be successful in addressing these risks.
Lack of Dividend Policy
The Company does not at present intend to pay cash dividends in the foreseeable future, as any earnings are expected to be retained for use in developing and expanding its business. However, the actual amount of dividends from the Company will remain subject to the discretion of the Company's Board of Directors and will depend on the results of operations, cash requirements and future prospects of the Company and other factors.
Possible Dilution to Present and Prospective Shareholders
The Company's plan of operation, in part, contemplates the accomplishment of business negotiations by the issuance of cash, securities of the Company, or a combination of the two, and possibly, incurring debt. Any transaction involving the issuance of previously authorized but unissued common shares would result in dilution, possibly substantial, to present and prospective holders of common shares.
Dependence of Key Personnel
The Company strongly depends on the business and technical expertise of its management and key personnel. There is little possibility that this dependence will decrease in the near term. As the Company's operations expand, additional general management resources will be required. These personnel will be central to the Company's ability to locate and develop business opportunities.
Lack of Trading
The lack of trading volume of the Company's shares reduces the liquidity of an investment in the Company's shares.
Volatility of Share Price
Market prices for shares of companies on the TSX Venture Exchange are often volatile. Factors such as announcements of financial results, and other factors could have a significant effect on the price of the Company's shares.
PROPOSED TRANSACTIONS
No transactions are proposed.
EVOKAI CREATIVE LABS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
OFF-BALANCE SHEET ARRANGEMENTS
The Company currently has no off-balance sheet arrangements.
ADDITIONAL INFORMATION
Additional information relating to the Company is available at www.sedarplus.com.
21