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Real Luck Group Ltd. — Management Reports 2022
Apr 28, 2022
47556_rns_2022-04-27_d8c572a7-9dd5-4efa-863d-db6024aa9a48.pdf
Management Reports
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Real Luck Group Ltd.
Management’s Discussion and Analysis
For the years ended December 31, 2021 and 2020
(Expressed in Canadian dollars)
INTRODUCTION
The following management’s discussion and analysis (“MD&A”) is dated April 27, 2022, provides information concerning the financial condition and results of operations of Real Luck Group Ltd. (“Real Luck” or the “Company”), for the year end December 31, 2021. The following MD&A should be read in conjunction with the Company’s annual audited consolidated financial statements for the years ended December 31, 2021 and2020 and the notes thereto. The Company’s financial statements and financial information included in this MD&A have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Except as otherwise stated, all dollar figures included therein and the following MD&A are presented in Canadian dollars.
Additional information relating to the Company is available on the Company’s website at www.luckbox.com and under the Company’s profile at www.sedar.com.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
Statements in this MD&A that are not historical facts are forward-looking statements involving known and unknown risks and uncertainties, which could cause actual results to vary considerably from these statements. Readers are cautioned not to put undue reliance on forward-looking statements.
This MD&A contains “forward-looking information” within the meaning of applicable Canadian securities legislation (“ forward-looking information ”). Such forward-looking information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made, and readers are advised to consider such forward-looking statements in light of the risks set forth below and as detailed under section Risks and Uncertainties in this MD&A.
In some cases, forward-looking information can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “expects” or “does not expect”, “estimates”, “outlook”, “prospects”; “projection”, “intends”, “believes”, “should”, “will”, “would” or the negative of these terms, and similar expressions intended to identify forward looking statements. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances. There can ne no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information.
Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking information contained herein is given as of the date of this MD&A and the Company disclaims any obligation to update any forward-looking information, whether as a result of new information, future events or results, except as may be required by applicable securities laws. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking information.
OVERVIEW
Real Luck Group Ltd. (“Real Luck” or the “Company”) was incorporated under the Business Corporation Act of Alberta on January 15, 2018. The head office, principal address and registered office of the Company are located at 1250, 639-5 Avenue SW, Calgary, Alberta T2P 0M9.
On December 11, 2020, the Company completed a reverse takeover (the “Transaction”) with Esports Ltd. (“Luckbox”), a private company limited by share capital incorporated and domiciled in the Isle of Man, and Elephant
Hill Sub Co., the Company’s wholly-owned subsidiary, through a three-cornered amalgamation. On December 16, 2020, the Company changed its name to “Real Luck Group Ltd” and began trading on TSX Venture Exchange as a Tier 2 Industrial Issuer under ticket symbol “LUCK”. Effective April 5, 2021, the Company is also listed on the OTCQB Venture Market under the trading symbol “LUKEF”.
DESCRIPTION OF BUSINESS
General
The Company is a fully licensed Business to Consumer (“B2C”) operator of an award-winning global online betting platform (“Luckbox”), which offers real-money wagering on esports, sports and casino games .
Through its proprietary Luckbox platform, the Company currently offers players the ability to bet on professional competitive video game events and matches across 13 game titles, and more than 100 sports. The Company added a third revenue stream in the form of casino betting in December 2021.
Through its Isle of Man license, Luckbox is currently able to accept players from more than 80 countries.
COMPANY STRATEGY AND OBJECTIVES
The Company works to maintain healthy margins through various methods, including odds creation, lowering costs and economic player acquisition and retention - working to decrease cost per acquisition (“CPA”) and increasing player lifetime value (“LTV”).
During the fiscal year 2021, the Company focused on continuing to enhance its proprietary platform by building a superior business intelligence infrastructure, which enables the Company to offer a unique and modern user experience tailored to the next generation of bettors, while ensuring maximum coverage of esports betting opportunities.
Refinements to the platform and the player onboarding funnel are designed to increase ROI on marketing spend when player acquisition efforts are scaled up, as well as increasing the lifetime value of players.
The Company has been engaged in an extensive process in regards to refining and retooling the platform and player onboarding funnel. This process was expected to end by the end of 2021, in order to reach a point where the Company can focus on player acquisition. While this is an on-going process, the Company has largely attained this milestone. During the year ended December 31, 2021, the Company sent $1.02 million on the development of its platform. The Luckbox platform should now be at a robust baseline allowing us to begin to engage in meaningful player marketing efforts for the first time in the Company’s life, enabling the Company to begin scaling revenue in 2022.
In addition to growing the player base, the Company newly integrated casino games will provide an additional B2C revenue stream. This vertical is one in which the team has a proven track record of success and one that is designed to be a near-term revenue driver for the business, in addition to the core esports betting revenue.
The Company is also planning to add further in-house capabilities, including the addition of its own odds compilation team, which will aid the Company in capturing greater value in addition to providing a more streamlined platform.
Most third-party odds providers in the market provide limited event coverage, increasing the complexity of user facing platforms. To get to market quickly and with as broad an offering as possible, the Company has elected to use a best-of-breed third-party supplier for their odds.
As the Company expands and seeks to scale, there is a business rationale to bring odds creation in-house. A proprietary solution will not only reduce costs and help ensure the highest quality, but it will also enable the Company to control the only part of the esports betting value chain that it does not currently perform in-house.
The Company is also targeting growth opportunities in new geographical regions by seeking to acquire additional licenses in selected regulated markets.
HIGHLIGHTS AND DEVELOPMENTS
Real Luck Group Ltd. was incorporated under the Business Corporation Act of Alberta on January 15, 2018. The head office, principal address and registered office of the Company are located at 1250, 639-5 Avenue SW, Calgary, Alberta T2P 0M9. The Company is currently trading on TSX Venture Exchange (“the Exchange”) as a Tier 2 Industrial Issuer under trading symbol “LUCK”. Effective April 5, 2021, the Company is also listed on the OTCQB Venture Market under the trading symbol “LUKEF”.
In May 2021, Thomas Rosander was promoted from Chief Customer Officer to Chief Executive Officer, after the resignation of Quentin Martin.
In December 2021, William Moore was appointed Chief Financial Officer after the resignation of Ran Kaspi.
The Company's focus has been on refining the Luckbox platform to fully prepare for player acquisition and anticipated revenue growth in 2022.
Special warrant private placement
On March 9, 2021, the Company completed a private placement of 14,837,317 special warrants of the Company at a price of $1.20 for aggregate gross proceeds of $17,804,780. Each special warrant automatically converts to one unit of the Company that consists of one common share and one half of one common share purchase warrant four months after the closing date of the private placement, upon the completion of certain procedures and filings as required by the Securities Laws and the Exchange. Each whole share purchase warrant entitles the holder to purchase one additional common share of the Company at an exercise price of $1.50 per share, for a period of 3 years from the date of closing.
In connection with the special warrant private placement the Company also issued 1,186,985 agent special warrants and 741,865 Corporate Finance Fee special warrants. Each agent special warrant is exercisable for one nontransferable agent warrant at no additional cost. Each agent warrant entitles the holder to purchase one unit comprised of one common share and one half of one share purchase warrant. Each whole warrant entitles the holder to purchase one common share for $1.50 per share for a period of 36 months following the date of issuance. Each Corporate Finance Fee special warrant is exercisable for one unit of the Company at no additional cost. Each unit has the same terms as described above.
Issuance of share capital
During the year ended December 31, 2021, the Company received gross proceeds of $1,288,980 from the exercise of 2,046,000 unit warrants previously issued under the private placement rounds completed in June 2020 and issued 2,046,000 common shares at an exercise price of $0.63 per share.
During the year ended December 31, 2021, the Company also received gross proceeds of $188,527 from the exercise of 448,875 broker warrants previously issued to agents and advisors for services in connection with the private placements of the subscription units and convertible notes during the year ended December 31, 2020. Each exercised brokered warrant entitles the holder to receive one unit which is comprised of one Company common share and one half of one warrant, for a total of 448,875 shares and 224,438 warrants. Each warrant entitles the holder to purchase one Company at an exercise price of $0.63 for a period of two years.
During the year ended December 31, 2021, a total of 419,666 options were exercised to purchase 419,666 common shares in the capital of the Company at $0.42 per share for gross proceeds of $176,260.
During the year ended December 31, 2021, the Company issued 15,579,182 common shares and 7,789,591 common share purchase warrants of the Company as a result of the conversion of 14,837,317 special warrants and 741,865 Corporate Finance Fee special warrants. In addition, the Company issued 1,186,985 agent warrants as a result of the conversion of the agent special warrants.
SUMMARY OF SIGNIFICANT EVENTS
The Company has undergone an intense and necessary phase of recalibrating the Luckbox platform, with “under the hood” improvements designed to provide a frictionless customer acquisition experience as well as improving player retention.
Luckbox’s technology platform now allows the Company to not only develop its own in-house solutions, to seamlessly plug into the platform and user experience, but also partner with relevant third-parties in a modular fashion, in order to rapidly adapt to business needs. During the current fiscal year, the Company announced the following partnerships and integrations, which make the platform more extensible and adaptable to the growing business needs, including sports betting and casino:
Solitics for customer engagement and business analytics
Luckbox will leverage Solitcs’ service to provide in-depth and meaningful player behaviour insights and provide the ability to personalize and automate customer engagements in real time, leading to higher customer retention and improved player economics.
Aspire Global for casino games, sportsbook including esports
This strategic partnership with Aspire Global’s (STO: ASPIRE) BtoBet is a key component of broadening the Company’s platform and adding casino games to the Luckbox platform as well as BtoBet’s comprehensive sportsbook solution, including esports.
Funanga for secure cash deposits
Luckbox will leverage Funanga's CashtoCode payment solutions. The partnership allows players to make instant and secure cash deposits at Luckbox via more than 150,000 retail locations across Europe and international markets.
Bambora for expanding payment options
Luckbox’s partnership with Bambora, saw the PaymentIQ gateway added to the Luckbox platform. The PaymentIQ solution is designed to bring a direct benefit to Luckbox as it immediately expands deposit options for players by providing access to every common payment method, including major credit cards, e-wallets, online bank transfers and mobile payments.
Checkin.com for customer onboarding
The Company’s partnership with user onboarding solution Checkin.com will streamline the onboarding process for Luckbox customers, with the aim of increasing player conversion rates and as an important precursor to stepping up marketing efforts.
Industry recognition
The Company was also informed it had been shortlisted in two categories at the EGR Marketing Awards 2021. Luckbox, which was named Rising Star at the EGR Operator Awards in 2020, was shortlisted in the Esports Operator and In-House Product categories.
Head of Data appointed to drive superior BI infrastructure
As part of the Company’s drive to build a superior business intelligence infrastructure, the Company appointed data scientist David Conde as its new Head of Data. David will play a key role as Luckbox strive to build a scalable business to become a dominant player in the space through data-driven marketing and operations.
Partnership with leading payment provider Nuvei
The Company’s partnership with global payment technology company Nuvei (TSX: NVEI) will allow new and existing customers a comprehensive choice of payment options when betting on the Luckbox platform. Nuvei is fully integrated and live on our site now and this represents another step in realizing Luckbox’s vision to deliver the best iGaming experience in the market.
Casino launch and player acquisition
The team launched casino in Q4 2021 and plans to increase player acquisition efforts in Q1 2022.
Incorporation of Real Luck Group Holdings Limited
The company Real Luck Group Holdings Inc. incorporated on November 18, 2021, with the primary function of obtaining and holding an Ontario Gaming License. This will allow the Real Luck Group to establish and grow licensed operations in Canada.
RESULT OF OPERATIONS
Selected Annual Information
| December 31, 2021 | December 31, 2020 | |||
|---|---|---|---|---|
| Revenue | $ | 25,174 | $ | 75,480 |
| Net loss for the year | (8,631,434) | (5,495,513) | ||
| Total loss and comprehensive loss for the year | (8,605,340) | (5,529,664) | ||
| Basic and diluted loss per share | (0.14) | (0.18) | ||
| Total current assets | 14,952,586 | 4,092,897 | ||
| Total non-current liabilities | 23,617 | 48,761 |
RESULT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2021
| Year ended December 31, 2021 Year ended December 31, 2020 $ Change **% Change ** |
|
|---|---|
| Revenue Cost of sales Operating expenses Advertising and marketing Depreciation Bad debt recovery Consulting fees Foreign exchange (gain) loss Legal and professional fees General and administrative Insurance Investor relations Salaries and director fees Share-based compensation Transfer agent and filing fees Travel and accommodation Other income Loss from operations before income taxes Income tax expenses (recovery) Net loss for the period Other comprehensive (gain) loss Total loss and comprehensive loss |
$ 25,174 $ 75,480 $ (50,306) (67%) 290,286 287,947 2,339 1% |
| (265,112) (212,467) (52,645) (25%) |
|
| 943,234 406,207 537,027 132% 79,352 89,962 (10,610) (12%) (126) (62,371) 62,245 (100%) 1,411,739 668,119 743,620 111% 62,633 96,614 (33,981) (35%) 1,254,687 907,092 347,595 38% 669,297 521,371 147,929 28% 137,569 - 137,569 100% 70,623 - 70,623 100% 1,735,563 1,547,475 188,088 12% 1,889,557 887,554 1,002,003 113% 98,884 16,503 82,381 499% 49,583 105,243 (55,660) (53%) |
|
| (8,402,595) (5,183,769) (3,218,826) 62% (42,334) 96,152 (138,486) (144%) |
|
| (8,625,373) (5,492,388) (3,132,985) (57%) 6,061 3,125 2,936 94% |
|
| (8,631,434) (5,495,513) (3,135,921) (57%) (26,094) 34,151 (60,245) (176%) |
|
| $(8,605,340) $(5,529,664) (3,075,676) (56%) |
Revenue
The Company generated minimal revenue during the year ended December 31, 2021, and 2020. As the Company is still in an early stage of operations and its focus has been on developing the platform and its offerings to deliver satisfactory user experience, minimal revenue is expected at this stage.
Cost of sales
Cost of sales increased by $2,339, or 1% in fiscal 2021, primarily due to the additional third-party providers in the 2021 fiscal year.
Operating expenses
The Company incurred operating expenses of $8,402,595 during the year ended December 31, 2021, compared to $5,183,769 for the year ended December 31, 2020.
The variances in operating costs were attributable to the following factors:
-
Increase in advertising and marketing expense of $537,027 was as a result of an increase in the marketing budget for 2021 to engage third-party consultants on esports and building an in-house content studio to deliver Luckbox’s content marketing strategy.
-
Increase in consulting fees of $743,620 was due to the Company entering into new contracts with corporate and capital market consultants near the end of fiscal 2020, and incurred costs in accordance with consulting agreements in the fiscal year 2021 that were not incurred in the fiscal year 2020.
-
Decrease in foreign exchange loss of $33,981 due to the fluctuations in the exchange rates of the Pound Sterling, the functional currencies of the Company’s subsidiaries, and the decrease in activities denominated in foreign currencies in the year ended December 31, 2021, compared to 2020.
-
Increase in legal and professional fees of $347,595 mainly due to the costs incurred in connection with the application for trading on OTCQB Venture Market and subscriber unit warrant exercises during the fiscal year 2021 that were not incurred in 2020.
-
Increase in general and administrative expenses of $147,926 was mainly attributable to the increase in event and conference expenses in the fiscal year 2021 compared to the fiscal year 2020.
-
Increase in insurance expenses of $137,569 was due to the Company obtaining an insurance policy for director and officer liability with coverage starting in Q4 2020.
-
Increase in salaries and director fees of $188,088 was attributable to the compensations for new directors appointed in Q4 2020 upon the completion of the reverse takeover.
-
Increase in share-based payments of $1,002,003 was due to the vesting of stock options granted to officers, directors and employees as at December 31,2021.
-
Increase in transfer agent and filing fees of $82,381 was due to the costs incurred on SEDAR filings and OTC application fees that were not incurred in the fiscal year 2020.
| December 31, 2021 December 31, 2020 |
|
|---|---|
| Total loss and comprehensive loss for the period Add: Listing expenses Loss on re-measurement of warrant liabilities Professional fees related to the Transaction Gain on re-measurement of conversion options Accretion expenses on convertible notes Normalized comprehensive loss |
$ (8,605,340) $ (5,529,664) - 587,881 - 140,005 - 246,487 - (2,630,811) - 1,820,163 |
| $ (8,605,340) $ (5,365,939) |
-
Listing expense of $540,027 was resulted from the completion of the Reverse Take Over Transaction in 2020.
-
The loss on re-measurement of warrant liabilities of $140,005 in the fiscal year 2020, were due to the changes in the fair value of the instruments during the year, as measured by the Black-Scholes option pricing model.
-
The professional fees of $246,487 were incurred in connection with the Reverse Take Over Transaction in 2020.
-
The increases in gain on re-measurement of conversion options of the convertible notes of $2,630,811 in the fiscal year 2020, was due to all the convertible notes were settled in fiscal 2020 and the fair value of the conversion options on settlement was recognized in profit and loss.
-
The increase in accretion expenses on convertible notes of $1,820,163 was due to the amortization of the carrying values of the Expoworld Notes that were issued and settled within fiscal 2020. In addition, the Avatar note was accreted over 4 months in fiscal 2019 and was accreted over 9 months in fiscal 2020, which leads to higher expense in fiscal 2020.
Fourth quarter results
| Three months ended December 31, 2021 Three months ended December 31, 2020 |
|
|---|---|
| Revenue Cost of sales Operating expenses Advertising, marketing and investor relations Amortization and depreciation Bad debt expense (recovery) Consulting fees Foreign exchange (gain) loss Legal and professional fees General and administrative expenses Insurance Investor relations Salaries and director fees Share-based payments Transfer agent and filing fees Travel and accommodation Other expenses (income) Loss from operations before income taxes Income tax expenses Net loss for the period Other comprehensive (gain) loss Total loss and comprehensive loss |
9,934 $ 16,423 77,631 89,146 |
| (67,697) (72,723) |
|
| 218,299 204,437 21,306 18,553 - (16,948) 366,696 167,806 4,452 28,838 272,714 307,604 188,104 118,633 34,652 - 11,421 - 394,507 484,666 436,593 857,908 5,128 16,503 15,832 91,830 |
|
| 1,969,704 2,279,830 (8,995) 102,590 |
|
| (2,028,406) (2,455,143) 2,242 1,521 |
|
| (2,030,648) (2,456,664) (37,276) 56,357 |
|
| (1,993,372) (2,513,021) |
Summary of quarterly results
| September 30, | December 31, | |||
|---|---|---|---|---|
| Three months ended, | March 31, 2021 | June 30, 2021 | 2021 | 2021 |
| Total revenue | - | 8,002 | 7,238 | 9,934 |
| Net loss | (2,399,916) | (2,280,266) | (1,920,603) | (2,030,648) |
| Total comprehensive loss | (2,400,680) | (2,327,865) | (1,883,422) | (1,993,372) |
| Basic and diluted net lossper share | (0.05) | (0.04) | (0.03) | (0.05) |
| September 30, | December 31, | |||
| Three months ended, | March 31, 2020 | June 30, 2020 | 2020 | 2020 |
| Total revenue | - | 25,065 | 33,992 | 16,423 |
| Net loss | (1,129,459) | (1,137,367) | (772,023) | (2,456,664) |
| Total comprehensive loss | (1,106,830) | (1,140,143) | (769,670) | (2,513,021) |
| Basic and diluted net lossper share | (0.06) | (0.05) | (0.02) | (0.05) |
For the three months ended December 31, 2021, net loss for the period decreased by $426,016 and total comprehensive loss decreased by $519,649 compared to the three months ended December 31, 2020. The most significant components of this overall change are explained as follows:
-
The decrease in operating expense of $310,126 for the three months ended December 31, 2021 compared to that of 2020 was mainly attributable due to the decrease in share-based payments of $421,315.
-
The decrease in other expenses and income of $111,585 were mainly attributable to the decrease in total non-recurring expenses as discussed in section above.
Quarter to quarter fluctuations are typically due to the following factors:
Net loss:
-
Additional costs incurred as a result of the Company entering into new agreements and contracts with consultants for professional services as the Company expands its operations.
-
Timing of grants of share-based compensation awards with the variation in the associated fair values of each award Unit, being either common shares or stock options, calculated at the time of grant and the variation in the number of awards granted
-
The fair value movements of the instruments classified as derivative liabilities, including the unit warrant as part of the subscription units and the conversion options of the convertible notes, as a result of the fluctuation in fair value of the underlying share price.
-
Timing of recognition of non-recurring expenses, including the legal and professional fees in connection with the completion of the reverse takeover transaction and listing expenses.
Total comprehensive loss:
- Fluctuations in the foreign exchange rates among the presentation currency, Canadian dollar, and the functional currencies of the subsidiaries, being Pound Sterling and Bulgarian Lev, that result in exchange differences recognized in other comprehensive income on translation.
Additional disclosure for venture issuers without significant revenue
The material components of general and administrative expenses have been disclosed for the years ended December 31, 2021 and 2020 under section “Results of Operations”.
Off-balance sheet arrangement
As at the date of this MD&A, the Company has not entered into any off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company’s cash flows for the year ended December 31, 2021 and 2020:
| December 31, 2021 December 31, 2020 |
|
|---|---|
| Cash used in operating activities, net Cash (used in) generated by investing activities Cash generated by financing activities Increase in cash Effects of exchange difference Cash, beginning of year Cash,end ofyear |
$ (6,930,495) $ (3,901,243) (50,531) 20,540 17,562,350 5,596,429 |
| 10,581,324 1,715,726 (25,648) 106,109 3,842,680 2,020,845 |
|
| $ 14,398,356 $ 3,842,680 |
The Company consumed net cash of $6,930,495 (2020 - $3,901,243) in operating activities. The increase in cash used in operating activities in fiscal year 2021 compared to the prior period was due to the Company incurred more administrative costs and professional fees to meet the filing requirements subsequent to being listed in Q4 2020. In addition, the Company incurred additional costs in the fiscal year 2021 to become listed on the OTCQB Venture Market and to enhance its presence in the esports betting market through content marketing.
As the Company is in its early-stage and only started carrying on business in its current capacity in April 2019, the Company has not generated cash flows from revenue. As a result, the Company has relied on its ability to raise financing through the issuance of equity securities to obtain sufficient cash flows. There is no certainty that equity financing will continue to be available at the times and in the amounts required to fund the Company’s future activities.
Cash used in investing activities for the year ended December 31, 2021, was mainly for the purpose of purchasing equipment used in operations.
Cash generated by financing activities for the year ended December 31, 2021, mainly came from the proceeds from the private placement of special warrant units completed during the period and proceeds from exercise of warrants and options previously issued. Refer to section “Highlights and Developments” for further details regarding these transactions.
Although the Company anticipates it will have positive cash flows from operating activities in future periods, to the extent that the Company has negative cash flows in any future periods, certain of the net proceeds from the financing may be used to fund such negative cash flows from operating activities, if any.
As at December 31, 2021, the Company had working capital of $13,912,864 (December 31, 2020 - $3,024,296). The Company believes that it has sufficient cash resources to fund its operations for the next twelve months.
RELATED PARTY DISCLOSURES
The Company has determined that related parties consist of the Company’s Board of Directors and its senior officers who are responsible for planning, directing and controlling the activities of the Company. The directors and officers of the Company are:
-
Thomas Rosander, CEO and Director (appointed on May 7, 2021)
-
William Moore, CFO (appointed on December 17, 2021)
-
Michael Stevens, former Corporate Secretary and Director (resigned on March 8, 2022)
-
Drew Green, Director (appointed on December 11, 2020)
-
Maruf Raza, Director (appointed on December 11, 2020)
-
Lloyd Melnick, Director (appointed on December 11, 2020)
-
Lars Lien, former CEO and Director (resigned on June 25, 2020)
-
Lee Hills, former Director (resigned on May 5, 2020)
-
Ran Kaspi, former CFO (resigned on December 17, 2021)
-
Quentin Martin, former CEO and Director (resigned on May 7, 2021)
-
Benn Timbury, COO (appointed on March 1, 2022)
-
Bo Wanghammar, Director (appointed on March 8, 2022)
-
Jo-Anne Archibald, Corporate Secretary (appointed on December 16, 2020)
Related party transactions
During the year ended December 31, 2021, the Company incurred charges with directors and officers recorded as follows:
| Cash fees and salaries | Share-based | compensation | ||
|---|---|---|---|---|
| Quentin Martin | $ | 128,725 |
$ | 158,756 |
| Ran Kaspi | 199,101 | 132,164 | ||
| Michael Stevens | 64,727 | 63,502 | ||
| Drew Green | 61,500 | 164,691 | ||
| Maruf Raza | 58,196 | 69,438 | ||
| Lloyd Melnick | 32,500 | 53,563 | ||
| Lee Hills | 56,051 | - | ||
| Thomas Rosander | 160,995 | 537,694 | ||
| William Moore | 24,325 | - | ||
| Total | $ | 786,120 | $ | 1,179,808 |
The share-based payments including options granted to related parties were fair valued on the dates that they were granted. During the year ended December 31, 2021, the Company granted 6,400,000 options at a weighted average exercise price of $0.26 to Thomas Rosander, Drew Green, Maruf Raza, Lloyd Melnick and William Moore. Out of 5,250,000 of the options granted, 10% vested immediately on grant date, 10% will vest six months from grant date, and 20% will vest each six months thereafter. Out of 1,150,000 of the options granted, 10% vested immediately and the remainder will vest based on milestones achieved.
Each stock option permits the holder to purchase one common share of the Company at the stated exercise price.
Related party balances
As at December 31, 2021, due from related party balance of $36,481 (December 31, 2020 - $36,062) represents the Canadian equivalent of amounts due from Lars Lien, former CEO and Director. Included in the total balance is a loan amount denominated in GBP of $35,947 (£20,000) that was advanced to Lars Lien on October 8, 2019, is interest bearing at 3%, is repayable by October 7, 2022, and is secured against 33,000 shares of the Company held by him.
For the year ended December 31, 2021, the accrued interest on the loan is $1,034 (2020 - $1,265) and has been recognized as interest income in profit and loss.
As at December 31, 2021, included in accounts payable and accrued liabilities is $2,500 (December 31, 2020 - $26,178) of consulting fees owed to Maruf Raza and Thomas Rosander. The amounts are unsecured, non-interest bearing and are due on demand.
As at December 31, 2021, included in accounts payable and accrued liabilities is an amount of $14,805 (December 31, 2020 - $2,988) due to Luckbox Limited, a related party under common control. The amount is unsecured, noninterest bearing and is repayable upon demand.
OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. As at December 31, 2021, the Company had a total of 68,781,500 issued and outstanding common shares. The total unit warrants outstanding were 16,123,590, the total agent warrants outstanding were nil, and the total exercisable stock options of 3,587,647. If all of these warrants and options were exercised, the total common shares on a fully diluted basis would be 61,457,032 shares.
NON-IFRS FINANCIAL MEASURES
This MD&A makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS, and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to compliment those IFRS measures by providing further understanding of the results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under IFRS. Non-IFRS measures including “Normalized Comprehensive Loss” (calculated as Total Comprehensive Loss less non-recurring expenses) and “Working Capital” (calculated as current assets less current liabilities) were used in order to facilitate operating performance comparisons from period to period and to prepare annual operating budgets and forecasts.
SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set out in note 3 to the audited consolidated financial statements for the years ended December 31, 2021 and 2020.
The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2020:
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Amendments to IAS 1 “Presentation of financial statements” and IAS 8 “Accounting policies, changes in accounting estimates and errors”: Definition of Material (in force for annual periods beginning on or after January 1, 2020).
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Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform (in force for annual periods beginning on or after January 1, 2020).
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Amendments to IFRS 3 "Business Combinations" (in force for annual periods beginning on or after January 1, 2020).
The adoption of these standards did not have material impacts on the Company’s consolidated financial statements for the year ended December 31, 2020.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of the Company’s consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the Company’s financial statements, and revenue and expenses during the reporting period. Estimates and assumptions are subject to uncertainty and actual results could significantly differ from those estimated. Revisions to estimates are adjusted for prospectively in the period in which the estimates are revised.
Significant estimates in the Company’s consolidated financial statements include the following:
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Share-based payments (Refer to note 15 to the Consolidated Financial Statements)
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Useful lives of equipment (Refer to note 7 to the Consolidated Financial Statements)
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Determination of lease terms (Refer to note 8 to the Consolidated Financial Statements)
The most significant judgments in applying the Company’s financial statements include:
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The assessment of the Company’s ability to continue as a going concern and whether there are events or conditions that may give rise to significant uncertainty;
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The fair value and classification of financial instruments;
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The determination of the functional currency of the Company and its subsidiary; and
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Whether there are indicators of impairment of the Company’s non-current assets.
Actual results could differ from management’s best estimates as additional information could become available in the future and may have an impact on future periods.
RISKS ARISING FROM FINANCIAL INSTRUMENTS
Credit risk
Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from cash and receivables from a related party.
The Company limits its exposure to credit loss on cash by placing its cash with reputable financial institutions. The exposure to credit loss on other receivables is limited as other receivables are primarily comprised of money deposited on a reputable and secured payment platform. The exposure to credit loss on receivables from a related party is limited as the amount is secured by shares of the Company owned by the related party.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Management controls and monitors the Company’s cash flow on a regular basis, including forecasting future cash flows.
Foreign exchange risk
Foreign currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company is exposed to currency risk as it incurs certain expenditures that are denominated in foreign currencies while its functional currency is the Canadian dollar. The Company does not hedge its exposure to fluctuations in foreign exchange rates.
As at December 31, 2021, the Company’s significant foreign exchange currency exposure on its financial instruments, expressed in Canadian dollars was as follows:
| BGN | GBP | EUR | USD | USD | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | 65,103 | $ | 462,382 | $ | 294,133 | $ | 6 |
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| Restricted cash | - | 93,102 | - | - | ||||||
| Other receivables | 351 | 20,047 | 94,713 | (20,031) | ||||||
| Due from a related party | - | 36,481 | - | - | ||||||
| Accounts payable | (217,920) | (369,925) | (29,452) | (20,669) | ||||||
| Lease liabilities | (64,018) | - | - | - | ||||||
| $ | (216,484) | $ | 242,087 | $ | 359,394 | $ | (40,694) |
The table below details the effect on earnings before tax of a 10% strengthening or weakening of the CAD exchange rates as at December 31, 2020 on items denominated in BGN, GBP, EUR and USD:
| 10% | 10% | ||
|---|---|---|---|
| Strengthening | Weakening | ||
| CAD:GBP exchange rate | $ | 41,390 | $ (41,390) |
| CAD:USD exchange rate | (5,167) | 5,167 | |
| CAD:EUR exchange rate | 51,757 | (51,757) | |
| CAD:BGN exchange rate | (15,940) | 15,940 | |
| $ | 72,040 | $ (72,040) |
Capital Management
The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern in order to provide future returns for shareholders and maintain an optimal capital structure. In order to maintain or adjust the capital structure, the Company may issue new shares or sell assets to reduce debt.
RISKS AND UNCERTAINTIES
Company has a Limited Operating History
The Company began carrying on business in its current capacity on April 25, 2019 and has not yet generated material income. The Company is, therefore, subject to many of the risks common to early- stage enterprises, including undercapitalization, cash shortages, limitations with respect to personnel, financial and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and likelihood of success must be considered in light of the early stage of operations. The Company’s lack of operating history may also make it difficult for investors to evaluate the Company’s prospects for success and there is no guarantee that the Company’s business model will continue to achieve its strategic objectives.
Global Economic Risk
The ongoing economic slowdown and downturn of global capital markets (in particular as a result of the current outbreak of the novel coronavirus (“ COVID-19 ”) and the global COVID-19 pandemic) has generally made the raising of capital by equity or debt financing more difficult. Access to financing has been negatively impacted by the ongoing global economic risks. As such, the Company is subject to liquidity risks in meeting development and future operating cost requirements in instances where cash positions are unable to be maintained or appropriate financing is unavailable. These factors may impact the Company’s ability to raise equity or obtain loans and other credit facilities
in the future and on terms favourable to the Company. If uncertain market conditions persist, the Company’s ability to raise capital could be jeopardized, which could have an adverse impact on the Company’s business and operations.
COVID-19 Risk
The outbreak of COVID-19 in 2020 has had a negative impact on global financial conditions. The Company cannot accurately predict the impact COVID-19 will have on the Company’s ability to remain open for business in response to government public health efforts to contain COVID-19 and to obtain financing or third-parties’ ability to meet their obligations with the Company, including due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak and the length of travel and quarantine restrictions imposed by governments of affected countries, and future demand of the Company’s products and services.
In the event that the prevalence of the coronavirus continues to increase (or fears in respect of the coronavirus continue to increase), governments may increase regulations and restrictions regarding the flow of labour or products, and travel bans, and the Company’s operations, suppliers, customers and distribution channels, and ability to advance its projects, could be adversely affected. Should any employees or consultants of the Company become infected with COVID-19 or similar pathogens, it could have a material negative impact on the Company’s operations and prospects.
Changing Economic Conditions
The demand for entertainment and leisure activities, including esports betting and gaming, more generally, can be highly sensitive to changes in consumers’ disposable income, and thus can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond the Company’s control. Unfavourable changes in general economic conditions, including recessions, economic slowdowns, sustained high levels of unemployment, and increasing fuel or transportation costs or the perception by customers of weak or weakening economic conditions, may reduce customers’ disposable income or result in fewer individuals engaging in entertainment and leisure activities, such as esports betting or online gaming. As a result, the Company cannot ensure that demand for its product and service offerings will remain constant. Adverse developments affecting economies throughout the world, including a general tightening of availability of credit, decreased liquidity in certain financial markets, increased interest rates, foreign exchange fluctuations, increased energy costs, acts of war or terrorism, transportation disruptions, natural disasters, declining consumer confidence, sustained high levels of unemployment or significant declines in stock markets, as well as concerns regarding epidemics and the spread of contagious diseases, could lead to a further reduction in discretionary spending on leisure activities, such as esports betting and gaming. Any significant or prolonged decrease in consumer spending on entertainment or leisure activities could adversely affect the demand for the Company’s product offerings, reducing its cash flows and revenues. If the Company experiences a significant unexpected decrease in demand for its product offerings, its business may be harmed.
Competition in Esports Betting Industry
The industry within which the Company operates is rapidly evolving and intensely competitive, and is subject to changing technology, shifting customer needs and frequent introductions of new offerings. The Company’s potential competitors include large and established companies as well as other start-up companies. Such competitors may spend more money and time on developing and testing products and services, undertake more extensive marketing campaigns, adopt more aggressive pricing or promotional policies or otherwise develop more commercially successful products or services than the Company, which could negatively impact its business. Furthermore, new competitors, whether licensed or not, may enter the Company’s key product and/or geographic markets. There is no assurance that the Company will be able to maintain or grow its position in the marketplace.
As a result of the foregoing, among other factors, the Company will have to continually introduce and successfully market new and innovative technologies, product and service offerings and product and service enhancements to
remain competitive and effectively stimulate customer demand, acceptance and engagement. The process of developing new product and service offerings and systems is inherently complex and uncertain, and new product and service offerings may not be well received by customers, even if well-reviewed and of high quality. Furthermore, the Company may not recover the often substantial up-front costs of developing and marketing new technologies and product and service offerings, or recover the opportunity cost of diverting management and financial resources away from other technologies and product or service offerings. Additionally, if the Company cannot efficiently adapt its processes and infrastructure to meet the needs of its product and service offering innovations, its business could be negatively impacted.
Reliance on Management
The success of the Company will be dependent upon the ability, expertise, judgment, discretion and good faith of its key executives, including the directors and officers of the Company and a small number of highly skilled and experienced executives and personnel. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results, or financial condition. The competition for highly skilled technical, management and other employees in the Company’s industry is high and there can be no assurance that the Company will be able to engage or retain the services of such qualified personnel in the future.
Esports Betting Industry Is Heavily Regulated
The Company and its officers, directors, major shareholders, key employees and business partners are subject to the laws and regulations relating to online gaming of the jurisdictions in which the Company conducts business, as well as the general laws and regulations that apply to all e-commerce businesses, such as those related to privacy and personal information, tax and consumer protection. These laws and regulations vary from one jurisdiction to another and future legislative and regulatory action, court decisions or other governmental action. There can be no assurance that legally enforceable prohibiting legislation will not be proposed and passed in jurisdictions relevant or potentially relevant to the Company’s business to prohibit, legislate or regulate various aspects of the Internet, e-commerce, payment processing, or the online gaming industries. Compliance with any such legislation may have a material adverse effect on the Company’s business, financial condition and results of operations.
Any gaming licence that the Company currently holds may be revoked, suspended or conditioned at any time, and the industry has recently experienced significantly more enforcement actions, particularly in the United Kingdom, where the Gambling Commission has issued fines against numerous operators for regulatory failings. The loss of a gaming licence in one jurisdiction could trigger the loss of a gaming licence or affect the Company’s eligibility for such a licence in another jurisdiction, and any of such losses, or potential for such loss, could cause the Company to cease offering some or all of its product offerings, increasing its customer base and/or generating revenues in the impacted jurisdictions.
Additionally, the Company’s product and service offerings must be approved in most regulated jurisdictions in which they are offered and will likely need to undergo third-party testing by a certified testing lab. Such testing can be costly and time consuming, and this process cannot be assured or guaranteed. Obtaining these approvals is a timeconsuming process that can be extremely costly and does not guarantee the Company to obtain such approvals.
Furthermore, some jurisdictions require licence holders to obtain government approval before engaging in some transactions, such as business combinations, reorganizations, stock offerings and repurchases. The Company may not be able to obtain all necessary gaming licences in a timely manner, or at all. Delays in regulatory approvals or failure to obtain such approvals may also serve as a barrier to entry to the market for the Company’s product offerings. If the Company is unable to overcome the barriers to entry, it will materially affect its results of operations and future prospects.
Complex and Evolving Regulatory Environment for Online Gaming Industry
In addition to regulations governing online gaming, the Company might be subject to a variety of laws and regulations domestically and abroad that involve the Internet, e-commerce, privacy and protection of data and personal information, rights of publicity, acceptable content, intellectual property, advertising, marketing, distribution, data and information security, electronic contracts and electronic communications, competition, protection of minors, consumer protection, unfair commercial practices, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance and online payment and payment processing services. The Company may introduce new products or services, expand its activities in certain jurisdictions, or take other actions that may subject it to additional laws, regulations or other government scrutiny.
These laws, regulations and legislation, along with other applicable laws and regulations are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations, including pre-existing laws regulating communications and commerce in the context of the Internet and e-commerce, are often uncertain, particularly in the new and rapidly evolving industry in which the Company operates, and may be interpreted and applied inconsistently across jurisdictions and inconsistently with its future policies and practices.
Legislators and regulators also look beyond online gaming regulations specifically to implement restrictive measures on online gaming. In certain jurisdictions, this has included restrictions on payment processing, Internet blocking, account and identity verification requirements, and similar measures. Such regulations, if not appropriately mitigated, could materially adversely affect the Company’s business, results of operations or financial condition. In addition, such restrictive measures may impact the ability or desire of third-party suppliers, including payment processors, to provide services to the Company globally or in certain jurisdictions. This would adversely affect the Company’s financial results due to the potential need to determine whether to change suppliers, which may not be on as favorable terms, or comply with the supplier’s requested restrictions.
These laws and regulations, as well as any changes to the same and any related inquiries, investigations or any other government actions, may be costly to comply with and may delay or impede new product development, result in negative publicity, increase the Company’s operating costs, require significant management time and attention, and subject it to remedies that may harm its business, including fines or demands or orders that modify or cease certain or all existing business practices, such as limiting its use of personal information to add value for customers, or implement costly and burdensome compliance measures. Any such consequences could adversely affect the Company’s business, results of operations or financial condition.
Social Responsibility Concerns
Negative public perception and concerns with safer betting and online gaming could lead to new regulatory restrictions on the Company’s current and future operations. Such restrictions on the Company’s future marketing or product offerings could result in increased compliance costs and have a material adverse effect on its business, results of operations, financial condition and prospects. In addition, public scrutiny related to betting and gaming activities could negatively impact the Company’s reputation and the value of its brand. This can result in a decrease in employee engagement and retention, and the willingness of future customers and the Company’s partners to do business with it, which could have a materially adverse effect on its business, results of operations and cash flows.
Success of Esports Betting Products Not Guaranteed
The esports betting industry is characterized by elements of chance. Accordingly, the Company employs theoretical win rates to estimate what a certain type of esports bet, on average, will win or lose in the long run. The actual win rates of esports bets may differ from the theoretical win rates that the Company has estimated and could result in the winnings of the Company’s customers exceeding those anticipated. The variability of win rates (hold rates) also has the potential to negatively impact the Company’s financial condition, results of operations, and cash flows.
Failure to Retain or Add Customers
The Company operates in a dynamic environment characterized by rapidly changing industry and legal standards, and its products will be subject to changing consumer preferences that cannot be predicted with certainty. The Company will need to keep up with trends in the digital sports entertainment and gaming industries to continually introduce new offerings that complement its existing platforms to maintain or increase customer engagement and growth of its business. If the Company is unable to maintain or increase its customer base or engagement, or effectively monetize its customer base’s use of its product offerings, its revenue and financial results may be adversely affected.
Intellectual Property and Risk of Infringement
The Company’s success depends on its ability to obtain trademark protection for the names or symbols under which it markets its product offerings and to obtain copyright protection of its proprietary technologies, other game innovations and creative assets. There can be no assurance that any trademark or copyright will provide competitive advantages for the Company or that its intellectual property will not be successfully challenged or circumvented by competitors. Moreover, due to the differences in foreign patent, trademark, copyright and other laws concerning proprietary rights, the Company’s intellectual property may not receive the same degree of protection in each jurisdiction where it operates. The Company’s failure to possess, obtain or maintain adequate protection of its intellectual property rights for any reason in these jurisdictions could allow competitors to mimic its brands, products, services and methods of operations, and have a material adverse effect on its business, results of operations and financial condition.
Risk of Failing to Adapt to Changing Technology and to Effectively Scale
The Company’s future success depends on its ability to adapt and enhance its suite of technology and software, such as its platforms, as well as its product offerings to meet customer needs at competitive prices. Such efforts will require adding new functionality and responding to technological advancements or disruptive technologies, which will increase the Company’s research and development costs. The Company’s ability to grow is also subject to the risk of future disruptive technologies. If new and/or disruptive technologies emerge that are able to deliver online betting and gaming and/or entertainment products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely affect the Company’s ability to compete.
In addition, as the customer base and the amount and types of product offerings continue to grow and evolve, the Company needs an increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy customers’ needs. Such infrastructure expansion may be complex, and unanticipated delays in completing these projects or availability of components may lead to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the quality of the Company’s offerings. As such, the Company could fail to continue to effectively scale and grow its technical infrastructure to accommodate increased demands.
Reliance on technical infrastructure and third-party networks
The Company relies on information technology and other systems and platforms to deliver its product offerings to customers. The Company has experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Such disruptions have not had a material impact on the Company; however, future disruptions from unauthorized access to, fraudulent manipulation of, or tampering with the Company’s computer systems and technological infrastructure, or those of third-parties, could result in a wide range of negative outcomes, each of which could materially adversely affect the Company’s business, financial condition, results of operations and prospects.
Furthermore, the delivery of the Company’s offerings and a significant portion of the Company’s revenues is dependent on the continued use and expansion of third-party owned communication networks, including wireless networks, the Internet and mobile operating systems. No assurance can be given as to the continued use and expansion of these networks as a medium of communications for the Company.