UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 20549
U.S.A.
FORM20-F_________________________
FORM 20-F
_________________________
q
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2018
November 30, 2019
OR
q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT v,vOF 1934
For the transition period from
to
OR
q
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission FileNo. Number 0-19884
LIQUID MEDIA GROUP LTD.
(formerly known as LEADING BRANDS, INC.)
[(Exact nameName of Registrant as specifiedSpecified in its charter]Its Charter)
Not Applicable
[Translation of Registrant’s name into English]
British Columbia, Canada
[(Jurisdiction of incorporationIncorporation or organization]Organization)
Unit 101 – 33 West 8th Avenue,
#202, 5626 Larch Street
Vancouver, BC Canada V5Y 1M8V6M 4E1
[(Address of principal executive offices]Principal Executive Offices)
Ralph McRae,
Daniel Cruz, Chief ExecutiveFinancial Officer
Phone Number:604-685-5200
Facsimile:604-685-5249
Unit 101 – 33 West 8th Avenue#202, 5626 Larch Street
Vancouver, British Columbia Canada V5Y 1M8BC V6M 4E1
Telephone: 1.604.602.0001
Email: daniel@liquidmediagroup.co
(Name, telephone,e-mailTelephone, E-mail and/or facsimileFacsimile number and addressAddress of Company contact person)Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Common Shares, without Par Value | YVR | NASDAQ Capital Market |
(Title of | Trading Symbol | Name of |
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
As 5,727,558 common shares (as of February 28, 2018, Leading Brands, Inc. had 2,802,412 Common Shares, without par value, outstanding.2020).
Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☐ ☒No ☒
If this report is an annual or transition report, indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐Yes ☐☒ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☒☐ No ☐
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 2.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☒☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or an emerging growth company. See the definitionsdefinition of “large “accelerated filer” “accelerated filer,” and “emerging“emerging growth company”company” in Rule 12b–212b-2 of the Exchange Act. (Check one):
Large accelerated filer☐
Accelerated filer☐
Non-accelerated filer☒
Emerging Growth Company☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:
If “Other”“Other” has been checked in response to the previous question, indicate by check mark which financial statement item the RegistrantCompany has elected to follow: Item 17 ☐ Item 18 follow.
Item 17☐ | Item 18☐ |
If this is an annual report, indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule12b-2 of the Exchange Act):.☐ Yes ☒ No ☐
Index
PART I
Item 1. – Identity of Directors, Senior Management and Advisers
5
Item 2. – Offer Statistics and Expected Timetable
5
Item 3. – Key Information
5
Item 4. – Information on the Company
21
Item 4A. – Unresolved Staff Comments
27
Item 5. – Operating and Financial Review and Prospects
28
Item 6. – Directors, Senior Management and Employees
41
Item 7. – Major Shareholders and Related Party Transactions
49
Item 8. – Financial Information
51
Item 9. – The Offer and Listing.
52
Item 10. – Additional Information.
52
Item 11. – Quantitative and Qualitative Disclosures About Market Risk.
54
Item 12. – Description of Securities Other than Equity Securities.
55
PART II
Item 13. – Defaults, Dividend Arrearages and Delinquencies.
55
Item 14. – Material Modifications to the Rights of Security Holders and Use of Proceeds.
55
Item 15. – Controls and Procedures.
56
Item 16A. – Audit Committee Financial Expert.
57
Item 16B. – Code of Ethics.
57
Item 16C. – Principal Accountant Fees and Services.
58
Item 16D. – Exemptions from the Listing Standards for Audit Committees.
58
Item 16E. – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
59
Item 16F. – Change in Registrant’s Certifying Accountant
59
Item 16G. – Corporate Governance
59
Item 16H. – Mine Safety Disclosure
60
PART III
Item 17. – Financial Statements.
60
Item 18. – Financial Statements.
60
Item 19. – Exhibits.
109
3
INTRODUCTION
The terms “Leading Brands”, the “Company”, “LMG”, “Liquid”, “we”, “us” and “our” as used in this Annual Report on Form20-F, or “Annual Report,” refer to Leading Brands, Inc.Liquid Media Group Ltd. and its consolidated subsidiaries or predessesor entities (including Leading Brands, Inc.), except where the context requires otherwise.
Unless otherwise specified, all references to “dollars” or “$” in this Annual Report are expressed in Canadian dollars (“CDN”C$”), unless otherwise indicated, and all references to “U.S. dollars,” “US$” or “USD$“US$” are expressed in the currency of the United States of America.
Forward-Looking Statements.
This Annual Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”“Exchange Act”). Statements which are not historical facts are forward-looking statements. The Company, through its management, makes forward-looking statements concerning its expected future operations, performance, results and other developments. The words “may,” “continue,” “plan,” “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict” and similar expressions are also intended to identify forward-looking statements. Forward-looking statements relate to, among other things:
¨
Our expectations regarding market acceptance of our revenue;
¨
Our intention to make strategic acquisitions to grow our business;
¨
Our expectations regarding litigation risks and administrative costs;
¨
Our plan to raise capital through a crowd-funding portal;
¨
The effectiveness of raw materials, including water, sugar, cardboard , closuressteps taken to protect our intellectual property and flavoring;
¨
Our status as a foreign private issuer and our products;
Such forward-looking statements are estimates reflecting the Company’s judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. It is impossible to identify all such factors. Factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those listed under “Item“Item 3.D. Risk Factors,” as well as other possible risks such as shareholder and regulatory approvals of the Company’s planned acquisition of Liquid Media Group Ltd. (“Liquid”) by way of plan of arrangement, general economic conditions, changing trends in the film and gaming media industries, pricing, economic uncertainties (including currency exchange rates), government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other factors which may be identified from time to time in the Company’s public announcements. Events may occur in the future that the Company is unable to accurately predict, or over which it has no control. If one or more of those uncertainties materialize, or if the underlying assumptions prove incorrect, actual outcomes may vary materially from those forward-looking statements included in this Annual Report.
All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
4
SPECIAL NOTE REGARDING LINKS TO EXTERNAL WEBSITES
Links to external, or third-party websites, are provided solely for convenience. We take no responsibility whatsoever for any third-party information contained in such third-party websites, and we specifically disclaim adoption or incorporation by reference of such information into this report.
FOREIGN PRIVATE ISSUER FILINGS
We are considered a “foreign private issuer” pursuant to Rule 405 promulgated under the Securities Act. In our capacity as a foreign private issuer, we are exempt from certain rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our shares. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information.
For as long as we are a “foreign private issuer” we intend to file our annual financial statements on Form 20-F and furnish our quarterly financial statements on Form 6-K to the SEC for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act. However, the information we file or furnish may not be the same as the information that is required in annual and quarterly reports on Form 10-K or Form 10-Q for U.S. domestic issuers. Accordingly, there may be less information publicly available concerning us than there is for a company that files as a domestic issuer.
We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We are required to determine our status as a foreign private issuer on an annual basis at the end of our second fiscal quarter. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by United States residents and any of the following three circumstances applies: (1) the majority of our executive officers or directors are United States citizens or residents; (2) more than 50% of our assets are located in the United States; or (3) our business is administered principally in the United States. If we lose our “foreign private issuer status” we would be required to comply with Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirement for “foreign private issuers”.
PART I
Item 1. – Identity of Directors, Senior Management and Advisers
This item is not applicable for an Annual Report.
Item 2. – Offer Statistics and Expected Timetable
This item is not applicable for an Annual Report.
Item 3. – Key Information
A.
Selected financial data.
The following table sets forth certain selected consolidated financial information with respect to Leading BrandsLMG for the periods indicated. It should be read in conjunction with this Annual Report and the Company’s consolidated financial statements listed in “Item“Item 18 – Financial Statements”Statements” of this Annual Report. The following table is derived from, and is qualified by, the Company’s financial statements and the notes thereto which have been prepared in accordance with generally accepted accounting principles in the United StatesInternational Financial Reporting Standards (“U.S. GAAP”IFRS”).
FISCAL YEAR ENDED Feb. 28, 2018 | FISCAL YEAR ENDED Feb. 28, 2017 | FISCAL YEAR ENDED Feb. 29, 2016 | FISCAL YEAR ENDED Feb. 28, 2015 | FISCAL YEAR ENDED Feb. 28, 2014 | ||||||||||||||||
Net sales / revenue from continuing operations | NIL | NIL | NIL | NIL | NIL | |||||||||||||||
Net income (loss) from continuing operations | ($ | 830,115 | ) | ($ | 713,945 | ) | ($ | 1,192,226 | ) | ($ | 1,009,400 | ) | ($ | 1,132,028 | ) | |||||
Net income (loss) from discontinued operations | ($ | 2,557,034 | ) | ($ | 5,795,744 | ) | $ | (111,058 | ) | $ | 1,344,982 | $ | 2,295,323 | |||||||
Net income (loss) | ($ | 3,387,149 | ) | ($ | 6,509,689 | ) | ($ | 1,303,284 | ) | $ | 335,582 | $ | 1,163,295 | |||||||
Earnings (loss) per share, basic – continuing operations | (0.30 | ) | ($ | 0.25 | ) | ($ | 0.41 | ) | ($ | 0.35 | ) | ($ | 0.39 | ) | ||||||
Earnings (loss) per share, basic – discontinued operations | (0.91 | ) | ($ | 2.05 | ) | $ | (0.04 | ) | $ | 0.46 | $ | 0.78 | ||||||||
Earnings (loss) per share, diluted - continuing operations | (0.30 | ) | ($ | 0.25 | ) | ($ | 0.41 | ) | ($ | 0.32 | ) | ($ | 0.35 | ) | ||||||
Earnings (loss) per share, diluted - discontinued operations | (0.91 | ) | ($ | 2.05 | ) | $ | (0.04 | ) | $ | 0.42 | $ | 0.72 |
Total assets Net assets Share Capital Long-term debt Cash dividends declared per common share Weighted average common shares outstanding 2,802,412 Diluted: 2,820,647 Diluted: 2,880,882 Diluted: 2,922,684 Diluted: Diluted: Exchange Rates $ 1,453,652 $ 5,979,686 $ 13,274,708 $ 14,755,112 $ 15,140,842 $ 1,063,223 $ 5,028,288 $ 11,677,766 $ 13,073,486 $ 12,820,201 $ 31,305,247 $ 31,305,247 $ 31,946,732 $ 32,401,440 $ 32,713,370 NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL
basic and diluted Basic:
2,802,412
Basic:
2,820,647
Basic:
2,880,882
Basic:
3,192,963
Basic:
2,929,722
3,246,223
Exchange |
Exchange Rate – May 1, 2018: 1.2867
Exchange rates for the previous six months: US$1 equivalent to the following in Canadian dollars:
Apr. 1-30, 2018 | Mar. 1-30, 2018 | Feb. 1-28, 2018 | Jan. 1-31, 2018 | Dec. 1-29, 2017 | Nov. 1-30, 2017 | |||||||||||||||||||
High | 1.2908 | 1.3088 | 1.2809 | 1.2535 | 1.2886 | 1.2888 | ||||||||||||||||||
Low | 1.2552 | 1.2830 | 1.2288 | 1.2293 | 1.2545 | 1.2683 |
| February 2020 | January 2020 | December 2019 | November 2019 | October 2019 | September 2019 |
High | 1.3319 | 1.3233 | 1.3302 | 1.3307 | 1.3330 | 1.3343 |
Low | 1.3224 | 1.2970 | 1.2988 | 1.3148 | 1.3056 | 1.3153 |
Average exchange rates for each of the five most recent fiscal years:US$1equivalent to the following in Canadian dollars:
| Year ended November 30, 2019 | Year ended November 30, 2018 | Year ended November 30, 2017 | Year ended November 30, 2016 | Year ended November 30, 2015 |
Average | 1.3290 | 1.2907 | 1.3030 | 1.3276 | 1.2603 |
Mar. 1, 2017 to Feb. 28, 2018 | Mar. 1, 2016 to Feb. 28, 2017 | Mar. 1, 2015 to Feb. 29, 2016 | Mar. 1, 2014 to Feb. 28, 2015 | Mar. 1, 2013 to Feb. 28, 2014 | ||||||||||||||||
Average | 1.2880 | 1.3109 | 1.3058 | 1.1255 | 1.0462 |
B.
Capitalization and indebtedness.
This item is not applicable for an Annual Report.
C.
Reasons for the offer and use of proceeds.
This item is not applicable for an Annual Report.
D.
Risk factors.
Risks Related To Our Business
Our business and operations are subject to numerous risks. The Companyfollowing risks should be considered in conjunction with “Item 5. Operating and Financial Review and Prospects”. These risks may affect our operating results and, individually or in the aggregate, could cause our actual results to differ materially from past and anticipated future results. Additional risks not currently known by us or that we consider immaterial at the present time may also impair our business, financial condition, prospects or results of operations. If any of the following risks occur, our business, financial condition, prospects or results of operations would likely be materially adversely affected. In that case, the trading price of our common shares could decline and you may lose all or part of the money you paid to buy our common shares. The risks set out below are not the only risks and uncertainties we currently face; other risks may arise in the future. The following discussion of risks may contain forward-looking statements as may be required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk Related to Our Business and Our Industry
Our limited operating history and our evolving business make it difficult to evaluate our results of operations and prospects.
Our company was created on August 8, 2018 as the resulting issuer of a business combination by plan of arrangement between Liquid Media Group (Canada) Ltd. (fka Liquid Media Group Ltd.) (“Liquid Canada”) and Leading Brands, Inc. (“LBIX”). We cannot assure you that our revenue will increase, or that we will be able to operate profitably in future periods. Our limited operating history and evolving business make the prediction of future results of operations difficult and, therefore, past results should not be taken as indicative of our future performance. You should consider our business and prospects in light of the risks, uncertainties, expenses and challenges that we will face as an early-stage gaming, TV, film media and entertainment company operating in highly competitive, rapidly evolving, and challenging markets. If we fail to address the risks and challenges that we face, including those described elsewhere in this “Risk Factors” section, our business, financial condition and results of operations could be adversely affected.
We are in the initial phase of executing our business plan and we cannot guarantee that our intended business will be successful.
We are in an early phase of development and are just beginning to implement our business plan. We cannot guarantee that our vision for a vertically-integrated, cloud-based global studio, producing content for all platforms through a network of shared services will be successful, or that we will be able to develop our gaming and media content as we intend to do, acquire additional content for development and franchising, and create the cloud-based network for global content development that form parts of our business plan. We also may not be successful in raising the financing that we are hoping to raise through our planned crowdfunding portal for funding of our projectsin the gaming, film and TV industry segments.
Our business is intensely competitive and “hit” driven. If we do not deliver “hit” products and services, or if consumers prefer our competitors’ products or services over our own, our operating results could suffer.
Competition in our industry is intense and we expect new competitors to continue to emerge throughout the world. Our competitors range from large established companies to emerging start-ups. In our industry, though many new products and services are regularly introduced, only a relatively small number of “hit” titles accounts for a significant portion of total revenue for the industry. We do not yet have a significant number of titles that we develop and the underperformance of a title may have a large adverse impact on our financial results. Also, hit products or services offered by our competitors may take a larger share of consumer spending than we anticipate, which could cause revenue generated from our products and services to fall below expectations.
In addition, both the online and mobile games marketplaces are characterized by frequent product introductions, relatively low barriers to entry, and new and evolving business methods, technologies and platforms for development. We expect competition in these markets to intensify. If our competitors develop and market more successful products or services, offer competitive products or services at lower price points or based on payment models perceived as offering a better value proposition (such as free-to-play or subscription-based models), or if we do not continue to develop consistently high-quality and well-received products and services, our revenue, margins, and profitability will decline.
We have a history of operating losses and negative cash flow and we may never achieve profitability.
We have a history of operating losses and negative cash flows. Indeed, we only began generating revenue in fiscal year 2018. We anticipate that our operating expenses will increase substantially in the foreseeable future as we increase our sales and marketing activities, and continue to develop our technology, products, projects, and services. For example, we will need additional funds to add to our content library and for development costs incurred to develop new games and redevelop our retro games, for production costs incurred in connection with the development of film and tv projects, costs related to our cloud-based network initiative, and for licensing and distribution expenses. These efforts may prove more expensive than we currently anticipate and we may incur significant additional costs and expenses in connection with our business development activities. In addition, our film and gaming content creation operations are relatively capital intensive while revenue-generating opportunities depend on the availability of projects in the market. During periods of low project volumes, fixed costs can result in operating losses. All of these costs and expenses could prevent us from achieving or maintaining profitability in future periods.
We lack adequate financing and may not be able to obtain financing on acceptable terms, or at all, whichwould have a material adverse effect on our business, results of operations, financial condition and prospects.
We have limited capital and we may require funds in excess of our existing cash resources to fund operating deficits, develop new products or services, establish and expand our marketing capabilities, and finance general
8
and administrative activities. We do not currently generate sufficient cash from our businesses to fund our operations. We do not have any bank credit facility or other working capital credit line under which we may borrow funds for working capital or other general corporate purposes. We have plans to implement a crowdfunding portal through which we may raise money from investors to fund our operations in the gaming, film and TV industry segments, but we cannot guarantee that we will be successful in raising the funds we need in that manner. If we do not have, or are not able to obtain, sufficient funds, we may have to delay strategic opportunities, investments, or projects. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of, or eliminate some or all of our creative work. Any of these actions could have a material adverse effect on our business, results of operations or financial condition.
We are subject to product development risks which could result in delays and additional costs, and we must adapt to changes in software technologies.
We depend on our internal development studios and third-party software developers to develop new interactive entertainment software within anticipated release schedules and cost projections. The development cycle for emulated titles generally ranges from 3 months to 12 months and for new titles 6 months to 2 years . Therefore our development costs can be substantial. If we or our third party developers experience unanticipated development delays, financial difficulties or additional costs, we may not be able to release titles according to our schedule and at budgeted costs. There can be no assurance that our products will be sufficiently successful so that we can recoup these costs or make a profit on these products.
In addition, there are substantial risks that there will be no or an insufficient market for the titles developed. In such event, we will likely suffer losses, and to the extent that we are unable to develop any games or film titles which generate a sufficient interest in the market to provide profits, funding, capital or a return. In such event, we may suffer significant losses.
Additionally, in order to stay competitive, our internal development studios must anticipate and adapt to rapid technological changes affecting software development. Any inability to respond to technological advances and implement new technologies could render our products obsolete or less marketable. Further, the failure to pursue the development of new technology, platforms, or business models that obtain meaningful commercial success in a timely manner may negatively affect our business, resulting in increased production costs and more strenuous competition.
Programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games, which would harm our operating results.
Our games may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch, particularly as we launch new games and rapidly release new features to existing games under tight time constraints. We believe that if our players have a negative experience with our games, they may be less inclined to continue, or resume playing our games or recommend our games to other potential players. Undetected programming errors, game defects and data corruption can disrupt our operations, adversely affect the game experience of our players by allowing players to gain unfair advantage, harm our reputation, cause our players to stop playing our games, divert our resources and delay market acceptance of our games, any of which could result in legal liability to us or harm our operating results.
Competition within, and to, the media and entertainment industries is intense, and our competitors may be able to draw upon a greater depth and breadth of resources than those available to us.
We operate in highly competitive markets characterized by pressure to innovate, expand feature sets and functionality, accelerate new product releases and reduce prices. Within the video game segment of the entertainment industry, we compete with other publishers of entertainment software developed for use on the PC, video game consoles and handheld, mobile and tablet devices or social networking sites. Our competitors
9
include very large corporations with significantly greater financial, marketing and product development resources than we have. A relatively small number of titles account for a significant portion of net revenues, and an even greater portion of net profit, in the game entertainment industry, and the availability of significant financial resources is a “shell company” as definedmajor competitive factor in Rule12b-2the production of high-quality products and in the Exchange Act.
Following the salemarketing of products that are ultimately well-received. Our larger competitorsmay be able to deliver greater innovation, respond more quickly to new or emerging technologies and disposition of the Company’s water brand and remaining beverage assets by virtue of the disposition of the shares of its subsidiaries, including Leading Brands of Canada, Inc. (“LBCI”) on September 15, 2017, the Company became a shell company. As a shell company, the Company’s common shares are not eligible to be sold pursuant to Rule 144 promulgated pursuantchanges in market demand, devote more resources to the Securities Act. In addition,development, marketing and sale of their products, successfully expand into emerging and other international markets, or price their products more aggressively than we can. If our competitors are more successful than we are in developing products, or in attracting and retaining customers, our financial condition and operating results could be adversely affected.
Our growth relies on market acceptance.
While we believe that there will be significant customer demand for our game, tv, and film offerings and services, there is no assurance that there will be broad market acceptance of our offerings. There also may not be broad market acceptance of our offerings if our competitors offer products or services that are preferred by prospective customers. Customers consider many factors when evaluating our products relative to those of our competitors, including innovation, ease of use, price, feature sets, functionality, reliability, performance, reputation, and training and support, and we may not compare favorably against our competitors in all respects. There can be no assurance that our efforts will be successful in the near future, or at all, or that our competitors will not take significant market share in similar efforts. If we fail to develop new products and to manage new product introductions and transitions properly, or if our offerings do not receive market acceptance, our financial condition and operating results could be harmed.
We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
We receive, store and process personal information and other player data, and we enable our players to share their personal information with each other and with third parties, including on the internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other player data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that Nasdaq (asthese obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to players or other third parties, or our privacy related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our players to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as players, vendors or developers, violate applicable laws or our policies, such violations may also put our players' information at risk and could in turn have an adverse effect on our business.
In the area of information security and data protection, many states have passed laws requiring notification to players when there is a security breach for personal data, such as the 2002 amendment to California'sInformation Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined below)and difficult to practically implement. The costs of compliance with these laws may increase in
10
the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.
In operating ourmedia and entertainment business, we may fail to launch new products according to our timetable, and our new products may not determinebe commercially successful.
In order for our media and entertainment business strategy to succeed over time, we will need to license, acquire, or develop new digital entertainment products that the Company has regained compliancecan generate additional revenue and diversify our revenue sources. A number of factors, including technical difficulties, government approvals and licenses of intellectual property right required for launching new products, lack of sufficient development personnel and other resources, and adverse developments in our relationship with the Nasdaq ruleslicensors of our new licensed products could result in delay in launching our new products. Therefore, we cannot assure you that we will be able to meet our timetable for development of our business.
There are many factors that may adversely affect the popularity of our new products. For example, we may fail to anticipate and adapt to future technical trends and new business models, fail to satisfy consumer preferences and requirements, fail to effectively plan and organize marketing and promotion activities, fail to effectively detect and prevent programming errors or defects in the products, and fail to operate our new products at acceptable costs. We cannot assure you that our new products will gain market acceptance and become commercially successful. If we are not able to license, develop or acquire additional digital entertainment products that are commercially successful, our future revenues and profitability may decline. If our games and other entertainment offerings do not meet consumer expectations, whether because they fail to function as advertised or otherwise, our sales may suffer. If our games and services do not function as consumers expect, it may negatively impact our business.
Our industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our new resources among, emerging technologies and business models, our business may be negatively impacted.
The entertainment industry in general, and the gaming, tv and film segments thereof in particular, are rapidly evolving, primarily as a result of free content, minimal entry costs for creation and distribution, and expanded use of mobile devices. We must continually anticipate and adapt our products to emerging technologies, delivery platforms and business models in order to stay competitive and try to predict and prepare for rapid changes in consumer demand that could materially alter public preferences for different forms of entertainment and leisure activities. The rapid growth of technology and shifting consumer tastes prevent us from being able to accurately predict the overall effect that technological growth may have on our potential revenue and profitability. When we choose to incorporate a new technology into a product or to develop a product for a new platform, operating system or media format, we often are required to make a substantial investment prior to the introduction of the product. If we invest in the development of products incorporating a new technology or for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than we anticipated and may not cover our development costs. Further, our competitors may adapt to an emerging technology or business model more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers, or both. If, on the other hand, we elect not to pursue the development of products incorporating a new technology or for new platforms, or otherwise elect not to pursue a new business model, that achieves significant commercial success, it may have adverse consequences. It may take significant time and resources to shift product development resources to that technology, platform or business model, as the case may be, and may be more difficult to compete against existing products incorporating that technology or for that platform or against companies using that business model. Any failure to successfully adapt to, and appropriately allocate resources among, emerging technologies and to keep pace with rapid technological change could negatively impact our business and prevent us from achieving profitability or sustaining a meaningful market position.
11
Our business is subject to our ability to develop commercially successful products for the current video game platforms.
We are a provider of video game products primarily for the casual-game consumer and have published video games for interactive entertainment hardware platforms, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. The success of our business is subject to the continued popularity of these platforms and our ability to develop commercially successful products for these platforms.
Companies and governmental agencies may restrict access to our website, other websites that carry our products, mobile applications or the internet, generally, which could lead to losses or slower growth due to the Company’s shell company status. See “The Company’s Planeffects such restrictions may have on our player base.
In general, players need to regain complianceaccess the internet and platforms such as Facebook, Apple, Google, Liquid’s website, the websites of our partners or entities controlled by us or mobile applications in order to play the games we offer or will offer. Companies and governmental entities may block or restrict access to these sites or applications or the internet generally for a number of reasons, for example, confidentiality, security, a determination that greater regulatory oversight is required, or they may adopt policies that restrict the access of employees to access the sites and applications. If companies or governmental entities block, limit or otherwise adopt restrictive policies or regulations which materially interfere with the Nasdaq’s minimum $2.5 million stockholders’ equityability of players to play our games, our business and operations will likely be negatively affected and could lead to losses or slower growth than anticipated.
The video game hardware manufacturers set the royalty rates and other requirementsfees that we must pay to provide games for continued listingtheir platforms, and therefore have significant influence on our costs. If one or more of these manufacturers change their fee structure, our profitability will be materially impacted.
In order to provide products and service for a video game system such as Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One, we must take a license from Nintendo, Sony and Microsoft, respectively, which give these companies the opportunity to set the fee structure that we must pay in order to provide games for that platform. Similarly, these companies have retained the flexibility to change their fee structures, or adopt different fee structures for online purchases of games, online gameplay and other new features for their consoles. The control that hardware manufacturers have over the fee structures for their platforms and online access could adversely impact our costs, profitability and margins. Because providing products for video game systems is the largest portion of our business, any increase in fee structures would significantly harm our ability to generate profits.
Acquisitions we pursue in our industry and related industries could result in operating difficulties, dilution to our shareholders and other consequences harmful to our business.
As part of our growth strategy, we may selectively pursue strategic acquisitions in our industry and related industries. We may not be able to consummate such acquisitions, which could adversely impact our growth. If we do consummate acquisitions, integrating an acquired company, business or technology may result in unforeseen operating difficulties and expenditures, including:
·
increased expenses due to transaction and integration costs;
·
potential liabilities of the acquired businesses;
·
potential adverse tax and accounting effects of the acquisitions;
·
diversion of capital and other resources from our existing businesses;
·
diversion of our management’s attention during the acquisition process and any transition periods;
·
loss of key employees of the acquired businesses following the acquisition; and
·
inaccurate budgets and projected financial statements due to inaccurate valuation assessments of the
12
acquired businesses.
Our evaluations of potential acquisitions may not accurately assess the value or prospects of acquisition candidates and the anticipated benefits from our future acquisitions may not materialize. In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.
Changes in tax laws or tax rulings could materially affect our effective tax rates, financial position and results of operations.
The tax regimes to which we are subject or under which we operate is unsettled and may be subject to significant change. Changes in tax laws or tax rulings, or changes in interpretations of existing laws, could cause us to be subject to additional income based taxes, non-income taxes (such as payroll, sales, use, value-added, net worth, property and goods and services taxes), or tariffs related to the import or export of our offerings, could materially affect our financial position and results of operations. Any significant changes to our effective tax rate or the imposition of significant tariffs on our products may result in a material adverse consequence on our business, financial condition, results of operations, and cash flows.
Risks Related to the Film Industry
Our results of operations may fluctuate significantly as to its film operations depending upon the Company successfully closing its planned acquisitiontiming of Liquid” below.television shows and films delivered or made available to various media
Results of operations with respect to our production and distribution of film and television operations for any periods are significantly dependent upon the number and timing of television programs and films delivered or made available to various media. Consequently, our results of operations may fluctuate materially from period to period and the results of any one period are not necessarily indicative of results for future periods. Cash flows may also fluctuate and are not necessarily closely correlated with revenue recognition. Although traditions are changing, due in part to increased competition from new channels, industry practice is that broadcasters make the most of their annual programming commitments between February and June, such that new programs can be ready for telecast at the start of the broadcast season in September, or a mid-season replacements in January. Because of this annual production cycle, our film revenues may not be earned on an even basis throughout the year. Results from operations may fluctuate materially from quarter to quarter and the results for any one quarter are not necessarily indicative or results for future quarters.
Our entertainment programming may not be accepted by the public which would result in a portion of our costs not being recouped or anticipated profits not neing realized.
The entertainment industry involves a substantial degree of risk. Acceptance of entertainment programming represents a response not only to the production's artistic components, but also the quality and acceptance of other competing programs released into the marketplace at or near the same time. The availability of alternative forms of entertainment and leisure time activities, general economic conditions, public tastes generally and other intangible factors, all of which could change rapidly or without notice und cannot be predicted with certainty.
There is a risk that some or all or of our programming will not be purchased or accepted by the public generally, resulting in a portion of costs not being recouped or anticipated profits not being realized. There can be no certaintyassurance that revenue from existing or future programming will replace loss of revenue associated with the Transactioncancellation or unsuccessful commercialization of any particular production.
13
Our film and television productions may not receive favorable reviews or ratings or perform well in ancillary markets, broadcasters may not license the rights to our film and television programs and distributors may not distribute or promote our films and television programs, any of which could have a material adverse effect on our results of operations or financial condition.
Because the performance of television and film programs in ancillary markets, such as home video and pay and free television is often directly related to reviews from critics and/or television ratings, poor reviews from critics or poor television ratings may negatively affect future revenue. Our results of operations will depend, in part on the experience and judgment of our management to select and develop new investment and production opportunities. We cannot make assurances that our films and television programs will obtain favorable reviews or ratings or that its films and television programs will perform well in ancillary markets or that broadcasters will license the rights to broadcast any of our film and television programs in development or renew licenses to broadcast film and television programs in our library. The failure to achieve any or the foregoing could have a material adverse effect on our business, results or operations or financial condition.
Licensed distributors’ decisions regarding the timing or release of and promotional support for our films, television programs and related products are important in determining the success of these films, programs and related products. We do not control the timing and manner in which our licensed distributors distribute our films, television programs or related products. Any decision by those distributors not to distribute or promote one of our films, television programs or related products or to promote competitors’ films, programs or related products to a greater extent than they promote us could have a material adverse effort on our business, operations or financial condition.
We are dependent upon certain key personnel.
We are dependent upon the services of key executives, including our Chair, Joshua Jackson, and our CFO, Daniel Cruz. The loss of our executive officers or our other key personnel, particularly with little or no notice, could cause delays on projects and could have an adverse impact on our client and industry relationships, our business, operating results or financial condition.
Due to the relatively small size of our company, the loss of key persons or our inability to attract and retain additional highly-skilled employees may adversely affect our business and future operations. The loss of one or more key employees or contractors, if not replaced, could adversely affect Liquid’s project exploration and development programs, consolidated operations and financial condition.
Our success depends in part on our ability to hire and retain competent and skilled management and technical, sales and other personnel.
Our success depends to a significant extent on our ability to identify, hire, and retain qualified creative, technical and managerial personnel in a competitive job market. We expect competition for personnel with the specialized creative and technical skills needed to create our products and provide our services will continue to intensify in future. Our competitors may be able to offer a work environment with higher compensation or more opportunities to work with cutting-edge technology than we can. If we are unable to retain our key personnel or appropriately match skill sets with our needs, we would be required to expend significant time and financial resources to identify and hire new qualified personnel and to transfer significant internal historical knowledge, which might significantly delay or prevent the achievement of our business objectives.
We may be involved in legal proceedings that may result in adverse outcomes.
From time to time, we may be involved in claims, suits, government investigations, audits and proceedings arising from the ordinary course of our business. Such claims, suits, government investigations, audits and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the
14
outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources and other factors.
Declines in consumer spending and other adverse changes in the economy could have a material adverse effect on our business, financial condition and operating results.
Most of our products and services involve discretionary spending on the part of consumers. We believe that consumer spending is influenced by general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to general economic conditions and economic cycles as consumers are generally more willing to make discretionary purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. Adverse economic conditions such as a prolonged general economic downturn, including periods of increased inflation, unemployment levels, tax rates, interest rates, energy prices or declining consumer confidence could also reduce consumer spending. Reduced consumer spending may result in reduced demand for our products and may also require increased selling and promotional expenses, which may have an adverse effect on our business, financial condition and operating results. In addition, uncertainty and adverse changes in the economy could also increase costs associated with developing and publishing our products, increase the cost and availability of sources of financing, and increase our exposure to material losses from bad debts, any of which could have a material adverse effect on our business, financial condition and operating results. If economic conditions worsen, our business, financial condition and operating results could be adversely affected.
Our business is subject to a variety of other U.S. and foreign laws, many of which are unsettled and still developing, and which could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and abroad, including laws regarding consumer protection, intellectual property, export and national security, that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States. For example, laws relating to the liability of providers of on line services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. It is also likely that as our business grows and evolves and our games are played in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. In addition, certain of our games may become subject to gambling-related rules and regulations and expose us to civil and criminal penalties if we do not comply.
It is difficult to predict how existing laws will be completed.applied to our business and the new laws to which we may become subject. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly banned, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to modify our games, which would harm our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.
It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States and elsewhere that could restrict the on line and mobile industries, including player privacy, advertising, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt calls for more stringent consumer protection laws that may
15
impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase, and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the regulation of currency and banking institutions may be interpreted to cover virtual currency or goods. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding these activities may lessen the growth of social game services and impair our business.
Our management team has limited experience managing a public company.
Members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws, rules and regulations that govern public companies. These obligations will require significant attention from our management and could divert their attention away from the day-to-day management of our business. In the event that our management team are not successful or efficient as managers of a public company, this could have a material adverse effect on our business, results of operations, or financial condition.
We may not be able to manage our potential growth.
For us to succeed, our business needs to experience significant expansion. There can be no assurance that it will achieve this expansion. This expansion, if accomplished, may place a significant strain on our management, operational and financial resources. To manage any material growth, we will be required to implement operational and financial systems, procedures and controls. We will also be required to expand our finance, administrative and operations staff. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations at any increased level. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
Our business will suffer if we are unable to successfully integrate acquired companies into our business or otherwise manage the growth associated with multiple acquisitions.
We have acquired businesses, personnel and technologies in the past and we intend to continue to pursue acquisitions that are complementary to our existing business and expand our employee base and the breadth of our offerings. Our ability to grow through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions. Since we expect the social game industry to consolidate in the future, we may face significant competition in executing our growth strategy. Future acquisitions or investments could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could adversely affect our financial condition and results of operations. The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits. Integration of a new company’s operations, assets and personnel into ours will require significant attention from our management. The diversion of our management's attention away from our business and any difficulties encountered in the integration process could harm our ability to manage our business. Future acquisitions will also expose us to potential risks, including risks associated with any acquired liabilities, the integration of new operations, technologies and personnel, unforeseen or hidden liabilities and unanticipated, information security vulnerabilities, the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, our relationships with employees, players, and other suppliers as a result of integration of new businesses.
We use a limited number of suppliers.
We rely on a limited number of suppliers for hardware, software, and film and gaming production equipment. While other sources of supply do exist for this equipment, an unexpected disruption in supply or an increase in pricing could have a negative impact on our earnings.
Risks Related to Intellectual Property
We depend on protection afforded by trademarks and copyrights to protect our intellectual property.
We hold a number of trademarks and copyrights relating to certain significant products. We rely on trademark laws and contractual provisions to protect these trademarks and copyrights, and there can be no assurance that third parties will not infringe or misappropriate our trademarks and copyrights. Existing trade secret, copyright and trademark laws offer only limited protection and do not account for common law claims. Furthermore, the monitoring and enforcement against the unauthorized use of our intellectual property rights could entail significant expenses and could prove difficult or impossible. As previously announcedwell, the laws of other countries in which we may choose to market our products may afford little or no effective protection of our intellectual property. If we lose some or all of our intellectual property rights, our business may be materially adversely affected.
Intellectual property claims may increase our costs or require us to cease selling affected products, which could adversely affect our financial condition and results of operations.
Development of original content, including publication and distribution, sometimes results in claims of intellectual property infringement. Although we make efforts to ensure our products do not violate the intellectual property rights of others, it is possible that third parties may still allege infringement. These claims and any litigation resulting from these claims may be time consuming and costly to defend, divert management attention, and result in damage awards payable by us. They could also prevent us from selling the affected product; or require us to redesign the affected product to avoid infringement or obtain a license for future sales of the affected product or prevent us from utilizing important technologies, ideas or formats.
Security breaches involving the source code for our products or other sensitive and proprietary information could adversely affect our business.
We securely store the source code for our interactive entertainment software products as it is created. A breach, whether physical, electronic or otherwise, of the systems on September which such source code and other sensitive data are stored could lead to damage or piracy of our software. In addition, certain parties with whom we do business are given access to our sensitive and proprietary information in order to provide services and support our team. These third parties may misappropriate our information and engage in unauthorized use of it. If we are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures which could materially and adversely affect our business, financial condition and operating results. Any theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive position, reputation, brand, and future sales of our products. Our business could be subject to significant disruption, and we could suffer monetary and other losses and reputational harm, in the event of such incidents and claims.
Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business and operating results.
We regard the protection of our trade secrets, copyrights, trademarks, trade dress, domain names and other product rights as critical to our success. We strive to protect our intellectual property rights by relying on
17
federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
We pursue the registration of our domain names, trademarks, and service marks in the United States and in certain locations outside the United States. We are seeking to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced.
Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.
The proliferation of "cheating" programs and scam offers that seeks to exploit our games anti players affects the game-playing experience and may lead players to stop playing our games.
Unrelated third parties have developed, and may continue to develop, "cheating" programs that enable players to exploit our games, play them in an automated way or obtain unfair advantages over other players who do play fairly. These programs harm the experience of players who play fairly and may disrupt the virtual economy of our games. In addition, unrelated third parties attempt to scam our players with fake offers for virtual goods. We devote significant resources to discover and disable these programs and activities, and if we are unable to do so quickly our operations may be disrupted, our reputation damaged and players may stop playing our games. This may lead to lost revenue from paying players, increased cost of developing technological measures to combat these programs and activities, legal claims relating to the diminution in value of our virtual currency and goods, and increased customer service costs needed to respond to dissatisfied players.
Risk Related to Our Stock
We may not be able to maintain our listing on the NASDAQ Capital Market.
Our common shares currently trades on the NASDAQ Capital Market. Following our business combination in August 2018, we were required to establish compliance with the NASDAQ initial listing requirements, which we did in October 2018. NASDAQ has continued listing requirements that we must maintain to avoid delisting. The standards include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of $35 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three fiscal years. Our results of operations and our fluctuating shares price directly impact our ability to satisfy these listing standards. If we are unable to maintain these listing standards, we may be subject to delisting.
A delisting from NASDAQ would result in our common shares being eligible for quotation on the over-the-counter market which is generally considered to be a less efficient system than listing on markets such as NASDAQ or other national exchanges because of lower trading volumes, transaction delays, and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common shares. Additionally, trading of our common shares on the OTCBB may make us less desirable to institutional investors and may, therefore, limit our future equity funding options and
18 2017,
could negatively affect the liquidity of our shares.
If we make a significant acquisition that requires the issuance of our common shares, we may be required to reapply for NASDAQ listing.
Reapplying for NASDAQ listing may require us to satisfy the more stringent original listing standards of the NASDAQ Capital Market, which has substantially higher standards than the continuing listing standards. If any such application is not approved, our shares of common shares could be delisted from the NASDAQ Capital Market.
Additional capital raising efforts in future periods may be dilutive to our then current shareholders or result in increased interest expense in future periods.
In order to finance our operations, we have raised funds through the issuance of common shares and securities convertible into common shares and may do so again in future. We cannot predict the size of future issuances of common shares or the size or terms of future issuances of debt instruments or other securities convertible into common shares, or the effect, if any, that future issuances and sales of our securities will have on the market price of our common shares. Sales or issuances of substantial numbers of common shares, or the perception that such sales could occur, may adversely affect the market price of our common shares. With any additional sale or issuance of common shares, or securities convertible into common shares, our investors will suffer dilution to their voting power.
We could lose our “foreign private issuer” status in the future, which could result in significant additional costs and expenses to us.
In order to maintain our current status as a “foreign private issuer” (as defined in Rule 405 under the United StatesSecurities Act of 1933), where more than 50% of our outstanding voting securities are directly or indirectly owned by residents of the United States, we must not have any of the following: (i) a majority of our executive officers or directors being U.S. citizens or residents, (ii) more than 50% of our assets being located in the United States, or (iii) our business being principally administered in the United States. If we were to lose our foreign private issuer status:
·
we would no longer be exempt from certain of the provisions of U.S. securities laws, such as Regulation FD and the Section 16 short swing profit rules;
·
we would be required to commence reporting on forms required of U.S. companies, such as Forms l0-K, 10-Q and 8-K, rather than the forms currently available to us, such as Forms 20-F and 6-K;
·
we would be subject to additional restrictions on offers and sales of securities outside the United States, including in Canada;
·
we might lose the ability to rely upon exemptions from the NASDAQ corporate governance requirements that are available to foreign private issuers; and
·
if we engage in capital raising activities after losing our foreign private issuer status, there is a higher likelihood that investors may require the Company entered into a definitive arrangement agreement dated September 17, 2017 (the “to file resale registration statements with the Securities and Exchange Commission (“Arrangement AgreementSEC”) as a condition to any such financing.
If we are characterized as a passive foreign investment company for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), our U.S. shareholders may suffer adverse tax consequences.
If 75% or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign, in which we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income, then we will be a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes. Alternatively, we will be considered to be a PFIC if at least 50% of our assets in a taxable
19
year, averaged over the year and ordinarily determined based on fair market value and including our pro-rata share of the assets of any company in which we are considered to own, directly or indirectly, 25% or more of the shares by value, are held for the production of, or produce, passive income. Once treated as a PFIC, for any taxable year, a foreign corporation will generally continue to be treated as a PFIC for all subsequent taxable years for any shareholder who owned shares of the foreign corporation when it was treated as a PFIC. If we were to be a PFIC, and a U.S. holder does not make an election to treat us as a “qualified electing fund,” or QEF, or a “mark-to-market” election, “excess distributions” to a U.S. holder, and any gain recognized by a U.S. holder on a disposition of our ordinary shares, would be taxed in an unfavorable way. Among other consequences, our dividends, to the extent that they constituted excess distributions, would be taxed at the regular rates applicable to ordinary income, rather than the 20% maximum rate applicable to certain dividends received by an individual from a qualified foreign corporation, and certain “interest” charges may apply. In addition, gains on the sale of our ordinary shares would be treated in the same way as excess distributions.
The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is unclear whether we would be permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income in the calculation of gross income. Although we do not expect that we will be a PFIC in the future, in light of the periodic asset and income tests applicable in making this determination, no assurance can be given that we will not become a PFIC. If we do become a PFIC in the future, U.S. holders who hold ordinary shares during any period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to exceptions for U.S. holders who made a timely QEF or mark-to-market election, or certain other elections. We do not currently intend to prepare or provide the information that would enable our shareholders to make a QEF election.
We have never paid cash dividends on our common shares, and we do not anticipate paying cash dividends in the foreseeable future.
We have never declared or paid any cash dividends on our common shares and do not intend to pay any cash dividends in the foreseeable future. We currently intend to retain any future earnings to fund the growth of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our common shares will be the sole source of gain for the foreseeable future.
Sales of a substantial number of our common shares into the public market could result in significant downward pressure on our share price.
Our common shares are traded on the NASDAQ under the symbol “YVR.” As of November 30, 2019, there were 5,345,660 common shares issued and outstanding. The concurrent sale of a substantial number of our common shares in the public market could cause a reduction in the market price of our common shares.
We are incorporated in British Columbia, Canada, and all but one of our directors and officers live in Canada, and all of the Company’s assets, with the exception of Majesco, are in Canada; therefore, investors may have difficulty initiating legal claims and enforcing judgments against us and our directors and officers.
We are a company incorporated under the laws of British Columbia, all but one of our directors and officers are residents of Canada and all our assets and operations, with the exception of our 51% held subsidiary Majesco Entertainment Company ("Majesco”), are located outside of the United States. It may not be possible for shareholders to enforce in Canada judgments against the Company obtained in the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws.
20
While reciprocal enforcement of judgment legislation exists between Canada and the United States, we and our insiders may have defenses available to avoid in Canada the effect of U.S. judgments under Canadian law, making enforcement difficult or impossible. There is uncertainty as to whether Canadian courts would enforce (a) judgments of U.S. courts obtained against us or our insiders predicated upon the civil liability provisions of the U.S. federal and state securities laws or (b) in original actions brought in Canada, liabilities against us or our insiders predicated upon the U.S. federal and state securities laws. Therefore, our shareholders in the United States may have to avail themselves of remedies under Canadian corporate and securities laws for any perceived oppression, breach of fiduciary duty and like legal complaints. Canadian law may not provide for remedies equivalent to those available under U.S. law.
Item 4. – Information on the Company
A.
History and development of the Company.
1.
The legal name of the Company is “Liquid Media Group Ltd.”
2.
The Company was incorporated under theCompany Act(British Columbia) on February 4, 1986 under the name “2060 Investments Ltd.” On May 21, 1986, the Company changed its name to “Camfrey Resources Ltd.” On March 16, 1993, the Company changed its name to “Brio Industries Inc.,” and on October 25, 1999, the Company changed its name to Leading Brands, Inc. On August 10, 2018, the Company changed its name to “Liquid Media Group Ltd.”
On August 9, 2018, the Company consummated a business combination with Liquid to acquire LiquidCanada by way of a plan of arrangement pursuant tounder theBusiness Corporations Act (British Columbia) (the “"TransactionArrangement"). Pursuant to the Arrangement, Liquid Canada was acquired by and became a wholly-owned subsidiary of the Company. As part of the Arrangement, on August 10, 2018, the Company changed its name to Liquid Media Group Ltd. and Liquid Canada changed its name to Liquid Media Group (Canada) Ltd. At the time of completion of the Arrangement, the Company had 1,848,980 common shares issued and outstanding which included 1,288,497 common shares issued to former Liquid Canada shareholders, representing 69.69% of the Company’s issued and outstanding shares. Initially, the common shares of the Company issued in connection with the Arrangement were listed on NASDAQ under the ticker symbol “LBIX”. Effective August 10, 2018, the trading symbol of the Company was changed to “YVR”.
3.
The Company is a corporation incorporated under the laws of the province of British Columbia, Canada, and is governed by theBusiness Corporations Act (British Columbia). The head office of the Company is located at #202, 5626 Larch Street, Vancouver, BC, V6M 4E1;Tel: 604-602-0001
4.
During the Company’s fiscal year ended November 30, 2019, the Company realized several material changes to both its organizational structure as well as the nature of its business.
On January 22, 2019, the Company changed its auditor from Charlton & Company to Davidson & Company LLP.
In February 2019, the Company closed its private placement offering of unsecured convertible debentures raising US$2,678,000. Each debenture will mature two years from closing, will bear interest at 2% per annum, and will be convertible into units at a price of US$1.50 per unit. Each unit will consist of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 for a period of two years from the closing date of the offering. At the time of the closing of the Debenture offering, the Company also converted US$255,000 of accounts payable to non-related parties into 113,334 common shares at a price of US$2.62.
21
In February 2019, the Company granted 461,500 stock options to certain officers, directors, and consultants of the Company with an exercise price of US$2.55 per share and a term of five years.
In February 2019, the Company issued 113,334 common shares valued at $391,013 to settle debt of $335,792.
In April 2019, the Company issued 46,539 common shares valued at $243,162 to settle debt of $199,896 and issued 17,222 common shares valued at $73,980 to various consultants of the Company for consulting and public relations services provided to the Company.
In April 2019, the Company entered into an Assignment and Assumption Agreement whereby the vendor assigned all of its rights and obligations under a Master Services Agreement with A&E Television Networks, LLC. (“A&E”) and is seekingit’s Statements of Work forAncient Aliens: The Game® with A&E to list the post-acquisition entityCompany.
In May 2019, the Company announced that it was expanding the scope of its relationship with A&E, becoming the official operator of the free-to-play, card collecting strategy gameKnightfall™: Rivals, available on The Nasdaq Capital Market (the “iTunes and Google Play.
In May 2019, the Company entered into a Collaboration Agreement with YDX Innovation Corp. (“NasdaqYDX”). In accordance with the applicable Canadian securities laws, whereby the Company plans to hold a special meetingleverage YDX technology to bring classic and future games to life in YDX’s Arkave Virtual Reality (VR) Arenas. The companies also plan to collaborate on new IP, content, products, and technology. In November 2019, the Company announce that it had selected ‘Romans from Mars’ as the first title from its library of shareholdersgames for adaptation into an immersive virtual reality (VR) experience through its partnership with YDX.
In May 2019, the Company appointed Nancy Basi to consider resolutions to approve the issuanceits Board of Directors. Ms. Basi is Executive Director of the Media & Entertainment Centre for the Vancouver Economic Commission and Vice President of the VR/AR Association’s Vancouver Chapter.
In June 2019, the Company showcasedAncient Aliens: The Game® live at AlienCon in Los Angeles.
In June 2019, the Company announced the selection of Miss Kwirk as the first gaming intellectual property for development within its Studio-as-a-Service offering. Miss Kwirk is the first title in the Company’s retro reboot initiative, a five title series designed to expand the franchise potential of popular retro titles owned by the Company.
In October 2019, the Company announced the repricing of a total of 1,142,598 share purchase warrants issued on or prior to October 15, 2018 to US$1.20 per share.
In November 2019, the Company announced that it was launching an initiative in partnership with the Whistler Film Festival (“WFF”). To mark the countdown to WFF’s 20th anniversary in 2020, Liquid confirmed support of WFF’s new 20x2020 campaign for 2019 and 2020 that will directly support vetted Canadian creators with IP in development to participate in WFF’s slate of talent development programs, which serve to advance projects from script to screen and connect storytellers and dealmakers across borders and on all platforms.
In November 2019, the Company restructured its debt with RDL Realisation, PLC (“RDL”) to extend the maturity date of the loan to November 30, 2020. Additionally, the Company agreed to make quarterly payments of $250,000 beginning on March 31, 2020 and has pledged 215,000 common shares formingas security against the considerationloan. RDL also released the previously held security interest over the Company’s shares of Waterproof Studios Inc.
22
During the year ended November 30, 2019, various lenders converted $1,795,455 (US$1,133,761) worth of net convertible debentures into 1,000,167 units of the Company, with each unit consisting of one common share and one share purchase warrant to be paid to Liquid shareholders pursuantpurchase one additional common share at an exercise price of US$1.75 per share on or before February 26, 2021.
Subsequent to the Transaction, among other things. A special meetingyear ended November 30, 2019:
·
The Company announced in December 2019, the upcoming launch of Company shareholders is expected to be held concurrently withIridion 3D and its sequel, Iridion II, December 12, 2019 on Steam for PC through its subsidiary Majesco.
·
In January 2020, a special meeting of Liquid shareholders, which will be called by Liquid to consider the Transaction. Closingconsultant of the Transaction is subject to Liquid receiving approval from its shareholders for the Transaction. The Transaction will also require the approval of Company shareholders andfiled a lawsuit in the Supreme Court of British Columbia (the “Court”), as well as certain regulatory approvals. Ifagainst the requisite approvalsCompany for approximately $400,000 for unpaid consulting fees, US$500,000 for the unpaid cash consideration for the purchase of 51% interest in Majesco, and a payment for the difference between US$500,000 and the value of the Liquid shareholders,Company’s shares issued on the purchase of the 51% interest in Majesco. The Company has accrued $1,064,450 in the Annual Financial Statements. Management is currently seeking legal advice on this lawsuit.
·
The Company held its annual shareholder meeting on February 4, 2020, at which the Class III directors were elected and Davidson & Company LLP were appointed as the auditors for the ensuing year. Accordingly, the Company’s violation of the NASDAQ listing require regarding the holding of an annual shareholder meeting was remedied.
·
In January 2020, the Company shareholders,issued 57,125 common shares to settle debt of $193,582 and the Court are not obtained and/or the regulatory approvals and other conditions of the Transaction are not satisfied, the Company may not be able11,674 common shares for $33,058 in services included in commitment to close the Transaction which may result in the Company being unable to maintain its public listing on the Nasdaq.issue shares at November 30, 2019.
Completion of the Transaction is subject to certain conditions that may be outside the control of both the Company and Liquid, including, without limitation, the requisite approvals
·
In February 2020, a consultant of the Company shareholders andfiled a lawsuit in the Liquid Shareholders andSupreme Court of British Columbia against the receiptCompany in relation to the issuance of the final order from the Court. There can be no assurance that these conditions will be satisfied or that the Transaction will be completed as currently contemplated or at all.
There is also no certainty, nor can either party provide any assurance, that the Amended and Restated Arrangement Agreement will not be terminated by either party before completion of the Transaction.
If the Transaction is not completed, the market pricea share certificate for 59,706 common shares of the Company, shares32,149 of which the consultant states is owing to him and the Liquid shares may declinegeneral and their respective businesses may suffer. In addition, the Company and Liquid will each remain liable for significant consulting, accounting and legal costs relatingspecial damages in relation to the Transaction and will not realize anticipated synergies, growth opportunities and other benefits ofshares. Management is currently seeking legal advice on this lawsuit. No provision has been included in the Transaction. Liquid and the Company may, if the Transaction is not consummated, be required to raise significant additional capital through the capital markets and/or incur significant borrowings to meet capital requirements. If the Transaction is delayed, the achievement of synergies and the realization of growth opportunities could be delayed and may not be available to the same extent.
The Company’s plan to regain compliance with the Nasdaq’s minimum $2.5 million stockholders’ equity and other requirements for continued listing is contingent upon the Company successfully closing its planned acquisition of Liquid.
On January 23, 2018, the Company received notice from the Nasdaq Listing Qualifications Staff (“Nasdaq Staff”) indicating that the Company no longer complied with Listing Rule 5550(b) (the “Rule”), based in part upon the Company’snon-compliance with the minimum $2.5 million stockholders’ equity requirement for continued listing on the Nasdaqfinancial statements as of November 30, 2019.
·
In February 2020, the Company signed an asset purchase agreement with a vendor to acquire a portfolio of assets including certain streaming platforms for US$3,325,000.
·
Subsequent to November 30, 2019, the Company issued 98,004 common shares for total proceeds of $204,891 (US$154,181) in connection with: (1) the exercise of 66,500 share purchase warrants at US$1.75 per warrant for proceeds of $154,651 (US$116,375), of which $104,651 (US$78,750) wasa included in the commitment to issue shares as at November 30, 2019; and (2) 31,504 share purchase warrants at US$1.20 per warrant for proceeds of $50,240 (US$37,806).
5.
The Company expended $Nil on the purchase of property, plant and equipment in the fiscal years ended November 30, 2019, 2018 and 2017.
6.
Capital expenditures that are planned for the fiscal year ending November 30, 2020 are in Canada and will be funded with cash on hand.
7.
There have been no indications of public takeover offers by third parties in respect of the Company’s shares or by the Company in respect of other companies’ shares during the last and current fiscal year.
23
8.
The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies, including the Company, that file electronically with the SEC. The Company’s website ishttps://liquidmediagroup.co/.
B.
Business overview.
1.
During the fiscal years ended November 30, 2019, November 30, 2018 and November 30, 2017, the Company’s primary business is aggregating mature gaming and film production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution.
2.
Gaming Content Creation and Distribution Business
The Company (through Liquid Canada) holds a 51% interest in Majesco, a proven gaming publisher. Majesco is the developer of mobile, console, and desktop downloadable games including such hits as “A Boy and his Blob” and “Gone Home.” Majesco holds various assests acquired through a spin-out entity of a publicly traded company called PolarityTE, Inc. (NASDAQ: PTE), whose principal business operations were previously those of Majesco.
Majesco develops and publishes a wide range of video games on digital networks, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. Majesco has sold video games to distributors and through digital distribution for platforms such as Xbox Live Arcade, PlayStation Network, or PSN, and Steam, and for mobile devices and online platforms. Majesco’s titles are targeted at various demographics at a range of various price points. Majesco focuses on publishing lower-cost games targeting casual-game consumers and independent game developer fans. In some instances, Majesco’s titles are based on licenses of well-known properties and, in other cases, original properties. Majesco enters into agreements with content providers and video game development studios for the creation of video games sold domestically and internationally.
The Company was grantedalso holds a45-day period series gaming titles in its portfolio acquired from Throwback, Zift and Lightning Man.
Video Game Industry
The video game software market is comprised of two primary sectors: (i) dedicated console software for systems such as the Xbox, PlayStation, Wii, and handheld gaming systems, such as the Nintendo DS and Nintendo 3DS; and (ii) software for multipurpose devices such as personal computers (“PCs”) and mobile devices such as smartphones and tablets. In recent years an increasing amount of software has been made available digitally through online networks such as Microsoft’s Xbox Live Arcade, and Sony’s PlayStation Network.
Gaming Product Development
Majesco primarily uses third party development studios to submit a plandevelop its games. However, Majesco may employ game-production and quality-assurance personnel to regain compliancemanage the creation of the game and its ultimate approval by the first party hardware manufacturer. Majesco carefully selects third parties to develop video games based on their capabilities, suitability, availability and cost. Majesco typically has broad rights to commercially utilize products created by the third party developers it works with. Development contracts are structured to provide developers with incentives to provide timely and satisfactory performance by associating payments with the Rule. On March 23, 2018,achievement of substantive development milestones, and by providing for the Nasdaq Staff grantedpayment of royalties to them based on sales of the Company an extensiondeveloped
24
product, only after Majesco recoups development costs.The process for producing video games also involves working with platform manufacturers from the initial game concept phase through approval of time to regain compliancethe final product. During this process, Majesco works closely with the Rule. The termsdevelopers and manufacturers to ensure that the title undergoes careful quality assurance testing. Each platform manufacturer requires that the software and a prototype of the extension are as follows: on or before July 23, 2018, the Company will submit an application for the post Transaction entity to list on the Nasdaq, complyeach title, together with all initial listing standards of the Nasdaq,related artwork and receivedocumentation, be submitted for its pre-publication approval. This approval to trade the securities of the post Transaction entity on the Nasdaq. The Company believes that upon closing the Transaction, that the resulting combined entity will meet all applicable requirements for listing on the Nasdaq. If the Company is unable to complete the Transaction, or, if the Company is able to complete the Transaction but unable to satisfy the Rule and the other requirements of the Nasdaq, then the Company may be unable to maintain its listing on the Nasdaq and could bede-listed.generally discretionary.
The Company depends on key management employees.Intellectual Property
The Company’s
Majesco’s business is dependent upon intellectual property rights in numerous respects. Majesco typically owns the continued support of existing senior management, including Ralph D. McRae, who iscopyright to our software code and content and register copyrights and trademarks in the Chairman, President, Chief Executive OfficerUnited States as appropriate.
a.
Platform Licenses
Hardware platform manufacturers require that publishers obtain a license from them to publish titles for their platforms. Majesco currently has non-exclusive licenses from Nintendo, Microsoft and a directorSony for each of the Company. Mr. McRae has been with the Company since March 1996,popular console and he has been responsiblehandheld platforms. Each license generally extends for a term of between two to four years and is terminable under a variety of circumstances. Each license allows it to create one or more products for the Company’s business planning, corporateapplicable system, and brand initiativesrequires Majesco to pay a per-unit license fee and/or royalty payment from the title produced and financings. The loss of Mr. McRae,may include other compensation or any other key memberspayment terms. All of the Company’s existing management, could adversely affect the Company’s business and prospects. There may be a limited number of personnel with the requisite skills to serve in these positions and the Company may be unable to locate or employ such qualified personnel on acceptable terms.
Possible conflicts of interest may arise with the Company’s directors, officers, and other members of management.
Certainhardware manufacturers approve each of the Company’s directors, officers,titles Majesco submits for approval on a title-by-title basis, at their discretion. Majesco is also dependent on approvals from distributors for its video game software for PCs and other members of management presently serve as directors, officers, promoters or members of management of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties to such other companies. All such conflicts will be disclosed in accordance with the provisions of applicable corporate legislation and directors and officers will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.mobile devices.
Litigationb.
Licenses from Third Parties
Most of Majesco’s titles are based on rights, licenses and properties, including copyrights and trademarks, owned by third parties. Majesco’s original titles may require rights to properties from third parties, such as rights to music or legal proceedings could exposecontent. License agreements with third parties generally extend for a term of between two to four years, are limited to specific territories or platforms and are terminable under a variety of circumstances. Several of our licenses are exclusive within particular territories or platforms. The licensors often have strict approval and quality control rights. Typically, Majesco is obligated to make minimum guaranteed royalty payments over the Company to significant liabilitiesterm of these licenses and thus negatively affect the Company’s financial results.
The Company is a party, fromadvance payments against these guarantees, but other compensation or payment terms, such as milestone payments, are also common. From time to time, Majesco may also license other technologies from third party developers for use in its products, which also are subject to litigation claimsroyalties and legal proceedings. Defending such proceedings could result in significant ongoing expenditures and the continued diversionother types of Company management’s time and attention from the operation of the Company’s business, which could have a negative effectpayment.
Customers
Majesco focuses on the Company’sdownload business, operations. The Company’s failurewhere games are downloaded from servers maintained by game companies, such as Valve, Microsoft, Sony and Nintendo. Accordingly, currently Majesco’s customers are substantially users of games on those platforms. Majesco continues to
successfully defend or settle any litigation or legal proceedings could result in liability that, to the extent not covered by the Company’s insurance, could have a material adverse effect on the Company’s financial condition, revenue and profitability, and could cause the market value of the Company’s common shares to decline. Following the disposition of LBCI’s Edmonton bottling plant (the “Plant”)during the fiscal year ended February 28, 2017, LBCI was involved in a legal dispute with former employees of the Plant. The Company assumed liability for any claims and LBCI posted a $600,000 deposit with its lawyers to secure payment of that and any other claims and associated professional fees. The parties have agreed to settle the matter and are in the process of finalizing the resulting releases and legal documentation. The settlement severance has been accrued in the Company’s consolidated financial statements.
Other risks related to the Company’s business may arise and affect the Company’s sales and earnings.Competition
For example, such risks may include:
Risks Related to the Transaction
The Transaction, if completed, will fundamentally change the Company’s primary business from beverageco-packing and distribution to film and gaming content creation and distribution.
The integration of the Company and Liquid may not occur as planned.
The abilitycomputer generated (“CG”) animation business is highly competitive. Liquid competes with a number of North American studios that provide 3D CG animation as well as foreign companies in locations such as China, India and other countries in Asia where the wage levels are significantly below those of North American companies. Liquid attempts to realize the benefitsdifferentiate itself from its competition through
25
its high quality level of the Transaction will depend in part on successfully consolidating functionsCG animation, production processes and integrating operations, procedures and personneltraining of skilled employees. Each of these factors permits it to create unique CG animation in a timely and efficient manner, as well ascost-efficient manner.
Animation Production Services
The Company (through Liquid Canada) holds a 49% interest in Waterproof Studios Inc. (“Waterproof”), an animation studio based in Vancouver, BC. Waterproof is a Vancouver based content creation studio founded in 2011, providing industry leading creative development, computer generated production, visual effects and animation content. Through Waterproof, the Company’s animation production business provides animation services on a work-for-hire basis. Waterproof’s principal customers consist of majour video game publishers, traditional film and television studios, distributors, broadcasters, and other streaming service providers.
Production services-for-hire work has been the combined company’sbasis of Waterproof’s animation business. Since inception, Waterproof has built out a production facility, developed its production pipeline, and hired a talented and experienced work force. By establishing a consistent production service-for-hire model, Liquid can selectively search for proprietary properties that warrant production based on distribution potential.
Growth Strategy
With the goal of becoming a global competitor in gaming and film content creation, the Company is forging relationships with an extensive network of industry partners to integrate cutting edge technology into its portfolio of gaming and film products. Initial growth efforts in this regard are intended to consolidate the city of Vancouver’s fragmented film and entertainment market, where more than $3.4 billion is spent annually on film and television production services.(1) Vancouver’s fragmented media and entertainment sector is ripe for consolidation. The Company believes more entertainment assets that build upon its model of the studio of the future can be attracted to generate growth for shareholders. The ability to realize the anticipated growth opportunitiesproduce intellectual property across silos such as gaming and synergies, efficiencies and cost savings from integratingTV/ Film with the Company’s existing sales channel and Liquid’s businesses following completion of the Transaction. This integration will require the dedication of substantial management effort, time and resources which may divert management’s focus and resources from other strategic opportunities following completion of the Transaction and from operational matters during this process. The integration process may result in the loss of key employees and the disruption of ongoing business and employee relationships that may adversely affect the ability of the combined companydistribution channels is core to achieve the anticipated benefits of the Transaction.its growth.
3.
The valueSeasonality
Liquid’s operating results for any period are subject to cyclical or season fluctuations and dependent on factors such as the number and timing of film and television programs delivered, the Company shares that Liquid shareholders receive under the Transaction orbudgets and financing cycles of the Company shares that existing Company shareholders retain following the Transaction, may be less than the value of the Liquid shares or Company Shares, as applicable, as of the date of the Amendedbroadcasters, overall demand for content, general advertising revenues and Restated Arrangement Agreement (as defined herein) or the date of the shareholder meetings.
The consideration payable to Liquid shareholders pursuant to the Transaction is based on a fixed exchange ratio and there will be no adjustment for changes in the market price of Company shares or Liquid shares prior to the consummation of the Transaction. None of the parties are permitted to terminate the Amended and Restated Arrangement Agreement (as defined herein) and abandon the Transaction solely because of changes in the market price of the Company shares or Liquid shares.
There may be a significant amount of time between the date when Company shareholders and Liquid shareholders vote at their respective shareholder meetings and the date on which the Transaction is completed. As a result, the relative or absolute prices of the Company shares or the Liquid shares may fluctuate significantly between the dates of the Amended and Restated Arrangement Agreement, the shareholder meetings and completion of the Transaction.
These fluctuations may be caused by, among other factors, changes in the businesses, operations, results and prospects of the companies, market expectations of the likelihood that the Transaction will be completedretail cycles associated with consumer spending activity, and the timing and level of its completion,success achieved by merchandise licenced and royalties paid in respect thereof, none of which can be predicted with certainty. Consequently, Liquid’s results from operations may fluctuate materially from period-to-period and the prospects for the combined company’s post-combination operations, the effectresults of any conditions or restrictions imposed on or proposed with respect to the combined company by governmental authorities and general market and economic conditions.
As a result of such fluctuations, historical market pricesone period are not necessarily indicative of results for future market prices or the market valueperiods
4.
The Company makes no statements concerning its competitive position.
C.
Organizational structure.
The following is a list of the Company shares that Company’s significant subsidiaries as of November 30, 2019:
1() “Activity Report 2017-2018” CreativeBC (16 July 2018), online: <https://www.creativebc.com/database/files/library/FINAL___Creative_BC___2017_18_Tax_Credits_Release(1).pdf>
26
·
Liquid shareholders will receive on completionMedia Group (Canada) Ltd. (“Liquid Canada”)
-
Incorporated in British Columbia, Canada;
-
100% owned by the Company; and
-
Principal operating subsidiary of the Transaction. There can be no assurance that the market value of the Company shares that Liquid shareholders will receive on completion of the Transaction will equal or exceed the market value of the Liquid shares held by such Liquid shareholders prior to such time. In addition, there can be no assurance that the trading price of the Company shares will not decline following completion of the Transaction.Company.
Following the Transaction the trading price of the Company shares may be volatile.
The trading prices of the Company shares and the Liquid shares have been and may continue to be subject to and, following completion of the Transaction, the common shares of the combined company may be subject to, material fluctuations and may increase or decrease in response to a number of events and factors. Following the completion of the Transaction, a significant number of additional Company shares will be available for trading in the public market. The increase in the number of Company shares may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, Company shares. The potential that such a shareholder may sell its Company shares in the public market (commonly referred to as “market overhang”), as well as any actual sales of such Company shares in the public market, could adversely affect the market price of the Company shares.·
The Company will be vulnerable to exchange rate fluctuations.
Liquid’s film and gaming content creation and distribution business is carried out primarily in Canada. However, Liquid purchases certain hardware, software, and digital content production equipment priced in U.S. dollars, for the use of its operations in Canada. Liquid also sells or is planning to sell certain developed media and entertainment content into the United States as well as into the People’s Republic of China (via Liquid’s 51% equity stake in Majesco Entertainment Company (“Majesco”) which is currently developing products for sale
-
Incorporated in Nevada, USA;
-
51% owned by the People’s Republic of China). AsCompany; and
-
Operating a result, after the Company’s planned acquisition of Liquid, the Company will be vulnerable to exchange rate fluctuationsvideo gaming developer and it does not presently use any financial instruments to hedge foreign currency fluctuations. A significant increase in the value of the U.S. Dollar (USD) or Chinese Renminbi (CNY) in relation to the Canadian dollar would negatively impact the Company’s earnings.
The Company will use a limited number of suppliers.
Liquid relies on a limited number of suppliers for hardware, software,D.
Property, plant and film and gaming production equipment. While other sources of supply do exist for this equipment, an unexpected disruption in supply or an increase in pricing could have a negative impact on the Company’s earnings after it acquires Liquid.
The Company is exposed to varying degrees of competition.
Increased consolidations of the Company’s competitors within the media and entertainment industry with and into larger companies, increased market place competition, and more competitive product and pricing pressures could impact the Company’s earnings, market share and volume growth. The competition in the media and entertainment industry is likely to continue, and the Company cannot make any assurance that this competition will not intensify in the future, which could materially and adversely affect the Company’s financial condition and results of operations.
Changes in the film and gaming entertainment industries could adversely affect the Company’s financial results.
The film and gaming media business environment is constantly evolving as a result of, among other things, changes in consumer preferences, evolving technology, shifting consumer tastes and needs, changes in consumer lifestyles and competitive product and pricing pressures. If the Company is unable to successfully adapt to this constantly changing environment, the Company’s earnings and sales could be negatively affected.
Changes in laws and regulations could negatively affect the Company’s operations.
After the completion of the Transaction, the Company will be subject to various laws and regulations, and changes in such laws and regulations could have a negative impact on the Company’s operations. For example:
The Company depends on protections afforded by trademarks and copyrights.
Liquid and its subsidiaries hold a number of trademarks and copyrights relating to certain significant products. The Company will rely on trademark laws and contractual provisions to protect these trademarks and copyrights, and there can be no assurance that third parties will not infringe or misappropriate the Company’s trademarks and copyrights. If the Company loses some or all of its intellectual property rights, the Company’s business may be materially adversely affected.
The Company is vulnerable to operating losses.
Liquid’s film and gaming content creation operations are relatively capital intensive while revenue-generating opportunities depend on the availability of projects in the market. During periods of low project volumes, fixed costs can result in operating losses. Additionally, following Liquid’s acquisition of a 51% control interest in Majesco on January 15, 2018, Liquid will have exposure to additional financial risks resulting from the performance of Majesco’s business operations.
The Company’s failure to accurately estimate demand for Liquid’s media and entertainment products and services could adversely affect the Company’s business and financial results.
The Company may not correctly estimate demand for Liquid’s products and services. The Company’s ability to estimate demand for Liquid’s products and services is imprecise, particularly as Liquid enters new markets in Asia. If the Company materially underestimates or overestimates demand for Liquid’s products and services, the Company’s financial results may be adversely affected.
General Risks Related To The Film and Gaming Industry
Liquid competes with large companies with greater resources.
Liquid competes, to some degree, with other larger companies in the film and gaming industry. Some of these competitors have substantially greater marketing, cash, distribution, production, technical and other resources than Liquid. The Company cannot make any representation that such competition will not intensify in the future which could materially and adversely affect the Company’s financial condition and operations.
The Film and Gaming industry is subject to various regulations and the Company will need to be in compliance with current and changing rules and regulations.
The creation and distribution of film and gaming content is subject to the rules and regulations of various federal and provincial agencies. Any adverse publicity associated with anynon-compliance may damage the Company’s reputation and its ability to successfully market its products and services.
Risks Related To The Company’s Capital Stock
The Company’s common shares have experienced significant price volatility.
The Company’s common share price has experienced significant price volatility, with closing trading prices on the Nasdaq ranging from a low of US$0.82 to a high of US$5.62 during the five-year period from March 1, 2013 to February 28, 2018. During this period, the stock market for other small capitalization stocks has also experienced significant price fluctuations, which have often been unrelated to the operating performance of the affected companies. Such future
fluctuations could adversely affect the market price of the Company’s common shares. The Company has had periods where the bid price of the Company’s common shares closed below US$1.00 per shareItem 4A. – Unresolved Staff Comments
None.
Item 5. – Operating and on January 23, 2018, the Company received notice that it wasnon-compliant under the Rule. The Company was granted a45-day period to submit a plan to regain compliance with the Rule. On March 23, 2018, the Nasdaq Staff granted the Company an extension of time until July 23, 2018 to regain compliance with the Rule. The terms of the extension are as follows: on or before July 23, 2018, the Company will submit an application for the post Transaction entity to list on the Nasdaq, comply with all initial listing standards of the Nasdaq,Financial Review and receive approval to trade the securities of the post Transaction entity on the Nasdaq. The Company believes that upon closing the Transaction, that the resulting combined entity will meet all applicable requirements for listing on the Nasdaq. If the Company is unable to complete the Transaction, or, if the Company is able to complete the Transaction but unable to satisfy the Rule, then the Company may be unable to maintain its listing on the Nasdaq and could bede-listed. If the Company isde-listed, the price of the Company’s common shares may fall and there may be a limited trading market for the common shares on other trading markets such that investors may not be able to trade the desired number of shares.Prospects
A.
Sales of a substantial number of the Company’s common shares into the public market could result in significant downward pressure on the price of the Company’s common shares.Operating results.
Introduction
The Company’s common shares are traded on the Nasdaq under the symbol “LBIX.” As of February 28, 2018, there were 2,802,412 common shares issued and outstanding. The concurrent sale of a substantial number of the Company’s common shares in the public market could cause a reduction in the market price of the Company’s common shares.
The Company may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses to the Company.
In order to maintain the Company’s current status as a “foreign private issuer” (as such term is defined in Rule 405 under the Securities Act), where more than 50% of the Company’s outstanding voting securities are directly or indirectly owned by residents of the United States, the Company must not have any of the following: (i) a majority of the Company’s executive officers or directors being U.S. citizens or residents, (ii) more than 50% of the Company’s assets being located in the United States, or (iii) the Company’s business being principally administered in the United States. If the Company were to lose its “foreign private issuer” status, either as a result of the acquisition of Liquid or otherwise:
The Company is incorporated in British Columbia, Canada, and all of the Company’s directors and officers live in Canada, and most of the Company’s assets are in Canada; therefore, investors may have difficulty initiating legal claims and enforcing judgments against the Company and its directors and officers.
The Company is a corporation existing under the laws of British Columbia, all of its directors and officers are citizens of Canada and the majority of the Company’s assets and operations are located outside of the United States. It may not be possible for shareholders to enforce, in Canada, judgments against the Company obtained in the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws.
While reciprocal enforcement of judgment legislation exists between Canada and the United States, the Company and its insiders may have defenses available to avoid, in Canada, the effect of U.S. judgments under Canadian law, making enforcement difficult or impossible. As such, there is uncertainty as to whether Canadian courts would enforce (a) judgments of U.S. courts obtained against the Company or such persons predicated upon the civil liability provisions of the U.S. federal and state securities laws or (b) in original actions brought in Canada, liabilities against the Company or such persons predicated upon the U.S. federal and state securities laws. Therefore, the Company’s shareholders in the United States may have to avail themselves of remedies under Canadian corporate and securities laws for any perceived oppression, breach of fiduciary duty and like legal complaints. Canadian law may not provide for remedies equivalent to those available under U.S. law.
The Company may be deemed to be a controlled foreign corporation or a passive foreign investment company under the Internal Revenue Code of 1986, as amended (the “Code”)
If more than 50% of the voting power of all of the Company’s classes of shares or total value of the Company’s shares is owned, directly or indirectly, by citizens or residents of the United States, U.S. domestic partnerships and corporations or estates or trusts other than foreign estates or trusts (“U.S. Shareholders”), each of which owns 10% or more of the total combined voting power of all of the Company’s classes of shares (“10% U.S. Shareholders”), the Company could be treated as a “controlled foreign corporation,” as such term is defined under Subpart F of the Code. This classification would effect many complex results, including the required inclusion by such U.S. Shareholders in income of their pro rata shares of the Company’s “Subpart F income” (as specifically defined by the Code), if any, and the requirement that 10% U.S. Shareholders comply with certain additional U.S. tax reporting obligations. While the Company believes that it is a controlled foreign corporation, the Company has not made a determination as to whether it is a controlled foreign corporation under the Code, and cannot give any assurance that it would not be determined to be a controlled foreign corporation under the Code now or in the future.
As the Company currently does not have active operations, even if the Company is not a controlled foreign corporation, it could be treated as a “passive foreign investment company” under the Code, depending upon the nature of the Company’s income and assets and those of its subsidiaries. Such a status would effect many complex results to the Company’s U.S. Shareholders, including those who own less than 10% of the total combined voting power of the Company’s outstanding shares.
These results might include imposition of higher rates of tax on certain dividends and on gains from sale of the Company’s shares than would otherwise apply. While the Company does not believe that it is a passive foreign investment company nor ever has been, the Company has not made a determination as to whether it is or ever has been a passive foreign investment company and so cannot give any assurance in this regard, whether now or in the future.
Item 4. – Information on the Company
33 W. 8th Avenue – Unit 101
Vancouver BC
Canada V5Y 1M8
Tel:604-685-5200
On September 22, 2016, the Company announced its intention to exit theco-pack business and wind down operations at itshot-fill bottling plant in Edmonton, Alberta.
On October 31, 2016, the Company announced that it had entered into a binding agreement to sell its Edmonton bottling plant, land, and buildings with a scheduled closing date of February 1, 2017.
On February 1, 2017, the Company sold its Edmonton bottling plant and adjusted its operations from a bottler/distributor to just that of a distributor.
On September 15, 2017, in preparation for the Company’s planned entry into the film and gaming content creation business, the Company disposed of its legacy beverage assets through the disposition of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and indirect minority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the
responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBCI and Richmond Holdings Ltd. (“Richmond Holdings”) after all costs and expenses arising in relation to that head lease (the “Lease”). The transaction was reviewed and approved by the disinterested directors of the Company.
On September 17, 2017, the Company entered into the Arrangement Agreement to acquire 100% of Liquid pursuant to the Transaction. Liquid’s primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution. At
During the time of this announcement, the Company anticipated that its shareholders would hold 22.637% and Liquid shareholders would hold 77.363% of the post-transaction entity. The Company also announced its intention that at the time ofyear ended November 30, 2018, pursuant to the closing of the Transaction, that all of its Board members, with the exception of Mr. Tom Gaglardi, would resign and be replaced by Messrs. Jackson, Brezer and Cruz, and Ms. Katsoolis, who are directors and an officer of Liquid.
On January 15, 2018, the Company announced an amendment to the Arrangement Agreement by entering into the amended and restated definitive arrangement agreement dated January 14, 2018 (the “Amended and Restated Arrangement Agreement”) with Liquid relating to the Transaction whereby the original agreed valuation of existing Company shares was increased from USD$1.50 per share to USD$1.78 per share. As a result, the Company’s shareholders are anticipated to hold 25.8% and Liquid shareholders are anticipated to hold 74.2% of the post-transaction entity. At the same time, the Company announced that Liquid had acquired 51% of Majesco, a proven gaming publisher. The acquisition of Majesco by Liquid satisfied one of the key terms of the Amended and Restated Arrangement Agreement relating to the Transaction whereby Liquid shall acquire a gaming studio.
On January 23, 2018, the Company received notice from the Nasdaq Staff indicating that the Company no longer complied with the Rule, based in part upon the Company’snon-compliance with the minimum $2.5 million stockholders’ equity requirement for continued listing on the Nasdaq as of November 30, 2017 and the Company was granted a45-day period to submit a plan to regain compliance with the Rule. On March 23, 2018, the Nasdaq Staff granted the Company an extension of time to regain compliance with the Rule. The terms of the extension are as follows: on or before July 23, 2018, the Company will submit an application for the post Transaction entity to list on the Nasdaq, comply with all initial listing standards of the Nasdaq, and receive approval to trade the securities of the post Transaction entity on the Nasdaq. The Company believes that upon closing the Transaction, that the resulting combined entity will meet all applicable requirements for listing on the Nasdaq. If the Company is unable to complete the Transaction, or, if the Company is able to complete the Transaction but unable to satisfy the Rule and the other requirements of the Nasdaq, then the Company may be unable to maintain its listing on the Nasdaq and could bede-listed.
On February 8, 2018, the Company announced that it had entered into a support agreement with Liquid’s subsidiary, Majesco, whereby the Company will invest in the exploitation of Majesco’s gaming properties in Asia. In order to assist Liquid with the development of its
gaming business (and in advance of the closing of the preferred share financing investment), the Company agreed to advance funds to Majesco so that Majesco can retain Web Presence in China (“WPIC”)to assist Majesco develop its intellectual properties and gaming content in the People’s Republic of China. Under the terms of the support agreement, the Company agreed to invest USD$50,000 to Majesco as consideration for receiving 5% of Majesco’s net profits from its sales of gaming assets in Asia for a period of 5 years. On February 5, 2018, the Company advanced an initial tranche of USD$25,000 of its planned USD$50,000 investment to Majesco. This amount is refundable from Majesco if the Transaction is not completed by June 1, 2018
The Company expended $10,449 on the purchase of property, plant and equipment in the fiscal year ended February 28, 2017, of which $8,039 was for bottling equipment, and $2,410 was for office equipment, computers and software.
The Company expended $200,221 on the purchase of property, plant and equipment in the fiscal year ended February 29, 2016, of which $46,576 was for bottling equipment, $96,720 was for leasehold improvements, $40,426 was for coolers, and $16,499 was for office equipment, computers and software.
The Company expended $525,182 on the purchase of property, plant and equipment in the fiscal year ended February 28, 2015, of which $433,404 was for bottling equipment, and $91,778 was for office equipment, computers and software.
Sale of Legacy Beverage Assets.In the fiscal year ended February 28, 2017, the Company sold its 50,000 square foot bottling plant in Edmonton, Alberta. As part of the sale of its legacy beverage assets, on September 15, 2017 the Company disposed of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and indirect minority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond Holdings after all costs and expenses arising in relation to the Lease. The transaction was reviewed and approved by the disinterested directors of the Company.
Pending Acquisition of Liquid. On September 17, 2017, the Company entered into the Arrangement Agreement to acquire 100% of Liquid by way of a plan of arrangement. Liquid’s primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution. Based on the agreed valuation of the Company’s shares at USD$1.78 per share pursuant to the Amended and Restated Arrangement Agreement, Company shareholders are anticipated to hold 25.8% and Liquid shareholders are anticipated to hold 74.2% of the post-transaction entity.
Acquisition of Majesco. On January 15, 2018, the Company announced that Liquid had successfully acquired 51% of Majesco, a proven gaming publisher. The acquisition of Majesco by Liquid satisfied one of the key terms of the Amended and Restated Arrangement Agreement whereby Liquid shall acquire a gaming studio. Majesco is the developer of mobile, console, and desktop downloadable games including such hits as “A Boy and his Blob” and “Gone Home.” In order to advance Majesco’s development of its gaming business in the growing Asian market, in Q1 of 2018, the Company announced that it had entered into a support agreement with Majesco, whereby the Company will invest in the exploitation of Majesco’s gaming properties in Asia. In order to assist Liquid with the development of its gaming business (and in advance of the closing of the preferred share financing investment), the Company agreed to advance funds to Majesco so that Majesco can retain WPICto assist Majesco to develop its intellectual properties and gaming content in the People’s Republic of China.Under the terms of the support agreement, the Company agreed to invest USD$50,000 to Majesco as consideration for receiving 5% of Majesco’s net profits from its sales of gaming assets in Asia for a period of 5 years. On February 5, 2018, the Company advanced an initial tranche of USD$25,000 of its planned USD$50,000 investment to Majesco. This amount is refundable from Majesco if the Transaction is not completed by June 1, 2018.
All of the Company’s operations and assets are located in Canada. As at February 28, 2018, the Company did not have any employees and consolidated its operations through its offices and independent contractors.
The Company had no subsidiaries as at February 28, 2018. On September 15, 2017, in preparation for the Company’s planned entry into the film and gaming content creation business, the Company disposed of its legacy beverage assets through the disposition of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and indirect minority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond Holdings after all costs and expenses arising in relation to the Lease. The transaction was reviewed and approved by the disinterested directors of the Company. For additional clarity, a list of the names of each of the Company’s subsidiaries that were disposed of during the fiscal year ended February 28, 2018 is included below:
On February 1, 2017, the Company sold its Edmonton bottling plant and exited its lease of its regional warehouse and distribution center in Edmonton.
On September 15, 2017 in connection with the Company’s sale of its subsidiaries, the purchase price was deposited in escrow as a security for the payment of certain liabilities that were to remain the responsibility of the Company, including certain obligations. Certain other amounts relating to sublease receipts will be added to the escrow relating to the Lease. . The Lease expires in February 2023.
None.
Item 5. – Operating and Financial Review and Prospects
Introduction
The Company is in the process of undergoingunderwent a fundamental change in business from beverageco-packing and distribution to film and gaming content production and distribution.
During the fiscal year ended February 28, 2018, the Company entered into the Amended and Restated Arrangement Agreement to acquire 100% of Liquid pursuant to the Transaction. Liquid’s primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution. The acquisition of Liquid is subject to the Company obtaining various regulatory, exchange, and court approvals which are outside the Company’s direct control. As such, the Company is unable to make any representation that the acquisition will be successfully completed or approved.
Overall Performance - Fiscal Year Ended November 30, 2019
During the year ended November 30, 2019, the Company’s primary focus was securing financing through the issuance of convertible debentures and on developing relationships through which the Company could expand its current gaming content.
Gross Profit (Loss)
Gross profit (loss) decreased by $1,485,200 to $(1,556,568) for the year ended November 30, 2019 from $(71,368) for the comparable period in 2018. The decrease in gross profit is attributable to: (1) lower sales earned in Majesco; and (2) the Company entering into license agreements for video games and platforms during the fourth quarter of fiscal 2018, which are being amortized over the term of the agreements.
Operating Expenses
For the year ended November 30, 2019, operating expenses increased by $3,768,949 from $2,077,766 in the year ended November 30, 2018 to $5,846,715 in the year ended November 30, 2019 primarily as a result of:
Operating Expense | Increase / Decrease in Expenses | Explanation for Change |
Accretion expense | Increase of $211,155 | Increased due to the requirement to accrete the equity portion of the convertible debentures. No accretion was required in the comparative year. |
Amortization | Increase of $82,480 | Increased due to the Company amortizing its game catalogues over a 15 year period. No amortization was required in the comparative year. |
Consulting and directors fees | Increase of $584,011 | Increased due to more consultants being engaged due to the acquisition of Majesco and the Company focusing on future growth. |
Insurance | Increase of $40,884 | Increased due to an increase in the premium associated with Directors and Officers policy. |
Interest expense | Increase of $44,852 | Increased due interest being charged on the convertible debentures received at the end of the first quarter in fiscal 2019. |
Investor relations, filing, and compliance fees | Increase of $142,335 | Increased due to the Company becoming publicly traded on the NASDAQ during the Q3 of fiscal 2018. |
Marketing | Increase of $1,166,568 | Increased due to the Company entering into a digital marketing campaign to increase awareness of the Company. |
Other general and administrative expenses | Increase of $45,735 | Increased due to increased corporate activity. |
Professional fees | Increase of $409,062 | Increase due to: (1) legal fees incurred in relation to the lawsuit brought on by the former President and director or the Company; (2) increased legal and accounting fees associated with filing the Company’s 2018 YE and 2019 Q1 during; and (3) increased bookkeeping fees due to increased corporate activity. |
Share-based compensation | Increase of $1,062,377 | Increased due to more options being issued in the current year. |
Other Income (Expenses)
The following occurred during the year ended November 30, 2019 as compared to the year ended November 30, 2018:
·
The Company recorded an increase in the share of profit of equity investment of $315,380 from its investment in Waterproof.
·
The Company recorded a decrease in the write-off of associate of $310,484 as the Company decided to write-off its investment in Household Pests during fiscal 2018. There were no write-offs during fiscal 2019.
·
The Company recorded a decrease in the write off of intangible assets of $116,352 as the Company decided not to proceed with the development of one video game. There were no write-offs during fiscal 2019.
·
The Company recorded an increase in the write-off of licenses of $717,125 as the Company decided not to proceed with the license with World of Wireless UK Limited. There were no write-offs during fiscal 2018.
·
The Company recorded a decrease in listing expenses of $4,130,557 in relation to the Arrangement between the Company and Liquid Canada during fiscal 2018.
28
·
The Company recorded a decrease in project investigation of $166,989 in relation to the Arrangement between the Company and Liquid Canada during fiscal 2018. Fiscal 2019 included some additional costs associated with the legacy beverage business.
·
The Company recorded a decrease in derivative liability – Continuing operationswarrants of $1,557,086 as no new derivatives were setup in fiscal 2019.
·
The Company recorded a decrease in gain on derivative liability of $1,479,847 due to the revaluation of the derivative liabilities at the end of the fiscal 2019.
·
The Company recorded an increase in the gain on settlement of debt of $271,303 in relation to the settling of various debt through the issuance of the Company’s common shares during the fiscal 2019 as compared to the settlements recorded in fiscal 2018.
·
The Company recorded an increase in the unrealized gains on equity instruments of $953,961 relating to the revaluation of the Company’s investment in Waterproof in fiscal 2019. No revaluation was done in fiscal 2018 as the investment was previously held as an equity investment.
·
The Company recorded an increase in the allowance for credit loss of $145,431 as management determined it was prudent to allow for a portion of the loans receivable in fiscal 2019. No allowance was recorded in fiscal 2018.
Overall Performance - Fiscal Year Ended November 30, 2018
The major developments during the year ended February 28,November 30, 2018 included:
Net loss decreased
The Company’s operations presented for the 2018 fiscal year represent the results of the parent company, Liquid Media Group Ltd., and its subsidiaries Liquid Canada and Majesco. The operations presented for the 2017 fiscal year represent the results of Liquid Canada.
Loss increased by $3,122,540$5,571,363 to $3,387,149$7,500,233 for the year ended February 28,November 30, 2018 from a net loss of $6,509,689$1,928,870 in the comparable period last year. Of the total loss, $7,537,749 is attributable to shareholders of the Company and a profit of $37,516 is attributable to non-controlling interests. This change principally occurred due to the Company’s losslisting fees expensed on the discontinuedco-packingArrangement between LBIX and legacy beverage operations. The discontinued operationsLiquid .
Comprehensive loss increased by $5,172,471 to $7,101,341 for the year ended November 30, 2018 from a comprehensive loss of $1,928,870 in the fiscalcomparable period last year. Of the total comprehensive loss, $7,255,667 is attributable to shareholders of the Company and a profit of $154,326 is attributable to non-controlling interests. Comprehenvise loss includes the foreign currency translation adjustment on converting from the Company’s functional currency of USD to its reporting currency of CAD.
Sales
The Company’s sales increased by $687,381 to $687,381 for the year ended February 28,November 30, 2018 includedfrom sales of $Nil in the Company’s legacy beverage operations. last two fiscal years. The increase in sales was due to the Company acquiring a 51% interest in Majeco during the year ended November 30, 2018.
Cost of Sales
The Company’s continuing operations that are presentedcost of sales increased by $758,749 to $758,749 for the current year ended November 30, 2018 from sales of $Nil in the last two fiscal years. The increase in cost of sales was due to the Company acquiring a 51% interest in Majeco and prior years represent the results ofCompany entering into license agreements for video games and platforms during the parent company, Leading Brands Inc.year ended November 30, 2018.
Selling, General and Administrative
29
Operating Expenses
For the fiscal year ended February 28,November 30, 2018, selling, general and administrativeoperating expenses increased by $149,558$523,555 from $726,530$1,554,211 in the fiscal year ended February 28,November 30, 2017 to $876,088$2,077,766 in the year ended February 28,November 30, 2018 primarily as a result of:
Operating Expense | Increase / Decrease in Expenses | Explanation for Change |
Consulting and directors fees | Increase of $346,238 | Increased due to more consultants being engaged due to the acquisition of Majesco and the Company focusing on future growth. |
Foreign exchange loss | Increase of $67,361 | Increased as the Company started incurring more US$ expenses. |
Interest expense | Decrease of $81,789 | Decreased due to the reduction in interest-bearing loans outstanding during the year. |
Investor relations, filing, and compliance fees | Increase of $99,009 | Increased due to the Company becoming listed on the NASDAQ during the year and the Company increasing the amount of shareholder communication. |
Professional fees | Increase of $479,028 | Increased due to the Arrangement between LBIX and Liquid and the acquisition of Majesco. |
Share-based compensation | Decrease of $464,865 | Decreased due to fewer options being issued in the current year. |
Salaries and benefits | Increase of $95,121 | Increased due to Majesco having employees |
Travel | Decrease of $58,387 | Decreased as the prior year included increased travel in relation to the acquisition of Majesco. |
Other Income (Expenses)
The Company recorded an increase in the share of $219,474;
Other Expenses
Depreciation expense was recorded at $1,053$94,618 from its investment in Waterproof for the fiscal year ended February 28,November 30, 2018 which wasas compared the same as $1,053 recorded in the prior fiscal year. The Company also recognized depreciation expense within discontinued operations.
In the fiscal year ended February 28,November 30, 2017.
During the year ended November 30, 2018, the Company recorded $19,703a write-off of associate of $310,484 as the Company decided to write-off its investment in interest income from bank balances compared to $nilHousehold Pests. There were no write-offs in during fiscal 2017.
During the year ended November 30, 2018, the Company recorded an increase in the priorwrite off of intangible assets of $116,352 as the Company decided not to proceed with the development of one video game.
During the year ended November 30, 2018, the Company recorded listing expenses of $4,130,557 in relation to the Arangement between LBIX and Liquid. There were no listing expenses during fiscal year.2017.
During the year ended November 30, 2018, the Company recorded derivative liability – warrants of $1,557,086 upon the change of the Company’s functional currency from CAD to USD. Additionally, the Company recorded a gain on derivative liability of $1,030,328 during the year ended November 30, 2018 due to the revaluation of the derivative liability at the year-end date. The revaluation of the derivative liability in fiscal 2017 did not require adjustment as the fair value recorded approximated the revalued amount.
30
During the year ended November 30, 2018, the Company recorded gain on debt settlements of $172,383 in relation to the settling of various debts through the issuance of the Company’s common shares. There were minimal debt settlements in fiscal 2017.
B.
Liquidity and Capital Resources.
Fiscal Year Ended November 30, 2019
As at November 30, 2019, the Company has current assets of $6,349,663 and current liabilities of $5,805,314, which results in working capital of $544,349 (2018 - $710,406).
The Company recorded $3,995does not have adequate operating revenue to finance its existing obligations and therefore must continue to rely on external financing to generate capital to maintain its capacity to meet working capital requirements. The Company has relied on debt and equity raises to finance its operating activities since incorporation. The Company intends to continue to rely on debt and the issuance of shares to finance its operations. However, there is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company.
Cash Flows
The table below sets forth a summary of cash flow activity and should be read in other incomeconjunction with the Company’s cash flow statements:
| Year ended November 30, | |
| 2019 | 2018 |
| $ | $ |
Cash inflows (outflows) used in operating activities | (4,026,634) | 326,256 |
Cash flows used in investing activities | (213,702) | (138,262) |
Cash flows provided by financing activities | 4,456,019 | 3,994,886 |
Effect of foreign exchange on cash | 44,391 | 90,144 |
Increase in cash during the year | 260,074 | 4,273,024 |
Cash, beginning of year | 4,327,331 | 54,307 |
Cash, end of year | 4,587,405 | 4,327,331 |
The cash flow used in fiscal year ended February 28, 2018, comparedoperating activities increased by $4,352,890 to $nil in the prior fiscal year. This income represents the net proceeds on the sublease revenue derived from the office on 33 West 8th Avenue in Vancouver, British Columbia.
Discontinued Operations
Net loss from discontinued operations decreased by $3,238,710 to $2,557,034$(4,026,634) for the year ended February 28, 2018November 30, 2019 from a$326,256 compared to the comparative year. The decline in cash flow from operating activities represents the effect on cash flows from net loss of $5,795,744losses adjusted for items not affecting cash, principally: accrued interest income and expenses, amortization and accretion, share-based compensation expense, changes in the comparable period lastvalue of derivatives, gains and losses on the settlement of debt, unrealized foreign exchange, the share of profit of its equity investment, the unrealized gains on the revaluation of equity instruments, and the write off of various items, in addition to net changes in non-cash balances relating to operations.
Cash used by investing activities for year ended November 30, 2019 decreased by $75,440 compared to the comparative year mostly due to the Company receiving cash from the Arrangement between the Company and Liquid Canada during fiscal 2018.
Cash provided by financing activities for year ended November 30, 2019 improved by $461,133 compared to the comparative year. During the fiscal year ended February 28, 2018,November 30, 2019, the financing activities mostly increased because the Company disposedclosed its private placement offering of its legacy beverage operations.unsecured convertible debentures by raising $3,502,793, received loan proceeds of $812,933, and raised $368,617 from the exercise of warrants. The decrease incomparative year included the loss from discontinued operations compared to the prior year is principally due to thewrite-offclosing of a deferred tax asset of $2,480,257 recognizedprivate placement for $4,157,760, raising $167,500 in the prior year as well as increased losses as a resultloan proceeds, and raising $156,615 from the discontinuationexercise ofco-packing operations. This decrease was offset by the loss recognized on the disposal of the legacy beverage operations of $1,071,946 in the fiscal year ended February 28, 2018. warrants.
Fiscal Year Ended February 28, 2017 – Continuing operationsNovember 30, 2018
Selling, General and Administrative Expenses
For the fiscal year ended February 28, 2017, selling, general and administrative expenses decreased $550,597 from $1,277,127 in the fiscal year ended February 29, 2016 to $726,530 in the year ended February 28, 2017 primarily as a result of:
Other Expenses
Depreciation expense decreased to $1,053 for the fiscal year ended February 28, 2017, as compared to $1,316 in the prior fiscal year.
In the fiscal year ended February 28, 2017, the Company recorded $nil interest income from bank balances compared to $4,900 in the prior fiscal year.
Discontinued Operations
Net loss from discontinued operations increased by $5,684,686 to $5,795,744 for the year ended February 28, 2018 from a net loss of $111,058 in the comparable period last year. The increase in the loss from discontinued operations compared to the prior year is principally thewrite-off of a deferred tax asset of $2,480,257 recognized in the fiscal year ended February 28, 2017, as well as increased losses as a result from the discontinuation ofco-packing operations.
Fiscal Year Ended February 28, 2018
As of February 28,November 30, 2018, the Company had working capital of $1,060,066$710,406 compared to a working capital deficit of $3,939,880$950,981 at the prior fiscal year end. The Company held $1,369,352$4,901,841 in cash account balances (including restricted cash) at February 28,November 30, 2018 compared with $4,315,028$54,307 at the prior fiscal year end.
Considering the positive working capital position, including the cash on hand at February 28,November 30, 2018, the Company believes that it has sufficient working capital to continue operations for the next twelve months.
Cash provided by (used in): | Fiscal Year ended February 28, 2018 | Fiscal Year ended February 29, 2017 | Change | Fiscal Year ended November 30, 2018 ($) | Fiscal Year ended November 30, 2017 ($) | Change ($) | |||||||||
Operating Activities | ($ | 2,596,859 | ) | ($ | 1,351,804 | ) | ($ | 1,245,055 | ) | 326,256 | (1,155,954) | 1,482,210 | |||
Investing Activities | $ | (348,817 | ) | $ | 5,523,802 | ($ | 5,872,619 | ) | (138,262) | (553,499) | 415,237 | ||||
Financing Activities | $ | nil | ($ | 139,789 | ) | $ | 139,789 | 3,994,886 | (736,961) | 4,731,847 |
The increase in cash utilizedflow generated from operating activities improved by $1,482,210 to $326,256 for the year ended November 30, 2018 from $(1,155,954) compared to the prior year. The cash flow improvement from operating activities represents the effect on cash flows from net losses adjusted for items not affecting cash, principally: accrued interest income and expenses, amortization, share-based compensation expense, listing expenses, changes in the fiscal year ended February 28, 2018 for operating activities isvalue of derivatives, write off of intangible assets, gains on the resultsettlement of debt, unrealized foreign exchange, and the highernon-cash expenses (e.g. depreciation,share of loss on disposal, deferred income tax provisions) associated with theof its equity investment, in addition to net loss recordedchanges in the prior fiscal year.non-cash balances relating to operations.
The decrease in cash utilized in the fiscal year ended February 28, 2018 for investing activities is the result of the sale of the Edmonton bottling plant, land and building and sale of a long-unused internet domain in the prior fiscal year.
Cash used by investing activities for year ended November 30, 2018 improved by $415,237 compared to the prior year mostly due to the Company spending more on its associates and issuing loans during the year ended November 30, 2017. In the current year, the Company also acquired cash from the acquisition of Majesco and the reverse acquisition with LBIX.
Cash provided by (used by) financing activities in the fiscalfor year ended February 28,November 30, 2018 was $nil and changed fromimproved by $4,731,847 compared to the prior fiscalyear. During the year due to cash being usedended November 30, 2018, the Company closed a private placement netting proceeds of $3,711,189 after the payment of share issuance costs and received loan proceeds of $182,500 from third parties and related parties. During the year ended November 30, 2017, the Company closed a private placement for the Company’s share repurchase program in the prior fiscal year.$592,427 and repaid $1,756,721 on their credit facility agreement.
Other sources of financing are more fully described in the consolidated financial statements appearing in “Item“Item 18 – Financial Statements”Statements” of this Annual Report.
The Company generally maintains cash or cash equivalents in Canadian and U.S. funds and does not use financial instruments for hedging purposes.
The Company has no material commitments for capital expenditures in the fiscal year ending February 28, 2019.
Fiscal Year Ended February 28, 2017
As of February 28, 2017, the Company had working capital of $3,939,880 compared to working capital of $477,354 at the prior fiscal year end. The Company held $4,315,028 in cash account balances at February 28, 2017 compared with $282,819 at the prior fiscal year end.
Considering the positive working capital position, including the cash on hand at February 28, 2017, available debt and other internal resources, the Company believes that it has sufficient working capital to continue operations for the next twelve months.
Cash provided by (used in): | Fiscal Year ended February 28, 2017 | Fiscal Year ended February 29, 2016 | Change | |||||||||
Operating Activities | ($ | 1,351,804 | ) | ($ | 833,873 | ) | ($ | 517,931 | ) | |||
Investing Activities | $ | 5,523,802 | ($ | 409,914 | ) | $ | 5,933,716 | |||||
Financing Activities | ($ | 139,789 | ) | ($ | 176,316 | ) | $ | 36,527 |
The decrease in cash utilized in the fiscal year ended February 28, 2017 for operating activities is the result of the lower net income this fiscal year.
The increase in cash utilized in the fiscal year ended February 28, 2017 for investing activities is the result of the sale of the Edmonton bottling plant, land and building and sale of a long-unused internet domain.
Cash used for financing activities in the fiscal year ended February 28, 2017 decreased in comparison to the prior fiscal year due to less cash being used for the Company’s share repurchase program.
Other sources of financing are more fully described in the consolidated financial statements appearing in “Item 18 – Financial Statements” of this Annual Report.
The Company generally maintains cash or cash equivalents in Canadian and U.S. funds and does not use financial instruments for hedging purposes.
The Company has no material commitments for capital expenditures in the fiscal year ending February 28, 2018.November 30, 2019.
As a shell company, the Company does not have any deferred product costs at this time. C.
Research and development, patents and licenses, etc.
The Company does not have a formal research and development program. It develops productsvideo games as and when it sees fit by working with existing staff and outside consultants, where appropriate.
From 2009 until32
Majesco has numerous licensing/royalty agreements whereby Majesco is given the lastright to sell various video games in exchange for royalty payments based on various percentages ranging from 10% to 85% of selling prices.
The Company has a license agreement with Lightning Man for license to market and distribute six video games owned by Lightning Man, including: Bunny Boom, Bar Crasher, Nyctophobia, Resurgence, Clowns and Machetes, and Piggy Pals, over a two year period. As part of the Lightning Man agreement, the Company has agreed to pay a total of $100,000 (in three tranches) to Lightning Man over a 6-month period for the rights to two future video game titles that will be jointly developed by the Company and Lightning Man.
D.
Trend Information.
During the fiscal yearyears ended February 28, 2018,November 30, 2016 and 2017, the Company was focused on producingits film content and selling beverage products that can generate superior margins. The Company now plans to enterdistribution business. In fiscal 2018, through the film andacquisition of Majesco, the Companyadded gaming content and distribution business viato its planned acquisition of Liquid by way of plan of arrangement.business.
The Company believes that growing demand in the film and gaming content production and distribution business, as well as the accelerated industry adoption of cloud-based gaming, represent growth opportunities for the Company and its shareholders.
E. |
The following table presents ourCompany had no off balance sheet arrangements during the fiscal years ended November 30, 2019, 2018 and 2017.
F.
Tabular disclosure of contractual obligations.
There were no contractual obligations as of February 28, 2018:November 30, 2019:
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | less than 1 year | 1-3 years | 4-5 years | more than 5 years | |||||||||||||||
Long-term Debt Obligations | — | — | — | — | — | |||||||||||||||
Capital (Finance) Lease Obligations | — | — | — | — | — | |||||||||||||||
Operating Lease Obligations (1) | $ | 143,585 | $ | 123,073 | $ | 20,512 | — | — | ||||||||||||
Purchase Obligations | — | — | — | — | — | |||||||||||||||
Other Long-term Liabilities Reflected on the Company’s Balance Sheet under the GAAP of the primary financial statements | — | — | — | — | — | |||||||||||||||
Interest on Capital Lease | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 143,585 | $ | 123,073 | $ | 20,512 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Company’s annual financial statements have been prepared in accordance with U.S. GAAP.IFRS. Some accounting policies have a significant impact on the amount reported in these financial statements. A summary of those significant accounting policies can be found in the Summary of Significant Accounting Policies in the annual financial statements. Note that the preparation of this Annual Report requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes, as explained below, that the most critical accounting policies cover the following areas: accounts receivable; inventory;foreign currency translation, financial instruments, investment in associates, intangible assets, goodwill, derivative liability, convertible debentures, share capital, share-based compensation, revenue recognition; stock-based compensation, derivative liabilityrecognition, royalties and licenses, and income taxes.
Accounts Receivable
Accounts receivable invoicesForeign currency translation
The functional currency of an entity is the currency of the primary economic environment in which the entity operates. The functional currency of the Company and Liquid Canada changed from the CAD to the USD dollar effective September 1, 2018. The functional currency of Majesco is the USD. The functional currency of Waterproof is the CAD. The functional currency determinations were conducted through an analysis of the consideration factors identified in IAS 21,The Effects of Changes in Foreign Exchange Rates.
Transactions in currencies other than USD are recorded whenat exchange rates prevailing on the productsdates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are deliveredtranslated at the period end exchange rate while non-monetary assets and title transfers to customersliabilities in foreign
33
currencies are translated at historical rates. Revenues and expenses are translated at the average exchange rates approximating those in effect during the reporting period.
For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s USD operations are translated into CAD at the exchange rate at the reporting date. The income and expenses are translated using average rate. Foreign currency differences that arise on translation for consolidation purposes are recognized in other comprehensive income (loss).
Financial instruments
Financial assets
On initial recognition, financial assets are recognized at fair value and are subsequently classified and measured at: (i) amortized cost; (ii) fair value through other comprehensive income (“FVOCI”); or when bottling services are performed(iii) fair value through profit or loss (“FVTPL”). The classification of financial assets is generally based on the business model in which a financial asset is managed and collectionits contractual cash flow characteristics. A financial asset is measured at fair value net of related receivables is reasonably assured. Allowances for doubtful accounts are based primarily on historicalwrite-off experience. Account balancestransaction costs that are deemed uncollectibledirectly attributable to its acquisition except for financial assets at FVTPL where transaction costs are charged off againstexpensed. All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. On initial recognition of an equity instrument that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income.
The classification determines the method by which the financial assets are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Receivables and loans receivable are measured at amortized cost with subsequent impairments recognized in profit or loss. Cash, restricted cash, and investment in equity instruments are classified as FVTPL.
Impairment
An ‘expected credit loss’ impairment model applies which requires a loss allowance after all meansto be recognized based on expected credit losses. The estimated present value of collectionfuture cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in profit or loss for the period.
In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been exhausted andhad the potential for recovery is considered remote. Allowances for doubtfulimpairment not been recognized.
For the years presented, the Company did not record an expected credit loss on its accounts receivable; however, an expected credit loss of $nil are netted against accounts$145,431 was recorded on its loans receivable as at February 28, 2018 (2017: $nil)November 30, 2019 (2018 - $Nil). A 10% change
Financial liabilities
Financial liabilities are designated as either: (i) fair value through profit or loss; or (ii) other financial liabilities. All financial liabilities are classified and subsequently measured at amortized cost except for financial liabilities at FVTPL. The classification determines the method by which the financial liabilities are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Accounts payable and accrued liabilities, due to related parties, loans payable, and convertible debentures are classified as other financial liabilities and carried on the statement of financial position at amortized cost. Derivative liabilities are measured at FVTPL.
34
Investment in associates
The Company’s investment in associates was accounted for using the equity method of accounting. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the estimates for doubtful accounts would not resultassociate is carried in the statement of financial position at cost. The statement of loss reflects the share of the results of operations of the associate until significant influence ceases. Where there has been a material change recognized directly in the equity of the associate, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of changes in shareholders’ equity (deficiency). Profits and losses resulting from transactions between the Company and the associate are eliminated to the financial statements.
Inventory
Raw materials and finished goods purchased for resale are valued atextent of the lower of cost, determined on a first-in, first-out basis, and market value. Finished goods, produced from manufacturing operations, are valued at the lower of standard cost which approximates average cost of raw materials, direct labour and overhead and market value. The provisions for obsolete or excess inventory are based on estimated forecasted usage of inventories. A significant change in demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory. Provisions for obsolete or excess inventory are recorded as cost of goods sold. At February 28, 2018, the inventory balance was presented net of a provision for obsolete inventoryinterest in the associate.
Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The financial statements include the Company’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company from the date that significant influence or joint control commences, until the date that significant influence or joint control ceases. When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of $nil (2017: $15,638). A 10% change inthat interest, including any long-term investments, is reduced to nil, and the estimatesrecognition of provision for obsolete inventory would not result in a material changefurther losses is discontinued, except to the financial statements.
Revenue Recognition
Revenueextent that the Company has obligations, or has made payments on salesbehalf of products is recognized when the products are delivered and title transfers to customers. Revenues from the provision of manufacturing, bottling or other services are recognized when the services are performed and collection of related receivables is reasonably assured.investee. The Company records shippingused the equity method of accounting for its 49% investment in Waterproof until significant influence ceased on March 1, 2019 and handling revenue as a component of sales revenue,for its 50% investment in Household Pests.
Equipment
Equipment is stated at historical cost less accumulated depreciation and shipping and handlingaccumulated impairment losses.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of sales. Incentives offeredthe item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to customersprofit or loss during the financial period in which they are incurred.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in profit or loss.
Assets under construction are not depreciated until available for their intended use.
Depreciation is charged over the estimated useful lives using the declining balance method as follows:
Computer equipment
30%
Intangible assets
The Company has intangible assets from business acquisitions and development of gaming content. The amortization method, useful life and residual values are assessed annually and the assets are tested for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Amortization expense is recorded on a straight-line basis beginning with the month the corresponding assets are available for use and over the estimated useful lives provided below:
35
Video game catalogues
15 years
Brands
indefinite
Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the accounts and any gain or loss is reflected in profit and loss. Expenditures for repairs and maintenance are expensed as incurred.
Video game catalogues
The video game catalogues are made up of a diverse variety of games, ranging in age and popularity. The catalogues are unique due to the diverse nature of the products within the catalogues, making it difficult to assign a useful life. The useful life of 15 years represents management’s view of the expected period over which the Company expects benefits from the acquired gaming content packaged as catalogues. The election of this useful life is supported by internal game titles still producing revenue at this age.
Video game development expenditures, including rebates, cash discounts, volume discounts,the cost of material, direct labour, and slotting feesother direct costs are recordedrecognized as a reduction of net salesan intangible asset when the salesfollowing recognition requirements are recognized.met:
Stock-based Compensation·
Under U.S. GAAP,the development costs can be measured reliably;
·
the project is technically and commercially feasible;
·
the Group intends to and has sufficient resources to complete the project;
·
the Group has the ability to use or sell the software, and
·
the software will generate probable future economic benefits.
Video games being developed are amortized once development is complete and the game starts to generate income.
Brand
Through the acquisition of Majesco, the Company follows Accounting Standards Codification (“ASC”) 718 Share-Based Payment (“ASC 718”). ASC 718 requiresacquired the “Majesco Entertainment” brand which was determined to have an indefinite life.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized but is subject to, at a minimum, annual impairment tests. The Company assesses the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value is less than its carrying value. Impairment is tested at the cost center level by comparing the fair value of a cost center with its carrying amount including goodwill. If the carrying amount of the cost center exceeds its fair value, goodwill of the cost center is considered impaired and the second step of the test is performed to recognizedetermine the amount of impairment loss, if any.
Impairment of non-financial assets
The carrying amount of the Company’s non-financial assets is reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in profit or loss.
The recoverable amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the statementestimates used to determine the recoverable amount, however, not to an amount
36
higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years.
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of operationsan acquisition is measured as the grantaggregate of the consideration transferred, measured at acquisition date fair value, and the amount of share-based compensation awards granted to employees over the requisite service period. Compensation expense recognized reflects estimates of award forfeitures and any changes in estimates thereof are reflectednon-controlling interest in the periodacquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of change.the acquiree’s identifiable new assets. Acquisition costs incurred are expensed.
Compensation costs are charged to the Consolidated Statements of Comprehensive Loss.
Derivative Liabilityliability
Under ASC815-40-15 Derivatives and Hedging,non-employee stock options grantedShare purchase warrants outstanding during the yearyears ended February 28, 2011November 30, 2019 and 2018 met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the“fixed-for-fixed” criteria of that guidance. “fixed-for-fixed” criteria. As a result, the Company was required to separately account for the stock optionswarrants as a derivative instrument liability recorded at fair value andmarked-to-market each period with the changes in the fair value each period charged or credited to income.loss. Changes in fair value are recognized as gain/loss on derivative liability until the warrants are exercised or expire.
Convertible debentures
The Company’s convertible debenture was classified as a liability, less the portion relating to the conversion feature which is classified as a component of equity. As a result, the recorded liability to repay the convertible notes is lower than its face value. The liability was initially recorded at fair value and subsequently at amortized cost using the effective interest rate method; the liability is accreted to the face value over the term of the convertible debenture.
Share capital
Financial instruments issued by the Company are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Company’s common shares, share warrants, and options are classified as equity instruments.
Incremental costs directly attributable to the issue of new shares or options are recognized as a deduction from equity, net of tax.
Valuation of equity units issued in private placements:
The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.
The fair value of the common shares issued in private placements is determined to be the more easily measurable component as they are valued at their fair value which is determined by the closing price on the issuance date. The remaining balance, if any, is allocated to the attached warrants. Any fair value attributed to the warrants is recorded to reserves.
Loss per share
Basic and diluted loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of shares outstanding during the reporting period. If applicable, diluted income per share is computed similar to basic income per share except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of share options, warrants, and convertible debentures, if dilutive. The number of additional shares is calculated by assuming that outstanding share
37
options and warrants were exercised and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting periods. For the years presented, this calculation proved to be anti-dilutive.
Share-based compensation
The Company grants stock compensation untiloptions to buy common shares of the Company to directors, officers and consultants.
All share-based payments made to employees and non-employees are measured and recognized using the Black-Scholes option pricing model. For employees, the fair value of the options is measured at grant date. For non-employees, the fair value of the options is measured on the earlier of the date at which the counterparty performance is complete, the date the performance commitment is reached, or the date at which the equity instruments are granted if they are fully vested and afternon-forfeitable. Share-based payments to non-employees are measured at the fair value of the goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. Stock options that vest over time are recognized using the graded vesting method. Share based compensation is recognized as changean expense with a corresponding increase in reserves. At each financial reporting period, the amount recognized as expense is adjusted to reflect the number of share options expected to vest. If and when the stock options are ultimately exercised, the applicable amounts of reserves are transferred to share capital.
Where the terms of a stock option are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value.value of the stock-based compensation arrangement or is otherwise beneficial to the employee as measured at the date of modification over the remaining vesting period.
Revenue recognition
Animation production services
Revenue from animation production services provided is recognized when the services have been provided and control of the deliverable has been transferred to the customer. Revenue collected prior to it being earned is recorded as deferred revenue and recognized as the related services are provided. Management estimates the pace of revenue recognition based on contract milestones and determination of when it considered the revenue to be earned. The Company’s arrangements with customers are evidenced by contracts with customers. Any costs incurred to secure a contract will be capitalized and amortized over the period in which the revenue is recognized.
Software games
Revenue from sales of interactive software games on game consoles and PCs are recognized as revenue when games are purchased by a customer.
Sales of the Company’s games are made by third party gaming platform companies pursuant to license agreements, and these gaming platform companies retain an agreed upon portion of sales as fees. The Company reports revenues related to these arrangements net of the fees retained by the gaming platform companies, as the Company has determined that the gaming platform companies are considered the primary obligors to the end consumers for the sale of the games.
Royalties and licenses
Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of sales at the contractual rate based on a percentage of the revenue earned.
38
Income Taxestaxes
Current income tax
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the country where the Company operates and generates taxable income.
Deferred income tax
Deferred income tax is provided for based on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.
Deferred income tax assets and liabilities are computedmeasured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on differences between the carrying amount of assets and liabilities on the balance sheet and their corresponding tax values using the enacted income tax rates (and tax laws) that have been enacted or substantively enacted by tax jurisdiction at each balance sheet date. the end of the reporting period.
Deferred income tax assets also result from unused loss carry-forwards and other deductions. The valuation of deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets is reviewed annuallyagainst current income tax liabilities and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable amount. Significant management judgment is required in determining our provision fordeferred income taxes ourrelate to the same taxable entity and the same taxation authority.
Current income and deferred tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Accounting pronouncements not yet adopted
A number of new standards, amendments to standards and interpretations applicable to the Company are not yet effective for the year ended November 30, 2019 and have not been applied in preparing these consolidated financial statements.
a)
IFRS 16 – Leases: specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities and any valuation allowance recorded against our net deferred income tax assets. We evaluate all available evidence, such as recent and expected future operating results by tax jurisdiction, and current and enacted tax legislation and other temporary differences between book and tax accounting to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. There is a risk that management estimates for operating results could vary significantly from actual results, which could materially affect the valuation of the deferred income tax asset. Although the Company has tax loss carry-forwards and other deferred income tax assets, management has determined certain of these deferred income tax assets do not meet the more likely than not criteria, and accordingly, these deferred income tax asset amounts have been offset by a valuation allowance as disclosed in Note 10 of the consolidated financial statements appearing in “Item 18 – Financial Statements” of this Annual Report.
New Pronouncements
In May 2014, the Financial Accounting Standard Board, or FASB, issued Accounting Standards UpdateNo. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU2014-09) to supersede existing revenue recognition guidance under generally accepted accounting principles in the United States, or GAAP. The core principle of ASU2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.
ASU2014-09 defines a five steps process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU2014-09 is effective for the fiscal and interim reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period presented within the option to elect certain practical
expedients as defined within ASU2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU2014-09. In August 2015, ASU2015-14 was issued which delayed the effective date to reporting periods beginning after December 15, 2017. The Company will adopt ASU2014-09, and its related clarifying ASUs, as of March 1, 2018. The Company is continuing to assess the potential effects of these ASUs on its consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company anticipates adopting the standard using the modified retrospective transition approach. Under this approach, the new standard would apply to all new contracts initiated on or after March 1, 2018. For existing contracts that have remaining obligations as of March 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. The Company does not expect the adoption of these ASUs to have a material impact on the consolidated financial statements.
In July 2015, the FASB issued ASU2015-11, “Simplifying the Measurement of Inventory” (“ASU2015-11”). Under ASU2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. ASU2015-11 defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU2015-11 is effective for interim and annual periods beginning after December 15, 2016. The Company adopted this standard, which did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued Accounting Standards UpdateNo. 2016-02 (ASU2016-2), Leases, which supersedes ASC Topic 840, Leases. ASU2016-2 requires lessees to recognize a lease liability and a lease asset for all leases includingunless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating leases,or finance, with a term greater than twelve monthsIFRS 16’s approach to lessor accounting substantially unchanged from its balance sheets. ASU2016-02 is effective for annual periods,predecessor, IAS 17. The standard was issued in January 2016 and interim periods within those annual periods, beginning after December 15, 2018, which will be our fiscal year beginning March 1, 2019 (fiscal 2020). Early adoption is permitted. The Company continues to evaluate the impact that the adoption will have on its consolidated financial statements and disclosures.
In March 2016, the FASB issued authoritative guidance under ASU2016-09, Compensation-Stock Compensation (Topic 718) “Improvements to Employee Share-Based Payment Accounting”. ASU2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU2016-09 is effective for annual periods beginning after December 15, 2016. The Company adoptedon or IFRSfter January 1, 2019. Management does not anticipate this standard which did notwill have a materialsignificant impact on the Company’s consolidated financial statements.
In June 2016,
b)
IFRIC 23 – Uncertainty Over Income Tax Treatments: clarifies how to apply the FASB issued ASUNo. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU2016-13”). Financial Instruments—Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basisrecognition andavailable-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold measurement requirements in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit lossesIAS 12 when there is a valuation account thatuncertainty over income tax treatments. It is deducted from the amortized cost basis of the financial assets to
present the net amount expected to be collected. Foravailable-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal yearsannual periods beginning on or after December 15,January 1, 2019 including interim periods within those fiscal years. We are currently evaluatingwith early adoption permitted. Management does not anticipate this standard having a material effect on the impact of the adoption of ASU2016-13 on ourCompany’s consolidated financial statements.
In August 2016, the FASB
Other accounting standards or amendments to existing accounting standards that have been issued ASUNo. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU2016-15”), which addresses the following eight specific cash flow issues: debt prepaymentbut have future effective dates are either not applicable or debt extinguishment costs; settlement ofzero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a materialsignificant impact on ourthe Company’s consolidated financial statements.
In November 2016, the FASB issued ASUNo. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this amendment was included in these consolidated financial statements within the consolidated Statements of Cash Flows.
In January 2017, the FASB issued Accounting Standards Update2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU2017-01”). ASU2017-01 clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. ASU2017-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be our fiscal year beginning March 1, 2018 (fiscal 2019). Early adoption is not permitted.
39
G.
Safe Harbor
The Company will adopt this guidance inseeks safe harbor for our forward-looking statements. Please see the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU2017-04”). ASU2017-04 simplifies how an entity is required to test goodwill for impairment. ASU2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, which will be our fiscal year beginning March 1, 2020 (fiscal 2021). Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2021. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU2017-09”). ASU2017-09 clarifies the guidance on when to apply modification accounting for share-based payment awards. ASU2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be our fiscal year beginning March 1, 2018 (fiscal 2019). Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.
Item 6. – Directors, Senior Management and Employees
A.
Directors and Senior Management
The following is a list of the current directors and senior officers of the Company, their municipalities of residence, their current positions with the Company, areas of experience, and principal business activities performed outside the Company:
Nancy Basi
|
| |
|
| |
Donna M. Moroney | Ms. Moroney has been Corporate Secretary of the |
There are no arrangements or understandings pursuant to which any of the above was selected as a director or executive officer. There are no family relationships between any of the persons named above.
B.
Compensation
Compensation Principles
The Company is committed to the philosophy of sharing the benefits of success with those who help the Company grow and prosper. The Company’sCompany's strength and ability to sustain growth is based on an organization that perceives people as its single most important asset. The Company’sCompany's philosophy is to provide sufficient compensation opportunities in order to attract and retain key executive officers critical to the Company’sCompany's long-term success. The Company has developed an informal employee share option plan to increase the risk/reward ratio of its executive compensation program, to focus management on long-term strategic issues, and to align management’smanagement's interests with those of the shareholders of the Company in the sustained growth of shareholder value.
The Company does not have a formal compensation committee. The Company relies on the independent members of the Board for determining executive compensation. The Board may, from time to time, retain independent consultants to advise on compensation matters.
Compensation Program
The Company’sCompany's executive compensation program includes base salary, annual cash or short-term incentives (bonuses) and long-term incentive compensation in the form of stock options.
The compensation program is designed to:
·
promote an ownership mentality among key leadership and the Board of Directors;
·
enhance the overall performance of the Company; and
·
recognize and reward individual performance and responsibility.
Base Compensation
The Company determines base salary based on a combination of factors, including comparable market data, experience, expertise and job responsibilities. The Company’sCompany's process for determining executive compensation is relatively simple and does not include formal targets, criteria or analysis.Salary levels are reviewed periodically and adjustments may be made, if warranted, after an evaluation of executive and Company performance, salary trends in the Company’sCompany's business sector, and any increase in responsibilities assumed by the executive.
Short-Term Incentives
Bonuses for senior management are, with limited exceptions, discretionary and are intended to reward senior managers for exceptional performance that positively impacts the profitability and growth of the Company. Depending on the Company’sCompany's financial and operating performance, performance-based bonuses may be awarded.
Long-Term Incentives
The long-term incentives are intended to align executive and shareholder interests by creating a strong and direct link between executive compensation and shareholder return, and to enable executive officers to develop and maintain a significant, long-term stock ownership position in the Company’sCompany's common shares. Long-term incentives may be granted in the form of stock options which generally vest over several years of service with the Company. Further discussion follows in the section titled “Option-Based Awards”"Option-Based Awards".
Risk Considerations
As the Company does not have a bonus program in place for its employees generally, and any significant bonuses for the Named Executive Officers (as defined below in the section “Summary"Summary Compensation Table”Table") must be approved by the Board, the Board has not considered the implications of risks associated with the Company’sCompany's compensation policies and practices. While the Board of Directors does not formally analyse risks associated with the Company’sCompany's compensation policies and practices, these policies and practices do not include structural inconsistencies that are likely to unduly encourage or cause an executive officer to expose the Company to inappropriate or excessive risks.
Financial Instruments
No Named Executive Officer or director is permitted to purchase financial instruments to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the Named Executive Officer or director.
Option-Based Awards
The Company does not have a formal stock option plan. Options for the purchase of common shares of the Company are granted from time to time to directors, officers and employees as an incentive. These options are long-term incentives that generally vest over several years of service with the Company. The options granted
42
are exercisable at a price which is equal to or greater than the fair market value of the common shares at the date the options are granted. Options are granted in consideration of the level of responsibility of the employee as well as his or her impact or contribution to the long-term operating performance of the Company. In determining the amount and frequency of such grants, a variety of factors are evaluated, including job level, and past, current and prospective services rendered. The Board also takes into account the number of options, if any, previously granted, and the exercise price of any outstanding options to ensure that such grants are in accordance with all applicable regulatory policies.
Compensation Governance
Please see the sections above titled “Base Compensation”"Base Compensation", “Short-Term Incentives”"Short-Term Incentives", and “Long"Long Term Incentives”Incentives" for a discussion of the practices adopted by the Board to determine compensation for directors and executive officers. The Company does not have a formal compensation committee.
Summary Compensation Table
The following table (presented in accordance with Canada’sCanada's National Instrument Form51-102F6Statement of Executive Compensation)sets forth all annual and long term compensation for services in all capacities to the Company for the three most recently completed financial years of the Company in respect of:
(a)
each individual who acted as the Chief Executive Officer ("CEO") or the Chief Financial Officer ("CFO") or acted in a similar capacity for all or any portion of the most recently completed financial year, (b) each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and the CFO, |
(collectively the “Named Executive Officers” or “NEOs”).
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
The Company does not have formal employment or consulting agreements. The executive employment agreement with Chairman, President and CEO, Ralph McRae, effective June 1, 2015 (the “Executive Employment Agreement”), ended on September 15, 2017. Effective September 15, 2017, Mr. McRae invoices the Company for his consulting services.
Outstanding Option-Based Awards for Named Executive Officers
The following table sets forth information concerning all stock option awards outstanding at the end of the most recently completed fiscalfinancial year including awards granted beforewhose total compensation was, individually, more than $150,000 for that financial year, and
(c)
each individual who would have satisfied the criteria under paragraph (b) but for the fact that the individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of the most recently completed fiscal year, to each offinancial year.
(collectively the "Named Executive Officers. Officers" or "NEOs").
The Company has not granted any share-based awards.completed the Transaction on August 8, 2018. Its first financial year end after the Transaction was November 30, 2018. Information for the 2017 financial year reflects information for Liquid Canada, as the predecessor entity.
NEO | |||||||||||||||
| Salary ($) |
| Option- based awards(1) | Non-equity Incentive plan compensation | All Other Compen- sation
| Pension Value ($) | Total compen- sation
|
| ($) | ||||||
| Long- term incentive plans | ||||||||||||||
Daniel Cruz CFO, and director of Liquid | 2019
| 155,000(2) | Nil Nil | 369,468
| Nil Nil | Nil
| 6,000 Nil | Nil
| 530,468 | ||||||
Jesse Sutton | 2019 | 266,000(3) | Nil | Nil | Nil | Nil | Nil | Nil | 266,000 |
Charlie Brezer | 2019 | 155,000(4) | Nil | 369,468 | Nil | Nil | 6,000 | Nil | 530,468 |
(1)
The value of option awards reflects the grant datefairvalue ofoptionbased awards in the 2017, 2018 and 2019fiscal years. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model. The options are granted in U.S. dollars and are converted into Canadian dollars at the Bank of Canada closing rate as of the date of the options grant for accounting purposes.
(2)
Mr. Cruz charged consulting fees from Wawel Den Inc., a company controlled by Mr. Cruz.
(3)
Mr.Sutton charged consultingfees from ZiftInteractiveLLC., a company controlled byMr. Sutton.
(4)
Mr. Brezer charged consultingfees from Ispani Holdings Inc., a company controlled byMr. Brezer.
(5)
Includes directors fees chared to the Company.
During fiscal 2017,LiquidCanada entered into formal consulting agreements withWawelDen Inc., a company controlledbyMr. Cruz, and Ispani Holdings Inc., a company controlled by Mr. Brezer, whichexpired onDecember31, 2017. In January 2018,new agreementswith WawelDen Inc. and Ispani Holdings Inc. were entered intowhichexpired onDecember31, 2018. In January 2019,new agreementswith WawelDen Inc. and Ispani Holdings Inc. were entered intowhichexpired onDecember31, 2019. In May 2019,new agreementswith WawelDen Inc. and Ispani Holdings Inc. were entered intowhichcontinue on a month-to-month basis.
Outstanding Option-Based Awards for Named Executive Officers
The termsfollowing table sets forth particulars of all option-based and share-based awards outstanding for each Named Executive Officer at November 30, 2019:
| Option-based Awards | Share-based Awards | |||||
Name | Number of Securities underlying unexercised options (#) | Option exercise price ($) | Option Expiration Date | Value of unexercised in-the-money-options ($)(1) | Number of shares or units of shares that have not vested (#) | Market or payout value of share awards that have not vested ($)(2) | Market or payout value of vested share-based awards not paid out or distributed ($) |
Daniel Cruz | 150,000 | US$2.55 | Feb 28, 2024 | 159,468 | N/A | N/A | N/A |
Charlie Brezer | 150,000 | US$2.55 | Feb 28, 2024 | 159,468 | N/A | N/A | N/A |
TOTAL | 300,000 |
|
|
|
|
|
|
(1)
Based on the difference between the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year) of US$3.35 and the stock options are discussedoption exercise price, multiplied by the number of Shares under option converted at the “Option-Based Awards” section above.exchange November 30, 2019 foreign exchange rate of 1.3289:1.
(2)
Based on the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year) of US$3.35.
44
Option Exercises During the Most Recently Completed Fiscal Year
No stock options were exercised by the Named Executive Officers during the most recently completed fiscal year.
Option Repricing
The Company did not reprice any stock options during the most recent fiscal year.
Value Vested or Earned During the Year
The following table sets outforth particulars of the value of option-based awards and share awards which vested orduring the year ended November 30, 2019, and the value of non-equity incentive plan compensation earned of all stock options that vested duringthe most recently completed fiscalduring the year ended Novemebr 30, 2019 for each of the Named Executive Officers:Officer:
Name | Option-based awards-Value vested during the year ($) | Share awards – Value during the year on vesting ($)(2) | Non-equity incentive plan compensation-Pay-out during the year ($)(3) | ||
| 159,468 | N/A | N/A | ||
| |||||
| N/A | N/A |
(1)
This amount is the aggregate dollar value that would have been realized if the options under option based awards had been exercised on the vesting date. It is determined by the difference between the exercise price of the option and the market price on November 30, 2019 converted to Canadian dollars at the exchange rate of 1.3289. If the option was not-in-the-money then a NIL value was assigned.
(2)
The Company has not granted any share-based awards.
(3)
The Company did not pay any non-equity incentive plan compensation during the year ended November 30, 2019.
The Company does not have a formal stock option plan. Stock options generally vest over several years of service with the Company.on grant date. The value vested during the year varies according to the vesting date and the market price of the underlying securities on a selected exercise date.
Further details regarding stock options may be found in the sections above titled “Option-Based"Option-Based Awards for Named Executive Officers”Officers" and below titled “Outstanding"Outstanding Option-Based Awards for Directors”Directors".
Pension Plan Benefits
The Company does not have a pension plan or defined contribution plan that provides for payments or benefits to the Named Executive Officers at, following, or in connection with retirement.
Termination of Employment, Change in Responsibilities and Employment Contracts
The Executive Employment Agreement between the Company, LBIC and Ralph D. McRae (the “Executive”), effective June 1, 2015 was terminated on September 15, 2017. In connection with the Legacy Transaction as described below under Item 7. B. 1. a) – “Major Shareholders and Related Property Transaction – Related party transactions,” the $900,000 severance obligation was fully satisfied on September 15, 2017.
The Company and its subsidiaries have no arrangements that provide for payments to a Named Executive Officer at, following or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, change in control of the Company or change in a Named Executive Officer’sOfficer's responsibilities.
Director Compensation
Directors who are not paid executives of the Company receive $1,500 per quarter(pro-rated for those serving less than a full quarter) and $500 for each Board meeting and committee meeting attended. Directors who are also executives of the Company do not receive director’s fees.
Reference is made to the Summary Compensation Table above for details of compensation paid to directorstodirectors who are also Named Executive Officers, in their capacity as executiveofficers of the Company. Directors are also compensated for their services in their capacity as directors by the granting from time to time of incentive stock options.
The following table sets forth all amounts of compensation provided to the directors, who are not Named Executive Officers, for the Company’sCompany's most recently completed fiscal year:
Director Name | Fees Earned ($) | Share-based Awards ($) | Option-Based Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||
James Corbett | 11,000 | nil | nil | nil | 20,000 | (2) | 31,000 | |||||||||||||||||
Darryl Eddy | 11,000 | nil | nil | nil | 40,000 | (2) | 51,000 | |||||||||||||||||
Stephen Fane | 6,000 | (1) | nil | nil | nil | 50,000 | (2) | 56,000 | ||||||||||||||||
R. Thomas Gaglardi | 8,000 | nil | nil | nil | nil | 8,000 |
Director | Fees Earned ($) | Share-based Awards ($) | Option-Based Awards ($)(1) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) |
Joshua Jackson | 6,000 | Nil | 28,326 | Nil | Nil | 34,326 |
Stephen Jackson | 6,000 | Nil | 123,156 | Nil | Nil | 129,156 |
Nancy Basi(2) | 3,500 | N/A | N/A | N/A | N/A | N/A |
(1)
The value of option awards reflects the grant datefairvalue ofoptionbased awards in the 2019fiscal year. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model. The options are granted in U.S. dollars and are converted into Canadian dollars at the Bank of Canada closing rate as of the date of the options grant for accounting purposes.
(2)
Ms. Basi was appointed as a director of the Company on May 28, 2019.
Outstanding Option-Based Awards for Directors
Options for the purchase of Sharescommon shares of the Company are granted from time to time to directors under the same terms as those granted to employees, and described above in “Option-Based Awards”"Option-Based Awards".
The following table sets forth information concerningparticulars of all stock optionoption-based and share-based awards outstanding for each director, who was not a Named Executive Officer, at November 30, 2019:
| Option-based Awards | Share-based Awards | |||||
Name | Number of Securities underlying unexercised options (#) | Option exercise price ($) | Option Expiration Date | Value of unexercised in-the-money-options ($)(1) | Number of shares or units of shares that have not vested (#) | Market or payout value of share awards that have not vested ($)(2) | Market or payout value of vested share-based awards not paid out or distributed ($) |
Joshua Jackson | 11,500 | US$2.55 | Feb 28, 2024 | 12,226 | N/A | N/A | N/A |
Stephen Jackson | 50,000 | US$2.55 | Feb 28, 2024 | 53,156 | N/A | N/A | N/A |
Nancy Basi | Nil | N/A | N/A | N/A | N/A | N/A | N/A |
TOTAL | 61,500 |
|
|
|
|
|
|
(1)
Based on the enddifference between the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year, including awards granted beforeyear) of US$3.35 and the stock option exercise price, multiplied by the number of Shares under option converted at the exchange November 30, 2019 foreign exchange rate of 1.3289:1.
(2)
Based on the closing price of the Company’s Shares on the Exchange on November 30, 2019 (being the last day the Company's shares traded during the most recently completed fiscal year, to eachyear) of the directors. The Company has not granted any share-based awards.US$3.35.
| ||||||||||||||
|
|
|
|
| ||||||||||
|
|
|
|
|
| ||||||||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
No stock options were exercised by the directors during the most recently completed fiscal year, nor were any of the stock options repriced during that period.
46
Value Vested or Earned During the Year
The following table sets outforth particulars of the value of option-based awards and share-based awards which vested orduring the year ended November 30, 2019, and the value of non-equity incentive plan compensation earned of all stock options that vested duringthe most recently completed fiscalduring the year ended November 30, 2019 for each director of the directorsCompany who arewas not a Named Executive Officers:Officer:
| Option-based awards-Value vested during the year ($)(1) |
| Non-equity incentive plan compensation-Pay-out during the year ($)(3) | |
| ||||
| N/A | N/A | ||
Stephen | 53,156 | N/A | N/A | |
| N/A | N/A | N/A |
(1)
This amount is the aggregate dollar value that would have been realized if the options under option based awards had been exercised on the vesting date. It is determined by the difference between the exercise price of the option and the market price on November 30, 2019 converted to Canadian dollars at the exchange rate of 1.3289. If the option was not-in-the-money then a NIL value was assigned.
(2)
The Company has not granted any share-based awards.
(3)
The Company did not pay any non-equity incentive plan compensation during the year ended November 30, 2019.
The Company does not have a formal stock option plan. Options grantedStock options generally vest over several years of service with the Company.on grant date. The value vested during the year varies according to the vesting date and the market price of the underlying Sharessecurities on a selected exercise date. In the Company’s fiscal year ended February 28, 2018, no stock options were exercised by directors.
Further details regarding stock options may be found in the sections above titled “Option-Based"Option-Based Awards for Named Executive Officers”Officers" and “Outstanding"Outstanding Option-Based Awards for Directors”Directors".
C.
Board Practices
1.
The Company’s Board of Directors has been set at five directors and is divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three-year terms of office. Any director whose term has expired is eligible for re-election subject to Board approval.
The following table lists the currentclasses of directors and remaining terms of office for the directors and the period during which the directors have served:
Name | Class | of Director |
| Expiry Term | ||
Joshua Jackson | Class III | January 2014 | 2021 annual general meeting (“ | |||
Daniel Cruz | Class I | May 2017 | 2022 AGM | |||
Charles Brezer | Class II | October 2015 | 2020 AGM | |||
Stephen Jackson | Class III | July 2018 | 2021 AGM | |||
Nancy Basi | Class I | May 2019 | 2022 AGM |
Two
Three of the five current directors are independent based upon the tests for independence set forth in applicable Canadian and U.S. securities legislation. Ralph McRaeDaniel Cruz is not independent as he is the Chairman, President and Chief Executive
47
Financial Officer of the Company. R. Thomas GaglardiCompany and Charlie Brezer is not independent as he has beneficial ownershipbased on the compensation received by him.
2.
There are no directors’ service contracts with the Company or any of more than 10%its subsidiaries providing for benefits upon termination of the common shares of the Company.service.
3.
Audit Committee
The members of the Company’s Audit Committee are:
Stephen Jackson
Two out of the three membersNancy Basi
All of the Audit Committee being James Corbett and Darryl R. Eddy, are independent directors, are financially literate, and are considered “financial experts” as defined by the SEC. Ralph McRae, by virtue of acting as the Chairman, President and Chief Executive Officer of the Company, is not considered independent. For details on their professional careers, see “Item“Item 6 - A. Directors, Senior Management and Employees”Employees”.
The Audit Committee has a written charter which specifies the scope of its authority and responsibility. A copy of the Audit Committee Charter was previously filed as an exhibit to the Company’s Annual Report on Form20-F, filed on May 30, 2008, and is incorporated by reference. The Audit Committee reviews andre-assesses the adequacy of its written charter on an annual basis. The function of the Audit Committee is one of review and oversight. The committee also is responsible for monitoring the independence, qualifications and performance of the Company’s external auditors, overseeing the audits of the Company’s financial statements and approving anynon-audit services. The committee reports to the Board of Directors from time to time with respect to its activities and its recommendations and provides background and supporting information as may be necessary for the Board of Directors to make an informed decision.
Nomination of Directors
The Board has adopted a charter for the Nominating and Corporate Governance Committee. The committee is currently comprised of the twothree independent directors:directors :
Joshua Jackson
Stephen Jackson
Nancy Basi
Pursuant to its charter, the responsibilities, powers and operation of the committee include:include : identifying and recommending new candidates for Board nomination; evaluating the effectiveness of the Board, its committees and its directors; monitoring and reviewing the Company’s corporate governance practices and policies and making recommendations for changes when appropriate; and ensuring that a comprehensive orientation is received by new directors and that continuing education opportunities are available.
In connection with its responsibilities relating to Board nominations, the committee is responsible for identifying and recommending new candidates for nomination to the Board based upon: (i) the competencies and skills necessary for the Board as a whole to possess; (ii) the competencies and skills necessary for each individual director to possess; (iii) the competencies and skills which each new nominee to the Board is expected to bring; and (iv) whether the proposed nominee to the Board will be able to devote sufficient time and resources to the Company. Other members of the Board and representatives of the food and beverage industry are consulted for possible candidates.
The size of the Board is reviewed on a regular basis by the committee and the Board. The committee and the Board will take into account the number of directors required to carry out the Board’s duties effectively, and to maintain a diversity of view and experience.
Compensation of Directors and the CEO
The independent directors have the responsibility for determining and reviewing compensation for the directors and senior management of the Company.
Reference is made to the Compensation section above for further information.
Assessments
The Board conducts informal assessments of the Board’sBoard's effectiveness, the individual directors and each of its committees on a regular basis. As part of the assessments, the Board reviews the mandates or charters and conducts reviews of applicable corporate policies.
As of May 1, 2018,November 30, 2019, the executive officers of Leading Brands, Inc.Liquid Media Group Ltd. are:
Ralph D. McRae Chairman, President and Chief Executive Officer
Daniel Cruz | Chief Financial Officer, Director |
Charlie Brezer | Director |
D.
Employees
Following are the number of employees of the Company and its subsidiaries for the past three fiscal years as at the end of each fiscal year:
February 28, 2018 | February 28, 2017 | February 29, 2016 | November 30, 2019 | November 30, 2018 | November 30, 2017 | ||||||||||
Canada | 0 | 24 | 73 | 0 | |||||||||||
United States | 0 | 0 | 0 |
E.
Share ownership
Options to purchase common shares from the Company are granted from time to time to directors, officers and employees of the Company on terms and conditions acceptable to the Board of Directors.
As of February 28, 2018,November 30, 2019, the Company had 669,000461,500 issued and outstanding options, with a weighted average exercise price of US$2.675.$3.39.
Of
All of the total stock options granted, 669,000 havewere fully vested and are available for exercise as of May 1, 2018.November 30, 2019.
The following table provides share ownership information with respect to the directors and officers listed in “Item 6 – Directors, Senior Management and Employees”Employees" above, as at May 1, 2018.February 28, 2020.
|
|
| ||||||||||||||
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
(1)
The information as to number of shares beneficially owned (directly or indirectly or over which control or direction is exercised) is not within the direct knowledge of the management of the Company and has been furnished by the respective director or officer. Percentages of ownership are based on 5,727,558 common shares of the Company issued and outstanding as at February 28, 2020.
(2)
The Debentures will mature two years from closing and will bear interest at 2% per annum. Each Debenture is convertible into Debenture Units at a price of US$1.50 per unit. Each Debenture Unit consists of one common share and one Debenture Warrant. Each Debenture Warrant will entitle the holder to acquire one common share of the Company for US$1.75 for a period of two years from the closing date of the Debenture offering.
(3)
18,338 of these shares are held by Wawel Den Inc., a company controlled by Mr. Cruz.
Further information regarding stock options with respect to the directors and officers may be found in the sections above, titled “Outstanding“Outstanding Option-Based Awards for Named Executive Officers”Officers” and “Outstanding“Outstanding Awards for Directors.Directors.”
There are no other arrangements involving the employees in the capital of the Company.
Item 7. – Major Shareholders and Related Party Transactions
A.
Major shareholders
As at May 1, 2018February 28, 2020, the Company had 2,802,4125,757,558 common shares without par value issued and outstanding.
1.
Following are the shareholders that are the beneficial owners of 5% or more of the Company’s voting securities, as of February 28, 2020:
(a)
Shareholder | Number of Shares | Percentage of Issued Capital |
Joshua Jackson | 930,306 | 16.24% |
(1)
Includes 263,640 common shares currently held, as well as 333,333 units issuable upon conversion the convertible debenture, consisting of 333,333 common shares and 333,333 common share purchase warrants, which, if fully exercised would be 333,333 common shares.
(b)
To the best of the Company's knowledge, there has been no significant change in the percentage ownership held by any major shareholders during the past three fiscal years.
(c)
The Company’s major shareholders do not have different voting rights than other shareholders.
2.
The Company’s register of 66 registered shareholders showed that as of February 28, 2020, 1,163,455 of the Company’s common shares, or 20.31%, were held by 24 registered shareholders residing in the United States. The register includes Cede and Co., an American depository holding shares on behalf of beneficial shareholders. However, since the Company meets the Business Contacts Test of the definition of a Foreign Private Issuer, the Company’s status as a Foreign Private Issuer has not changed.
3.
To the Company’s knowledge, the Company is not owned or controlled, directly or indirectly, by another corporation, any foreign government, or by any other natural or legal persons.
4.
To the Company’s knowledge, there are no arrangements the operation of which at a subsequent date may result in a change in control of the Company. A substantial number of common shares of the Company are held by depositories, brokerage firms and financial institutions in “street form”.
B.
Related party transactions
1.
The Company has not at any time during the period since the beginning of the last fiscal year to November 30, 2019 been a party to any material transactions in which any director or officer of the Company, or any relative or spouse, or any relative of any such spouse, has any direct or indirect material interest except as follows:
(a)
Shareholder | Number of Shares | Percentage of Issued Capital | ||||||
R. Thomas Gaglardi/ Northland Properties Corporation(1) | 419,125 | 15.0 | % | |||||
Salzhauer family | 197,971 | 7.1 | % | |||||
Ralph McRae | 176,126 | 6.3 | % |
(b)
Incurred consulting and director fees of $161,000 (2018 - $120,182) to Wawel Den Inc. (“Wawel”), a company controlled by Daniel Cruz, the CFO and a director of the Company, and share-based compensation of $369,468 (2017 - $Nil) to Mr. Cruz. During the year ended November 30, 2018, the Company issued 18,338 common shares to settle $120,000 in outstanding accounts payable owing to Wawel. During the year ended November 30, 2019, Mr. Cruz advanced $93,060 (US$70,000) to the Company for the convertible debenture offering. In July 2019, Mr. Cruz converted his debenture into 46,667 units of the Company with each unit consisting of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 28, 2021. As at November 30, 2019, $20,460 (2017 - $47,578) was included in accounts payable and accrued liabilities as owing to Mr. Cruz and Wawel.
(c)
Incurred consulting fees of $266,000 (2018 - $60,000) to Zift, a company controlled by Jesse Sutton, the director of Majesco. As at November 30, 2019, $908,970 (2018 - $1,128,324) was included in accounts payable and accrued liabilities as owing to Zift.
51
(d)
Incurred consulting fees of $nil (2018 - $107,162) to Five Zoo C&D Inc. (“Five Zoo”), a company controlled by Krysanne Katsoolis, the former president, chief executive officer and a director of the Company. As at November 30, 2019, $318,937 (2018 - $159,617) was included in accounts payable and accrued liabilities as owing to Five Zoo.
(e)
Incurred directors fees of $6,000 (2018 - $Nil) and share-based compensation of $28,326 (2018 - $nil) to Joshua Jackson, Chair and a director of the Company. During the year ended November 30, 2019, Mr. Jackson advanced $664,717 (US$500,000) to the Company for the convertible debenture offering. As at November 30, 2019, $144,900 (2018 - $36,018) was included in accounts payable and accrued liabilities as owing to Mr. Jackson.
(f)
Incurred directors fees of $6,000 (2018 - $Nil) and share-based compensation of $123,156 (2018 - $Nil) to Stephen Jackson, a director of the Company. As at August 31, 2019, $6,000 (2018 - $Nil) was included in accounts payable and accrued liabilities as owing to Mr. Jackson.
(g)
Incurred directors fees of $3,500 (2018 - $Nil) to Nancy Basi, a director of the Company. As at November 30, 2019, $3,500 (2018 - $Nil) was included in accounts payable and accrued liabilities as owing to Ms. Basi.
(h)
Earned interest income of $8,137 (2017 – $8,116) from a loan receivable issued to Waterproof. As at November 30, 2019, Waterproof owed the Company $94,882 (2018 - $104,553) for the outstanding balance of principal and interest on the loan.
The Company believes that the services described above were provided to the Company on a basis not less favorable than would be provided to an unrelated third party.
C.
Interest of experts and counsel
This Item is not applicable for an Annual Report.
Item 8. – Financial Information
A.
Consolidated Statements and Other Financial Information.
Please see “Item“Item 18 - Financial Statements”Statements” for a list of the financial statements filed as part of this Annual Report.
Legal Proceedings
The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business, none of which are expected to have significant effects on the Company’s financial position, profitability, or cash flows.
In October 2018, the former president and chief executive officer of Liquid Canada (the “Claimant”) filed a lawsuit with the United States District Court Southern District of New York against the Company for approximately $11,800,000 for breach of contract, defamation, and violation of human rights (the “Action”). The settlement severance relatedClaimant asserts the existence of an unwritten contract which, if it was entered, increased her base compensation from US$120,000 to US$400,000 per year. Such contract was not executed by any party and is not, the Company states, a contract the Company would have contemplated at the time. The Company’s counsel applied to the Company’s Edmonton bottling plant legal disputecourt seeking dismissal of the Action. As at November 30, 2019, the violation of human rights claim was dismissed. In February 2020, the Company settled with the Claimant for US$240,000 which has been accruedrecorded as at November 30, 2019.
In January 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company for approximately $400,000 for unpaid consulting fees, US$500,000 for the unpaid cash consideration for the purchase of 51% interest in Majesco, and a payment for the difference between US$500,000 and the value of the Company’s consolidatedshares issued on the purchase of the 51% interest in Majesco. The Company has accrued $1,064,450 as at November 30, 2019. Management is currently seeking legal advice on this lawsuit.
In February 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company in relation to the issuance of a share certificate for 59,706 common shares of the Company, 32,149 of which the consultant states is owing to him and general and special damages in relation to the shares. Management is currently seeking legal advice on this lawsuit. No provision has been included in the financial statements.statements as of November 30, 2019.
Dividend Distributions
The Company intends to consider dividend distributions when it determines that it cannot realize better returns to investors by investing internally.
B.
Significant Changes
There have been no significant changes since the date of the annual financial statements.
Item 9. – The Offer and Listing
A.
Offer and listing details.
|
(a) For the five most recent full fiscal years:
Period | High $ | Low $ | ||||||
March 1, 2017 to Feb. 28, 2018 | 2.82 | 0.82 | ||||||
March 1, 2016 to Feb. 28, 2017 | 3.34 | 1.31 | ||||||
March 1, 2015 to Feb. 29, 2016 | 4.27 | 1.62 | ||||||
March 1, 2014 to Feb. 28, 2015 | 5.05 | 2.83 | ||||||
March 1, 2013 to Feb. 28, 2014 | 5.83 | 3.30 |
(b) For each full financial quarter of the two most recent full fiscal years:
Period | High $ | Low $ | ||||||
4th Quarter Dec. 1, 2017 – Feb. 28, 2018 | 1.85 | 1.27 | ||||||
3rd Quarter Sept. 1, 2017 – Nov. 30, 2017 | 2.82 | 0.82 | ||||||
2nd Quarter June 1, 2017 – Aug. 31, 2017 | 2.01 | 0.85 | ||||||
1st Quarter Mar. 1, 2017 – May 31, 2017 | 2.14 | 1.66 | ||||||
4th Quarter Dec. 1, 2016 – Feb. 28, 2017 | 2.92 | 1.47 | ||||||
3rd Quarter Sept. 1, 2016 – Nov. 30, 2016 | 2.43 | 1.38 | ||||||
2nd Quarter June 1, 2016 – Aug. 31, 2016 | 3.34 | 1.38 | ||||||
1st Quarter Mar. 1, 2016 – May 31, 2016 | 2.65 | 1.31 |
(c) For the most recent six months:
Period | High $ | Low $ | ||||||
April 1 – 30, 2018 | 1.22 | 1.04 | ||||||
March 1 – 30, 2018 | 1.38 | 1.19 | ||||||
February 1 – 28, 2018 | 1.46 | 1.27 | ||||||
January 1 – 31, 2018 | 1.85 | 1.53 | ||||||
December 1 – 29, 2017 | 1.74 | 1.41 | ||||||
November 1 – 30, 2017 | 2.03 | 1.60 |
The Company’s common shares have been quoted on the Nasdaq (formerly called the NasdaqSmall-cap Market) since August 3, 1993. The ticker symbolThis item is LBIX.not applicable for an Annual Report.
B.
Item 10. – Additional InformationPlan of Distribution
This item is not applicable for an Annual Report.
C.
Markets
The Company’s common shares have been quoted on the NASDAQ (formerly called the NASDAQ Small-cap Market) since August 3, 1993. The ticker symbol is YVR.
D.
Selling Shareholders
This item is not applicable for an Annual Report.
E.
Diliution
This item is not applicable for an Annual Report.
F.
Expense of the Issue
This item is not applicable for an Annual Report.
53
Item 10. – Additional Information
A.
Share capital
This item is not applicable for an Annual Report.
B.
Memorandum and articles of association.
The Notice of Articles relating to the consolidation of the Company’s common shares and the increase in authorized share capital that were filed with the British Columbia Registry Services on February 1, 2010 were filed on a Form6-K on February 3, 2010.
All other information required by this “Item 10.B”“Item 10.B” was previously reported to the SEC in the Company’s registration statement on FormF-3, filed on September 24, 2007, and is incorporated by reference.
C. |
As part of the sale of the Company’s Legacy Transaction, on September 15, 2017 the Company disposed of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and together with members of his family, a majority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. In connection with the Legacy Transaction agreement, the severance obligation under the Executive Employment Agreement was satisfied. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond Holdings after all costs and expenses arising in relation to the Lease. The transaction was reviewed and approved by the disinterested directors of the Company.
Material contracts.
On September 17, 2017, the Company entered into the Arrangement Agreement to complete the Transaction and is seeking to list the post-acquisition entity on The Nasdaq. In accordance with the applicable Canadian securities laws, the Company plans to hold a special meetingacquire 100% of shareholders to consider resolutions to approve the issuance of the shares forming the consideration to be paid to Liquid shareholdersCanada pursuant to the Transaction, among other things. A special meeting of Company shareholders is expected to be held concurrently with a special meeting of Liquid shareholders, which will be called by Liquid to consider the Transaction. Closing of the Transaction is subject to Liquid receiving approval from its shareholders for the Transaction. The Transaction will also require the approval of Company shareholders and the Supreme Court of British Columbia (the “Court”), as well as certain regulatory approvals. A copy of the contract was filed on SEDAR (Canada) and EDGAR (U.S.A.) on September 18, 2017.
On January 14,15, 2018, the Company enteredannounced an amendment to the Arrangement Agreement by entering into the Amended and Restated Arrangement Agreement with Liquid Canada relating to the Transaction whereby the original agreed valuation of existing Company shares as part of the transaction was increased from USD$US$1.50 per share to USD$US$1.78 per share. As a result, Company shareholders are anticipated to hold 25.8% and Liquid shareholder are anticipated to hold 74.2%At the time of completion of the post-transaction entity. At the same time, the Company announced that Liquid had acquired 51% of Majesco, a proven gaming publisher. The acquisition of Majesco by Liquid satisfied one of the key terms of the Amended and Restated Arrangement Agreement whereby Liquid shall acquire a gaming studio.
On FebruaryTransaction on August 8, 2018, the Company announced that it had entered into a support agreement with Liquid’s subsidiary, Majesco, whereby the Company will invest in the exploitation of Majesco’s gaming properties in Asia. In order9,244,898 common shares issued and outstanding, including 6,442,486 issued to assistformer Liquid with the development of its gaming business (and in advanceCanada shareholders, representing 69.69% of the closing of the preferred share financing investment), the Company agreed to advance funds to Majesco so that Majesco can retain WPIC to assist Majesco develop its intellectual propertiesCompany’s issued and gaming content in the People’s Republic of China. Under the terms of the support agreement, the Company agreed to invest USD$50,000 to Majesco as consideration for receiving 5% of Majesco’s net profits from its sales of gaming assets in Asia for a period of 5 years. On February 5, 2018, the Company advanced an initial tranche of USD$25,000 of its planned USD$50,000 investment to Majesco. This amount is refundable from Majesco if the Transaction is not completed by June 1, 2018.outstanding shares.
D.
Exchange controls.
Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends, interest, royalties and similar payments, management fees, loan repayments, settlement of trade debts, or the repatriation of capital. Any such remittances to U.S. residents, however, may be subject to withholding tax.
E.
A brief and general description is included below of certain taxes, including withholding taxes, to which U.S. security holders may be subject under the existing tax laws and regulations of Canada. The consequences, if any, of provincial taxes are not considered.
Please note that the following information is a brief summary only and security holders should seek the advice of their own tax advisors with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any U.S. federal, state or local taxes.
Taxation on Dividends
Generally, cash dividends paid or deemed to be paid by a Canadian-corporation tonon-resident shareholders are subject to a withholding tax of 25% (unless an income tax convention applies to reduce the withholding tax rate to some other amount). Dividends paid to U.S. residents are subject to a withholding tax of 15%, and dividends paid to a U.S. resident company which owns 10% or more of the voting shares of the Canadian corporation are subject to a withholding tax of 5%. Dividends paid by a Canadian corporation to shareholders residing in Canada are not subject to withholding tax.
54
Taxation on Capital Gains
Generally, the disposition by anon-resident of shares of a Canadian public corporation is not subject to Canadian income tax, unless such shares are “taxable Canadian property” within the meaning of theIncome Tax Act (Canada) and no relief is afforded under any applicable tax treaty. The shares of the Company would be taxable Canadian property of anon-resident purchaser if thenon-resident purchaser used the shares in carrying on a business in Canada, or if thenon-resident, together with persons with whom he does not deal at arm’s length, owned 25% or more of the issued shares of any class of the capital stock of the Canadian corporation at any time during the five-year period immediately preceding the disposition.
In addition, Canada may tax capital gains realized by an individual resident in the United States on the disposition of shares of a Canadian corporation if the following conditions are met:
·
the individual was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition of shares; and
·
the individual owned the shares when he ceased to be resident in Canada.
Holders of common shares of the Company should seek independent advice from their own professional tax advisers with respect to the income tax consequences arising from the holding of common shares of the Company.
F. |
This item is not applicable for an Annual Report.
This item is not applicable for an Annual Report.
G.
Statement by experts.
This item is not applicable for an Annual Report.
H.
Documents on display.
Copies of documents concerning the Company, which are referred to in this Annual Report, are available for inspection at the head office of the Company located at Unit 101 - 33 W. 8th Avenue,#202, 5626 Larch Street, Vancouver, BC, Canada V5Y 1M8.V6M 4E1.
I.
Subsidiary Information.
This item is not applicable for an Annual Report. The Company sold all of its subsidiaries (as defined in Rule1-02(w) of RegulationS-X) during the fiscal year ended February 28, 2018.
Item 11. – Quantitative and Qualitative Disclosures About Market Risk
Currency risk
The Company concludes sales in U.S. dollars to customers in the U.S. and other foreign countries. The Company also purchases raw materials as well as equipment in U.S. dollars. Consequently, it is exposed to a variety of financial risks by virtue of its activities including currency, credit, interest rate, and liquidity risk.
(a)
Currency risk
Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. The Company’s operations are carried out in Canada and the United States. As at November 30, 2019, the Company had current assets totaling C$364,145 and current liabilities totalling C$2,356,044. These factors expose the Company to foreign currency exchange rate fluctuationsrisk, which could have an adverse effect on the profitability of the Company. A 1% change in the
55
exchange rate would change other comprehensive income/loss by approximately US$15,000. At this time, the Company currently does not have plans to enter into foreign currency future contracts to mitigate this risk, however it may do so in the future.
(b)
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
The Company’s cash is held in a large Canadian financial institution and a Bahamas based financial institution. The Company maintains certain cash deposits with respectSchedule I financial institutions, which from time to the receivable and payable balances denominated in U.S. dollars.time may exceed federally insured limits. The Company has not hedged itsexperienced any significant credit losses and believes it is not exposed to any significant credit risk. The Company’s restricted cash is held with a law firm in trust in which credit risk exposure is low. The Company’s sales tax receivable is due from the Government of Canada; therefore, the credit risk exposure is low.
The maximum exposure to currency fluctuations.credit risk as at November 30, 2019 and 2018 is the carrying value of the loans receivable. The Company has allowed for an expected credit loss of $145,431 on the loans receivable.
At February 28, 2018,
(c)
Interest rate risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. As at November 30, 2019, the loans included in loans payable and convertible debentures bear interest at rates ranging from 3.5% to 14.4% per annum and are due on demand. The Company does maintain bank accounts which earn interest at variable rates but it does not believe it is currently subject to any significant interest rate risk.
(d)
Liquidity risk
The Company’s ability to continue as a going concern is dependent on management’s ability to raise required funding through future equity issuances and through short-term borrowing. The Company manages its liquidity risk by forecasting cash balances included $1,457 denominated in U.S. dollars (2017 - $88,825), accounts receivable balances included $nil denominated in U.S. dollars (2017 - $2,688),flows from operations and anticipating any investing and financing activities. Management and the Company’s accounts payableBoard of Directors are actively involved in the review, planning and accrued liabilities balance included $4,095 denominated in U.S. dollars (2017 - $130,517).
approval of significant expenditures and commitments. As at February 28, 2018, all other factors being equal,November 30, 2019, the Company had a 5% U.S. dollar rise per Canadian dollar would have an unfavourable impactcash balance, including restricted cash, of approximately $100 on net earnings for$5,260,068 to settle current financial liabilities of $5,805,314. Additionally, as there is no assurance the year. A 5%U.S.-to-Canadian dollar decrease would have a positive impactconvertible debentures will be converted into common shares of similar magnitude.the Company, the Company is exposed to liquidity risk.
Item 12. – Description of Securities Other than Equity Securities
This item is not applicable for an Annual Report, except for “Item 12.D.3”“Item 12.D.3” and “Item 12.D.4.“Item 12.D.4.” The Company does not have securities represented by American Depositary Receipts.
PART II
Item 13. – Defaults, Dividend Arrearages and Delinquencies
None.
56
Item 14. – Material Modifications to the Rights of Security Holders and Use of Proceeds
A.
On February 2, 2010,October 15, 2018, a 5:1 consolidation of the Company’s common shares, also known as a reverse stock split, became effective. Fractional shares were rounded to the nearest whole number. In connection with the share consolidation, the Company increased its authorized number of common shares to 500,000,000 common shares.
The documents relating to the share consolidation were filed with the SEC on a Form6-K on October 15, 2018 and are incorporated by reference.
On June 16, 2015, LBIX’s shareholders approved a Further Amended and Restated Shareholder Rights Plan Agreement (the "Rights Plan"). A copy of the Rights Planwas filed with the SEC on Form 6-K on July 7, 2015 and is incorporated by reference. Liquid assumed the Rights Plan following the Arrangement and it will expire at the termination of the Company's annual general meeting in 2020. LBIX has had a shareholders rights plan in place since 1991.
On February 2, 2010, a 5:1 consolidation of the LBIX common shares became effective. Fractional shares were rounded to the nearest whole number. In connection with the share consolidation, LBIX increased its authorized number of common shares to 500,000,000 common shares. The documents relating to the share consolidation were filed with the SEC on a Form 6-K on February 3, 2010 and are incorporated by reference.
B.
There has been no material withdrawal or substitution of assets securing any class of registered securities of the Company.
C.
There has been no change of trustee or paying agent for any registered securities.
D.
This item is not applicable.
Item 15. – Controls and Procedures
Disclosure Controls and Procedures
Based on his evaluation as
Our management, with the participation of February 28, 2018, the Company’sour Chief Executive Officer/ Interim Principal Financial Officer, has concluded that the Company’sevaluated our disclosure controls and procedures (as definedas of the end of the period covered by this Annual Report on Form 20-F. Based on this evaluation, our management concluded that as of the end of the period covered by this Annual Report on Form 20-F, our disclosure controls and procedures were not effective, because of a material weakness in Rules13a-15(e) and15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is:our internal control over financial reporting, as discussed below.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s system of internal controls is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.IFRS.
Management recognizes that effective internal control overOur management, with the participation of our interim principal executive officer and principal financial reporting may nonetheless not prevent or detect all possible misstatements or frauds. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
As part of its evaluation ofofficer, evaluated the effectiveness of itsour internal control over financial reporting as requiredof November 30, 2019. Our management’s evaluation of our internal control over financial reporting was based on the framework in Internal Control—Integrated Framework, issued by paragraph (c) ofRules13a-15 or5d-15 of the Exchange Act, the Company utilized the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework (1992).Commission. Based on this evaluation, our management concluded that our internal control over
57
financial reporting was not effective as of November 30, 2019. The Company annually reviews the final documentation to ensure that controls are still functioning as described and serving the purposes for which they were designed.
Management has assessed the effectivenessineffectiveness of the Company’sour internal control over financial reporting aswas due to the existence of a material weakness.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management identified the following material weakness:
(a)
We lack adequate oversight related to the development and performance of internal controls. Due to the limited number of personnel in the Company, there are inherent limitations to segregation of duties amongst personnel to perform adequate oversight.
To address this material weakness, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented
Remediation
Effective for the fiscal year ended February 28, 2018. Due to the loss of accounting staff in the fiscal year ended February 28,November 30, 2018, as well as the resignation of Ms. Fei Xu in March 2018, management identified a material weakness related to segregation of duties and retained an external accounting firm to provide financial and accounting services to the Company pendingto mitigate the completionrisks relating to the lack of segragation of duties.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and are committed to taking further action and implementing additional improvements as necessary and as funds allow.
Limitations on Effectiveness of Controls
Our chief executive officer does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Transaction.control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additional controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
58
Changes in internal controlInternal Control over financial reportingFinancial Reporting
Due to increased administrative demands of financial reporting in the resignationUS and Canada following completion of Ms. Fei Xu in March 2018,the Arrangement, management has identified a material weakness related to segregation of duties and hired an external accounting firm to provide financial and accounting services to the Company pendingfor the completion of the Transaction.financial years ended November 30, 2019 and 2018.
Item 16.– [Reserved]
Item 16A. – AuditCommitteeAudit Committee Financial Expert
The Company’s Board of Directors has determined that all three members of its Audit Committee, James Corbett, Darryl EddyStephen Jackson, Joshua Jackson, and Ralph McRae,Nancy Basi, satisfy the requirements of “audit committee financialexpert”. James CorbettStephen Jackson, Joshua Jackson and Darryl EddyNancy Basi are independent directors of the Audit Committee. Ralph McRae, by virtue of being the Chairman, President and Chief Executive Officer of the Company, is not considered independent.directors. For details on their professional careers, and for further information regarding the Company’s Audit Committee, see “Item 6.A”“Item 6.A” and “Item 6.C”“Item 6.C” above.
Item 16B. – Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics (the “Code“Code of Ethics”Ethics”) that applies to the Company’s directors, officers and employees. A copy of this Code of Ethics was filed with the SEC on June 1, 2005 and is incorporated by reference. Copies will be provided at no charge upon request to the Company at Unit 101 - 33 W. 8th Avenue,#202, 5626 Larch Street, Vancouver, BC, Canada V5Y 1M8,V6M 4E1, or electronically to info@Lbix.com.info@liquidmediagroup.co.
There were no amendments or waivers to the Code of Ethics during the most recently completed fiscal year.
Item 16C. – Principal Accountant Fees and Services
The Company’s independent auditor for the fiscal year ended November 30, 2019 and November 30, 2018 was Davidson & Company LLP, Chartered Professional Accountants.
The Audit Committee approves all audit, audit-related services, tax services and other services provided by the auditor. Any services provided by auditor that are not specifically included within the scope of the audit must be pre-approved by the Audit Committee in advance of any engagement. Under theSarbanes-Oxley Act of 2002, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimus exception prior to the completion of an audit engagement. None of the fees paid to Davidson & Company LLP were approved pursuant to the de minimus exception.
The aggregate fees billed by the Company’s external auditors for each of the last two fiscal years for audit fees are as follows:
Fiscal Year | Audit Fees | Audit |
Related Fees
Tax Fees |
All Other Fees | ||||
November 30, 2019 | $153,004 | Nil | Nil | Nil |
November 30, 2018 | $260,000 | Nil | Nil | Nil |
Item 16D. – Exemptions from the Listing Standards for Audit Committees
None.
Item 16E. –Purchases– Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From the fiscal year ended February 28, 2010 through to February 28, 2018, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to US$3,500,000 of the Company’s outstanding common shares. No common shares were repurchased by the Company during the fiscal year ended February 28, 2018. All shares repurchased in prior fiscal years have been returned to treasury.
59
Item 16F. – Change in Registrant’s Certifying Accountant
None.
Item 16G. – Corporate Governance
The Nasdaq rules provide thatCompany is a foreign private issuers mayissuer and our common shares are listed on NASDAQ. NASDAQ Marketplace Rule 5615(a)(3) permits a foreign private issuer to follow its home country practicepractices in lieu of most of the Nasdaqrequirements of the 5600 Series of the NASDAQ Marketplace Rules. In order to claim such an exemption, the Company must disclose the significant differences between its corporate governance requirements, subjectpractices and those required to be followed by U.S. domestic issuers under NASDAQ’s corporate governance requirements. Set forth below is a brief summary of such differences.
Shareholder Approval Requirements
NASDAQ Marketplace Rule 5635 requires each issuer to obtain shareholder approval prior to certain exceptions and requirements and exceptdilutive events, including a transaction other than a public offering involving the sale of 20% or more of the issuer’s common shares outstanding prior to the extent that such exemptions would be contrary to U.S. federaltransaction for less than the greater of book or market value of the stock. The Company does not follow this NASDAQ Marketplace Rule. Instead, and in accordance with the NASDAQ exemption, the Company complies with British Columbia corporate and securities laws, which do not require shareholder approval for dilutive events unless the Company were to dispose of all or substantially all of its undertaking.
In addition, Section 5635 requires shareholder approval of most equity compensation plans and regulations. The Company has chosenmaterial revisions to such plans, as well as with respect to the sale of our securities at a discount to their market value to an officer, director, employee or consultant. We do not follow this NASDAQ Marketplace Rule. Instead, and in accordance with the NASDAQ exemption, we comply with the Nasdaqwith British Columbia corporate governance rules as though it was a U.S. company, except for Rule 5635(c), requiringand securities laws, which do not require shareholder approval of equity compensation arrangements andplans or most discount to market offerings of securities unless otherwise indicated in the articles of the Company.
Compensation Committee Requirements
NASDAQ Marketplace Rule 5605(d) regarding Compensation Committees.requires that all companies must have a compensation committee charter and a compensation committee consisting of at least two members, and each compensation committee member must be an independent director. The Company has notified Nasdaq thatcurrently does not have a compensation committee or a compensation committee charter as it has elected to followfollows British Columbia practicecorporate and securities laws with respect to the compensation of the officers of the Company.
Board of Director Nomination Requirements
NASDAQ Marketplace Rule 5605(e) requires Board of Director nominations must be either selected, or recommended for the Board's selection, by either a nominating committee comprised solely of independent directors or by a majority of the independent directors. The Company currently has a nominating committee and follows British Columbia corporate and securities laws with respect to the nomination and selection of directors. The directors of the Company are divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three-year terms of office, with a class renewed at the each annual general meeting of the shareholders of the Company or until their successors in lieu of these Nasdaq rules.office are duly elected or appointed.
Item 16H. – Mine Safety Disclosure
Not applicable.
60
PART III
Item 17. – Financial Statements
Not applicable.
Item 18. – Financial Statements
Leading Brands, Inc.
LIQUID MEDIA GROUP LTD.
Consolidated Financial Statements
February 28,For the years ended November 30, 2019, 2018, and 2017
(Expressed in Canadian Dollars)
| ||
| ||
![]() |
|
|
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Leading Brands Inc.
Vancouver, Canada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Leading Brands Inc. (the “Company”) and subsidiaries, which comprise the consolidated balance sheets as at February 28, 2018 and 2017 and the related consolidated statements of comprehensive loss, cash flows and changes in shareholders’ equity, for each of the three years in the period ended February 28, 2018 and related notes, including a summary of significant accounting policies and other explanatory information (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at February 28, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and to fulfill our other ethical responsibilities in accordance with these requirements.
We conducted our audits in accordance with the standards of the PCAOB and Canadian generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO CANADA LLP63
Chartered Professional Accountants
Vancouver, Canada
May 29, 2018
We have served as the Company’s auditor since 2001.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
Leading Brands, Inc.Liquid Media Group Ltd.
Consolidated Balance SheetsStatements of Financial Position
(Expressed in Canadian Dollars)
As at | Feb. 28, 2018 | Feb. 28, 2017 | ||||||
Assets | ||||||||
Current | ||||||||
Cash and cash equivalents | $ | 786,340 | $ | 4,315,028 | ||||
Restricted cash (note 2) | 583,012 | — | ||||||
Accounts receivable | — | 85,628 | ||||||
Inventory (Note 3) | — | 361,102 | ||||||
Prepaid expenses and deposits (Note 5) | 81,143 | 129,520 | ||||||
|
|
|
| |||||
1,450,495 | 4,891,278 | |||||||
Property, plant and equipment(Note 4) | 3,157 | 765,024 | ||||||
Intangible assets(Note 6) | — | 279,189 | ||||||
Assets attributable to discontinued operations(Note 16) | — | 26,195 | ||||||
|
|
|
| |||||
Total Assets | $ | 1,453,652 | $ | 5,979,686 | ||||
|
|
|
| |||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Current | ||||||||
Accounts payable and accrued liabilities | $ | 117,405 | $ | 605,046 | ||||
Liabilities attributable to discontinued operations (Note 16) | 250,000 | 300,000 | ||||||
Derivative Liability –non-employee stock options(Note 9) | 23,024 | 46,352 | ||||||
|
|
|
| |||||
390,429 | 951,398 | |||||||
|
|
|
| |||||
Shareholders’ Equity | ||||||||
Share Capital (Note 7(a)) | ||||||||
Authorized 500,000,000 common shares without par value 20,000,000 preferred shares without par value | ||||||||
Issued 2,802,412 common shares (2017 – 2,802,412) | 31,305,247 | 31,305,247 | ||||||
Additionalpaid-in capital | 19,455,359 | 19,455,359 | ||||||
Accumulated other comprehensive income— currency translation adjustment | — | 577,916 | ||||||
Accumulated deficit | (49,697,383 | ) | (46,310,234 | ) | ||||
|
|
|
| |||||
1,063,223 | 5,028,288 | |||||||
|
|
|
| |||||
Total Liabilities and Shareholders’ Equity | $ | 1,453,652 | $ | 5,979,686 | ||||
|
|
|
|
| Note | November 30, | November 30, 2018 |
|
| $ | $ |
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
Cash |
| 4,587,405 | 4,327,331 |
Restricted cash | 4 | 672,663 | 574,510 |
Receivables | 6 | 698,361 | 182,067 |
Prepaids | 7 | 296,352 | 18,921 |
Loans receivable | 8 | 94,882 | 431,295 |
|
| 6,349,663 | 5,534,124 |
Loans receivable | 8 | 233,837 | - |
Licenses | 9 | 1,840,836 | 4,382,598 |
Investment in associates | 10 | - | 397,629 |
Investment in equity instruments | 11 | 1,551,324 | - |
Equipment | 12 | 123,305 | - |
Intangible assets | 13 | 1,707,959 | 1,676,822 |
Goodwill | 5,14 | 3,582,548 | 3,585,883 |
|
| 15,389,472 | 15,577,056 |
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
Accounts payable and accrued liabilities | 15 | 4,367,381 | 3,887,847 |
Corporate income taxes payable |
| - | 1,668 |
Loans payable | 16,19 | 1,437,933 | 934,203 |
|
| 5,805,314 | 4,823,718 |
Convertible debentures | 17,19 | 1,388,402 | - |
Deferred income taxes | 25 | 23,163 | 23,184 |
Derivative liability | 18 | 1,102,277 | 652,758 |
|
| 8,319,156 | 5,499,660 |
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
Share capital | 18 | 21,118,940 | 18,032,601 |
Commitment to issue shares | 18 | 137,197 | 12,550 |
Reserves | 18 | 2,166,098 | 771,623 |
Accumulated other comprehensive income |
| 303,465 | 282,082 |
Accumulated deficit |
| (18,441,785) | (10,860,401) |
Equity attributable to shareholders of the company |
| 5,283,915 | 8,238,455 |
Non-controlling interest | 20 | 1,786,401 | 1,838,941 |
|
| 7,070,316 | 10,077,396 |
|
| 15,389,472 | 15,577,056 |
Nature and continuance of operations(Note 1)
Subsequent events (Note 27)
Approved on behalf of the Board:Board of Directors on February 28, 2020:
/s/ Ralph McRae“Charlie Brezer”
“Daniel Cruz”
Director
/s/ Darryl EddyDirector
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
64
Liquid Media Group Ltd.
Consolidated Statements of Loss
(Expressed in Canadian Dollars)
|
|
| Year ended November 30, | ||
|
| Note | 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
|
|
|
|
|
|
Sales |
| 429,236 | 687,381 | - | |
Cost of sales | 9 | 1,985,804 | 758,749 | - | |
Gross profit (loss) |
| (1,556,568) | (71,368) | - | |
|
|
|
|
|
|
Operating expenses |
|
|
|
| |
| Accretion expense | 17 | 211,155 | - | 1,900 |
| Amortization | 13 | 100,202 | 17,722 | - |
| Bad debts |
| - | 10,020 | - |
| Consulting and director fees | 19 | 1,467,406 | 883,395 | 537,157 |
| Depreciation | 12 | 1,553 | - | - |
| Foreign exchange (gain) loss |
| 16,833 | 65,612 | (1,749) |
| Insurance |
| 58,452 | 17,568 | - |
| Interest expense | 16,17,19 | 178,767 | 133,915 | 215,704 |
| Investor relations, filing, and compliance fees |
| 268,679 | 126,344 | 27,335 |
| Marketing |
| 1,166,568 | - | - |
| Other general and administrative expenses |
| 80,103 | 34,368 | 35,939 |
| Professional fees |
| 979,070 | 570,008 | 90,980 |
| Share-based compensation | 18,19 | 1,173,512 | 111,135 | 576,000 |
| Salaries and benefits |
| 114,379 | 95,121 | - |
| Travel |
| 30,036 | 12,558 | 70,945 |
|
|
| 5,846,715 | 2,077,766 | 1,554,211 |
|
| (7,403,283) | (2,149,134) | (1,554,211) | |
|
|
|
|
|
|
| Interest income | 8 | 68,867 | 53,548 | 37,579 |
| Share of profit (loss) of equity investment | 10 | 195,726 | (119,654) | (25,036) |
| Write-off of associate | 10 | - | (310,484) | - |
| Write-off of investment in films |
| - | (12,447) | - |
| Write-off of intangible assets | 13 | - | (116,352) | - |
| Write-off of licenses | 9 | (717,125) | - | - |
| Listing expense | 3 | - | (4,130,557) | - |
| Project investigation | 3 | (192,601) | (359,590) | (362,655) |
| Write-off of deposit |
| - | - | (25,000) |
| Derivative liability - warrants | 18 | - | (1,557,086) | - |
| Gain (loss) on derivative liability | 18 | (449,519) | 1,030,328 | - |
| Gain (loss) on settlement of debt | 6,15,18 | (98,487) | 172,816 | 453 |
| Unrealized gains on equity instruments | 11 | 953,961 | - | - |
| Allowance for credit loss | 8 | (145,431) | - | - |
|
|
| (384,609) | (5,349,478) | (374,659) |
Loss before income taxes |
| (7,787,892) | (7,498,612) | (1,928,870) | |
| Deferred income tax expense (recovery) | 17 | (160,917) | - | - |
| Income tax expense (recovery) | 25 | (1,659) | 1,621 | - |
Loss for the year |
| (7,625,316) | (7,500,233) | (1,928,870) |
The accompanying notes are an integral part of these consolidated financial statements.
65
Liquid Media Group Ltd.
Consolidated Statements of Loss
(Expressed in Canadian Dollars)
|
|
| Year ended November 30, | ||
|
| Note | 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
Loss attributable to: |
|
|
|
| |
| Shareholders of the Company |
| (7,581,384) | (7,537,749) | (1,928,870) |
| Non-controlling interest | 20 | (43,932) | 37,516 | - |
Loss for the year |
| (7,625,316) | (7,500,233) | (1,928,870) |
Leading Brands, Inc.Loss per common share(Note 18)
The accompanying notes are an integral part of these consolidated financial statements.
66
Liquid Media Group Ltd.
Consolidated Statements of Comprehensive Loss
(Expressed in Canadian Dollars)
For the year ended | Feb. 28, 2018 | Feb. 28, 2017 | Feb. 29, 2016 | |||||||||
Expenses (income) | ||||||||||||
Selling, general and administrative | $ | 876,088 | $ | 726,530 | $ | 1,277,127 | ||||||
Depreciation of property, plant, equipment and intangible asset | 1,053 | 1,053 | 1,316 | |||||||||
Interest income | (19,703 | ) | — | (4,900 | ) | |||||||
Other income | (3,995 | ) | — | — | ||||||||
Change in fair value of derivative liability | (23,328 | ) | (13,638 | ) | (81,317 | ) | ||||||
|
|
|
|
|
| |||||||
830,115 | 713,945 | 1,192,226 | ||||||||||
|
|
|
|
|
| |||||||
Loss before income tax | (830,115 | ) | (713.945 | ) | (1,192,226 | ) | ||||||
Income tax provision (recovery)(Note 10) | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Net loss from continuing operations | $ | (830,115 | ) | $ | (713,945 | ) | $ | (1,192,226 | ) | |||
|
|
|
|
|
| |||||||
Net loss from discontinued operations(Note 16) | $ | (2,557,034 | ) | $ | (5,795,744 | ) | $ | (111,058 | ) | |||
Net and Comprehensive loss | $ | (3,387,149 | ) | $ | (6,509,689 | ) | $ | (1,303,284 | ) | |||
|
|
|
|
|
| |||||||
Basic and diluted loss per common share | ||||||||||||
Continuing operations | $ | (0.30 | ) | $ | (0.25 | ) | $ | (0.41 | ) | |||
Discontinued operations | (0.91 | ) | (2.05 | ) | (0.04 | ) | ||||||
|
|
|
|
|
| |||||||
Net basic loss per common share | $ | (1.21 | ) | $ | (2.31 | ) | $ | (0.45 | ) | |||
Weighted average common shares outstanding | ||||||||||||
Basic and diluted (Note 7(e)) | 2,802,412 | 2,820,647 | 2,880,882 |
|
|
| Year ended November 30 | ||
|
| Note | 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
|
|
|
|
|
|
Loss for the year |
| (7,625,316) | (7,500,233) | (1,928,870) | |
Other comprehensive income |
|
|
|
| |
| Foreign currency translation adjustment |
| 12,775 | 398,892 | - |
Comprehensive loss for the year |
| (7,612,541) | (7,101,341) | (1,928,870) | |
|
|
|
|
|
|
Comprehensive loss attributable to: |
|
|
|
| |
| Shareholders of the company |
| (7,560,001) | (7,255,667) | (1,928,870) |
| Non-controlling interest | 20 | (52,540) | 154,326 | - |
Comprehensive loss for the year |
| (7,612,541) | (7,101,341) | (1,928,870) |
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
67
Liquid Media Group Ltd.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
For the year ended | Feb 28, 2018 | Feb. 28, 2017 | Feb. 29, 2016 | |||||||||
Cash provided by (used in) | ||||||||||||
Operating activities | ||||||||||||
Net loss from continuing operations | $ | (830,115 | ) | $ | (713,945 | ) | $ | (1,192,226 | ) | |||
Net loss from discontinued operations | (2,557,034 | ) | (5,795,744 | ) | (111,058 | ) | ||||||
|
|
|
|
|
| |||||||
Net loss for the year | (3,387,149 | ) | (6,509,689 | ) | (1,303,284 | ) | ||||||
Items not involving cash | ||||||||||||
Depreciation of property, plant, equipment and intangible asset | 74,398 | 634,692 | 705,024 | |||||||||
Leasehold inducement | — | (22,234 | ) | 22,234 | ||||||||
Loss on disposal of assets | 752 | 1,581,672 | 1,757 | |||||||||
Loss on sale of legacy beverage operations | 1,071,396 | — | — | |||||||||
Stock based compensation (Note 8) | — | — | 104,850 | |||||||||
Change in derivative liability (Note 9) | (23,328 | ) | (13,638 | ) | (81,317 | ) | ||||||
Deferred income tax provision (recovery) | — | 2,480,257 | (436,654 | ) | ||||||||
Changes innon-cash operating working capital | ||||||||||||
Accounts receivable, net | (53,809 | ) | 238,949 | (21,445 | ) | |||||||
Inventory, net | 102,137 | 606,928 | 348,596 | |||||||||
Prepaid expenses and other assets | 19,257 | 260,931 | (127,063 | ) | ||||||||
Accounts payable and accruals | (400,513 | ) | (609,672 | ) | (46,571 | ) | ||||||
|
|
|
|
|
| |||||||
(2,596,859 | ) | (1,351,804 | ) | (833,873 | ) | |||||||
|
|
|
|
|
| |||||||
Investing activities | ||||||||||||
Purchase of property, plant and equipment | — | (10,449 | ) | (200,221 | ) | |||||||
Purchase of intangible asset | (20,053 | ) | (120,146 | ) | (210,892 | ) | ||||||
Proceeds on disposal of assets | 11,000 | 5,654,397 | 1,199 | |||||||||
Cash outflow on business disposition | (339,764 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
(348,817 | ) | 5,523,802 | (409,914 | ) | ||||||||
|
|
|
|
|
| |||||||
Financing activity | ||||||||||||
Repurchase of common shares | — | (139,789 | ) | (176,316 | ) | |||||||
|
|
|
|
|
| |||||||
— | (139,789 | ) | (176,316 | ) | ||||||||
|
|
|
|
|
| |||||||
Increase (Decrease) in cash and cash equivalents | (2,945,676 | ) | 4,832,209 | (1,420,104 | ) | |||||||
Cash and cash equivalents, beginning of year | 4,315,028 | 282,819 | 1,702,922 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, including restricted cash,end of year | $ | 1,369,352 | $ | 4,315,028 | $ | 282,819 | ||||||
|
|
|
|
|
| |||||||
Supplementary disclosure of cash flow information | ||||||||||||
Cash paid (received) during the year | ||||||||||||
Interest received | $ | (23,698 | ) | $ | — | $ | (4,900 | ) | ||||
Interest paid | — | — | 85 | |||||||||
Income taxes | — | — | — | |||||||||
|
|
|
|
|
|
|
|
| Year ended November 30, | ||
|
|
| 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
Cash flows provided by (used in) operating activities |
|
| |||
| Loss for the year | (7,625,316) | (7,500,233) | (1,928,870) | |
| Items not affecting cash: |
|
|
| |
|
| Accretion expense | 211,155 | - | 1,900 |
|
| Accrued interest income | (60,662) | (49,404) | (37,572) |
|
| Accrued interest expense | 162,152 | 126,360 | 211,460 |
|
| Accrued income taxes | - | 1,668 | - |
|
| Allowance for credit loss | 145,431 | - | - |
|
| Amortization - intangibles | 100,202 | 17,722 | - |
|
| Amortization – licenses | 1,819,596 | 603,718 | - |
|
| Depreciation | 1,553 | - | 200 |
|
| Bad debts | - | 10,020 | - |
|
| Change in value of derivatives | 449,519 | 526,758 | - |
|
| Commitment to issue shares | 33,058 | - | - |
|
| Deferred income tax recovery | (160,917) | - | - |
|
| (Gain) loss on settlement of debt | 98,487 | (172,816) | (453) |
|
| Non-cash listing expense | - | 4,130,557 | - |
|
| Share of (profit) loss on equity investment | (195,726) | 119,654 | 25,036 |
|
| Share-based compensation | 1,173,512 | 111,135 | 576,000 |
|
| Shares issued for services | 73,980 | - | - |
|
| Unrealized foreign exchange | (6,722) | (155,943) | - |
|
| Unrealized gains on equity instruments | (953,961) | - | - |
|
| Write-off of intangible assets | - | 116,352 | - |
|
| Write-off of investments in associates | - | 310,484 | - |
|
| Write-off of investments in film | - | 12,447 | - |
|
| Write-off of license fees | 717,125 | - | - |
| Changes in non-cash working capital: |
|
|
| |
|
| Receivables | (516,294) | (99,469) | (32,035) |
|
| Prepaids | (204,840) | 172,815 | (154,604) |
|
| Accounts payable and accrued liabilities | 713,702 | 2,044,431 | 182,984 |
|
| Corporate income taxes payable | (1,668) | - | - |
|
|
| (4,026,634) | 326,256 | (1,155,954) |
Cash flows provided by (used in) investing activities |
|
| |||
| Cash acquired from reverse acquisition | - | 579,279 | - | |
| Cash received prior to reverse acquisition | - | 124,561 | - | |
| Cash acquired for Majesco | - | 11,060 | - | |
| Payment for consideration of Majesco | - | (196,505) | - | |
| Investment in film | - | - | (12,447) | |
| Investment in associate | - | (2,339) | (275,805) | |
| Investment in intangibles | (133,356) | (79,808) | - | |
| Loan receivable issued | - | - | (278,619) | |
| Loan receivable received | 10,000 | - | 13,372 | |
| Interest received on loans | 7,807 | - | - | |
| Restricted cash from reverse acquisition | - | (574,510) | - | |
| Restricted cash received | 574,510 | - | - | |
| Purchase of restricted deposit certificate | (672,663) | - | - | |
|
|
| (213,702) | (138,262) | (553,499) |
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
68
Liquid Media Group Ltd.
Consolidated Statements of Changes in Shareholders’ EquityCash Flows
(Expressed in Canadian Dollars)
Common Stock | Treasury Stock | Additional Paid-In Capital | AOCI | Accum. Deficit | Total Shareholders’ Equity | |||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Balance at February 28, 2015 | 2,900,542 | $ | 32,401,440 | $ | — | $ | 18,591,391 | $ | 577,916 | $ | (38,497,261 | ) | $ | 13,073,486 | ||||||||||||||
Net loss | — | — | — | — | — | (1,303,284 | ) | (1,303,284 | ) | |||||||||||||||||||
Shares repurchased under provisions of the share repurchase plan | — | — | (454,708 | ) | 278,392 | — | — | (176,316 | ) | |||||||||||||||||||
Shares cancelled | (40,705 | ) | (454,708 | ) | 454,708 | — | — | — | — | |||||||||||||||||||
Stock based compensation expense (Note 8) | — | — | — | 83,880 | — | — | 83,880 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at February 29, 2016 | 2,859,837 | $ | 31,946,732 | $ | — | $ | 18,953,663 | $ | 577,916 | $ | (39,800,545 | ) | $ | 11,677,766 | ||||||||||||||
Net loss | — | — | — | — | — | (6,509,689 | ) | (6,509,689 | ) | |||||||||||||||||||
Shares repurchased under provisions of the share repurchase plan | — | — | (641,485 | ) | 501,696 | — | — | (139,789 | ) | |||||||||||||||||||
Shares cancelled | (57,425 | ) | (641,485 | ) | 641,485 | — | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at February 28, 2017 | 2,802,412 | $ | 31,305,247 | $ | — | $ | 19,455,359 | $ | 577,916 | $ | (46,310,234 | ) | $ | 5,028,288 | ||||||||||||||
Net loss | — | — | — | — | — | (3,387,149 | ) | (3,387,149 | ) | |||||||||||||||||||
Foreign exchange translation adjustment | — | — | — | — | (577,916 | ) | — | (577,916 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at February 28, 2018 | 2,802,412 | $ | 31,305,247 | $ | — | $ | 19,455,359 | $ | — | $ | (49,697,383 | ) | $ | 1,063,223 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended November 30, | ||
|
|
| 2019 | 2018 | 2017 |
|
|
| $ | $ | $ |
Cash flows provided by (used in) financing activities |
|
| |||
| Loan proceeds | 812,933 | 167,500 | 2,000 | |
| Loan repayments | (137,000) | (27,500) | (1,756,721) | |
| Loan proceeds from related parties | - | 37,582 | 291,368 | |
| Loan repayments to related parties | (172,203) | (50,500) | - | |
| Interest paid on loans | (23,260) | - | (160,585) | |
| Convertible debentures issued | 3,502,793 | - | - | |
| Shares issued for cash | - | 4,157,760 | 592,427 | |
| Share issuance costs | - | (446,571) | - | |
| Commitment to issue shares | 104,139 | - | 168,550 | |
| Warrants issued for cash | 368,617 | 156,615 | 126,000 | |
|
|
| 4,456,019 | 3,994,886 | (736,961) |
Effect of foreign exchange on cash | 44,391 | 90,144 | - | ||
Change in cash during the year | 260,074 | 4,273,024 | (2,446,414) | ||
Cash, beginning of year | 4,327,331 | 54,307 | 2,500,721 | ||
Cash, end of year | 4,587,405 | 4,327,331 | 54,307 | ||
|
|
|
| ||
Supplemental cash-flow disclosure: |
|
|
| ||
Interest received | 7,807 | 3,963 | - | ||
Interest paid | 23,260 | 1,161 | 159,306 |
Supplemental disclosure with respect to cash flows (Note 23)
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
69
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements of Changes in Shareholders’ Equity (Deficiency)
(Expressed in Canadian Dollars)
| Shares | Amount | Commitment to Issue Shares | Reserves | Accumulated Other Comprehensive Income | Deficit | Non-controlling interest | Total |
|
| $ | $ | $ | $ | $ | $ | $ |
|
|
|
|
|
|
|
|
|
Balance, November 30, 2016 | 1,845,237 | 1,081,000 | - | 14,397 | - | (1,393,782) | - | (298,385) |
Shares issued for private placement - cash | 124,434 | 499,615 | - | - | - | - | - | 499,615 |
Shares issued to settle debt | 179,294 | 642,973 | - | - | - | - | - | 642,973 |
Shares issued for finder fees | 4,000 | 24,600 | - | - | - | - | - | 24,600 |
Share issue costs | - | (24,600) | - | - | - | - | - | (24,600) |
Shares issued pursuant to exercise of warrants | 4,750 | 17,812 | - | - | - | - | - | 17,812 |
Shares issued pursuant to exercise of stock options | 20,000 | 123,000 | - | (48,000) | - | - | - | 75,000 |
Share subscription received | - | - | 168,550 | - | - | - | - | 168,550 |
Share-based compensation | - | - | - | 576,000 | - | - | - | 576,000 |
Loss for the year | - | - | - | - | - | (1,928,870) | - | (1,928,870) |
Balance, November 30, 2017 | 2,177,715 | 2,364,400 | 168,550 | 542,397 | - | (3,322,652) | - | (247,305) |
Shares issued pursuant to acquisition agreement | 66,667 | 415,000 | - | - | - | - | - | 415,000 |
Non-controlling interest acquired | - | - | - | - | - | - | 1,684,615 | 1,684,615 |
Eliminate capital stock of Liquid Media Group (Canada) Ltd. | (2,244,381) | - | - | - | - | - | - | - |
Opening balance of Liquid Media Group Ltd. | 560,410 | - | - | - | - | - | - | - |
Issuance of shares to former shareholders of Liquid Canada | 1,288,497 | 4,277,319 | - | 96,303 | - | - | - | 4,373,622 |
Shares issued for cash | 800,000 | 4,157,760 | - | - | - | - | - | 4,157,760 |
Shares issued for license fees | 888,000 | 4,880,639 | - | - | - | - | - | 4,880,639 |
Shares issued to settle debt | 113,764 | 623,771 | - | - | - | - | - | 623,771 |
Shares issued for intangible assets | 268,000 | 1,469,456 | - | - | - | - | - | 1,469,456 |
Shares issued for commitment | 28,451 | 156,000 | (156,000) | - | - | - | - | - |
Shares issued for share issuance costs | 10,000 | (448,145) | - | 24,774 | - | - | - | (423,371) |
Share issuance costs | - | (23,200) | - | - | - | - | - | (23,200) |
Warrants exercised for cash | 52,985 | 159,601 | (4,000) | (2,986) | - | - | - | 152,615 |
Warrants exercised for shares to be issued | - | - | 4,000 | - | - | - | - | 4,000 |
Share-based compensation | - | - | - | 111,135 | - | - | - | 111,135 |
Foreign exchange on translation | - | - | - | - | 282,082 | - | 116,810 | 398,892 |
Loss for the year | - | - | - | - | - | (7,537,749) | 37,516 | (7,500,233) |
Balance, November 30, 2018 | 4,010,108 | 18,032,601 | 12,550 | 771,623 | 282,082 | (10,860,401) | 1,838,941 | 10,077,396 |
|
| |||
| ||||
|
|
Leading Brands, Inc.
Notes to the The accompanying notes are an integral part of these consolidated financial statements.
70
Liquid Media Group Ltd.
Consolidated Financial Statements of Changes in Shareholders’ Equity (Deficiency)
(Expressed in Canadian Dollars)
Shares Amount Commitment to Issue Shares Reserves Accumulated Other Comprehensive Income Deficit Non-controlling interest Total $ $ $ $ $ $ $ Balance, November 30, 2018 4,010,108 18,032,601 12,550 771,623 282,082 (10,860,401) 1,838,941 10,077,396 Shares issued to settle debt 159,873 634,175 - - - - - 634,175 Units issued for conversion of convertible debentures 1,000,167 2,040,346 - (244,890) - - - 1,795,456 Residual value of warrants issued for conversion of convertible debentures - (30,779) - 30,779 - - - - Shares issued for services 17,222 73,980 - - - - - 73.980 Commitment to issue shares - - 137,197 - - - - 137,197 Warrants exercised for cash 158,291 368,617 - - - - - 368,617 Subscriptions reclassified to payables - - (12,550) - - - - (12,550) Share-based compensation - - - 1,173,512 - - - 1,173,512 Convertible debenture - equity portion - - - 435,074 - - - 435,074 Foreign exchange on translation - - - - 21,383 - (8,608) 12,775 Loss for the year - - - - - (7,581,384) (43,932) (7,625,316) Balance, November 30, 2019 5,345,661 21,118,940 137,197 2,166,098 303,465 (18,441,785) 1,786,401 7,070,316
|
2018 | 2017 | 2016 | ||||||||||
Allowances for Doubtful Accounts | ||||||||||||
Balance at beginning of year | $ | — | $ | — | $ | 36,329 | ||||||
Write-off of receivables | — | — | (36,329 | ) | ||||||||
|
|
|
|
|
| |||||||
Balance at end of year | $ | — | $ | — | $ | — | ||||||
|
|
|
|
|
|
The remainderaccompanying notes are an integral part of this page is intentionally left blank.these consolidated financial statements.
71
Leading Brands, Inc.
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
1.
NATURE AND CONTINUANCE OF OPERATIONS
Liquid Media Group Ltd. (“Liquid” or the “Company”), formerly Leading Brands Inc. (“LBIX”), is the parent company of Liquid Media Group (Canada) Ltd. (“Liquid Canada”), formerly Liquid Media Group Ltd. The Company is an entertainment companywith a strong portfolio of content IP spanning creative industries. The Company’s mission is to empower storytellers worldwide to develop, produce and distribute content across channels and platforms. The head office and registered records office of the Company is Suite 202 – 5626 Larch Street, Vancouver, British Columbia, V6M 4E1. The Company’s shares trade on the Nasdaq Stock Market (“Nasdaq”) under the trading symbol “YVR”. On August 9, 2018, the Company announced the successful closing of the proposed business combination with Liquid Canada by way of plan of arrangement under the Business Corporations Act (British Columbia) (the "Arrangement"). Pursuant to the Arrangement, Liquid Canada was acquired by and became a wholly-owned subsidiary of LBIX. As part of the Arrangement, on August 10, 2018, LBIX changed its name to Liquid Media Group Ltd. and Liquid Canada changed its name to Liquid Media Group (Canada) Ltd. At the time of completion of the Arrangement, LBIX had 1,848,980 common shares issued and outstanding which included 1,288,497 common shares issued to former Liquid Canada shareholders, representing 69.69% of the Company’s issued and outstanding shares. Initially, the common shares of the Company issued in connection with the Arrangement were listed on NASDAQ under the ticker symbol “LBIX”. Effective August 10, 2018, the trading symbol of LBIX was changed to “YVR”. Upon closing of the transaction, the shareholders of Liquid Canada owned 69.69% of the common shares of the Company, and as a result, the transaction is considered a reverse acquisition of the Company by Liquid Canada. All previous common shares and warrants were exchanged at a ratio of one share of Liquid Canada for 0.5741 of LBIX (“Conversion Rate”). For accounting purposes, Liquid Canada is considered the acquirer and the Company, the acquiree. Accordingly, the consolidated financial statements are in the name of Liquid Media Group Ltd; however, they are a continuation of the financial statements of Liquid Canada (Note 3). These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. As at November 30, 2019, the Company has generated losses since inception and has an accumulated deficit of $18,441,785 (2018 - $10,860,401). The continued operations of the Company are dependent on its ability to generate future cash flows or obtain additional financing. Management has estimated that it does have sufficient working capital to meet the Company’s liabilities and commitments as they become due for the upcoming 12 months. These material uncertainties cast substantial doubt upon the Company’s ability to continue as a going concern within one year of the approval of these financial statements. There is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company. These consolidated financial statements do not reflect any adjustments that may be necessary if the Company is unable to continue as a going concern. 72 Liquid Media Group Ltd. Notes to Consolidated Financial Statements November 30, 2019 (Expressed in Canadian Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies used in the preparation of these consolidated financial statements. Statement of compliance These consolidated financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”). Financial instruments On December 1, 2018, the Company adopted IFRS 9Financial Instruments which replaced IAS 39,Financial Instruments: Classification and Measurement. IFRS 9 provides a revised model for recognition and measurement of financial instruments and a single, forward-looking ‘expected loss’ impairment model. IFRS 9 also includes significant changes to hedge accounting. The Company adopted the standard retrospectively. IFRS 9 did not impact the Company’s classification and measurement of financial assets and liabilities. The following summarizes the significant changes in IFRS 9 compared to the previous standard: · IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or fair value. The classification and measurement of financial assets is based on the Company’s business models for managing its financial assets and whether the contractual cash flows represent solely payments for principal and interest. The change did not impact the carrying amounts of any of the Company’s financial assets on the transition date. Prior periods were not restated and no material changes resulted from adopting this new standard. · The adoption of the new “expected credit loss” impairment model under IFRS 9, as opposed to an incurred credit loss model under IAS 39, had no impact on the carrying amounts of our financial assets on the transition date. Revenue Recognition On December 1, 2018, the Company adopted IFRS 15, Revenue from Contracts with Customers which replaced IAS 18, Revenue, IAS 11, Construction Contracts, and related interpretations, and establishes a comprehensive framework for determining whether revenue should be recognized, and if so, how much and when revenue should be recognized. The Company has adopted IFRS 15 using the cumulative effect method (without practical expedients), which requires that the effect of initially applying this standard be recognized at the date of initial application, which is December 1, 2018, and that the information for the year ended November 30, 2018 is presented as previously reported. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements, and as a result, there was no adjustment made to deficit on December 1, 2018. 73 Liquid Media Group Ltd. Notes to Consolidated Financial Statements November 30, 2019 (Expressed in Canadian Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Statement of compliance (continued) Although no adjustments were required in applying IFRS 15 to prior periods, the new standard is expected to impact the manner in which revenue is recognized in the future. Under IFRS 15, revenue is recognized when a customer obtains control of the goods or services. Accounting policies have been updated to reflect the terminology required by IFRS 15, however, the content and the application thereof has not changed. The Company’s main source of revenue continues to be derived from software games; however, due to IFRS 15, the Company is changing its revenue recognition policy in regards to any revenue it may derive from animation production services. The details of the nature of the changes to previous accounting policies in relation to the Company’s various revenue generating arrangements are set out below:
|
Type of service or products | Nature, timing of satisfaction of performance obligations, significant payment terms | Nature of change in accounting policy |
production services | ||
| ||
| ||
|
| The Company previously recognized revenue on a percentage of In the
| ||||
| |||||
|
| ||||
Leading Brands, Inc.Basis of presentation
The consolidated financial statements of the Company have been prepared on an accrual basis and are based on historical costs, except for certain financial assets and liabilities, including derivative instruments that are measured at fair value. The consolidated financial statements are presented in Canadian dollars unless otherwise noted.
74
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
|
| |||
2.
Leading Brands,SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries at the end of the reporting period as follows:
| Incorporation | Percentage owned | |
| 2019 | 2018 | |
Liquid Media Group (Canada) Ltd. (“Liquid Canada”) | Canada | 100% | 100% |
Companies owned by Liquid Canada: |
|
|
|
Majesco Entertainment Company (“Majesco) | USA | 51% | 51% |
On January 9, 2018, Liquid Canada acquired 51% of the shares of Majesco Entertainment Company (“Majesco”), a Nevada corporation. The Company is a provider of video game products primarily for the mass-market consumer. (Note 5)
All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated upon consolidation.
Non-controlling interest represents the portion of a subsidiary’s earnings and losses and net assets that is not held by the Company. If losses in a subsidiary applicable to a non-controlling interest exceed the non-controlling interest in the subsidiary’s equity, the excess is allocated to the non-controlling interest except to the extent that the majority has a binding obligation and is able to cover the losses.
Use of estimates
The preparation of financial statements in conformity with IFRS requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported revenues and expenses during the period.
Although management uses historical experience and its best knowledge of the amount, events or actions to form the basis for judgments and estimates, actual results may differ from these estimates.
The most significant accounts that require estimates as the basis for determining the stated amounts include the valuation of convertible debentures, the valuation of investments in films and intangible assets including goodwill, the valuation of investments in equity instruments, the valuation of share-based compensation and other equity based payments and derivative liability, and the valuation of expected credit loss.
Significant judgements includes the determination of functional currency, assessments over level of control or influence over companies, and the recoverability and measurement of deferred tax assets.
Critical judgment exercised in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is as follows:
Level of control or influence over companies
The accounting for investments in other companies can vary depending on the degree of control and influence over those other companies. Management is required to assess at each reporting date the Company’s control and influence over these other companies. Management has used its judgment to determine which companies are controlled and require consolidation and those which are significantly influenced and require equity accounting. The Company has considered its ownership position in Waterproof Studios Inc. (“Waterproof”) to constitute significant influence up to February 28, 2019 and thereafter does not have the ability to influence the key operating activities of the entity due to ongoing disputes. Accordingly, as of March 1, 2019 the Company has accounted for its investment under fair value through profit or loss (Note 10 and 11).
75
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
| ||||
Leading Brands, Inc.2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates (continued)
Functional currency
The functional currency of the Company and its subsidiaries is the United States dollar (“USD”); however, determination of functional currency may involve certain judgments to determine the primary economic environment which is re-evaluated for each new entity or if conditions change. The Company’s functional currency changed from the Canadian dollar (“CAD”) on September 1, 2018 as a result of the Company being listed on the Nasdaq and management determining that all future financings will be completed in USD.
Income taxes
In assessing the probability of realizing income tax assets, management makes estimates related to expectation of future taxable income, applicable tax opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments are as follows:
Valuation of share-based compensation, derivatives, and convertible features
The Company uses the Black-Scholes Option Pricing Model for valuation of share-based compensation and other equity based payments. Option pricing models require the input of subjective assumptions including expected price volatility, interest rate, and forfeiture rate. Changes in the input assumptions can materially affect the fair value estimate and the Company’s earnings and equity reserves.
Valuation of intangible assets including goodwill
Goodwill and intangible assets are tested for impairment at each reporting date. Management first reviews qualitative factors in determining if an impairment needs to be recorded. Quantitative factors are then used to calculate the amount of impairment, if needed. Goodwill and intangibles resulted from a business acquisition. Intangibles were valued based on estimated discounted cash flows.
Valuation of investment in equity instrument
The Company values its equity instruments in private companies at fair value at each reporting date. The determination of fair value is based on estimates made by management on the expected earnings before income, taxes, and amortization multiplied by a reasonable factor for the appropriate industry applicable to the private company.
Valuation of expected credit loss
Loans receivables are assessed for an estimated credit loss at each reporting date. The estimated loss is determined based on management’s knowledge of the debtor and their ability to repay the loan. As the current debtors’ are private entities, management must rely on assertions provided to them from the debtor to make their estimates.
Valuation of convertible debentures
The equity portion of the convertible debenture is calculated using a discounted cash flow method which requires management to make an estimate on an appropriate discount rate.
76
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
| ||||
| ||||
Leading Brands, Inc.2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The functional currency of an entity is the currency of the primary economic environment in which the entity operates. The functional currency of the Company and Liquid Canada changed from the CAD to the USD dollar effective September 1, 2018. The functional currency of Majesco is the USD. The functional currency of Waterproof is the CAD. The functional currency determinations were conducted through an analysis of the consideration factors identified in IAS 21,The Effects of Changes in Foreign Exchange Rates.
Transactions in currencies other than USD are recorded at exchange rates prevailing on the dates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated at the period end exchange rate while non-monetary assets and liabilities in foreign currencies are translated at historical rates. Revenues and expenses are translated at the average exchange rates approximating those in effect during the reporting period.
For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s USD operations are translated into CAD at the exchange rate at the reporting date. The income and expenses are translated using average rate. Foreign currency differences that arise on translation for consolidation purposes are recognized in other comprehensive income (loss).
Financial instruments
Financial assets
On initial recognition, financial assets are recognized at fair value and are subsequently classified and measured at: (i) amortized cost; (ii) fair value through other comprehensive income (“FVOCI”); or (iii) fair value through profit or loss (“FVTPL”). The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at fair value net of transaction costs that are directly attributable to its acquisition except for financial assets at FVTPL where transaction costs are expensed. All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. On initial recognition of an equity instrument that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income.
The classification determines the method by which the financial assets are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Receivables and loans receivable are measured at amortized cost with subsequent impairments recognized in profit or loss. Cash, restricted cash, and investment in equity instruments are classified as FVTPL.
Impairment
An ‘expected credit loss’ impairment model applies which requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in profit or loss for the period.
In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
For the years presented, the Company did not record an expected credit loss on its accounts receivable; however, an expected credit loss of $145,431 was recorded on its loans receivable as at November 30, 2019 (2018 - $Nil).
77
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
| ||||
| ||||
Leading Brands, Inc.2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments (continued)
Financial liabilities
Financial liabilities are designated as either: (i) fair value through profit or loss; or (ii) other financial liabilities. All financial liabilities are classified and subsequently measured at amortized cost except for financial liabilities at FVTPL. The classification determines the method by which the financial liabilities are carried on the statement of financial position subsequent to inception and how changes in value are recorded. Accounts payable and accrued liabilities, due to related parties, loans payable, and convertible debentures are classified as other financial liabilities and carried on the statement of financial position at amortized cost. Derivative liabilities are measured at FVTPL.
Investment in associates
The Company’s investment in associates was accounted for using the equity method of accounting. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the statement of financial position at cost. The statement of loss reflects the share of the results of operations of the associate until significant influence ceases. Where there has been a change recognized directly in the equity of the associate, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of changes in shareholders’ equity (deficiency). Profits and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.
Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The financial statements include the Company’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company from the date that significant influence or joint control commences, until the date that significant influence or joint control ceases. When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued, except to the extent that the Company has obligations, or has made payments on behalf of the investee. The Company used the equity method of accounting for its 49% investment in Waterproof until significant influence ceased on March 1, 2019 and for its 50% investment in Household Pests (Note 10).
Equipment
Equipment is stated at historical cost less accumulated depreciation and accumulated impairment losses.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in profit or loss.
Assets under construction are not depreciated until available for their intended use.
78
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued) Equipment (continued) Depreciation is charged over the estimated useful lives using the declining balance method as follows: Computer equipment 30% Intangible assets
|
|
The remainderCompany has intangible assets from business acquisitions and development of gaming content. The amortization method, useful life and residual values are assessed annually and the assets are tested for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Amortization expense is recorded on a straight-line basis beginning with the month the corresponding assets are available for use and over the estimated useful lives provided below:
Video game catalogues
15 years
Brands
indefinite
Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the accounts and any gain or loss is reflected in profit and loss. Expenditures for repairs and maintenance are expensed as incurred.
Video game catalogues
The video game catalogues are made up of a diverse variety of games, ranging in age and popularity. The catalogues are unique due to the diverse nature of the products within the catalogues, making it difficult to assign a useful life. The useful life of 15 years represents management’s view of the expected period over which the Company expects benefits from the acquired gaming content packaged as catalogues. The election of this pageuseful life is intentionally left blank.supported by internal game titles still producing revenue at this age.
Leading Brands, Inc.Video game development expenditures, including the cost of material, direct labour, and other direct costs are recognized as an intangible asset when the following recognition requirements are met:
·
the development costs can be measured reliably;
·
the project is technically and commercially feasible;
·
the Group intends to and has sufficient resources to complete the project;
·
the Group has the ability to use or sell the software, and
·
the software will generate probable future economic benefits.
Video games being developed are amortized once development is complete and the game starts to generate income.
Brand
Through the acquisition of Majesco (Note 5), the Company acquired the “Majesco Entertainment” brand which was determined to have an indefinite life.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized but is subject to, at a minimum, annual impairment tests. The Company assesses the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value is less than its carrying value. Impairment is tested at the cost center level by comparing the fair value of a cost center with its carrying amount including goodwill. If the carrying amount of the cost center exceeds its fair value, goodwill of the cost center is considered impaired and the second step of the test is performed to determine the amount of impairment loss, if any.
79
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of non-financial assets
The carrying amount of the Company’s non-financial assets is reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in profit or loss.
The recoverable amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount, however, not to an amount higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years.
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable new assets. Acquisition costs incurred are expensed.
Derivative liability
Share purchase warrants outstanding during the years ended November 30, 2019 and 2018 met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed” criteria. As a result, the Company was required to separately account for the warrants as a derivative instrument liability recorded at fair value and marked-to-market each period with the changes in the fair value each period charged or credited to loss. Changes in fair value are recognized as gain/loss on derivative liability until the warrants are exercised or expire.
Convertible debentures
The Company’s convertible debenture was classified as a liability, less the portion relating to the conversion feature which is classified as a component of equity. As a result, the recorded liability to repay the convertible notes is lower than its face value. The liability was initially recorded at fair value and subsequently at amortized cost using the effective interest rate method; the liability is accreted to the face value over the term of the convertible debenture.
Share capital
Financial instruments issued by the Company are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Company’s common shares, share warrants, and options are classified as equity instruments.
Incremental costs directly attributable to the issue of new shares or options are recognized as a deduction from equity, net of tax.
80
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Share capital
Valuation of equity units issued in private placements:
The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.
The fair value of the common shares issued in private placements is determined to be the more easily measurable component as they are valued at their fair value which is determined by the closing price on the issuance date. The remaining balance, if any, is allocated to the attached warrants. Any fair value attributed to the warrants is recorded to reserves.
Loss per share
Basic and diluted loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of shares outstanding during the reporting period. If applicable, diluted income per share is computed similar to basic income per share except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of share options, warrants, and convertible debentures, if dilutive. The number of additional shares is calculated by assuming that outstanding share options and warrants were exercised and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting periods. For the years presented, this calculation proved to be anti-dilutive.
Share-based compensation
The Company grants stock options to buy common shares of the Company to directors, officers and consultants.
All share-based payments made to employees and non-employees are measured and recognized using the Black-Scholes option pricing model. For employees, the fair value of the options is measured at grant date. For non-employees, the fair value of the options is measured on the earlier of the date at which the counterparty performance is complete, the date the performance commitment is reached, or the date at which the equity instruments are granted if they are fully vested and non-forfeitable. Share-based payments to non-employees are measured at the fair value of the goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. Stock options that vest over time are recognized using the graded vesting method. Share based compensation is recognized as an expense with a corresponding increase in reserves. At each financial reporting period, the amount recognized as expense is adjusted to reflect the number of share options expected to vest. If and when the stock options are ultimately exercised, the applicable amounts of reserves are transferred to share capital.
Where the terms of a stock option are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the stock-based compensation arrangement or is otherwise beneficial to the employee as measured at the date of modification over the remaining vesting period.
81
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
Animation production services
Revenue from animation production services provided is recognized when the services have been provided and control of the deliverable has been transferred to the customer. Revenue collected prior to it being earned is recorded as deferred revenue and recognized as the related services are provided. Management estimates the pace of revenue recognition based on contract milestones and determination of when it considered the revenue to be earned. The Company’s arrangements with customers are evidenced by contracts with customers. Any costs incurred to secure a contract will be capitalized and amortized over the period in which the revenue is recognized.
Software games
Revenue from sales of interactive software games on game consoles and PCs are recognized as revenue when games are purchased by a customer.
Sales of the Company’s games are made by third party gaming platform companies pursuant to license agreements, and these gaming platform companies retain an agreed upon portion of sales as fees. The Company reports revenues related to these arrangements net of the fees retained by the gaming platform companies, as the Company has determined that the gaming platform companies are considered the primary obligors to the end consumers for the sale of the games.
Royalties and licenses
Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of sales at the contractual rate based on a percentage of the revenue earned.
Income taxes
Current income tax
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the country where the Company operates and generates taxable income.
Deferred income tax
Deferred income tax is provided for based on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Current income and deferred tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
82
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting pronouncements not yet adopted
A number of new standards, amendments to standards and interpretations applicable to the Company are not yet effective for the year ended November 30, 2019 and have not been applied in preparing these consolidated financial statements.
c)
IFRS 16 – Leases: specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard was issued in January 2016 and is effective for annual periods beginning on or after January 1, 2019. Management does not anticipate this standard will have a significant impact on the Company’s consolidated financial statements.
d)
IFRIC 23 – Uncertainty Over Income Tax Treatments: clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. It is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. Management does not anticipate this standard having a material effect on the Company’s consolidated financial statements.
Other accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant impact on the Company’s consolidated financial statements.
3.
REVERSE ACQUISITION
As described in Note 1, on August 9, 2018, pursuant to an Arrangement between LBIX and Liquid Canada, LBIX acquired all of the issued and outstanding shares of Liquid Canada. The former shareholders of Liquid Canada received an aggregate of 1,288,497 common shares of LBIX for all of the outstanding common shares of Liquid Canada. LBIX shareholders retained 560,410 common shares on completion of the transaction and the former LBIX stock option holders were granted 117,000 stock options.
The transaction constituted a reverse acquisition of LBIX and had been accounted for as a reverse acquisition transaction in accordance with the guidance provided under IFRS 2,Share-based Payment and IFRS 3,Business Combinations. As LBIX did not qualify as a business according to the definition in IFRS 3,Business Combination, this reverse acquisition did not constitute a business combination; rather the transaction was accounted for as an asset acquisition by the issuance of shares of the Company, for the net assets of LBIX and its public listing. Accordingly, the transaction had been accounted for at the fair value of the equity instruments granted by the shareholders of Liquid Canada to the shareholders and option holders of LBIX. The sum of the fair value of the consideration paid (based on the fair value of the LBIX shares just prior to the reverse acquisition) less the LBIX net assets acquired, has been recognized as a listing expense in profit or loss for the year ended November 30, 2018.
For accounting purposes, Liquid Canada was treated as the accounting parent company (legal subsidiary) and LBIX had been treated as the accounting subsidiary (legal parent) in these consolidated financial statements. As Liquid Canada was deemed to be the acquirer for accounting purposes, its assets, liabilities and operations since incorporation are included in these consolidated financial statements at their historical carrying value. The results of operations of LBIX are included in these consolidated financial statements from the date of the reverse acquisition of August 9, 2018.
83
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
3.
REVERSE ACQUISITION (continued)
The following represents management's estimate of the fair value of the LBIX net assets acquired as at August 9, 2018 as a result of the reverse acquisition and is subject to final valuation adjustments.
Total | |
$ | |
Cost of acquisition: | |
Shares retained by public company shareholders - 560,410 shares at US$5.85 x 1.3047 | 4,277,319 |
Fair value of stock options | 96,303 |
4,373,622 | |
Allocated as follows: | |
Cash | 4,769 |
Restricted | 574,510 |
Prepaid expenses | 37,132 |
Receivables | 124,561 |
Liabilities | (497,907) |
243,065 | |
Allocated to listing expense | 4,130,557 |
4,373,622 |
Stock options granted were valued using the Black Scholes model using the following assumptions: risk free rate of 2.09%, volatility of 127%, dividend yield of $Nil, and expected life of 0.94 years.
Within the liabilities assumed as part of the Arrangement, the Company has $nil of liabilities attributable to discontinued operations of LBIX as at November 30, 2019 (2018 - $250,000) as part of the disposal of LBIX’s legacy beverage assets. Upon consolidation, these liabilities were included in accounts payable and accrued liabilities.
During the year ended November 30, 2019, the Company incurred costs of $192,601 (2018 - $359,590; 2017 - $362,655) related to the reverse acquisition that were recorded as project investigation costs.
4.
RESTRICTED CASH
As at February 28, 2018,November 30, 2019, the Company held $583,012$672,663 (US$506,179) in restricted cash (2017—(2018 - $574,510) as follows:
a)
$nil). Restricted574,510 of restricted cash iswas held by the Company’s legal counsel as at November 30, 2018, in a trust account pursuant to the terms of an escrow agreement arising from the disposition of the Company’sLBIX’s legacy beverage business. These funds arewere held aside for the purpose of existing claims, excluded liabilities and financial lease liabilities during the escrow period as specified in the terms of the sale agreement in relation to the Company’sLBIX’s legacy beverage business. During the year ended November 30, 2019, the funds were released.
2018 | 2017 | |||||||
Finished goods, net | $ | — | $ | 279,666 | ||||
Raw materials | — | 81,436 | ||||||
|
|
|
| |||||
$ | — | $ | 361,102 | |||||
|
|
|
|
The ending balance above includes a total inventory obsolescence provision of $nil as at February 28, 2018 (2017—$15,638).
2018 | 2017 | 2016 | ||||||||||
Inventory Obsolescence Provision | ||||||||||||
Balance at beginning of year | $ | 15,638 | $ | 39,870 | $ | 114,744 | ||||||
Obsolescence provision | 278,646 | 404,767 | 75,000 | |||||||||
Write-off of inventory | (294,284 | ) | (428,999 | ) | (149,874 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at end of year | $ | — | $ | 15,638 | $ | 39,870 | ||||||
|
|
|
|
|
|
2018 | ||||||||||||
Cost | Accumulated Depreciation | Net | ||||||||||
Furniture and fixtures | $ | 59,190 | $ | 58,812 | $ | 378 | ||||||
Computer hardware and software | 271,177 | 268,398 | 2,779 | |||||||||
|
|
|
|
|
| |||||||
$ | 330,367 | $ | 327,210 | $ | 3,157 | |||||||
|
|
|
|
|
|
2017 | ||||||||||||
Cost | Accumulated Depreciation | Net | ||||||||||
Plant and equipment | $ | 379,688 | $ | 94,431 | $ | 285,257 | ||||||
Automotive equipment | 61,550 | 38,251 | 23,299 | |||||||||
Leasehold improvements | 500,724 | 220,510 | 280,214 | |||||||||
Furniture and fixtures | 212,652 | 187,768 | 24,884 | |||||||||
Computer hardware and software | 1,761,497 | 1,610,127 | 151,370 | |||||||||
|
|
|
|
|
| |||||||
$ | 2,916,111 | $ | 2,151,087 | $ | 765,024 | |||||||
|
|
|
|
|
|
Property, plant and equipment does not include any assets acquired under capital leases (2017—$nil). Accumulated amortization does not include any assets acquired under capital leases (2017—$nil).b)
As at February 28, 2018, $nil assets are attributableNovember 30, 2019, the Company had a $672,663 (US$506,179) deposit certificate which earns interest at 1.49% per annum and matures and renews monthly. The deposit certificate has been assigned as security to discontinued operations (2017—$760,814)City National Bank for a revolving bank loan (Note 16). The 2017 property, plant and equipment assets that are attributable to discontinued operations pertains to the Company’s legacy beverage business.
Leading Brands, Inc.84
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
5.
ACQUISITION OF MAJESCO ENTERTAINMENT COMPANY
On January 9, 2018, the Company acquired 51% of the issued and outstanding shares of Majesco Entertainment Company, a U.S. corporation. As consideration, the Company issued 66,667 common shares with a value of $415,000 and is required to pay cash consideration of up to US$1,000,000 (paid US$350,000 during the year ended November 30, 2019 (2018 - US$150,000) and accrued $664,450 (US$500,000) as at November 30, 2019 (2018 – $1,190,476 (US$850,000))).
In connection with the acquisition of Majesco, the Company agreed to pay a finder’s fee of 5% of the total purchase price for a total fee of $99,668 (US$75,000). As at November 30, 2019, the Company owes $33,223 (US$25,000) (2018 - $59,854 (US$45,000)) which is included in accounts payable.
The acquisition has been accounted for using the acquisition method pursuant to IFRS 3,Business Combinations. Under the acquisition method, assets and liabilities are recorded at their fair values on the date of acquisition and the total consideration is allocated to the assets acquired and liabilities assumed. The excess consideration given over the fair value of the net assets acquired has been recorded as goodwill.
Total | ||
$ | ||
Consideration: | ||
Common shares | 415,000 | |
Estimated cash payment on acquisition | 1,245,000 | |
Finder’s fee | 93,375 | |
Total consideration provided | 1,753,375 | |
Allocated as follows: | ||
Cash | 11,060 | |
Accounts payable | (67,320) | |
Due from former shareholder | 56,260 | |
Intangible assets – brand | 103,335 | |
Goodwill | 3,356,355 | |
Deferred income taxes | (21,700) | |
Non-controlling interest (Note 20) | (1,684,615) | |
1,753,375 |
2018 | 2017 | |||||||
Slotting fees | $ | — | $ | 3,792 | ||||
Insurance premiums | 43,347 | 52,561 | ||||||
Rental deposits and other | 37,796 | 99,362 | ||||||
|
|
|
| |||||
$ | 81,143 | $ | 155,715 | |||||
|
|
|
| |||||
Attributable to discontinued operations | $ | — | $ | 26,195 | ||||
Attributable to continuing operations | $ | 81,143 | $ | 129,520 |
2018 | ||||||||||||
Cost | Amortization | Net | ||||||||||
Brand Licence and Patent | $ | — | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
2017 | ||||||||||||
Cost | Amortization | Net | ||||||||||
Brand Licence and Patent | $ | 331,037 | $ | 33,848 | $ | 297,189 | ||||||
|
|
|
|
|
|
The intangible assets - brand licenceinclude the Majesco Entertainment brand.
6.
RECEIVABLES
| 2019 | 2018 |
| $ | $ |
Accounts receivable | 25,299 | 151,362 |
Sales tax receivable | 14,293 | 30,705 |
Other receivables | 658,769 | - |
|
|
|
| 698,361 | 182,067 |
During the year ended November 30, 2018, the Company agreed to settle a developer royalty receivable of $70,108 (US$52,707) for $33,254 (US$25,000). The settlement resulted in a loss of $36,854 which is included in gain (loss) on debt settlements.
85
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
7.
PREPAIDS
As at November 30, 2019, prepaids includes $208,066 (US$156,570) for a marketing campaign that is being expensed as costs are incurred.
8.
LOANS RECEIVABLE
Current amounts
As at November 30, 2019, the current loans receivable including accrued interest is as follows:
| Waterproof | Participant Games | Installment Entertainment | Total |
| $ | $ | $ | $ |
Balance November 30, 2017 | 100,399 | 172,135 | 109,357 | 381,891 |
Accrued interest revenue | 8,116 | 27,671 | 17,580 | 53,367 |
Repayments received | (3,963) | - | - | (3,963) |
|
|
|
|
|
Balance November 30, 2018 | 104,552 | 199,806 | 126,937 | 431,295 |
Reclassified as long-term | - | (199,806) | (126,937) | (326,743) |
Accrued interest revenue | 8,137 | - | - | 8,137 |
Repayments received | (17,807) | - | - | (17,807) |
|
|
|
|
|
Balance November 30, 2019 | 94,882 | - | - | 94,882 |
During fiscal 2016, the Company entered into a revolving credit facility agreement with Waterproof and patent were soldadvanced $100,000 to Waterproof. The revolving credit facility is unsecured, bears interest at 8% per annum and was due on July 21, 2017. If there is a default or an event of default has occurred and is continuing, all amounts outstanding shall bear interest, after as partwell as before judgment, at a rate per annum equal to 2% plus the applicable rate. Interest is payable on the first business day of each month. As at November 30, 2019, the Company had accrued interest receivable of $11,651 (2018 - $11,322). Subsequent to November 30, 2019, the Company received payment in full.
Long-term amounts
Loans receivable are classified as long-term when management has determined that they will not be receiving payment on these loans within the next twelve months. As at November 30, 2019, the long-term loans receivable including accrued interest are as follows:
| Participant Games | Installment Entertainment | Total |
| $ | $ | $ |
Balance November 30, 2018 | - | - | - |
Reclassified from current | 199,806 | 126,937 | 326,743 |
Accrued interest revenue | 32,120 | 20,405 | 52,525 |
Expected credit loss | (115,963) | (29,468) | (145,431) |
|
|
|
|
Balance November 30, 2019 | 115,963 | 117,874 | 233,837 |
86
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
8.
LOANS RECEIVABLE (continued)
Long-term amounts (continued)
During fiscal 2017, the Company entered into a subordinated convertible note with Participant Games Inc. in the amount of $150,000. The convertible note is unsecured, bears interest at 15% per annum and was due on demand on or before December 21, 2017. The loan was convertible into shares, at any time prior to December 21, 2018 and accordingly the value of the dispositionconversion feature remaining from the convertibility feature was nominal as at November 30, 2018. As at November 30, 2019, the Company has accrued interest receivable of $81,926 (2018 - $49,806) and has recorded an allowance for credit loss of $115,963 (2018 - $Nil) as the note remains unpaid.
During fiscal 2017, the Company entered into a convertible note with Installment Entertainment Inc. in the amount of $100,000. The convertible note is unsecured, bears interest at 15% per annum and was payable on demand on or before April 21, 2018. The loan was convertible into shares, at any time prior to April 21, 2018. As at November 30, 2019, the Company has accrued interest receivable of $47,342 (2018 - $26,937) and has recorded an allowance for credit loss of $29,468 (2018 - $Nil) as the note remains unpaid.
9.
LICENSES
Licenses were acquired during the year ended November 30, 2018 through the issuance of 888,000 common shares valued at $4,880,639 which are being amortized over the term of the legacy beverage operations. The loss oncorresponding agreements ranging from one year to ten years. During the disposition of these intangible assets wasyear ended November 30, 2019, amortization, included in cost of sales, amounted to $1,819,596 (2018 - $603,718). Additionally, one license with an unamortized balance of $717,125 was written off at November 30, 2019. The currency translation adjustment at November 30, 2019 was $100,636 (2018 - $105,677).
10.
INVESTMENT IN ASSOCIATES
Waterproof
On April 15, 2015, the loss on dispositionCompany acquired a 49% interest in Waterproof by paying $475,000 and issuing 100,000 common shares with a fair value of $125,001. The Company also issued 40,000 common shares as a finder’s fee with a fair value of $50,000 during the year ended November 30, 2015.
The Company owns 49% of Waterproof and previously held significant influence over the investment causing the Company to account for its investment using the equity method. As at March 1, 2019, the Company no longer had the ability to exert significant influence over Waterproof’s operating activities due to ongoing disputes, therefore causing the Company to reclassify the investment as FVTPL (Note 11).
The following table is a reconciliation of the legacy beverage operations (see Note 16).investment in Waterproof:
| 2019 | 2018 | 2017 |
| $ | $ | $ |
Balance, beginning of year | 397,629 | 509,857 | 534,893 |
Share of profit (loss) of equity investment | 195,726 | (119,654) | (25,036) |
Currency translation adjustment | (6,081) | 7,426 | - |
Derecognition to investment in equity instruments (Note 11) | (587,274) | - | - |
|
|
|
|
Balance, end of year | - | 397,629 | 509,857 |
a)Share capital87
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
10.
INVESTMENT IN ASSOCIATES (continued)
Waterproof (continued)
The following table summarizes Waterproof’s statements of financial position for the comparative year:
| ||||
|
| 2018 | ||
$ | ||||
Current assets | 563,806 | |||
Non-current assets | 255,904 | |||
Current liabilities | (678,258) | |||
Non-current liabilities | (36,787) | |||
Net assets | 104,665 |
The following table summarizes Waterproof’s revenue, expenses and losses for the comparative years:
|
| 2018 | 2017 |
|
| $ | $ |
Revenue |
| 4,999,395 | 2,358,268 |
Cost of sales |
| (3,951,861) | (1,768,559) |
Expenses |
| (1,291,786) | (640,815) |
|
|
|
|
Loss for the year |
| (244,252) | (51,106) |
Household Pests
The Company held a 50% interest in Household Pests Holdings Inc. (“Household Pests”) and accounted for its investment as a joint operation as the Company did not have the ability to control the key operating activities of the entity.
On May 3, 2017, Household Pests entered into a letter of understanding with Household Pests, LLC in connection with the development, financing, production and exploitation of the proposed animated feature film currently entitled Household Pests (the “Film”).
On August 31, 2017, Household Pests entered in to an option agreement with Pigmental, LLC (“Owner”) with respect to the purchase of all rights, titles, and interests in the Animation Work Purchase Agreement dated as of July 2, 2014 by and between Sergio Animation Studios, S.L. and the Owner for a sum of US$625,000.
During the year ended November 30, 2017, the Company paid $125,500 (US$100,000) as acquisition costs and incurred $181,872 in deferred costs.
As at November 30, 2018, Household Pests let the options lapse and as such, management wrote-off its $310,484 investment in Household Pests.
88
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
11.
INVESTMENT IN EQUITY INSTRUMENTS
Until February 28, 2019, the Company accounted for the investment in Waterproof (Note 10) using the equity method resulting in a carrying value of $587,274 at March 1, 2019, however, the Company no longer exerts significant influence over Waterproof’s operating activities resulting in the investment being reclassified as FVTPL.
The fair value as at March 1, 2019 was determined to be $1,649,362 resulting in a gain of $1,062,088 on derecognition from the equity accounting carrying value.
As at November 30, 2019, the value of Waterproof’s common shares were estimated to be $1,551,324 resulting in an unrealized gain on equity instruments of $953,961. The currency translation adjustment as at November 30, 2019 was $10,089.
12.
EQUIPMENT
Computer Equipment | ||
$ | ||
Cost: | ||
At November 30, 2018 | - | |
Additions | 125,143 | |
Net exchange differences | (277) | |
At November 30, 2019 | 124,866 | |
Amortization: | ||
At November 30, 2018 | - | |
Additions | 1,553 | |
Net exchange differences | 8 | |
At November 30, 2019 | 1,561 | |
Net book value: | ||
At November 30, 2018 | - | |
At November 30, 2019 | 123,305 |
89
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
13.
INTANGIBLE ASSETS
| Video Game Catalogues | Brands | Total |
| $ | $ | $ |
Cost: |
|
|
|
At November 30, 2017 | - | - | - |
Additions - shares | 1,469,456 | 103,335 | 1,572,791 |
Additions - paid or accrued | 196,160 | - | 196,160 |
Write-offs | (116,352) | - | (116,352) |
Net exchange differences | 39,994 | 1,951 | 41,945 |
At November 30, 2018 | 1,589,258 | 105,286 | 1,694,544 |
Additions - paid or accrued | 133,356 | - | 133,356 |
Net exchange differences | (7,053) | 5,013 | (2,040) |
At November 30, 2019 | 1,715,561 | 110,299 | 1,825,860 |
|
|
|
|
Amortization: |
|
|
|
At November 30, 2017 | - | - | - |
Additions | 17,722 | - | 17,722 |
At November 30, 2018 | 17,722 | - | 17,722 |
Additions | 100,202 | - | 100,202 |
Net exchange differences | (23) | - | (23) |
At November 30, 2019 | 117,901 | - | 117,901 |
|
|
|
|
Net book value: |
|
|
|
At November 30, 2018 | 1,571,536 | 105,286 | 1,676,822 |
At November 30, 2019 | 1,597,660 | 110,299 | 1,707,959 |
As at November 30, 2019, included in video game catalogues is $212,625 (2018 - $79,808) of development costs which the Company has not begun amortizing. Brands were acquired during the year ended November 30, 2018 pursuant to the acquisition of Majesco (Note 5).
14.
GOODWILL
Goodwill of $3,356,355 was acquired during the year ended November 30, 2018 pursuant to the acquisition of Majesco (Note 5). The currency translation adjustment as at November 30, 2019 was $226,193 (2018 - $229,528).
Goodwill is tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. At November 30, 2019, the Company performed its impairment review of goodwill by comparing each cost center’s fair value to the net book value including goodwill. The Company has determined that it has one cost center: Majesco. The fair value of the cost center was determined by management based on a valuation using the income approach. The income approach uses future projections of cash flows from the cost center and includes, among other estimates, projections of future revenue and operating expenses, market supply and demand, projected capital spending and an assumption of the weighted average cost of capital. Management’s evaluation of fair values includes analysis based on the future cash flows generated by the underlying assets, estimated trends and other relevant determinants of fair value for these assets. Management has determined that no events have occurred subsequent to the date of the assessment that would require a further impairment review of goodwill.
90
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
15.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| 2019 | 2018 |
| $ | $ |
Accounts payable | 2,845,308 | 1,084,852 |
Accounts payable on legacy beverage assets | - | 250,000 |
Accrued liabilities | 821,014 | 1,277,345 |
Payroll taxes payable | 474 | 842 |
Sales tax payable | 2,911 | - |
Developer royalties payable | - | 84,332 |
Payable on Majesco acquisition (Note 5) | 697,674 | 1,190,476 |
|
|
|
| 4,367,381 | 3,887,847 |
During the year ended November 30, 2019, the Company issued 159,873 (2018 - $81,937) common shares valued at $634,175 (2018 - $449,291) to settle accounts payable of $535,688 (2018 - $595,045) resulting in a loss of $98,487 (2018 – gain of $145,764) which is included in gain (loss) on settlement of debt.
16.
LOANS PAYABLE
A summary of loans payable balances and transactions is as follows:
| Related party | Third party | Credit Facility | Bank Loan | Total |
| $ | $ | $ | $ | $ |
Balance, November 30, 2017 | 291,368 | 2,000 | 750,000 | - | 1,043,368 |
Advance | 37,582 | 167,500 | - | - | 205,082 |
Repayment - cash | (50,500) | (27,500) | - | - | (78,000) |
Repayment - shares | (106,247) | (130,000) | - | - | (236,247) |
|
|
|
|
|
|
Balance, November 30, 2018 | 172,203 | 12,000 | 750,000 | - | 934,203 |
Advance | - | 150,000 | - | 662,933 | 812,933 |
Repayment - cash | (172,203) | (137,000) | - | - | (309,203) |
|
|
|
|
|
|
Balance, November 30, 2019 | - | 25,000 | 750,000 | 662,933 | 1,437,933 |
Related party loans
Related party loans consist of amounts advanced by directors or companies controlled by them. Several of the loans have been secured by assets of the Company with due dates ranging from demand loans to periods of one year and interest rates ranging from 0.0% to 8.0% per annum. As at November 30, 2019, all loans have been paid in full. Interest of $39,747 (2018 - $42,911) remains outstanding and is included in accounts payable and accrued liabilities.
Third party loans
Third party loans included loans secured by assets of the Company with due dates ranging from demand loans to periods of one year and interest rates ranging from 0.0% to 14.4% per annum. As at November 30, 2019, the amount outstanding is due on demand and incurs interest of 14.4% per annum. Interest of $2,192 (2018 - $1,945) remains outstanding and is included in accounts payable and accrued liabilities.
91
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
16.
LOANS PAYABLE (continued)
Credit facility
In fiscal 2016 a $2,500,000 Credit facility was secured by assets of the Company under a general security agreement with a due date of November 30, 2018 and an interest rate of 14.4% per annum. A fee of $60,000 was settled through the issuance of shares during the year ended November 30, 2017. The Company repaid $1,750,000 of principal and $147,945 of interest during the year ended November 30, 2017.
In June 2018, a new lender acquired the remaining $750,000 loan and under new terms, the loan was due on August 20, 2018. The new lender obtained a Limited Power of Attorney over the Company’s 49% interest in Waterproof (“Waterproof POA”). In December 2018, the lender registered a general security agreement over all the Company’s current and future assets.
In November 2019, the new lender signed a Forebearance Agreement which extended the maturity date of the loan to November 30, 2020 and required the Company to make quarterly payments of $250,000 commencing on March 31, 2020 until the principal and interest on the loan have been paid in full. In accordance with the Forebarance Agreement, the Company issued 215,000 treasury shares of the Company as security for the loan which will be transferred to the lender upon any default of the loan. Additionally, the new lender released the Waterproof POA and amended their general security agreement to exclude the Company’s investment in Waterproof.
Interest of $289,282 (2018 - $181,282) remains outstanding and is included in accounts payable and accrued liabilities.
Bank loan
In May 2019, the Company entered into a revolving note for US$500,000 with City National Bank which bears interest at 3.49% per annum and is secured by a deposit certificate of US$500,000 (Note 4(b)). As at November 30, 2019, the Company had received advances of $662,933 (US$498,857) against this loan.
17.
CONVERTIBLE DEBENTURES
| Liability component | Equity component | Total |
| $ | $ | $ |
Balance, November 30, 2018 | - | - | - |
Proceeds | 2,930,477 | 595,991 | 3,526,468 |
Deferred income tax liability | - | (160,917) | (160,917) |
Interest expense and accretion | 259,885 | - | 259,885 |
Settlement of convertible debentures | (1,795,455) | (244,890) | (2,040,345) |
Reallocation of interest to accounts payable | (25,156) | - | (25,156) |
Currency translation adjustment | 18,651 | - | 18,651 |
|
|
|
|
Balance, November 30, 2019 | 1,388,402 | 190,184 | 1,578,586 |
On February 28, 2019, the Company closed its private placement offering of unsecured convertible debentures raising $3,526,468 (US$2,678,000). Each debenture will mature two years from closing, will bear interest at 2% per annum, and can be converted into units at a price of US$1.50 per unit. Each unit will consist of one common share and one share purchase warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 26, 2021.
92
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
17.
CONVERTIBLE DEBENTURES (continued)
For accounting purposes, the convertible debentures are separated into their liability and equity components by first valuing the liability component. The fair value of the liability component at the time of issue was calculated as the discounted cash flows for the convertible debentures assuming a 12% discount rate, which was the estimated rate for a similar debenture without a conversion feature. The fair value of the equity component (conversion feature) was determined at the time of issue as the difference between the face value of the convertible debentures and the fair value of the liability component, less a deferred income tax adjustment to reflect the book to tax difference in value of the convertible debentures at the time of issuance. As the Company has excess tax assets to offset the deferred tax liability, which was created from the book to tax difference in value of the convertible debentures, the deferred tax liability was reversed, resulting in a deferred tax recovery of $160,917.
During the year ended November 30, 2019, net debentures of $1,795,455 (US$1,133,761) were converted into 1,000,167 units of the Company of which $30,779 was allocated to reserves relating to the value of the warrants issued. As a result, the Company transferred $244,890 from reserves to share capital representing the proportionate balance of the unamortized equity component.
Interest and accretion expense for the year ended November 30, 2019 was $259,885.
18.
SHARE CAPITAL AND RESERVES
Authorized share capital
The Company is authorized to issue 500,000,000 common shares without par value.
The Company is authorized to issue the following preferred shares:
Preferred shares without par value | 9,999,900 | |||
Series “A” preferred shares | 1,000,000 | |||
Series “B” preferred shares | 100 | |||
Series “C” preferred shares | 1,000,000 | |||
Series “D” preferred shares | 4,000,000 | |||
Series “E” preferred shares | 4,000,000 | |||
|
| |||
|
| 20,000,000 |
Leading Brands, Inc.Issued share capital
Common shares
During the year ended November 30, 2019:
a)
On February 28, 2019, the Company issued 113,334 common shares valued at $391,013 to settle debt of $335,792 resulting in a loss of $55,221 which is included in loss on debt settlements.
b)
On April 30, 2019, the Company issued 46,539 common shares valued at $243,162 to settle debt of $199,896 resulting in a loss of $43,266 which is included in loss on debt settlements.
c)
On April 30, 2019, the Company issued 17,222 common shares valued at $73,980 to various consultants of the Company for consulting and public relations services provided to the Company.
93
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
There are no preferredSHARE CAPITAL AND RESERVES (continued)
Issued share capital (continued)
Common shares outstanding as(continued)
d)
In November 2019, the Company issued 158,291 common shares valued at $368,617 for the exercise of warrants with an exercise price of US$1.75.
e)
During the year, the Company issued 1,000,167 units on the conversion of $1,795,455 (US$1,133,761) worth of convertible debentures (Note 17). As a result, the Company transferred $244,890 from reserves to share capital representing the proportionate balance of the unamortized equity component. Additionally, the Company allocated $30,779 to reserves representing the value of the warrants issued. Each unit comprised of one common share and one warrant with each warrant entitling the holder to acquire one common share of the Company for US$1.75 up to February 28, 2018 (2017—Nil).2021.
In
During the year ended February 28, 2017,November 30, 2018:
a)
On January 9, 2018, the Company repurchased and cancelled 57,425issued 66,667 common shares valued at $415,000 pursuant to the December 12, 2017 share purchase agreement for Majesco (Note 5).
b)
On August 9, 2018, a reverse acquisition transaction was completed whereby LBIX issued 1,288,497 common shares valued at $4,277,319 in exchange for all of itsthe issued and outstanding shares inof Liquid Canada (Note 3). Warrants held by Liquid Canada were transferred to the amountCompany as part of $139,789. Since the average issueArrangement valued at $96,303.
c)
On October 15, 2018, the Company completed a brokered private placement which consisted of the issuance of 800,000 units at a price of cancelledUS$4.00 per unit for gross proceeds of $4,157,760 (US$3,200,000). Each unit consisted of one common share and one share purchase warrant exercisable for a three-year period at an exercise price of US$5.00 per warrant. The Company incurred agents’ fees of $410,218, legal fees of $36,353, issued 10,000 common shares valued at $41,531 to an agent, and issued 8,000 agents warrants valued at $24,774 in connection with the closing of this private placement.
d)
On October 15, 2018 the Company issued 888,000 common shares valued at $4,880,639 for licences (Note 9).
e)
On October 15, 2018, the Company issued 113,764 common shares valued at $623,771 to settle debt of $833,487 resulting in a gain of $209,716 which is included in gain on debt settlements and issued 28,451 common shares valued at $156,000 for a commitment to issue shares.
f)
On October 15, 2018, the Company issued 268,000 common shares valued at $1,469,456 for the purchase of video games in connection with two separate purchase agreements (Note 13).
g)
During the year, the Company issued 51,148 common shares in connection with the exercise of share purchase warrants for proceeds of $154,320. As a result, the Company transferred $23,854 representing the fair value of the exercised share purchase warrants from reserves to share capital.
h)
During the year, the Company issued 1,837 common shares in connection with the exercise of 1,837 agents’ warrants at $1.25 per warrant for proceeds of $2,296. As a result, the Company transferred $2,985 representing the fair value of the exercised share purchase warrants from reserves to share capital.
94
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Issued share capital (continued)
During the year ended November 30, 2017:
a)
On March 14, 2017, the Company issued 117,750 units valued at $353,250 to settle debt. Each unit was comprised of one common share and 0.287 of a share purchase warrant of the Company. Each whole warrant entitles the holder to purchase one additional common share at a price of $3.75 per share for a term of five years from closing.
b)
On April 6, 2017, the Company closed a non-brokered private placement and issued 89,833 units at a price of $3.00 per unit for gross proceeds of $269,500 of which $16,500 was settled for debt. Each unit consisted of one common share and 0.287 of a share purchase warrant of the Company. Each whole warrant entitles the holder to purchase one additional common share at a price of $3.75 per share for a term of five years from closing.
c)
On May 19, 2017, the Company issued 22,854 common shares to settle debts totaling $69,100.
d)
On September 6, 2017, the Company closed a non-brokered private placement and issued 73,291 common shares at $6.15 per share to settle debt totaling $204,123 and for cash totaling $246,615. A finders’ fee of 4,000 shares was issued with a value of $24,600 in connection with the time of repurchase was $11.17, share capitalprivate placement and has been reduced by $641,485recorded as a share issuance cost.
e)
On September 12, 2017, the Company issued 20,000 common shares pursuant to the exercise of stock options for total proceeds of $75,000. As a result, the Company transferred $48,000 representing the fair value of the exercised stock options from reserves to share capital.
f)
On October 23, 2017, the Company issued 4,750 common shares pursuant to the exercise of share purchase warrants for total proceeds of $17,812.
Preferred shares
As at November 30, 2019 and additionalpaid-in capital has been increased by $501,696.2018, no preferred shares were issued and outstanding.
In
Treasury shares
On November 27, 2019, the Company issued 215,000 common shares into treasury as security against a loan in accordance with a Forebarance Agreement (Note 16).
Commitment to issue shares
As at November 30, 2019, the Company was committed to issuing $137,197 (2018 – $12,500) worth of common shares of which $33,058 is for services received and $104,139 is for 45,000 common shares to be issued in relation to the exercise of warrants.
95
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Loss per share
The basic and diluted loss per share attributable to the Company for the year ended February 29, 2016,November 30, 2019 was $1.78 (2018 - $3.14; 2017 - $0.96) and was based on the loss attributable to common shareholders and the weighted average number of common shares outstanding of 4,255,297 (2018 – 2,397,117; 2017 – 2,001,832).
The basic and diluted profit (loss) per share attributable to the non-controlling interests for the year ended November 30, 2019 was $(0.01) (2018 – $0.02) and was based on the profit (loss) attributable to non-controlling interests and the weighted average number of common shares outstanding of 4,255,297 (2018 – 2,397,117).
Stock options
Prior to the Arrangement described in Note 3, the Company repurchasedhad a stock option plan whereby the Company could grant share options to directors, officers, employees, and cancelled 40,705 of its issued and outstanding shares in the amount of $176,316. Since the average issue price of cancelled common shares at the time of repurchase was $11.17, share capital has been reduced by $454,708 and additionalpaid-in capital has been increased by $278,392.
On August 26, 2003, a Shareholder Protection Rights Plan was adopted whereby one share purchase right is attachedconsultants enabling them to each outstanding common share, exercisable only in the case of a specific event, such as the acquisition by an acquirer of 20% or moreacquire up to 15% of the issued common shares of the Company,Company.
The exercise price of each option is set by the Board of Directors at the time of grant subject to a minimum price of $0.10 per share but cannot be less than the market price (less permissible discounts) on the Canadian Stock Exchange. Options can have a maximum term of five years and at a predetermined calculated price. Attypically terminate ninety days following the Annual General Meeting on June 30, 2010, shareholders approved the updating and five-year extensiontermination of the Company’s Shareholder Protection Rights Plan to 2015. Atoptionee’s employment or engagement (thirty days for options granted for investor relations services), except in the Annual General Meeting in June 2015, shareholders approved an updated and five-year extensioncase of retirement or death. Vesting of options is at the discretion of the Company’s Shareholder Protection Rights Plan to 2020.Board of Directors at the time the options are granted.
All stock options outstanding in Liquid Canada were cancelled upon the completion of the Arrangement.
Following the Arrangement, the Company does not have a formal stock option plan. The Company occasionally grants stock options to its employees, officers, directors and consultants to purchase common shares of the Company. The options granted are exercisable at a price which is equal to or greater than the fair market value of the common shares at the date the options are granted. The options are granted with varied vesting periods including immediately, one and five years. Options granted generally have a life of 10 years. The
During fiscal 2018 and in connection with the Arrangement, the Company does not have a formal stock option plan.
At February 28, 2018,granted 117,000 stock options, were outstandingwith a total fair value of $236,345, to former option holders of LBIX of which 89,000 stock options vest 25% on grant date, 25% on October 2, 2018, 25% on January 2, 2019, and exercisable as follows:25% on April 2, 2019. Of the total fair value granted, $96,303 was considered to be part of the cost of acquisition of LBIX (Note 3). During the year ended November 30, 2019, the Company recorded share-based compensation of $36,781 (2018 - $111,135) in relation to these options.
Exercise Price | Number of Options Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price (USD) | Number of Options Exercisable | Weighted Average Exercise Price (USD) | |||||||||||||||
$2.45 | 447,000 | 2.25 | $ | 2.45 | 447,000 | $ | 2.45 | |||||||||||||
$2.45 | 50,000 | 0.70 | $ | 2.45 | 50,000 | $ | 2.45 | |||||||||||||
$3.00 | 80,000 | 0.32 | $ | 3.00 | 80,000 | $ | 3.00 | |||||||||||||
$3.50 | 10,000 | 0.70 | $ | 3.50 | 10,000 | $ | 3.50 | |||||||||||||
$3.50 | 55,000 | 1.50 | $ | 3.50 | 55,000 | $ | 3.50 | |||||||||||||
$3.69 | 25,000 | 7.37 | $ | 3.69 | 25,000 | $ | 3.69 | |||||||||||||
$6.20 | 2,000 | 0.10 | $ | 6.20 | 2,000 | $ | 6.20 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
669,000 | 669,000 | |||||||||||||||||||
|
|
|
|
Leading Brands, Inc.During the year ended November 30, 2019, the Company granted 461,500 stock options with a total fair value of $ 1,136,731 that vested immediately on grant.
96
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Stock options (continued)
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the valuation of the stock options granted:
| 2019 | 2018 | 2017 |
Risk-free interest rate | 1.82% | 2.09% | 1.28% |
Dividend yield | Nil | Nil | Nil |
Expected life | 5.0 years | 0.94 years | 5 years |
Volatility | 92% | 127% | 120% |
Weighted average fair value per option | $2.46 | $2.08 | $2.40 |
Stock option transactions are summarized as follows:
| Number of Stock Options | Weighted Average Exercise Price |
|
| $ |
Balance, November 30, 2016 | - | - |
Granted | 240,000 | 3.75 |
Exercised | (20,000) | 3.75 |
Balance, November 30, 2017 | 220,000 | 3.75 |
Cancelled – Plan of Arrangement | (220,000) | 3.75 |
Granted | 117,000 | 17.67 (USD$13.30) |
Balance, November 30, 2018 | 117,000 | 17.67 (USD$13.30) |
Granted | 461,500 | 3.39 (USD$2.55) |
Cancelled | (117,000) | 17.67 (USD$13.30) |
|
|
|
Balance, November 30, 2019 | 461,500 | 3.39 |
A summary of the Company’s stock option activityshare options outstanding and exercisable at November 30, 2019 is as follows:
Outstanding Options | Weighted Average Exercise Price (USD) | |||||||
Options outstanding as at February 28, 2015 | 856,767 | 2.98 | ||||||
Granted | 25,000 | 3.69 | ||||||
Expired | (1,767 | ) | 5.35 | |||||
|
|
|
| |||||
Options outstanding as at February 29, 2016 | 880,000 | 2.99 | ||||||
Cancelled | (12,000 | ) | 6.91 | |||||
|
|
|
| |||||
Options exercisable, February 28, 2017 | 868,000 | 2.94 | ||||||
Expired | (10,000 | ) | 15.75 | |||||
Cancelled | (189,000 | ) | 3.20 | |||||
|
|
|
| |||||
Options exercisable, February 28, 2018 | 669,000 | 2.68 | ||||||
Options vested and expected to vest | 669,000 | 2.68 | ||||||
|
|
|
|
Number of Stock Options | Exercise Price | Expiry Date | |
$ | |||
461,500 | 3.39 (USD$2.55) | February 28, 2024 | |
461,500 |
The aggregate intrinsic value of stock options exercised during the year ended February 28, 2018 was $nil USD (2017—$nil, 2016—$nil).
The aggregate intrinsic valueweighted average life of stockshare options outstanding as at February 28, 2018November 30, 2019 was $nil USD (2017—$nil, 2016—$nil).4.25 years.
The aggregate intrinsic value of stock options exercisable as at February 28, 2018 was $nil USD (2017—$nil, 2016—$nil).
As of February 28, 2018, the Company has Nil (2017 – nil)non-vested stock options.
As of February 28, 2018, there was $nil of total unrecognized compensation cost related tonon-vested stock options (2017 – $nil).97
Leading Brands, Inc.
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
A summary of the Company’s warrant activity and related information forSHARE CAPITAL AND RESERVES (continued)
Warrants
Agents’ warrants
During the year ended February 28,November 30, 2018, is as follows:
Outstanding Warrants | Weighted Average Exercise Price (USD) | |||||||
Warrants outstanding at February 28, 2015 February 29, 2016 and February 27, 2017 | 25,000 | 3.40 | ||||||
Granted | — | — | ||||||
Exercised | — | — | ||||||
Expired(1) | (25,000 | ) | 3.40 | |||||
|
|
|
| |||||
Warrants outstanding at February 28, 2018 | — | — | ||||||
|
|
|
|
Earnings (loss) per common share
For the years ended February 28, 2018, February 28, 2017, and February 29, 2016, common equivalent shares (consisting of shares issuable on exercise of stock options and warrants) totaling nil, nil and 905,000 respectively, were not included in the computation of diluted earnings per share because the effect was anti-dilutive.
2018 | 2017 | 2016 | ||||||||||
Weighted average shares – Basic EPS | 2,802,412 | 2,820,647 | 2,880,882 | |||||||||
Plus: incremental shares from assumed exercise of stock options | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Weighted average shares – diluted EPS | 2,802,412 | 2,820,647 | 2,880,882 | |||||||||
|
|
|
|
|
| |||||||
2018 | 2017 | 2016 | ||||||||||
Net loss from continuing operations | $ | (830,115 | ) | $ | (713,945 | ) | $ | (1,192,226 | ) | |||
Net loss from discontinued operations | (2,557,034 | ) | (5,795,744 | ) | (111,058 | ) | ||||||
|
|
|
|
|
| |||||||
Net loss | $ | (3,387,149 | ) | $ | (6,509,689 | ) | $ | (1,303,284 | ) | |||
|
|
|
|
|
| |||||||
Change in fair value of dilutive stock options | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Adjusted net loss | $ | (3,387,149 | ) | $ | (6,509,689 | ) | $ | (1,303,284 | ) | |||
|
|
|
|
|
|
Leading Brands, Inc.
Notes to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
Basic and diluted loss per common share
2018 | 2017 | 2016 | ||||||||||
Continuing operations | (0.30 | ) | $ | (0.25 | ) | $ | (0.41 | ) | ||||
Discontinued operations | (0.91 | ) | (2.05 | ) | (0.04 | ) | ||||||
|
|
|
|
|
| |||||||
Net basic earnings (loss) per common share | (1.21 | ) | $ | (2.31 | ) | $ | (0.45 | ) |
The weighted averagedate-of-grant fair value of the options granted during the year ended February 28, 2018 was $nil (2017: $nil) per option. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
2018 | 2017 | 2016 | ||||||||||
Risk-free rate | — | — | 1.45 | % | ||||||||
Dividend yield | Nil | % | Nil | % | Nil | % | ||||||
Volatility factor of the expected market price of the Company’s common shares | — | — | 99 | % | ||||||||
Weighted average expected life of the options (months) | — | — | 120 |
On January 26, 2015 the Company entered into a consulting agreement where the Company is committed to issue 25,000issued 8,000 agents’ warrants with an exercise price of US$3.40 and an expiry date of January 26, 2018. The warrants had4.00 per warrant with a grant datetotal fair value of $32,570 (Note 9). As at February 28, 2015, the warrants had been earned, and are included$24,774 in the outstanding warrants table in Note 7(d). There were no options granted during the year ended February 28, 2018 (2017: nil).
In connection with the vesting of certain employees’, officers’ and directors’ stock options, and warrantsOctober 15, 2018 private placement.
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the year ended February 28, 2018,valuation of the Company has recorded stock option compensation of $nil (2017—$nil; 2016—$83,880) which was credited to additionalpaid-in capital and expensed in selling, general and administrative expenses in the year.agents’ warrants granted:
2018 | ||
Risk-free interest rate | 2.30% | |
Dividend yield | Nil | |
Expected life | 2 years | |
Volatility | 105% | |
Weighted average fair value per warrant | $3.10 |
In accordance with ASC815-40-15, stock options and warrants granted tonon-employees that
Agents’ warrant transactions are exercisable in US dollars are required to be accounted forsummarized as derivative liabilities because they are considered not to be indexed to the Company’s stock due to their exercise price being denominated in a currency other than the Company’s functional currency.follows:
Thenon-employee options and warrants are required to bere-valued with the change in fair value
| Number of Agents’ Warrants | Weighted Average Exercise Price |
|
| $ |
Balance, November 30, 2016 and 2017 | 4,574 | 1.25 |
Issued | 8,000 | 5.32 (USD$4.00) |
Exercised | (1,837) | 1.25 |
Balance, November 30, 2018 | 10,737 | 4.35 |
Cancelled | 2,737 | 1.25 |
|
|
|
Balance, November 30, 2019 | 8,000 | 5.32 |
A summary of the liability recordedagents’ warrants outstanding and exercisable at November 30, 2019 is as a gain or loss on the changefollows:
Number of Agent’s Warrants | Exercise Price | Expiry Date | |
$ | |||
8,000 | 5.32 (USD$4.00) | October 15, 2020 | |
8,000 |
The weighted average life of fair value of derivative liability and included in other items in the Company’s Consolidated Statements of Comprehensive Lossagent’s warrants outstanding at the end of each reporting period. The fair value of the options will continue to be classified as a liability until such time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as a liability.November 30, 2019 was 0.88 years.
Leading Brands, Inc.98
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
Thenon-employee18.
SHARE CAPITAL AND RESERVES (continued)
Warrants (continued)
Share purchase warrants
During the year ended November 30, 2018, the Company issued 800,000 share purchase option andwarrants with an exercise price of US$5.00 per warrant liabilitiesin connection with the October 15, 2018 private placement.
The Company provided an anti-dilution clause on 132,043 warrants issued during the year ended November 30, 2017 that are accounted for at their respective fair values andtriggered on exercise of such warrants. During the year ended November 30, 2018, 72,800 additional warrants with an exercise price of US$2.50 were issued under this provision.
During the year ended November 30, 2019, the Company issued 1,000,167 share purchase warrants with an exercise price of USD$1.75 per warrant in connection with the conversion of various convertible debentures.
On October 18, 2019, the Company repriced six tranches of share purchase warrants to US$1.20.
Share purchase warrant transactions are summarized as follows:
2018 | 2017 | 2016 | ||||||||||
Derivative liability, opening balance | $ | 46,352 | $ | 59,990 | $ | 120,337 | ||||||
Warrants issued during the year | — | — | — | |||||||||
Options issued during the year | — | — | 20,970 | |||||||||
Change in fair value of options and warrants | (23,328 | ) | (13,638 | ) | (81,317 | ) | ||||||
|
|
|
|
|
| |||||||
Derivative liability, closing balance | $ | 23,024 | $ | 46,352 | $ | 59,990 | ||||||
|
|
|
|
|
|
| Number of Share Purchase Warrants | Weighted Average Exercise Price |
|
| $ |
Balance, November 30, 2016 | - | - |
Issued | 323,673 | 4.36 |
Exercised | (2,727) | 3.75 |
Balance, November 30, 2017 | 320,946 | 4.36 |
Granted | 800,000 | 6.65 |
Granted on anti-dilution clause | 72,800 | 3.32 (USD$2.50) |
Exercised | (51,148) | 3.01 |
Balance, November 30, 2018 | 1,142,598 | 6.05 |
Granted | 1,000,167 | 2.33 (USD$1.75) |
Exercised | (158,291) | 2.33 (USD$1.75) |
|
|
|
Balance, November 30, 2019 | 1,984,474 | 1.92 |
An estimate for the fair value ofnon-employee stock options and warrants is determined through use
A summary of the Black-Scholes Model. Assumptions applied by managementshare purchase warrants outstanding and exercisable at November 30, 2019 is as at February 28, 2018 were as follows: (1) weighted average risk-free rate of 1.90% (2017 – 0.67%; 2016 – 0.69%); (2) weighted average dividend yield of nil (2017 – nil; 2016 – nil); (3) a weighted average expected volatility of 105.99% (2017 – 91.47%; 2016 – 59.9%); (4) a weighted average expected life of 33 months (2017 – 27 months; 2016 – 38 months); and (5) a weighted average exercise price of $4.11 USD. These options have been included in the stock options data presented in Note 7(c).
As at February 28, 2018 the warrants granted to consultants expired unexercised.
The exercise ofnon-employee options and warrants will result in a reduction of the derivative liability.
Number of Share Purchase Warrants | Exercise Price | Expiry Date | |
$ | |||
31,504 | 1.59 (USD$1.20) | March 14, 2022 | |
24,208 | 1.59 (USD$1.20) | April 6, 2022 | |
286,886 | 1.59 (USD$1.20) | August 30, 2020 | |
800,000 | 1.59 (USD$1.20) | October 15, 2021 | |
841,876 | 2.33 (USD$1.75) | February 26, 2021 | |
1,984,474 |
Earnings before income taxes and the provision for income taxes consisted of the following for the years ended February 28, 2018, February 28, 2017, and February 29, 2016:
2018 | 2017 | 2016 | ||||||||||
(Loss) from continuing operations | $ | (830,115 | ) | $ | (713,945 | ) | $ | (1,192,226 | ) | |||
(Loss) from discontinued operations | (2,557,034 | ) | (3,315,217 | ) | (547,712 | ) | ||||||
(Loss) before income taxes: | ||||||||||||
Canada | $ | (3,387,149 | ) | $ | (4,029,162 | ) | $ | (1,739,938 | ) | |||
United States | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | (3,387,149 | ) | $ | (4,029,162 | ) | $ | (1,739,938 | ) | |||
|
|
|
|
|
| |||||||
Provision (recovery) for income taxes: | ||||||||||||
Current | $ | — | $ | — | $ | — | ||||||
Deferred, Canada | — | 2,480,257 | (436,654 | ) | ||||||||
Deferred, United States | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | — | $ | 2,480,257 | $ | (436,654 | ) | |||||
|
|
|
|
|
|
Leading Brands, Inc.99
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
Income tax computedSHARE CAPITAL AND RESERVES (continued)
Warrants (continued)
Share purchase warrants (continued)
The weighted average life of share purchase warrants outstanding at statutory tax rates reconcilesNovember 30, 2019 was 1.46 years.
Derivative liability
a)
On August 30, 2017, the Company completed a non-brokered private placement of 132,043 units for cash proceeds of $126,000. Each unit consisted of one “A” share purchase warrant and one “B” share purchase warrant. Each “A” warrant entitles the holder to purchase one share of the Company for a period of three years from closing at a price of $3.00 per warrant. Each “B” warrant entitles the holder to purchase one share of the Company for a period of three years from closing at a price of $6.00. The warrant agreement provides an anti-dilution clause for each of the A and B warrants that, upon exercise of the warrants, will cause the Company to issue additional warrants sufficient to entitle the warrant holder to acquire 10% of the issued and outstanding common shares of the Company. Such right is limited to one exercise of either of the A and B warrants and all of the A warrants must be exercised prior to exercising any of the class B warrants.
The anti-dilution right for the A and B share purchase warrants was valued at $126,000 as at November 30, 2017 as the acquisition price approximated fair value due to the income tax provision, usingrecency of the transaction. During the year ended November 30, 2018, certain A warrants were exercised causing the rights to expire resulting in a 26% (2017 – 26%, 2016 – 26%) statutory tax rate, as follows:
2018 | 2017 | 2016 | ||||||||||
Tax at statutory rates at CDN rates | $ | (880,659 | ) | $ | (1,047,652 | ) | $ | (452,384 | ) | |||
Foreign loss taxed at US rates | — | — | — | |||||||||
Effect of foreign exchange on loss carry-forwards | — | — | (704,281 | ) | ||||||||
Non-deductible expenses (revenue) | 8,122 | (55,681 | ) | 7,352 | ||||||||
Deferred tax assets transferred upon disposition of subsidiaries | 8,614,637 | — | — | |||||||||
Change in estimates and other items, net | (141,625 | ) | — | — | ||||||||
Change in valuation allowance | (7,600,475 | ) | 3,583,590 | 712,659 | ||||||||
|
|
|
|
|
| |||||||
Income tax provision (recovery) for year | $ | — | $ | 2,480,257 | $ | (436,654 | ) | |||||
|
|
|
|
|
|
decrease to the liability. As at February 28,November 30, 2019, the rights attached to the B warrants were valued at $1,102,277 (2018 - $100,912) resulting in a derivative loss of $1,001,365 for the year ended November 30, 2019 (2018 - gain of $25,088).
The following weighted average assumptions were used in the Black-Scholes option-pricing model for the revaluation of the derivative liability as at November 30, 2019 and November 30, 2018
| 2019 | 2018 |
Risk-free interest rate | 1.70% | 2.16% |
Dividend yield | Nil | Nil |
Expected life | 0.75 year | 1.75 years |
Volatility | 106% | 114% |
Probability of exercise | 75% | 20% |
b)
Due to the Company changing its functional currency from the CAD to the USD during the year ended November 30, 2018, a derivative liability occurred on the date of change on the Company’s previously issued share purchase warrants with CAD exercise prices. During the year ended November 30, 2019, the share purchase warrants with a CAD exercise price was repriced to USD resulting in the elimination of the derivative liability.
On initial recognition, the Company recorded a loss of $1,557,086 to set up the derivative liability. As at November 30, 2018, the Company has accumulated net operating lossesrevalued the derivative liability to $551,846 and recorded a gain of $1,005,240. As at November 30, 2019, the Company revalued the derivative liability to $nil and recorded a gain of $551,846.
100
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
18.
SHARE CAPITAL AND RESERVES (continued)
Derivative liability (continued)
The following weighted average assumptions were used in the amountBlack-Scholes option-pricing model for the revaluation of approximately $2.1 millionthe derivative liability as at November 30, 2019 and November 30, 2018:
| 2019 | 2018 |
Risk-free interest rate | - | 2.08% |
Dividend yield | - | Nil |
Expected life | - | 2.25 years |
Volatility | - | 102% |
19.
RELATED PARTY TRANSACTIONS
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. Key management personnel include the Company’s executive officers and Board of Director members.
A summary of related party loans and related transactions is included in Note 16. Interest paid or accrued to related parties during the year ended November 30, 2019 was $5,174 (2018 - $18,537; 2017 – $9,147).
Accounts payable and accrued liabilities at November 30, 2019 includes $945,940 (2018 - $556,541) owing to directors, officers, and a former director and officer of the Company or to companies controlled by common directors for unpaid consulting fees, expense reimbursements, and loan interest. Additionally, accounts payable and accrued liabilities includes $664,452 (2018 - $864,592) payable to a director of Majesco relating to the purchase of the Company’s 51% interest in Majesco.
During the year ended November 30, 2019, the Company received $781,395 (US$588,000) for convertible debentures detailed in Note 17 from three directors of the Company. In July 2019, two directors converted their debentures worth $116,944 (US$88,000) into 58,667 units of the Company.
As at November 30, 2019, a loan was due from Waterproof, which can be applied againstincluded accrued interest receivable, amounting to $94,882 (2018 - $104,553). During the year ended November 30, 2019, the Company recorded interest income of $8,137 (2018 - $8,116; 2017 - $6,070) in connection to this loan receivable. (Note 8).
During the year ended November 30, 2019, the Company recorded a gain on settlement of debt of which $Nil (2018 - $87,761, 2017 - $Nil) was with related parties.
Summary of key management personnel compensation:
| For the years ended November 30, | ||
| 2019 | 2018 | 2017 |
| $ | $ | $ |
Consulting and directors fees | 603,500 | 407,525 | 379,890 |
Share-based compensation | 890,418 | - | 576,000 |
Interest expense | 5,174 | 18,537 | 9,147 |
|
|
|
|
| 1,499,092 | 426,062 | 965,037 |
101
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
20.
NON-CONTROLLING INTEREST
The following table presents the changes in equity attributable to the 49% non-controlling interest in Majesco:
| 2019 | 2018 |
| $ | $ |
Balance, beginning of year | 1,838,941 | - |
Non-controlling interest on acquisition of Majesco (Note 5) | - | 1,684,615 |
Share of income (loss) for the year | (43,932) | 37,516 |
Foreign exchange on translation | (8,608) | 116,810 |
|
|
|
Balance, end of year | 1,786,401 | 1,838,941 |
The following table presents the non-controlling interest as at November 30, 2019 and 2018:
| 2019 | 2018 |
| $ | $ |
Assets |
|
|
Current | 33,770 | 243,660 |
Non-current | 3,905,471 | 3,776,093 |
| 3,939,241 | 4,019,753 |
|
|
|
Liabilities |
|
|
Current | 270,362 | 243,630 |
Non-current | 23,163 | 23,184 |
| 293,525 | 266,814 |
|
|
|
Net assets | 3,645,716 | 3,752,939 |
Non-controlling interest | 1,786,401 | 1,838,941 |
The following table presents the loss and comprehensive loss attributable to non-controlling interest:
| Year ended | |
| 2019 | 2018 |
| $ | $ |
|
|
|
Profit (loss) attributable to non-controlling interest | (43,932) | 37,516 |
Foreign exchange translation adjustment | (8,608) | 116,810 |
|
|
|
Comprehensive loss attributable to non-controlling interest | (52,540) | 154,326 |
102
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
21.
CAPITAL DISCLOSURE AND MANAGEMENT
The Company defines its capital as shareholders’ equity. The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern. The Company manages its capital structure to maximize its financial flexibility making adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets and business opportunities. The Company does not presently utilize any quantitative measures to monitor its capital. The Company is not subject to externally imposed capital requirements other than disclosed in Note 16.
22.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:
·
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
·
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
·
Level 3 – Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumption that market participants would use in pricing.
The Company’s financial instruments consist of cash, restricted cash, receivables, loans receivable, investment in equity instruments, accounts payable and accrued liabilities, due to related parties, loans payable, convertible debentures, and derivative liability. The fair value of receivables, loans receivable, accounts payable and accrued liabilities, due to related parties, and loans payable approximates their carrying values. Cash and restricted cash are measured at fair value using level 1 inputs. Convertible debentures and derivative liability are measured using level 2 inputs. The investment in equity instruments is measured at fair value using level 3 inputs.
As at November 30, 2019, the fair value of the level 3 asset was $1,551,324 based on a multiple of 6.9 times management’s estimate of Waterproof’s expected earnings before interest, taxes, and expected amortization. The Company’s investment in Waterproof does not have a quoted market price on an active market and the Company has assessed the fair value of the investment based on Waterproof’s unobservable earnings. As a result, the fair value is classified as level 3 of the fair value hierarchy. The process of estimating the fair value of Waterproof is based on inherent measurement uncertainties and is based on techniques and assumptions that emphasize both qualitative and quantitative information. There is no reasonable quantitative basis to estimate the potential effect of changing the assumptions to reasonably possible alternative assumptions on estimated fair value of the investment.
103
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
22.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
The Company is exposed to a variety of financial risks by virtue of its activities including currency, credit, interest rate, and liquidity risk.
(e)
Currency risk
Foreign currency exchange rate risk is the risk that the fair value or future earningscash flows will fluctuate as a result of changes in foreign exchange rates. The Company’s operations are carried out in Canada and $nil in the United States. As at November 30, 2019, the Company had current assets totaling CAD$364,147 and current liabilities totalling CAD$2,356,044. These factors expose the Company to foreign currency exchange rate risk, which could have an adverse effect on the profitability of the Company. A 1% change in the exchange rate would change other comprehensive income/loss by approximately US$15,000. At this time, the Company currently does not have plans to enter into foreign currency future contracts to mitigate this risk, however it may do so in the future.
(f)
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
The net operatingCompany’s cash is held in a large Canadian financial institution and a Bahamas based financial institution. The Company maintains certain cash deposits with Schedule I financial institutions, which from time to time may exceed federally insured limits. The Company has not experienced any significant credit losses and believes it is not exposed to any significant credit risk. The Company’s restricted cash is held with a law firm in trust in which credit risk exposure is low. The Company’s sales tax receivable is due from the Government of Canada; therefore, the credit risk exposure is low.
The maximum exposure to credit risk as at November 30, 2019 and 2018 is the carrying value of the loans receivable. The Company has allowed for an expected credit loss carry forward amounts commenceof $145,431 on the loans receivable.
(g)
Interest rate risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to expirecash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. As at November 30, 2019, the loans included in 2036loans payable and convertible debentures bear interest at rates ranging from 3.5% to 14.4% per annum and are due on demand. The Company does maintain bank accounts which earn interest at variable rates but it does not believe it is currently subject to any significant interest rate risk.
(h)
Liquidity risk
The Company’s ability to continue as a going concern is dependent on management’s ability to raise required funding through 2038.future equity issuances and through short-term borrowing. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. As at November 30, 2019, the Company had a cash balance, including restricted cash, of $5,260,068 to settle current financial liabilities of $5,805,314. Additionally, as there is no assurance the convertible debentures will be converted into common shares of the Company, the Company is exposed to liquidity risk.
Significant
104
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
23.
SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS
| For the years ended November 30, | ||
| 2019 | 2018 | 2017 |
| $ | $ | $ |
Supplemental non-cash disclosures |
|
|
|
Reallocation of value of options upon exercise | - | - | 48,000 |
Reallocation of value of warrants upon exercise | - | 2,986 | - |
Shares issued for the acquisition of Majesco (Note 5) | - | 415,000 | - |
Shares issued for intangible assets | - | 1,469,456 | - |
Shares issued for licenses | - | 4,880,639 | - |
Shares issued for debt settlements | 634,175 | 623,771 | 357,750 |
Warrants issued for share issue costs | - | 24,774 | - |
Net assets acquired on RTO (Note 3) | - | 243,065 | - |
Shares issued for commitment | - | 156,000 | - |
Investment in associates in accounts payable | - | - | 31,567 |
Acquisition of equipment in accounts payable | 125,143 | - | - |
Units issued for conversion of convertible debentures | 2,040,346 | - | - |
Accounts payable applied to convertible debentures | 23,675 | - | - |
Derecognition of investment in associate | 587,274 | - | - |
Loans receivable allocated to long-term | 379,268 | - | - |
Residual value of warrants on conversion of convertible debentures | 30,779 | - | - |
24.
CONTINGENCIES
In October 2018, the former president and chief executive officer of Liquid Canada (the “Claimant”) filed a lawsuit with the United States District Court Southern District of New York against the Company for approximately $11,800,000 for breach of contract, defamation, and violation of human rights (the “Action”). The Claimant asserts the existence of an unwritten contract which, if it was entered, increased her base compensation from US$120,000 to US$400,000 per year. Such contract was not executed by any party and is not, the Company states, a contract the Company would have contemplated at the time. The Company’s counsel applied to the court seeking dismissal of the Action. As at November 30, 2019, the violation of human rights claim was dismissed. In February 2020, the Company settled with the Claimant for US$240,000 which has been recorded as at November 30, 2019.
105
Liquid Media Group Ltd.
Notes to Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
25.
INCOME TAXES
A reconciliation of income taxes at statutory rates with the reported taxes is as follows:
| 2019 | 2018 | 2017 |
| $ | $ | $ |
|
|
|
|
Loss before income taxes | (7,787,892) | (7,498,612) | (1,928,870) |
Expected income tax expense (recovery) at statutory rates | (2,103,000) | (2,025,000) | (502,000) |
Change in statutory, foreign tax, foreign exchange rates and other | (44,576) | (75,379) | (13,000) |
Permanent difference | 356,000 | 1,439,000 | 163,000 |
Share issue cost | - | (132,000) | - |
Adjustment to prior years provision versus statutory tax returns and expiry of non-capital losses | (123,000) | - | - |
Change in unrecognized deferred tax assets | 1,752,000 | 795,000 | 352,000 |
|
|
|
|
Income tax expense (recovery) | (162,576) | 1,621 | - |
The significant components of the Company’s deferred tax assets and liabilities areliability is as follows:
2018 | 2017 | |||||||
Operating and other losses carried forward | $ | 552,145 | $ | 6,589,096 | ||||
Property, plant and equipment | (210 | ) | 1,451,069 | |||||
Trademark and deferred costs | — | 112,245 | ||||||
|
|
|
| |||||
Total deferred tax assets | 551,935 | 8,152,410 | ||||||
Valuation allowance | (551,935 | ) | (8,152,410 | ) | ||||
|
|
|
| |||||
Net deferred tax assets | $ | — | $ | — | ||||
|
|
|
|
|
| 2019 | 2018 |
|
| $ | $ |
Deferred tax assets (liabilities) |
|
|
|
Intangible assets |
| (23,163) | (23,184) |
Investment in associates |
| (122,000) | - |
Debt with accretion |
| (41,000) | - |
Non-capital losses |
| 163,000 | - |
|
|
|
|
Net deferred tax liability |
| 23,163 | 23,184 |
Deferred income taxes reflect
No deferred tax asset has been recognized in respect of the net tax effects offollowing losses and temporary differences betweenas it is not considered probable that sufficient future taxable profit will allow the carrying amounts of tax assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance for those deferred tax assets for which realization is not more likely than notasset to occur.be recovered:
The tax years that remain open to examination by the tax authorities are generally 2013-2018. The net operating losses from prior years
| 2019 | Expiry Date Range | 2018 | Expiry Date Range | 2017 | Expiry Date Range |
| $ |
| $ |
| $ |
|
Property and equipment | 2,675,000 | No expiry date | 437,000 | No expiry date | 36,000 | No expiry date |
Cumulative eligible capital | - | No expiry date | - | No expiry date | 35,000 | No expiry date |
Share issue costs | 305,000 | 2020-2022 | 414,000 | 2019-2022 | 44,000 | 2018-2022 |
Investment in associates | - | No expiry date | 56,000 | No expiry date | - | No expiry date |
Allowable capital losses | 323,000 | No expiry date | 11,000 | No expiry date | 13,000 | No expiry date |
Non-capital losses | 8,194,000 | 2026-2039 | 4,503,000 | 2026-2038 | 2,452,000 | 2026-2037 |
Tax attributes are subject to review, and potential adjustment, under examination to the extent they remain unutilized in an open year.by tax authorities.
There are no uncertain tax positions to recognize at February 28, 2018 and 2017.
106
Leading Brands, Inc.
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
The Company is committed to an operating lease pertaining to an office space. On September 15, 2017 in connection with the Company’s sale of its former subsidiaries, the Company entered into a series of share purchase and escrow agreements whereby the Company deposited $600,000 in escrow as security for potential financial lease liabilities (as well as excluded liabilities and existing claims) relating to the office lease between Leading Brands of Canada, Inc. and the landlord. The office lease is currently being subleased and has not resulted in additional payments from the Company since the sale of the Company’s subsidiaries. The Company expects that the remaining exposure of the office lease commitment is until April 2019. The minimum amounts due over the remaining terms of that agreement is as follows:26.
SEGMENTED INFORMATION
2019 | $ | 123,073 | ||
2020 | 20,512 | |||
|
| |||
Total future minimum payments | $ | 143,585 | ||
|
|
During the years ended February 28,November 30, 2019 and 2018, February 28, 2017 and February 29, 2016, the Company incurred rental expenseshad two offices: a head-office in Vancouver, BC, and Majesco’s office in New York, New York. In evaluating performance, management does not distinguish or group its sales and cost of $101,542, $553,763, and $705,765 respectively.
sales on a geographic basis. The Company is a party to various legal claims which have arisenhas determined it had one reportable operating segment during the year ended November 30, 2019: the investment in video games. During the year ended November 30, 2018, the Company had two reportable operating segments: the investment in the normal courseproduction of business, none of which are expected to have a material adverse effect onfilms and the financial position, results of operations, or cash flows ofinvestment in video games
Below summarizes the Company.Company’s reportable operating segments for the year ended November 30, 2019.
| Film | Video Games | Total |
| $ | $ | $ |
Segment Information |
|
|
|
Revenue | - | 429,236 | 429,236 |
Cost of sales | - | (1,985,804) | (1,985,804) |
Operating expenses | - | (445,396) | (445,396) |
Other expenses | - | 195,726 | 195,726 |
Taxes | - | 1,659 | 1,659 |
Segment loss | - | (1,804,579) | (1,804,579) |
|
|
|
|
Corporate expenses: |
|
|
|
Operating expenses |
|
| (5,401,319) |
Other expenses |
|
| (580,335) |
Tax recovery |
|
| 160,917 |
Foreign currency translation |
|
| 12,775 |
Total corporate expenses |
|
| (5,807,962) |
|
|
|
|
Comprehensive loss for the year |
|
| (7,612,541) |
|
|
|
|
Capital expenditures: |
|
|
|
Equipment | - | 125,143 | 125,143 |
Related party transactions not disclosed elsewhere are as follows:
2018 | 2017 | 2016 | ||||||||||||
i) | Incurred consulting fees with a company related by a director in common | $ | 2,813 | $ | — | $ | 21,000 | |||||||
ii) | Incurred management service fees with a company related by an officer in common | $ | 67,500 | $ | — | $ | — | |||||||
iii) | Incurred professional service fees with a company related by a director in common | $ | — | $ | — | $ | 132,000 | |||||||
iv) | Incurred marketing consulting services with a company related by a director in common | $ | — | $ | 3,113 | $ | 5,619 | |||||||
v) | Incurred bottling services from a company related by a director in common | $ | 160,642 | $ | 305,289 | $ | 218,812 | |||||||
vi) | Incurred consulting fees with a company related by an officer in common | $ | — | $ | 213,311 | $ | 150,000 | |||||||
vii) | Incurred services from a company related by a director in common | $ | — | $ | 1,775 | $ | 1,055 | |||||||
viii) | Purchased supplies from a company related by a director in common | $ | — | $ | 1,728 | $ | 1,273 |
Leading Brands, Inc.107
Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
On September 15, 2017,26.
SEGMENTED INFORMATION (continued)
Below summarizes the Company’s reportable operating segments for the year ended November 30, 2018.
| Film | Video Games | Total |
| $ | $ | $ |
Segment Information |
|
|
|
Revenue | - | 687,381 | 687,381 |
Cost of sales | - | (758,749) | (758,749) |
Operating expenses | - | (318,682) | (318,682) |
Other expenses | (442,585) | (153,206) | (595,791) |
Taxes | - | (1,621) | (1,621) |
Segment loss | (442,585) | (544,877) | (987,462) |
|
|
|
|
Corporate expenses: |
|
|
|
Operating expenses |
|
| (1,759,084) |
Other expenses |
|
| (4,753,687) |
Foreign currency translation |
|
| 398,892 |
Total corporate expenses |
|
| (6,113,879) |
|
|
|
|
Comprehensive loss for the year |
|
| (7,101,341) |
|
|
|
|
Capital expenditures: |
|
|
|
Intangible assets | - | 79,808 | 79,808 |
Goodwill | - | 3,585,883 | 3,585,883 |
Revenue derived in the Company’s video games segment is earned from a large number of customers located throughout the world. No one customer exceeds 5% of the Company’s sales.
27.
SUBSEQUENT EVENTS
a)
In January 2020, a consultant of the Company entered intofiled a lawsuit in the Supreme Court of British Columbia against the Company for approximately $1,150,000 for unpaid consulting fees, the unpaid cash consideration for the purchase of 51% interest in Majesco, and a payment for the difference between US$500,000 and the value of the Company’s shares issued on the purchase of the 51% interest in Majesco. The Company has accrued $1,064,450 in these financial statements. Management is currently seeking legal advice on this lawsuit.
b)
In January 2020, the Company issued 57,125 common shares to settle debt of $193,582 and 11,674 common shares for $33,058 in services included in commitment to issue shares at November 30, 2019.
c)
In February 2020, a consultant of the Company filed a lawsuit in the Supreme Court of British Columbia against the Company for the issuance of a share certificate for 59,706 common shares of the Company which the consultant states is owing to him and general and special damages in relation to the shares. Management is currently seeking legal advice on this lawsuit. No provision has been included in the financial statements as of November 30, 2019.
d)
In February 2020, the Company signed an asset purchase agreement with a company that hasvendor to acquire a portfolio of assets including certain officers and directors in common with the Company,streaming platforms for US$3,325,000. This agreement is subject to dispose of its legacy beverage assets for $325,000 (see Note 16). Further, the executive employment agreement between the Company, Leading Brands of Canada Inc. and Ralph McRae, effective June 1, 2015 was terminated on September 15, 2017. Upon termination of the agreement, and pursuant to the severance payment clause, the $900,000 severance obligation was fully satisfied.approval by NASDAQ.
The Company’s financial assets and financial liabilities as at February 28, 2018, measured at fair value on a recurring basis are summarized below:
Quoted Prices in Active Market (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance, February 28, 2018 | |||||||||||||
Cash and restricted cash | $ | 1,369,352 | $ | — | $ | — | $ | 1,369,352 | ||||||||
Derivative liability | — | — | (23,024 | ) | (23,024 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 1,369,352 | $ | — | $ | (23,024 | ) | $ | 1,346,328 | ||||||||
|
|
|
|
|
|
|
|
The Company’s financial assets and financial liabilities as at February 28, 2017, measured at108
fair value on a recurring basis are summarized below:
Quoted Prices in Active Market (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance, February 28, 2017 | |||||||||||||
Cash | $ | 4,315,028 | $ | — | $ | — | $ | 4,315,028 | ||||||||
Derivative liability | — | — | (46,352 | ) | (46,352 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 4,315,028 | $ | — | $ | (46,352 | ) | $ | 4,268,676 | ||||||||
|
|
|
|
|
|
|
|
The fair value of cash and cash equivalents and restricted cash approximates its carrying value.
The fair value of the derivative liability fornon-employee stock options is determined through use of the Black-Scholes model (Note 9).
The Company previously operated in one industry segment being the production and distribution of beverages. The Company’s principal operations were comprised of an integrated bottling and distribution system for beverages. Substantially, all of the Company’s operations, assets and employees are located in Canada and net revenue from export sales during all the years reported are less than 10%.
During the year ended February 28, 2018, the Company’s ten largest customers comprised approximately 75% (2017—93%; 2016—96%) of revenue and no one customer comprised more than 26% (2017—74%; 2016—84%) of revenue.
Leading Brands, Inc.Liquid Media Group Ltd.
Notes to the Consolidated Financial Statements
November 30, 2019
(Expressed in Canadian Dollars)
On December 15, 201627.
SUBSEQUENT EVENTS (continued)
e)
Subsequent to November 30, 2019, the Company approvedissued 98,004 common shares for total proceeds of $205,072 (US$154,182) in connection with: (1) the discontinuationexercise of all activities relating to the Company’sco-packing operations. As a result, theco-packing operations have ceased and all assets have been liquidated and all liabilities will be settled. All costs associated with the discontinuation were recorded as66,500 share purchase warrants at US$1.75 per warrant for proceeds of February 28, 2017.
On September 15, 2017 the Company disposed of its legacy beverage assets to a company that has certain officers and directors in common with the Company for $325,000, which amount is net of assumed liabilities for certain employee obligations and other matters, all$154,651 (US$116,375) of which is subject$104,139 (US$78,750) was included in commitment to certain working capital adjustments. All costs associated with the discontinuation were recorded as of February 28, 2018.
In conjunction with the discontinuance of theco-packing operations and legacy beverage sales the Company has presented the assets and liabilities under the captions “assets of discontinued operations” and “liabilities of discontinued operations” respectively in the accompanying balance sheetsissue shares as at February 28, 2018November 30, 2019; and February 28, 2017, and consist(2) 31,504 share purchase warrants at US$1.20 per warrant for proceeds of the following:$50,308 (US$37,806).
Assets of discontinued operation: | 2018 | 2017 | ||||||
Accounts Receivable | $ | — | $ | — | ||||
Prepaid expenses and deposits | — | 26,195 | ||||||
|
|
|
| |||||
Total current assets | — | 26,195 | ||||||
Property, plant and equipment | — | — | ||||||
Deferred tax assets | — | — | ||||||
|
|
|
| |||||
Total assets | $ | — | $ | 26,195 | ||||
|
|
|
| |||||
Liabilities of discontinued operation | ||||||||
Accounts payable and accrued liabilities | $ | 250,000 | $ | 300,000 | ||||
Lease inducement | — | — | ||||||
|
|
|
| |||||
Total liabilities | $ | 250,000 | $ | 300,000 | ||||
|
|
|
|
Amounts presented for the years ended February 28, 2018, February 28, 2017, and February 29, 2016 have been reclassified to conform to the current presentation. The following table provides the amounts reclassified for the years then ended:
Amounts reclassified | 2018 | 2017 | 2016 | |||||||||
Gross Revenue | $ | 1,114,877 | $ | 9,625,481 | $ | 11,513,289 | ||||||
Less: Discounts, rebates slotting fees | (291,689 | ) | (696,659 | ) | (502,085 | ) | ||||||
|
|
|
|
|
| |||||||
Net Revenue | 823,188 | 8,928,822 | 11,011,204 | |||||||||
Cost of sales | 902,087 | 6,699,947 | 7,856,351 | |||||||||
Selling, general, and administrative | 1,337,951 | 3,331,967 | 2,987,235 | |||||||||
Depreciation | 73,345 | 633,639 | 703,708 | |||||||||
Foreign exchange (gain) loss | (5,859 | ) | (3,186 | ) | 9,865 | |||||||
Loss on disposition of legacy beverage operations | 1,071,946 | |||||||||||
Loss on disposal of assets | 752 | 1,581,672 | 1,757 | |||||||||
|
|
|
|
|
| |||||||
3,380,222 | 12,244,039 | 11,558,916 | ||||||||||
|
|
|
|
|
| |||||||
Net Income (loss) before taxes | (2,557,034 | ) | (3,315,217 | ) | (547,712 | ) | ||||||
Income tax provision (recovery) | — | 2,480,527 | (436,654 | ) | ||||||||
|
|
|
|
|
| |||||||
Total amount reclassified as discontinued operations | $ | (2,557,034 | ) | $ | (5,795,744 | ) | $ | (111,058 | ) | |||
|
|
|
|
|
|
Leading Brands, Inc.
Notes to the Consolidated Financial Statements109
(Expressed in Canadian Dollars)
On March 23, 2018, the Nasdaq Listing Qualifications Staff (“Nasdaq Staff”) granted the Company an extension of time until July 23, 2018 to regain compliance with Listing Rule 5550(b) (the “Listing Rule”). The Company had previously received notice from Nasdaq Staff on January 23, 2018 ofnon-compliance with the Listing Rule and submitted a plan of compliance. The plan was based on the expectation that the combined company will meet all applicable requirements for initial listing on The Nasdaq Capital Market. It is expected that the combined entity will be required to meet all applicable requirements for initial listing on The Nasdaq Capital Market. Notwithstanding the foregoing, there can be no assurances that the Company will be able to complete the Transaction or that the combined entity will meet all applicable requirements for initial listing on The Nasdaq Capital Market.
|
110
SIGNATURESSIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Date
February 28, 2020
INDEX TO EXHIBITS
Exhibit No. | Description |
1.1 | Certificate of Incorporation and Articles and amendments to the Articles and Memorandum of the Company, incorporated by reference from prior filing as Exhibit 3.1 to the Form F-3, filed with the SEC on September 24, 2007. https:/ |
1.2 | Notice of Articles, incorporated by reference from prior filing as Exhibits 99.1 https://www.sec.gov/Archives/edgar/data/884247/000106299310000325/exhibit99-1.htm and 99.2 https://www.sec.gov/Archives/edgar/data/884247/000106299310000325/exhibit99-2.htm to the Form 6-K filed with the SEC on February 3, 2010. |
4.1 | Further Amended and Restated Shareholder Rights Plan Agreement, incorporated by reference from prior filing on Form 6-K filed with the SEC on July 7, 2015. https://www.sec.gov/Archives/edgar/data/884247/000106299315003721/form6k.htm |
4.2 | Share Purchase Agreement dated September 15, 2017 between the Company and 1133438 B.C. Ltd. Relating to the disposition of the Company’s subsidiaries, incorporated by reference from prior filing as Exhibit 4.2 to the Annual Report on Form 20-F filed with the SEC on June 1, 2018. https://www.sec.gov/Archives/edgar/data/884247/000119312518181963/d409843dex42.htm |
4.3 | Amended and Restated Arrangement Agreement dated January 14, 2018 between the Company and Liquid Canada (fka Liquid Media Group Ltd.), incorporated by reference from prior filing as Exhibit 4.3 to the Annual Report on Form 20-F filed with the SEC on June 1, 2018. https://www.sec.gov/Archives/edgar/data/884247/000119312518181963/d409843dex43.htm |
8.1* | Subsidiaries of the Registrant |
11.1 | Code of Ethics, incorporated by reference from the prior filing as Exhibit 11.1 to the Annual Report of Form 20-F, filed with the SEC on June 1, 2005 https://www.sec.gov/Archives/edgar/data/884247/000106299305001265/exhibit11-1.htm |
12.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
12.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
13.1* | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |