Tangelo Games Corp. CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the three months ended March 31, 2018 and (In Canadian dollars)

Transcription

1 CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the three months ended (In Canadian dollars)

2 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (unaudited) in Canadian Dollars CURRENT ASSETS March 31, December 31, Note Cash and cash equivalents $ 2,352,853 $ 2,108,132 Accounts receivable 2,206,638 2,191,452 Tax credits receivable 260, ,465 Income taxes receivable 943 1,371,195 Prepaids and other receivables 5 1,386,676 1,369,359 6,207,575 7,300, Long-term prepaids 5 164, ,415 Equipment 6 292, ,987 Goodwill 7 12,282,182 11,758,576 Intangibles 8 49,959,414 51,023,822 Deferred income tax assets 77,130 72,986 CURRENT LIABILITIES ASSETS LIABILITIES $ 68,983,881 $ 70,620,389 Accounts payable and accrued liabilities 9 $ 3,649,022 $ 4,224,246 Income taxes payable 477, ,506 Bank loans , ,910 Deferred revenue 101,320 96,456 Current portion of long-term debt , ,883 Loan payable 12 93,246,243-98,011,084 5,696,001 Long term debt , ,191 Loan payable 12-89,403,690 Employee benefits payable 69,954 5,335 Deferred income tax liabilty 11,561,912 11,779,024 SHAREHOLDERS' EQUITY 109,847, ,171,241 Share Capital 47,949,631 47,949,631 Warrants 13 6,081,000 13,381,174 Options 14 1,948,944 1,942,233 Contributed surplus 11,163,048 3,862,874 Accumulated other comprehensive income 7,291,161 5,013,554 Deficit (115,297,277) (108,700,318) (40,863,493) (36,550,852) Nature of operations and going concern 1 Commitments 20 $ 68,983,881 $ 70,620,389 Approved on behalf of the board: Bernard Wilson Director James Lanthier Director See accompanying notes to these condensed interim consolidated financial statements. 2

3 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS For the Three Months Ended (unaudited) in Canadian Dollars For the Three Months Ended March 31, REVENUE Note Game revenue $ 8,616,530 $ 8,986,738 8,616,530 8,986,738 EXPENSES Gaming commissions 1,930,910 2,129,015 Advertising and marketing 1,921,346 1,759,292 Salaries and benefits 1,774,084 1,442,013 Professional fees 292, ,840 Subcontractors 67, ,000 General and administration 702, ,326 Regulatory fees and investor relations 9,510 5,303 Travel and accommodation 89, ,386 6,788,151 6,553,175 OPERATING INCOME BEFORE Transaction costs, Severance and restructure costs, Depreciation of equipment, Amortization of intangibles and Stock-based compensation 1,828,379 2,433,563 Transaction costs - 47,468 Severance and restructure costs - 54,060 Depreciation of equipment 6 23,144 37,288 Amortization of intangibles 8 2,911,906 2,832,163 Stock-based compensation 14 6,711 34,512 2,941,761 3,005,491 OPERATING LOSS (1,113,382) (571,928) FINANCING AND OTHER NON-OPERATING EXPENSES Interest and accretion 12 2,920,885 5,118,535 Interest income (122) - Foreign exchange loss/(gain) 2,905,374 (939,647) 5,826,137 4,178,888 LOSS, CONTINUING OPERATIONS, BEFORE INCOME TAX (6,939,519) (4,750,816) Income taxes Current (326,700) (228,059) Deferred 665, ,422 NET LOSS, CONTINUING OPERATIONS (6,601,132) (4,293,453) Discontinued operations 16 4,173 14,150 NET INCOME, DISCONTINUED OPERATIONS 4,173 14,150 TOTAL NET LOSS FOR THE PERIOD (6,596,959) (4,279,303) OTHER COMPREHENSIVE LOSS Item that may be subsequently reclassified to profit or loss: Exchange differences on translation of foreign operations 2,277,607 (477,910) NET COMPREHENSIVE LOSS FOR THE PERIOD $ (4,319,352) $ (4,757,213) Basic and diluted loss per share, continuing operations ($0.04) ($0.02) Basic and diluted income per share, discontinued operations $0.00 $0.00 ($0.04) ($0.02) Weighted average number of shares: basic and diluted 184,288, ,668,880 See accompanying notes to these condensed interim consolidated financial statements. 3

4 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended (unaudited) in Canadian Dollars Operating Activities March 31, Net loss for the period, continuing operations $ (6,601,132) $ (4,293,453) Adjustments for: Depreciation of equipment 23,144 37,288 Amortization of intangibles 2,911,906 2,832,163 Stock-based compensation 6,711 34,512 Accretion and interest 2,920,885 5,118,576 Loss on disposition of equipment Unrealized foreign exchange 2,821,065 (865,028) Deferred income taxes (665,087) (685,422) Employee benefits 64,619 (54) 1,482,111 2,178,707 Change in working capital items: Accounts receivable (15,186) (70,897) Prepaid and other receivables (19,782) 21,878 Accounts payable and accrued liabilities, and income taxes payable (982,989) 152,665 Deferred revenue 4,864 47,243 Income taxes receivable 1,370,252 (124,842) Cash provided by continuing operations 1,839,270 2,204,754 Cash provided by discontinued operations 4, ,332 Investing Activities Purchase of equipment (3,442) (8,497) Cash used by investing activities (3,442) (8,497) Financing Activities Repayment of bank loan and long-term debt (97,461) (32,231) Interest payments made on bank and other loans (5,094) (6,686) Fees and interest paid in connection with loan payable (1,558,362) (2,945,323) Cash used by financing activities (1,660,917) (2,984,240) (Decrease)/increase in cash and cash equivalents 179,084 (531,651) Cash and cash equivalents, beginning of the period 2,108,132 3,023,132 Effect of exchange rate on cash held 65,637 (2,724) Cash and cash equivalents, end of the period $ 2,352,853 $ 2,488,757 Supplemental information: Fees and interest capitalized to loan payable $ 1,129,419 $ 1,301,200 See accompanying notes to these condensed interim consolidated financial statements. 4

5 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended (unaudited) in Canadian Dollars Other Contributed Comprehensive Number of shares Share Capital Warrants Options Surplus Income Deficit Total December 31, ,288,880 $ 47,949,631 $ 13,381,174 $ 1,942,233 $ 3,862,874 $ 5,013,554 $ (108,700,318) $ (36,550,852) Stock-based compensation , ,711 Expiry of stock options and warrants - - (7,300,174) - 7,300, Translation loss on foreign subsidiaries ,277,607-2,277,607 Net loss for the period (6,596,959) (6,596,959) March 31, ,288,880 $ 47,949,631 $ 6,081,000 $ 1,948,944 $ 11,163,048 $ 7,291,161 $ (115,297,277) $ (40,863,493) December 31, ,668,880 $ 47,841,031 $ 13,381,174 $ 1,966,504 $ 3,750,442 $ 6,155,866 $ (65,031,623) $ 8,063,394 Stock-based compensation , ,512 Expiry of stock options (112,432) 112, Translation loss on foreign subsidiaries (477,910) - (477,910) Net income for the period (4,279,303) (4,279,303) March 31, ,668,880 $ 47,841,031 $ 13,381,174 $ 1,888,584 $ 3,862,874 $ 5,677,956 $ (69,310,926) $ 3,340,693 See accompanying notes to these condensed interim consolidated financial statements. 5

6 1. Nature of Operations and Going Concern Tangelo Games Corp. ("the Company") was incorporated under the British Columbia Corporations Act on February 9, 2011 as Wedona Capital Inc. ( WCI ). The Company was incorporated as a "Capital Pool Corporation" ("CPC"), as this term is defined in the policies of the TSX Venture Exchange (the "Exchange"). On November 7, 2013, the Company completed a Qualifying Transaction as this term is defined in the policies of the Exchange when it acquired 100% of the issued and outstanding shares of ISIS Lab Inc. under the terms of a reverse takeover transaction (the "RTO"). On November 13, 2013, the shares of the Company began trading on the Exchange under the symbol "LAB". On September 15, 2014, the Company changed its name to Imperus Technologies Corp. and on October 15, 2014 the Company was continued under the Ontario Business Corporation Act ("OBCA"). On June 28, 2016, the Company changed its name to Tangelo Games Corp. and commenced trading on that day on the Exchange under the symbol GEL. These condensed interim consolidated financial statements are the consolidated financial statements of Tangelo Games Corp. and its wholly owned subsidiary companies: Vast Studios Inc. ( Vast ), incorporated in Ontario and purchased by the Company on July 22, 2014 Tangelo Games Holdings Ltd. ( Tangelo Holdings ), incorporated in Israel on December 17, 2014 Tangelo Games Israel Ltd. ( Tangelo Israel ), incorporated in Israel and purchased by the Company on January 30, 2015 Tangelo Games Spain, S.L.U. ( Tangelo Spain ), incorporated in Spain and purchased by the Company on November 16, Tangelo Israel and Tangelo Spain both develop and sell social casino games. Vast developed hidden object computer games. The Company decided to cease pursuing the business lines of Vast during 2015 and has consequently treated this operation as discontinued operations. The Company's head office is 65 Queen St. West, Toronto, Ontario, M5H 2M5. Going Concern The Company s condensed interim consolidated financial statements for the three months ended March 31, 2018, 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 they become due in the foreseeable future. At March 31, 2018, the Company had cash and cash equivalents of $2,352,853, and a working capital deficit of $91,803,509. The Company signed a new waiver with the Company s lenders effective September 30, 2017 whereby the maturity of the loan was extended to April 30, 2019 (Note 12). However, as the Company was in default of a covenant as at March 31, 2018, the loan has been classified as short-term at March 31, The Company is currently in negotiations with the lender with respect to this breach. As well as waiving certain covenant breaches as at September 30, 2017 and amending the covenants going forward, the waiver also provided interest relief such that the Company, with notice, can capitalize half of the required interest payments going forward. The Company s lenders are supportive partners and have repeatedly demonstrated their flexibility by waiving covenant breaches and adjusting payment terms for a fee in order to allow the Company to meet its commitments. Management believes the Company will be able to fund its regular operations over the next twelve months, under the assumption that the Company will complete a proposed transaction and would continue to negotiate with its lenders on principal repayments and interest. However, it is not possible to predict whether the Company will be successful in completing a transaction and whether the Company s lenders will continue to negotiate with the Company. These condensed interim consolidated financial statements for the three months ended March 31, 2018 do not include the adjustments that would result if the Company were unable to continue as a going concern. These factors cast significant doubt regarding the Company s ability to continue as a going concern. These condensed interim consolidated financial statements were authorized for issuance by the Board of Directors on May 29,

7 2. Statement of Compliance and Basis of Presentation Statement of Compliance These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ), under International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ), following the same accounting policies and methods of computation as the audited consolidated financial statements for the fiscal year ended December 31, 2017 except as disclosed below. The condensed interim consolidated financial statements do not include all of the disclosures included in the annual audited financial statements and the notes thereto included in the Company s annual report for the year ended December 31, Basis of Measurement These condensed interim consolidated financial statements are prepared on the historical cost basis except for certain financial instruments, which have been measured at fair value. Principles of Consolidation These condensed interim consolidated financial statements include the accounts of the Company and its whollyowned subsidiaries, as described above, from their respective dates of acquisition. All inter-company balances and transactions have been eliminated. Accounting for Business Combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of acquisition-date fair values of the assets transferred and liabilities assumed by the Company, liabilities incurred by the Company to former owners of the acquiree in exchange for control of the acquiree. Acquisition-related costs are recognized in the statement of loss as incurred. At the acquisition date, the identifiable assets acquired, liabilities and contingent liabilities assumed are recognized at their fair values, except for deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements, which are recognized and measured in accordance with IAS 12 Income Tax and IAS 19 Employee Benefits respectively. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after assessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer s previously held interest in the acquiree (if any), the excess is recognized immediately in the statement of loss as a bargain purchase gain. Functional and Presentation Currency The presentation currency of the Company is the Canadian dollar. The functional currency of the Company and its subsidiaries, except for Tangelo Israel and Tangelo Spain, is the Canadian dollar. The functional currency of Tangelo Israel is the US dollar and the functional currency of Tangelo Spain is the Euro. For the purpose of presenting these condensed interim consolidated financial statements, the assets and liabilities of Tangelo Israel and Tangelo Spain are translated to Canadian dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. All resulting currency translation gains or losses from translating the financial statements from the functional currency to the presentation currency are recorded in other comprehensive loss in the consolidated statements of loss and comprehensive loss. 7

8 2. Statement of Compliance and Basis of Presentation (continued) In preparing the financial statements of the individual entity, transactions in currencies other than the entity's functional currency (foreign currencies) are translated to the functional currency of each entity at the exchange rate in existence at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the end of the reporting period are translated at the exchange rates at that date. Non-monetary items which are measured using historical cost in a foreign currency are retranslated using the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise. 3. Significant Accounting Judgments, Estimates and Assumptions The preparation of condensed interim consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, these estimates are subject to measurement uncertainty. Actual results could differ from these estimates. The effect of changes in such estimates on the financial statements in future periods could be significant. Accounts specifically affected by estimates in these condensed interim consolidated financial statements are: Useful lives and residual values of intangibles: Management estimates the useful lives and residual values to calculate amortization expense for finite intangibles. Significant judgment is involved in the determination of useful life for the computation of amortization of intangible assets. No assurance can be given that the actual useful lives will not differ significantly from current assumptions. Estimated impairment of long term assets: Management reviews long term assets residual values and useful lives at the end of each reporting period and writes down the asset s carrying amount to its estimated recoverable amount if the carrying amount is greater. If the carrying amount of an asset exceeds its recoverable amount, the asset is impaired and an impairment loss is recognized in the consolidated statements of loss and comprehensive loss. The assessment of fair value requires the use of estimates and assumptions related to future operating performance and discount rates. Going concern: The Company uses significant judgement in determining its ability to continue as a going concern. In particular, management includes its relationship with the Company s lender in determining its ability to continue as a going concern. Determination of functional currency: Under IFRS, each entity within the Company has its results measured using the currency of the primary economic environment in which the entity operates (the functional currency). Judgment is necessary in assessing each entity s functional currency. The Company considers the currency of revenues and expenses, and inflows and outflows, as well as financing activities as part of its decision-making process. 8

9 4. New and Future Accounting Policies New accounting policies adopted during the period: IFRS 9 was issued by the IASB on July 24, 2014 and replaces IAS 39 Financial instruments: recognition and measurement. IFRS 9 utilizes a single approach to determine whether a financial asset is measured at amortized cost or fair value and a new mixed measurement model for debt instruments having only two categories: amortized cost and fair value. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Final amendments released on July 24, 2014 also introduced a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. The Company has adopted this standard effective January 1, As IFRS 9 largely retained the existing requirements in IAS 39 for the classification and measurement of financial liabilities, the adoption of IFRS 9 did not have a material impact on the carrying value of the Company s financial liabilities and there was no requirement to restate comparative periods disclosed. IFRS 9 does eliminate the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. Under IFRS 9, on initial recognition, a financial asset is classified as measured at fair value through profit and loss ( FVTPL ), at fair value through other comprehensive income ( FVOCI ) or at amortized cost. The Company has assessed the classification of its financial assets and liabilities under IFRS 9 and has summarized the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 in the following table: Measurement categories Financial instrument: IAS 39 IFRS 9 Cash and cash equivalents Loans and receivables Amortized cost Accounts receivable Loans and receivables Amortized cost Accounts payable and accrued liabilities Other financial liabilities Amortized cost Bank loans Other financial liabilities Amortized cost Current portion of long-term debt Other financial liabilities Amortized cost Loans payable Other financial liabilities Amortized cost IFRS 15, as issued in May 2014, establishes a new five-step model that will apply to revenue earned from a contract with a customer, regardless of the type of revenue or industry. The principles in IFRS 15 provides a more structured approach to measuring and recognizing revenue and will be applied using the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This new revenue standard, which has been jointly issued by the IASB and the US Financial Accounting Standards Board, is applicable to all entities and will supersede the current revenue recognition requirements under IFRS. The Company has adopted this standard effective January 1, The Company has applied the standard using the modified retrospective approach, whereby the cumulative impact of adoption is recognized in opening deficit. The adoption of IFRS 15 did not have a material impact on the timing and amount of revenue recognized by the Company. Future accounting policies: IFRS 16 replaces IAS 17, Leases was released in January This standard will bring most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and financing leases. Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. Adoption of IFRS 16 is mandatory and will be effective for annual periods beginning on or after January 1, 2019 with earlier adoption permitted. The Company is currently evaluating the impact the final standard is expected to have on its consolidated financial statements. 9

10 5. Prepaid Expenses and Other Receivables March 31, 2018 December 31, 2017 Harmonized sales tax and VAT receivable $ 54,273 $ 174,308 Payroll advance (Note 19) 1,015, ,328 Prepaid rent 151, ,136 Other deposits and miscellaneous receivables 330, ,002 $ 1,551,556 $ 1,531,774 Current portion $ 1,386,676 $ 1,369,359 Long-term portion 164, ,415 $ 1,551,556 $ 1,531, Equipment Leaseholds and Office Equipment Computer Equipment Total Cost Balance, December 31, 2017 $ 170,465 $ 254,863 $ 425,328 Additions 3,442-3,442 Foreign exchange impact 8,453 2,287 10,740 Balance, March 31, 2018 $ 182,360 $ 257,150 $ 439,510 Accumulated depreciation Balance, December 31, 2017 $ 28,023 $ 95,318 $ 123,341 Additions 11,476 11,668 23,144 Foreign exchange impact 1,460 (1,135) 325 Balance, March 31, 2018 $ 40,959 $ 105,851 $ 146,810 Net book value Balance, December 31, 2017 $ 142,442 $ 159,545 $ 301,987 Balance, March 31, 2018 $ 141,401 $ 151,299 $ 292,700 Depreciation expense charged to the condensed interim consolidated statements of loss and comprehensive loss for the three months ended March 31, 2018 was $23,144 (March 31, 2017: $37,288). 10

11 7. Goodwill Tangelo Israel Tangelo Spain TOTAL December 31, 2017 $ 4,295,042 $ 7,463,534 $ 11,758,576 Foreign exchange impact 119, , ,606 March 31, 2018 $ 4,414,530 $ 7,867,652 $ 12,282,182 At March 31, 2018, the Company assessed for indicators of impairment for the goodwill of its Tangelo Israel and Tangelo Spain operations, and determined there was no indication of impairment. 8. Intangibles Software Customer lists Technology Brand Assembled workforce Non-compete agreements Total Cost Balance, December 31, 2017 $ 5,675,109 $ 40,343,741 $ 32,436,090 $ 3,648,630 $ 878,150 $ 2,258,100 $ 85,239,820 Additions Foreign exchange translation changes 45,554 1,358,795 1,231, ,557 24,430 62,820 2,920,320 Balance, March 31, 2018 $ 5,720,663 $ 41,702,536 $ 33,667,254 $ 3,846,187 $ 902,580 $ 2,320,920 $ 88,160,140 Accumulated amortization and impairment Balance, December 31, 2017 $ 4,570,014 $ 11,055,910 $ 16,943,542 $ - $ - $ 1,646,532 $ 34,215,998 Additions 95,619 1,022,825 1,651, ,357 2,911,906 Foreign exchange translation changes 3, , , ,506 1,072,822 Balance, March 31, 2018 $ 4,669,032 $ 12,456,289 $ 19,238,010 $ - $ - $ 1,837,395 $ 38,200,726 Net book value Balance, December 31, 2017 $ 1,105,095 $ 29,287,831 $ 15,492,548 $ 3,648,630 $ 878,150 $ 611,568 $ 51,023,822 Balance, March 31, 2018 $ 1,051,631 $ 29,246,247 $ 14,429,244 $ 3,846,187 $ 902,580 $ 483,525 $ 49,959,414 Intangibles consist of software, customer lists, technology, brand, assembled workforce and non-compete agreements acquired from the acquisitions of Tangelo Israel and Tangelo Spain during Amortization expense charged to net loss for the three months ended March 31, 2018 was $2,911,906 (March 31, 2017: $2,832,163). 9. Accounts Payable and Accrued Liabilities March 31, 2018 December 31, 2017 Operations $ 2,092,930 $ 2,382,467 Interest payable (Note 12) 477, ,702 Corporate liabilities 719, ,238 Payroll and other government liabilities 359, ,839 $ 3,649,022 $ 4,224,246 11

12 10. Bank Loans Through the acquisition of Tangelo Spain, the Company is carrying certain bank loans at interest rates of between 5.45% and 6.13% per annum. Monthly payments are required up to June 2019, when the facilities will be paid in full. As at March 31, 2018, the current portion of these loans was 94,483 ($151,504) (December 31, 2017: 94,945 ($142,910)). The long-term portion, which is included in long-term debt, was 24,214 ($38,420) (December 31, 2016: 48,289 ($72,685)) (Note 11). 11. Long-term debt Long-term debt is composed of the long-term portion of bank loans and other loans. March 31, 2018 December 31, 2017 Bank loans (Note 10) $ 38,420 $ 72,685 Other loans 551, ,389 $ 590,117 $ 653,074 Current portion $ 385,693 $ 365,883 Long-term portion 204, ,191 $ 590,117 $ 653,074 Other loans were inherited through the acquisition of Tangelo Spain. These loans carry interest rates of 0.5% and approximately 3%, and mature in December 2019 with principal repayments starting in The carrying value of these loans at March 31, 2018 was 347,701 ($551,697) (December 31, 2017: 385,588 ($580,389)). As at March 31, 2018, 243,079 ($365,693) of this debt was recorded as current (December 31, 2017: 243,079 ($365,883)). During the three months ended March 31, 2018, the Company repaid 37,887 ($60,115) of other loans and 23,537 ($37,346) of bank loans (March 31, 2017: 23,030 ($32,231)). Interest on bank loans and long-term debt for the three months ended March 31, 2018 was $5,094 (March 31, 2017: $6,686). 12. Loan Payable March 31, 2018 December 31, 2017 Third Eye Capital $ 93,246,243 $ 89,403,690 Less: Current portion 93,246,243 - Long-term portion $ - $ 89,403,690 On January 30, 2015, in conjunction with, and as a condition of completion of, the Tangelo Israel Acquisition, the Company completed a secured debt financing pursuant to a credit agreement dated January 30, 2015 (the "Credit Agreement") among the Company, as borrower, certain subsidiaries of the Company, as credit parties, a syndicate of lenders and the lenders' administrative agent, Third Eye Capital Corporation ("TEC"). In accordance with the Credit Agreement, the lenders advanced to the Company a senior secured Term Loan Facility in the principal amount of US$40,000,000 (the "Term Loan Facility"). The Company used the net amount advanced to it under the Term Loan Facility to fund the Tangelo Israel Acquisition. The Term Loan Facility has a term of three years, subject to acceleration by TEC on certain events of default and subject to the Company's right to repay the Term Loan Facility after the first anniversary upon three months prior notice, and bears interest at 12% per annum, calculated and payable monthly in arrears. 12

13 12. Loan Payable (continued) In November 2015, the Company completed a senior secured term loan financing in the principal amount of US$28,000,000 (the Acquisition Facility ). The net proceeds from the Acquisition Facility were used by the Company to fund the closing cash portion of the Tangelo Spain Purchase Price and certain related expenses. The Acquisition Facility was effected by way of an amendment and restatement of the existing Credit Agreement dated January 30, 2015, as amended between the Company, as borrower, the subsidiaries of the Company, as credit parties, a syndicate of lenders, and the lenders administrative agent, TEC. The Acquisition Facility was coterminous with the existing senior secured Term Loan Facility under the Credit Agreement, maturing on January 30, 2018, subject to acceleration by TEC on certain events of default and the Company s right to repay the Acquisition Facility under certain circumstances and certain obligations of the Company to repay prior to such maturity date. The Acquisition Facility (like the existing facility) bears interest at a rate of 12% per annum, payable monthly. The Credit Agreement contained usual and customary terms and covenants and certain of the financial, operational and other covenants for the original Term Loan Facility were amended. Pursuant to the amended Credit Agreement, a maintenance fee of US$1,000,000 would be payable if the loan is outstanding as of January 30, This fee was charged in January 2017 and capitalized under the Term Loan Facility upon agreement by the lenders. Effective September 30, 2017, the Company entered into a waiver agreement, whereby the maturity of the loan was extended to April 30, The waiver waived certain covenant breaches as at September 30, 2017, and amended certain covenants going forward. The waiver also provided interest relief such that the Company was able to capitalize its interest that was due October 1 and November 1, Provided the Company remains in good standing with respect to the covenants, the Company, upon notice to the lenders, can capitalize half of its interest due monthly going forward. As well, the interest rate was amended, and is now based on a leverage ratio, depending on the Company s performance. The Company will be required to make a principal payment to the lenders should the Company complete an equity offering or debt financing in connection with the proposed transaction. The Company was charged a waiver fee of US$1,000,000 ($1,248,000) which was capitalized under the terms of the waiver agreement. The Company issued 20,000,000 warrants to the lenders pursuant to the Credit Agreement, where each warrant entitled the holder to acquire one common share of the Company at a price of $0.385 per share, expiring three years from the date of issue. As partial consideration for the Acquisition Facility, the Company issued to the lenders 15,000,000 non-transferrable warrants, each entitling the holder thereof to purchase one common share of the Company at a price of $0.195 per common share at any time until January 30, In connection with the January 2017 amendment, these warrants were repriced to $0.06 (Note 13). As well, they are subject to early acceleration in accordance with the policies of the TSXV. In connection with the September 2017 amendment, the expiry date of the warrants was extended to April 30, The Term Loan Facility is secured by, among other things: (i) a first priority security agreement in favour of TEC, on behalf of the Lenders, on all of the present and future real and personal property of the Company and its subsidiaries; (ii) guarantees provided by certain subsidiaries of the Company; (iii) source code escrow arrangements for current and future Source Code of the Company and its subsidiaries; (iv) the assignment of certain third party licensing and revenue sharing agreements; (v) deposit account control agreements over certain bank accounts of the Company and its subsidiaries; and (vi) a pledge of the shares of each of the subsidiaries of the Company. The loan payable was recognized initially at fair value net of direct attributable transactions costs. Subsequent to initial recognition, it is measured at amortized cost using an effective annual interest rate of 14%. During the three months ended March 31, 2018, the Company recorded interest and accretion expense with respect to this loan of $2,915,791 (March 31, 2017: $5,111,890, which includes a maintenance fee of US$1,000,000 ($1,301,200)). During the three months ended March 31, 2018, the Company capitalized $1,129,419 in interest as permitted by the September 2017 waiver agreement (March 31, 2017: $1,301,200 in fees were capitalized). As at March 31, 2018, the Company is in default with respect to one of its covenants, and is currently in negotiation with the lender. 13

14 13. Warrants Number of warrants Value Weighted Average Exercise Price December 31, ,360,920 $ 13,381,174 $0.309 Expiry of warrants (39,360,920) $ (7,300,174) $0.530 March 31, ,000,000 $ 6,081,000 $0.060 As at March 31, 2018, the following warrants remain outstanding: Number of Exercise warrants Expiry date price Value 35,000,000 April 30, 2019 $0.060 $ 6,081, Stock Options The stock option plan (the "Plan") is administered by the Board of Directors of the Company which establishes the exercise prices, vesting conditions and expiry date of the options. The number of common shares available under the Plan at March 31, 2018 and December 31, 2017 is 18,428,888. Number of options Value Weighted Average Exercise Price December 31, ,075,349 $ 1,942,233 $0.23 Vested - 6,711 $0.00 March 31, ,075,349 $ 1,948,944 $0.23 During the three months ended, no stock options were granted. Previously granted options that vest quarterly over two years resulted in an expense recorded for the three months ended March 31, 2018 of $6,711 (March 31, 2017: $34,512). The weighted average remaining contractual life of the outstanding options is 2.49 years (December 31, 2017: 2.73 years). 14

15 14. Stock Options (continued) As at March 31, 2018, the following stock options remain outstanding: Grant date Number of options outstanding Number of options vested Expiry date Exercise price Value Expected life BLACK-SCHOLES INPUTS Riskfree Expected interest dividend rate yield Expected volatility December 2, , ,000 December 2, 2018 $0.400 $ 33,840 5 years 1.76% 0% 100% April 7, ,489,000 4,489,000 April 7, 2020 $0.380 $ 1,186,443 5 years 0.54% 0% 118% April 16, , ,000 April 16, 2020 $0.475 $ 132,000 5 years 0.80% 0% 90% September 16, ,000,000 2,000,000 September 16, 2020 $0.225 $ 295,600 5 years 0.87% 0% 83% February 24, ,918,672 3,918,672 February 24, 2021 $0.075 $ 214,743 5 years 0.64% 0% 98% June 27, , ,467 June 27, 2021 $0.100 $ 68,175 5 years 0.56% 0% 127% September 13, , ,000 September 13, 2021 $0.075 $ 18,143 5 years 0.76% 0% 127% 12,075,349 11,898,139 $ Segmented Information For the three months ended March 31, 2018, the Company had three reportable segments. The segments, Mobile, Facebook, and Portal, are the platforms for the games the Company produces. The Company has designated these components as reporting segments as management monitors its revenues according to these platforms. Expenses are not reported to management according to these platforms. Segmented net loss from continuing operations for the three months ended March 31, 2018 is presented below: Three months ended March 31, 2018 Portal Facebook Mobile Other Subtotal Corporate Total Revenue $ 3,837,741 $ 3,910,598 $ 833,538 $ 34,653 $ 8,616,530 $ - $ 8,616,530 Gaming commissions (381,793) (1,275,390) (261,069) (12,658) (1,930,910) - (1,930,910) Advertising and marketing (1,921,346) - (1,921,346) Salaries and benefits (1,627,300) (146,784) (1,774,084) Professional fees (174,838) (117,596) (292,434) Subcontractors (67,500) (67,500) General and administration (644,799) (57,876) (702,675) Regulatory fees and investor relations (9,510) (9,510) Travel and accommodation (83,920) (5,772) (89,692) Depreciation of equipment (22,979) (165) (23,144) Amortization of intangibles (95,619) (2,816,287) (2,911,906) Stock-based compensation (2,955) (3,756) (6,711) Interest and accretion (2,920,885) (2,920,885) Interest income Foreign exchange gain (50,347) (2,855,027) (2,905,374) Net loss from continuing operations before taxes 3,455,948 2,635, ,469 21,995 2,061,517 (9,001,036) (6,939,519) Current and deferred taxes , ,387 Net loss from continuing operations $ 3,455,948 $ 2,635,208 $ 572,469 $ 21,995 $ 2,399,904 $ (9,001,036) $ (6,601,132) 15

16 15. Segmented Information (continued) Segmented net loss from continuing operations for the three months ended March 31, 2017 is presented below: Portal Facebook Mobile Other Subtotal Corporate Total Revenue $ 3,588,736 $ 4,400,414 $ 949,738 $ 47,850 $ 8,986,738 $ - $ 8,986,738 Gaming commissions (424,956) (1,380,731) (294,989) (28,339) (2,129,015) - (2,129,015) Advertising and marketing (1,759,292) - (1,759,292) Salaries and benefits (1,299,584) (142,429) (1,442,013) Professional fees (194,650) (122,190) (316,840) Subcontractors (105,000) (105,000) General and administration (555,790) (112,536) (668,326) Regulatory fees and investor relations (5,303) (5,303) Travel and accommodation (81,330) (46,056) (127,386) Transaction costs (47,468) (47,468) Severance and restructure costs (54,060) (54,060) Depreciation of equipment (37,148) (140) (37,288) Amortization of intangibles (2,832,163) (2,832,163) Stock-based compensation (16,764) (17,748) (34,512) Interest and accretion (5,118,535) (5,118,535) Foreign exchange gain , , ,647 Net loss from continuing operations before taxes 3,163,780 3,019, ,749 19,511 3,023,269 (7,774,085) (4,750,816) Current and deferred taxes , ,363 Net loss from continuing operations $ 3,163,780 $ 3,019,683 $ 654,749 $ 19,511 $ 3,480,632 $ (7,774,085) $ (4,293,453) The Company s revenues for the three months ended by geographic region, as presented below, is based on the primary jurisdiction where the Company is licensed to offer its products or services, not the location of its customer. Revenues, 2018 Portal Facebook Mobile Other Subtotal Corporate Total Spain $ 3,837,741 $ 735,608 $ 187,122 $ 35,320 $ 4,795,791 $ - $ 4,795,791 Israel - 3,174, ,416 (667) 3,820,739-3,820,739 Canada $ 3,837,741 $ 3,910,598 $ 833,538 $ 34,653 $ 8,616,530 $ - $ 8,616,530 Revenues, 2017 Portal Facebook Mobile Other Subtotal Corporate Total Spain $ 3,587,634 $ 747,653 $ 113,140 $ 47,850 $ 4,496,277 $ - $ 4,496,277 Israel 1,102 3,652, ,598-4,490,461-4,490,461 Canada $ 3,588,736 $ 4,400,414 $ 949,738 $ 47,850 $ 8,986,738 $ - $ 8,986,738 16

17 15. Segmented Information (continued) The distribution of the Company s non-current assets (namely long-term prepaids, equipment, goodwill, intangibles and deferred income tax assets) by geographic region is as follows: Non-current assets As at March 31, 2018 As at December 31, 2017 Spain $ 26,710,782 $ 26,398,757 Israel 35,946,510 36,801,850 Canada 119, , Discontinued Operations $ 62,776,306 $ 63,319,786 During the third quarter of 2015, the Company decided to no longer pursue its operations within its Vast subsidiary. The Company is focusing on its Tangelo Israel and Tangelo Spain subsidiaries going forward as well as future potential acquisitions. The following table summarizes the operations of Vast which was classified as discontinued operations. Vast s games are currently generating nominal royalty revenue. Three months ended March 31, 2018 March 31, 2017 Revenue $ 4,565 $ 8,373 Interest income - 6,625 Operating expenses (584) (589) Foreign exchange 192 (259) Net income from discontinued operations $ 4,173 $ 14,150 Vast had combined current assets of $271,746, non-current assets of $nil and current liabilities of $50,265 at March 31, 2018 (December 31, 2017: current assets of $266,989; non-current assets of $nil and current liabilities of $50,265). These amounts have been treated as a disposal group but have not been classified as held-for-sale because their carrying amount will be principally recovered through continuing use, being the collection of cash, receivables, tax credit receivables, and settlement of liabilities. During the three months ended March 31, 2018, the Company received approximately $nil in tax credit receivables related to discontinued operations (March 31, 2017: $242,000). The following table summarizes the net cash flows attributable to discontinued operations: March 31, March 31, Net income for the period 4,173 14,150 Changes in working capital - 242,182 Cash flows from operating activities $ 4,173 $ 256,332 Cash flows from investing activities $ - $ - Cash flows from financing activities $ - $ - 17

18 17. Economic Dependence The Company, through its Tangelo Israel subsidiary, uses Facebook as its primary distribution, marketing, promotion and payment platform for its products and expects to do so for the foreseeable future. Revenues generated through Facebook for the three months ended March 31, 2018 accounted for approximately 83% of Tangelo Israel s total revenues (March 31, 2017: 81%), and 76% of Tangelo Israel s accounts receivable at March 31, 2018 (December 31, 2017: 78%). With respect to Tangelo Spain, revenues generated through Facebook for the three months ended March 31, 2018 accounted for approximately 15% of total Tangelo Spain revenue (March 31, 2017: 17%), and 13% of Tangelo Spain s accounts receivable at March 31, 2018 (December 31, 2017: 14%). 18. Financial Instruments Fair Value Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values. Financial Risk Factors The Company is exposed in varying degrees to a variety of financial instrument related risks: Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments which are potentially subject to credit risk consist primarily of cash and accounts receivables. Credit risk associated with cash is minimized by ensuring cash is placed with financial institutions with high credit ratings. The carrying amount of trade accounts receivables are reduced through the use of an allowance for doubtful accounts. The allowance for doubtful accounts at March 31, 2018 was $237,104 (December 31, 2017: $128,823). A significant portion of the Company s accounts receivables are due from Facebook. Liquidity risk The Company manages its liquidity risk through the management of its capital which incorporates the continuous monitoring of actual and projected cash flows to ensure that it has sufficient liquidity to meet its operating commitments without incurring unacceptable losses or risking damage to the Company s reputation. The Company has reported working capital deficit of $91,803,509 as at March 31, 2018 (December 31, 2017: a working capital of $1,604,602). The working capital deficit at March 31, 2018 includes the Company s loan payable of $93,246,243 which has been classified as current during the three months ended March 31, As at December 31, 2017, the loan payable was classified as long-term. Foreign currency risk The Company's functional currency is the Canadian dollar. The Company s Tangelo Israel subsidiary operates in both New Israeli Shekels (NIS) and US dollars, while the Company s Tangelo Spain subsidiary operates in Euros. As well, the Company s debt facility is denominated in US dollars and its other loans are denominated in Euros. The Company does not hedge its foreign exchange risk. As at March 31, 2018, a plus or minus 5% change in foreign exchange rates applied to the financial instruments held at the end of the reporting period would affect net loss by approximately $4,700,000 and other comprehensive loss by $45,

19 19. Related Party Transactions and Balances Related parties include the Board of Directors, key management personnel, and enterprises which are controlled by these individuals. Remuneration of key management personnel of the Company for the three months ended March 31, 2018 and 2017 were as follows: Three months ended March 31, 2018 March 31, 2017 Salaries and related benefits $ 205,347 $ 195,532 Directors fees 37,500 37,500 Subcontractor expense 67,500 67,500 Stock-based compensation 4,010 19,683 $ 314,357 $ 320,215 Included in prepaids and other receivables at March 31, 2018 is 640,000 ($1,015,488) (Note 5) which was advanced to Mr. Vincenc Marti, the Company s President (December 31, 2017: 640,000 ($963,328)). Mr. Marti opted to receive his consideration from the Company s acquisition of Tangelo Spain in common shares of the Company rather than in cash. The advance was provided to assist Mr. Marti with his tax liability related to the common share consideration. The Company agreed to allow him to utilize future performance bonuses and other forms of remuneration to repay the advance. Included in accounts payable and accrued liabilities at March 31, 2018 is $nil (December 31, $nil) owing to related parties. 20. Commitments The Company is party to certain management contracts. These contracts require that additional payments of $1,600,000 be made upon the occurrence of certain events such as a change of control, while the loan payable (Note 12) is still outstanding and should the Company no longer be indebted. As the likelihood of these events taking place is uncertain and it is not probable that there will be any outflow of resources to settle the commitment, the contingent payments have not been reflected in these condensed interim consolidated financial statements. Minimum commitments remaining under these contracts, both while the Company is indebted under the loan payable and should the Company no longer be indebted, are approximately $1,500,000. The Company has total future financial commitments under its office operating leases in the amount of $1,095,278 over the next five years. Payments due by period Contractual obligation Total < 1 year 1-3 years 4-5 years > 5 years Operating leases $ 1,095,278 $ 540,438 $ 554,840 $ - $ - 19