EIGHT SOLUTIONS INC.

Transcription

1 June 30, 2015 NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS Under National Instrument , part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the condensed consolidated interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared by management and approved by the Audit Committee and Board of Directors of the Company. They include appropriate accounting principles, judgment and estimates in accordance with IFRS for interim financial statements. The Company s independent auditors have not performed a review of these condensed consolidated interim financial statements in accordance with the standards established by the Canadian institute of Chartered Accountants for a review of condensed consolidated interim financial statements by an entity s auditors.

2 Unaudited Condensed Consolidated Interim Financial Statements (Expressed in Canadian dollars) EIGHT SOLUTIONS INC.

3 Unaudited Condensed Consolidated Interim Statements of Financial Position (Expressed in Canadian dollars) June 30, December 31, Assets Current assets: Cash and cash equivalents $ 174,467 $ 572,164 Trade and other receivable (notes 4 and 10) 1,014,212 22,002 Tax credits receivable 960, ,781 Prepaid expenses - 31,345 2,149,460 1,586,292 Non-current assets: Prepaid expenses and deposits 35,274 79,555 Property and equipment (note 11) 219, ,154 Other receivable (note 4) 1,166,667 - Intangible assets (note 12) 8,940,807 10,354,027 Goodwill (note 5) 2,631,419 2,631,419 12,993,861 13,541,155 Total assets $ 15,143,321 $ 15,127,447 Liabilities and Shareholders Equity (Deficiency) Current liabilities: Trade payables and accrued liabilities (note 13) $ 1,415,769 $ 1,826,033 Bank loan (note 14) - 868,479 Loan payable (note 15) 3,294,635 3,288,308 Deferred revenue - 2,376,687 Current portion of lease incentives 76,200 76,200 Current portion of convertible promissory note (note 6(b)) 52,730 52,286 4,839,334 8,487,993 Non-current liabilities: Convertible promissory note (note 6(b)) 270, ,000 Lease incentives 127, ,163 Due to shareholder (note 6(a)) 3,221,364 2,930,362 Deferred tax liability 1,676,660 2,061,750 5,295,077 5,427,275 Total liabilities 10,134,411 13,915,268 Shareholders equity (deficiency): Share capital (note 17(a)) 17,283,814 17,268,579 Contributed surplus 3,411,271 3,005,930 Deficit (18,485,230) (22,306,009) Total deficiency attributed to owners of the Company 2,209,855 (2,031,500) Non-controlling interest 2,799,055 3,243,679 Total equity (deficiency) 5,008,910 1,212,179 Total liabilities and shareholders equity (deficiency) $ 15,143,321 $ 15,127,447 Reporting entity and going concern (note 1) Commitments and contingencies (note 16) The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. Approved on behalf of the Board: /s/ Roderick Armes Director 1

4 Unaudited Condensed Consolidated Interim Statements of Comprehensive (Loss) Income (Expressed in Canadian dollars) Three months ended Six months ended June 30, June 30, June 30, June 30, Revenue (note 7) $ 798,661 $ 6,346,007 $ 7,240,801 $ 10,477,346 Expenses: Employee expenses (note 8) 1,140,518 4,179,556 5,302,199 8,008,973 Contracted services 240,720 1,246,570 1,621,590 2,152,959 Supplies and materials 473, ,691 1,221,803 1,673,318 Amortization (notes 11 and 12) 636, ,735 1,338,152 1,158,104 Stock based compensation (note 18) 148, , , ,150 2,640,211 7,142,335 9,806,559 13,618,504 Loss before other income (expenses) (1,841,550) (796,328) (2,565,758) (3,141,158) Other income (expenses): Foreign exchange gain (loss) (47,655) (21,391) (47,374) (26,721) Finance expense (note 9) (51,990) (105,961) (242,038) (210,039) Gain on disposition (note 4) - - 5,846,235 - Gain on non-refundable loan (note 15) - 1,008,460-1,008,460 Gain on investment (note 5) ,373,333 (99,645) 881,108 5,556,823 6,145,033 Income (loss) before tax (1,941,195) 84,780 2,991,065 3,003,875 Deferred income tax recovery 195, , , ,448 Net (loss) income and comprehensive (loss) income for the period $ (1,745,238) $ 267,228 $ 3,376,155 $ 3,186,323 Total comprehensive (loss) income attributable to: Shareholders of the Company $ (1,521,993) $ 503,811 $ 3,820,779 $ 3,554,837 Non-controlling interest (223,245) (236,583) (444,624) (368,514) Net (loss) income per share attributable to owners of the Company: Basic (note 17(b)) $ (0.03) $ 0.01 $ 0.08 $ 0.08 Diluted (note 17(b)) $ (0.03) $ 0.01 $ 0.08 $ 0.07 The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. 2

5 Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders Equity (Deficiency) (Expressed in Canadian dollars) Six months ended June 30, 2015 and 2014 Total equity Total attributable to shareholders Number of Share Contributed shareholders Non-controlling equity common shares capital surplus Deficit of the Company interest (deficiency) December 31, ,736,630 $ 12,397,815 $ 1,973,445 $(20,136,735) $ (5,765,475) $ - $ (5,765,475) Stock based compensation , , ,150 Issuance of common shares (note 17(a)) 267, , , ,250 Acquisition of Reelhouse Media Ltd.(note 5) 1,569,286 2,330, ,593 2,530,658 4,061,676 6,592,334 Warrant exercise (note 17(a)) 1,008, ,280 20, , ,280 Net income (loss) for the period ,554,837 3,554,837 (368,514) 3,186,323 Balance, June 30, ,581,885 $ 15,859,410 $ 2,618,595 $(16,381,305) $ 2,096,700 $ 3,693,162 $ 5,789,862 December 31, ,095,488 $ 17,268,579 $ 3,005,930 $(22,306,009) $ (2,031,500) $ 3,243,679 $ 1,212,179 Stock based compensation 322, , ,815 Issuance of warrants 82,526 82,526 82,526 Option exercise (note 18) 25,393 15,235 15,235 15,235 Net income (loss) for the period 3,820,779 3,820,779 (444,624) 3,376,155 Balance, June 30, ,120,881 $ 17,283,814 $ 3,411,271 $(18,485,230) $ 2,209,855 $ 2,799,055 $ 5,008,910 The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. 3

6 Unaudited Condensed Consolidated Interim Statements of Cash Flows (Expressed in Canadian dollars) Six months ended June 30, June 30, Cash provided by (used in): Cash flows from operating activities: Net income (loss) for the period $ 3,376,155 $ 3,186,323 Adjustments for: Amortization 1,338,152 1,158,104 Amortization of lease inducement (38,110) (38,111) Stock based compensation 322, ,150 Gain from disposition of 3D studio assets (note 4) (5,846,235) - Issuance of warrants for consulting services 82,526 - Deferred income tax recovery (385,090) (182,448) Gain on investment (note 5) - (5,373,333) Gain on non-refundable loan (note 15) - (1,008,460) Finance expense 242, ,039 (907,749) (1,422,736) Lease incentives: Trade and other receivable (408,877) (649,003) Tax credits receivable - (74,012) Prepaid expenses and deposits 75,626 (70,901) Deferred revenue (2,376,687) (616,498) Trade payables and accrued liabilities (562,269) 831,804 Net cash used in operating activities (4,179,956) (2,001,346) Cash flows from financing activities: Decrease in bank indebtedness (880,387) - Proceeds from non-refundable loan (note 15) - 1,008,460 Advances from shareholder 275,000 - Repayment of finance lease liability - (130,400) Repayment of due to shareholder (33,880) (2,991) Proceeds from issuance of share capital (net of costs) 15,235 1,151,530 Interest paid (21,472) (29,478) Net cash from (used in) financing activities (645,504) 1,997,121 Cash flows from investing activities: Purchase of property and equipment (7,316) (172,636) Purchase of intangible assets (127,421) (69,653) Cash received on acquisition of business (note 5) - 1,757 Cash received on disposition of 3D studio assets (note 4) 4,562,500 - Interest received - 2,034 Net cash from (used in) investing activities 4,427,763 (238,498) Decrease in cash and cash equivalents (397,697) (242,723) Cash and cash equivalents, beginning of year 572,164 1,683,993 Cash and cash equivalents, end of period $ 174,467 $ 1,441,270 The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. 4

7 1. Reporting entity and going concern: Eight Solutions Inc., originally known as Delon Resources Corp., was incorporated on January 24, 2011 pursuant to the provisions of the Business Corporations Act (British Columbia). On April 24, 2013, Delon Resources Corp. acquired all the issued and outstanding common shares of Gener8 Digital Media Corp. ( Gener8 ) and changed its name to Gener8 Media Corp. under the Business Corporations Act (British Columbia) on April 22, On February 2, 2015, the Company changed its name from Gener8 Media Corp. to Eight Solutions Inc. The address of the Company s operating office is Suite 100, 138 East 7 th Avenue, Vancouver, B.C., Canada. The unaudited condensed consolidated interim financial statements of the Company as at June 30, 2015 and for the three and six month periods then ended comprise of the Company and its subsidiaries, Eight Technologies Inc., Eight Productions Corp., Eight Interactive Media Corp., Canada Inc., and Reelhouse Media Ltd. (note 5) (together referred to as the Company and individually as Company entities ). The Company is in the business of developing 3D conversion software, and cloud-based data management and analytic software. These unaudited condensed consolidated interim financial statements have been prepared using the going concern assumption, which assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and settle its liabilities in the normal course of business. As at June 30, 2015, the Company had a working capital deficit of $2,689,874 and had an accumulated deficit of $18,485,230. Excluding the one-time gain on sale of assets of $5,846,235, the Company had a net loss of $2,470,080 during the six months ended June 30, Furthermore, the Company has a loan payable of $3,294,635 as described in note 15. These conditions raise significant doubt about the Company s ability to continue as a going concern. The Company s future operations are dependent upon many factors, including the ability of the Company to generate sufficient profit and cash flows from operations. The decision to fund the Company is ultimately at the lenders or investors discretion, and there is no guarantee that funds will be provided at reasonable rates, or at all. These unaudited condensed consolidated interim financial statements do not reflect adjustments to the carrying values of assets and liabilities and the classifications used on the unaudited condensed consolidated interim statement of financial position that would be necessary if the going concern assumption was not appropriate. Such adjustments could be material. 5

8 2. Basis of presentation: (a) Statement of compliance: These unaudited condensed consolidated interim financial statements have been prepared in compliance with las 34 - Interim Financial Reporting as issued by the International Accounting Standards Board ( IASB ), on a basis consistent with those followed in the most recent annual consolidated financial statements. These unaudited condensed consolidated interim financial statements do not include all of the information required for full annual financial statements. These unaudited condensed consolidated interim financial statements were approved for issuance by the Board of Directors on August 26, Changes in accounting policies: The accompanying financial information reflects the same accounting policies and methods of application as the Company s consolidated financial statements for the year ended December 31, 2014, with the exception of the following new accounting standards that were issued by the IASB and adopted by the Company, effective January 1, (a) Revenue: Where revenue arrangements have separately identifiable components, the consideration received is allocated to each identifiable component and the applicable revenue recognition criteria are applied to each of the components. 4. 3D studio disposition: On January 27, 2015, the Company signed an agreement with Prime Focus Ltd. ( Prime Focus ) to sell certain assets of the Company related to the 3D studio conversion business for cash consideration of $6,500,000 less certain adjustments to closing. The Company also entered into a five-year worldwide exclusive Software Licensing Agreement to license its proprietary 3D conversion technology to Prime Focus for use throughout the entertainment industry and with it carrying along a five-year non-compete that mirrors the term of the licensing agreement. The Company will receive $1,000,000 annually for the license fee plus a potential royalty depending on Prime Focus 3D conversion revenue of up to $1,000,000 annually. As well, a two-year Technology Support Agreement was entered into for the Company to provide technical services and support to Prime Focus for approximately $1,000,000 per year. If the Technology Support Agreement is terminated or not renewed, Prime Focus will no longer have exclusive rights under the Software Licensing Agreement. On February 25, 2015, the Company received shareholder approval for the transaction which closed on March 23, 2015 (the Closing Date ) enabling the Company to focus on the development of their Cumul8 and Reelhouse technologies. The Company recognized a gain of disposition of $5,846,235 calculated as follows: 6

9 4. 3D studio disposition (continued): Cash proceeds on closing $ 1,270,113 Cash deposit received January 27, ,300,000 Other receivable 1,750,000 Deferred revenue adjustment 1,112,000 Cash used to repay bank loan 880,387 Purchase consideration, net of closing adjustments 6,312,500 Net assets sold: Property and equipment 466,265 Gain on disposition $ 5,846,235 The other receivable is due without interest in three equal annual instalments receivable each year after the Closing Date for three years. The Company will be able to utilize its tax losses from previous years to offset the gain from the disposition of its 3D studio conversion assets. 5. Business combination: On January 29, 2014, the Company converted a promissory note of $1,125,000 into 18,750,000 Reelhouse Media Ltd. ( Reelhouse ) common shares providing it a 48% interest in Reelhouse. On February 25, 2014, the Company acquired an additional 7,000,000 Reelhouse common shares in consideration of 1.3 million common shares issued by the Company, resulting in an increase in equity interest in Reelhouse from 48% to 66%. Headquartered in Vancouver, British Columbia, Reelhouse is an open video sharing platform dedicated specifically for quality entertainment content. The following table summarizes the fair value of the consideration transferred and the final estimated fair values of the major classes of assets acquired and liabilities assumed at the acquisition date. 7

10 5. Business combination (continued): Share capital issued on acquisition of 18% interest $ 2,015,000 Gain on investment, representing the fair value of the 48% investment held 5,373,333 Purchase consideration 7,388,333 Net assets acquired (liabilities assumed): Cash 1,757 Trade receivables 4,621 Intellectual property 12,332,148 Trade and other payables (51,661) Convertible promissory notes (321,199) Deferred income tax liability (2,631,419) Non-controlling interest ( NCI ) (4,577,333) Fair value of net identifiable assets acquired 4,756,914 Goodwill $ 2,631,419 The Company gained control of Reelhouse with the February 25, 2014 transaction and has accounted for the acquisition as a business combination. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same had the acquisition occurred on January 1, The re-measurement to fair value of the Company s 48% interest in Reelhouse, which had a carrying value of nil, resulted in a gain of $5,373,333. The fair value of NCI was determined in two components. The fair value of the ordinary NCI component was calculated with reference to Company s shares that were issued to acquire an 18% interest in Reelhouse. The fair value of other NCI, representing the value of the conversion feature component of the convertible promissory notes, was determined using the Black-Scholes valuation model (note 6(b)). The most significant input used in this model was the expected life of the conversion feature, which was estimated to be one year. Goodwill is attributed to the skills and technical talent of the employees of Reelhouse and other operational efficiencies. On April 24, 2014, the Company acquired additional Reelhouse common shares in consideration of 269,286 common shares issued by the Company, resulting in an increased interest in Reelhouse from 66% to 70%. Non-controlling interest was adjusted by $515,657 for the additional interest acquired and the difference of $200,593 was recorded in retained earnings. 8

11 6. Related party transactions: (a) Due to shareholders: A significant shareholder of the Company has provided an unsecured loan in the amount of $3,221,364 plus interest at a rate of 7.5% per annum, which has no specified repayment terms. The shareholder has confirmed in writing that no amount of the loan will be demanded for repayment before July 1, (b) Reelhouse convertible promissory notes: As at March 31, 2015, the Company indirectly held a $333,034 convertible promissory note in Reelhouse. The carrying value of the convertible promissory note was recorded at fair value, but is eliminated upon consolidation. The Company indirectly held has the option to convert the note into common shares of Reelhouse at a price of $0.15 per share. A significant shareholder of the Company holds a $270,000 convertible promissory note and 50,000 common shares of Reelhouse, which were received in exchange for the significant shareholder settling certain amounts owing to the Company, for software development services provided to Reelhouse by the Company in The significant shareholder reimbursed the Company for the cost of the services provided by way of a reduction of $320,000 of the amount otherwise due to the shareholder. This promissory note is noninterest bearing and can be converted at any time into common shares of Reelhouse at any time at the option of the holder at $0.06 per common share. Although the note is due on demand, the holder has confirmed in writing that the note will not be demanded for repayment before July 1, Another shareholder of the Company holds a $30,000 convertible promissory note with similar terms, which can be converted into common shares of Reelhouse at any time at the option of the holder at $0.15 per common share. The $30,000 note is due on demand. These convertible promissory notes, which were acquired as part of the Reelhouse acquisition (note 5), are considered to be compound financial instruments. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition. The carrying value of the liability components of these convertible promissory notes approximates fair value due to the nature of the notes. The difference between the total fair value of the convertible promissory notes and the liability components were allocated as the equity components to non-controlling interest on acquisition (note 5) and represent other NCI. 9

12 6. Related party transactions (continued): (c) Gener8 Investment Ltd. amalgamation: 7. Revenue: On April 11, 2014, the Company completed the amalgamation of a wholly owned subsidiary of the Company with Gener8 Investments Ltd. ( GIL ), a company controlled by a director and senior officer of the Company. Under the terms of the agreement, 5,689,271 shares of GIL were exchanged for Gener8 shares on a one-for-one basis, and the 5,689,271 shares otherwise held by GIL in Gener8 were cancelled. There was no change in the number of Gener8 shares issued and outstanding as a result of this transaction. Three months ended Six months ended June 30, June 30, June 30, June 30, D conversion revenue $ - $ 6,346,007 $ 6,288,596 $ 10,477,346 Licensing, royalty and other revenue 798, ,205 - Total $ 798,661 $ 6,346,007 $ 7,240,801 $ 10,477, Employee expenses: Three months ended Six months ended June 30, June 30, June 30, June 30, Production $ 354,261 $ 2,954,641 $ 2,883,575 $ 5,723,144 Research and development 786, ,606 1,460,427 1,008,491 General and administrative - 648, ,197 1,277,338 Total $ 1,140,518 $ 4,179,556 $ 5,302,199 $ 8,008, Finance expense: Three months ended Six months ended June 30, June 30, June 30, June 30, Interest expense $ 36,598 $ 83,966 $ 96,409 $ 163,819 Financing fees 7,435 10, ,011 25,793 Service charges 7,957 11,258 23,618 20,427 Total $ 51,990 $ 105,961 $ 242,038 $ 210,039 10

13 10. Trade and other receivables: June 30, December 31, Trade receivables $ 69,395 $ 22,002 Unbilled revenue 358,000 - Other 586,817 - Total $1,014,212 $ 22, Property and equipment: January 1, June 30, Cost 2015 Additions Disposals 2015 Furniture and fixtures $ 68,911 $ - $ 68,911 $ - Computer hardware 1,029,834 7,316 1,029,834 7,316 Leasehold improvements 398, ,491 Total $ 1,497,236 $ 7,316 $1,098,745 $ 405,807 January 1, December 31, Cost 2014 Additions Disposals 2014 Furniture and fixtures $ 68,911 $ - $ - $ 68,911 Computer hardware 851,713 45, ,915 Leasehold improvements 398, ,491 Total $ 1,319,115 $ 45,202 $ - $ 1,364,317 January 1, Amortization June 30, Accumulated amortization 2015 expense Disposals 2015 Furniture and fixtures $ 62,462 $ 1,111 $ 63,573 $ - Computer hardware 812,732 28, , Leasehold improvements 145,888 39, ,737 Total $ 1,021,082 $ 69,068 $ 904,037 $ 186,113 11

14 11. Property and equipment (continued): January 1, Amortization December 31, Accumulated amortization 2014 expense Disposals 2014 Furniture and fixtures $ 53,058 $ 4,218 $ - $ 57,276 Computer hardware 648,560 54, ,574 Leasehold improvements 66,190 19,924-86,114 Total $ 767,808 $ 78,156 $ - $ 845,964 June 30, December 31, Carrying amounts, net book value Furniture and fixtures $ - $ 6,449 Computer hardware 6, ,102 Leasehold improvements 212, ,603 Total $ 219,694 $ 476, Intangible assets: January 1, June 30, Cost 2015 Additions Disposals 2015 Computer software $ 746,079 $ 127,421 $ 873,500 $ - Intellectual property 12,332, ,332,148 Total $ 13,078,227 $ 127,421 $ 873,500 $ 12,332,148 January 1, December 31, Cost 2014 Additions Disposals 2014 Computer software $ 655,388 $ 42,336 $ - $ 697,724 Intellectual property - 12,332,148-12,332,148 Total $ 655,388 $12,374,484 $ - $ 13,029,872 12

15 12. Intangible assets (continued): January 1, Amortization June 30, Accumulated amortization 2015 expense Disposals 2015 Computer software $ 566,074 $ 35,869 $ 601,943 $ - Intellectual property 2,158,126 1,233,215-3,391,341 Total $ 2,724,200 $ 1,269,084 $ 601,943 $ 3,391,341 January 1, Amortization December 31, Accumulated amortization 2014 expense Disposals 2014 Computer software $ 403,468 $ 47,908 $ - $ 451,376 Intellectual property - 308, ,304 Total $ 403,468 $ 356,212 $ - $ 759,680 June 30, December 31, Carrying amounts, net book value Computer software $ - $ 180,005 Intellectual property 8,940,807 10,174,022 Total $8,940,807 $ 10,354, Trade payables and accrued liabilities: June 30, December 31, Carrying amounts, net book value Trade accounts payable $ 590,388 $ 791,959 Salary and benefits payable 755, ,849 Accrued liabilities 69, ,225 Total $ 1,415,769 $ 1,826,033 13

16 14. Bank loan: The Company entered into a loan agreement with a commercial bank. The agreement consists of two credit facilities, including: (1) a demand reducing production facility of $854,000; and (2) demand reducing interest reserve facility of $55,000. Both facilities bear interest at prime plus 2.50%. The loan is secured by a general security agreement and a first ranking security interest in the tax credits receivable. On March 23, 2015, the bank loan was repaid in full. 15. Loan payable: On October 30, 2013 the Company entered into a loan agreement for $3,000,000 with Tianjin Fu Feng Da Movie & Television Technology Investment and Development Co., Ltd. ( FFD ) at the same it entered into a Letter of Intent for a Canadian wholly-owned subsidiary of FFD ( Newco ) to acquire 100% of the net assets and business related to the Company's 2D-3D conversion business (the Proposed Transaction ). The Loan bears interest at a rate of 8% per annum and is secured by the Company's present and after-acquired personal property and a limited guarantee of Gener8. On March 18, 2014, the Company signed an Asset Purchase Agreement ( APA ) with FFD pursuant to the LOI signed on October 30, The definitive agreement was subject to closing conditions including all requisite regulatory, exchange approval, obtaining any requisite government approvals and third party consents, and various other conditions customary for an agreement of this nature. Shareholder approval was obtained on April 10, Subsequently, on April 30, 2014, the Company signed a letter agreement to extend the closing date of the APA to May 23, 2014 in consideration for a non-refundable advance payment of $1,000,000. The nonrefundable advance was recorded as a gain on non-refundable loan in the statements of comprehensive income (loss). With the Proposed Transaction still incomplete, on December 12, 2014 the Company signed a loan amendment with FFD to reduce the Loan from $3,000,000 plus accrued interest to $1,250,000 million and to extend the repayment date to December 31, On January 23, 2015, the Company delivered repayment of $1,250,000 to FFD pursuant to the amended Loan Agreement dated December 12, 2014 and terminated the Proposed Transaction with FFD. FFD rejected the loan repayment and made demands to repay the $1,250,000 in a manner that is a breach of the amended Loan Agreement. On March 6, 2015, the Company brought legal action in British Columbia Supreme Court against FFD, its sole shareholder and FFD s legal counsel seeking damages for misrepresentation and breach of the amended Loan Agreement, a declaration that the Company s indebtedness to FFD has been extinguished, and damages for defamation, wrongful interference with economic relations and other relief. As at June 30, 2015, while the Company considers the loan repaid pursuant to the amended Loan Agreement it continues to recognize the original loan plus accrued interest as a liability until the legal action brought about by the Company has concluded. 14

17 16. Commitments and contingencies: (a) Commitments: (i) As at June 30, 2015, non-cancellable operating lease rentals are payable as follows: 2015 $ 152, , , ,813 Total $ 813,013 The Company has operating lease for its office facility. The lease ends in 2018 with an option to renew the leases after that date. Lease payments are increased annually to reflect market rentals. (ii) As at June 30, 2015, the Company had entered into an agreement with a third party vendor to design, rack, finance, monitor, and host an off-site production datacenter. The rental payables are as follows: 2015 $ 57, ,232 Total $ 95,580 The term of the agreement is 36 months with 2-month penalty for early termination. The Company has the option to renew for an additional year with the same initial terms. 17. Shareholders deficiency: (a) Share capital: Authorized: Unlimited common shares without par value with special rights Unlimited class A preferred shares without par value, convertible Unlimited class B preferred shares without par value Unlimited class C preferred shares without par value Class A preferred shares are convertible at the option of the holder, at any time into such number of fully paid and non-assessable common shares. The conversion price for each preferred share shall initially be equal to the original issue price. Upon the occurrence of certain events in the future, the class A preferred shares will be converted into common shares at the then effective conversion price. As at June 30, 2015, the Company has no preferred shares issued and outstanding. 15

18 17. Shareholders deficiency (continued): (a) Share capital (continued): Issuance of common shares: On September 22, 2014, the Company closed the first tranche of a private placement raising $871,125 consisting of units at a price of $0.75 per unit. The Company issued 1,161,500 commons shares and 580,750 warrants with an exercise price of $1.00 expiring 18 months from closing. In connection the closing, an aggregate fee of $60,979 was paid in cash and 19,362 common shares and 90,986 warrants were issued. On September 30, 2014, the Company closed the second tranche of a private placement raising $616,875 consisting of units at a price of $0.75 per unit. The Company issued 822,500 commons shares and 411,250 warrants with an exercise price of $1.00 expiring 18 months from closing. In connection the closing, an aggregate fee of $43,181 was paid in cash and 13,711 common shares and 64,430 warrants were issued. On November 7, 2014, the Company closed the final tranche of a private placement raising $296,250 consisting of units at a price of $0.75 per unit. The Company issued 395,000 commons shares and 197,500 warrants with an exercise price of $1.00 expiring 18 months from closing. In connection the closing, an aggregate fee of $20,738 was paid in cash and 6,584 common shares and 30,942 warrants were issued. Warrant activity from December 31, 2013 to June 30, 2015 is as follows: Common shares warrants Weighted average exercise price Outstanding, December 31, ,924,255 $ 0.84 Issuance pursuant to private placement 1,375,858 $ 1.00 Issued pursuant to consulting agreement 25, Exercise of warrants (968,469) 0.78 Expiration of warrants (319,941) 1.29 Outstanding, December 31, ,036,703 $ 0.87 Issued pursuant to consulting agreement 200,000 $ 0.60 Exercise of warrants - - Expiration of warrants (1,429,712) 0.87 Outstanding, June 30, ,806,991 $ 0.85 The weighted average remaining contractual life of the warrants outstanding is 0.9 years ( years). 16

19 17. Shareholders deficiency (continued): (a) Share capital (continued): The fair value of all warrants issued during the six month period ended June 30, 2015 was estimated to be $82,526 (June 30, nil) and recorded in contributed surplus. The fair value was estimated by using the Black-Scholes valuation model based on the following assumptions at the issue date: Six months ended June 30, June 30, Volatility 171.3% - Expected life of warrants Dividend yield 0.0% - Risk free interest rate 0.5% - (b) Earnings per share: The following table sets forth the computation of loss per common share: Three month period ended Six month period ended June 30, June 30, June 30, June 30, Net income (loss) attributable to the Shareholders of the Company $ (1,521,993) $ 503,811 $ 3,820,779 $ 3,554,837 Weighted average number of common shares outstanding 49,120,881 46,099,385 49,116,953 45,364,198 Dilutive stock options and warrants - 3,823, ,547 4,467,879 Weighted average number of common shares used in the calculation of basic earnings per share 49,120,881 49,923,149 49,257,500 49,832,077 Earnings (loss) per share: Basic $ (0.03) $ 0.01 $ 0.08 $ 0.08 Diluted (0.03)

20 18. Stock-based compensation plans: Effective July 15, 2011, the Company adopted a Stock Option Plan. The purpose of the Stock Option Plan is to retain the services of valued key employees and consultants of the Company. Under the Stock Option Plan, the Plan Administrator is authorized to grant Stock Options to acquire up to a total of ten percent (10%) of the total number of issued common shares of the Company (calculated on a non-diluted basis) at the time a Stock Option is granted. Stock option activity from January 1, 2014 to June 30, 2015 is as follows: Common shares under option Weighted average exercise price Outstanding, December 31, ,755,655 $ 0.80 Forfeited, cancelled or expired (425,877) 1.15 Granted 470, Exercised (134,946) 0.48 Outstanding, December 31, ,664,832 $ 0.83 Forfeited, cancelled or expired (205,237) 0.96 Granted 988, Exercised (25,393) 0.60 Outstanding, June 30, ,422,452 $ 0.77 At June 30, 2015, 2,875,437 options were exercisable. contractual life of the options outstanding is 8.44 years. The weighted average remaining (a) Valuation of share options: The fair values of all share-based payments were measured based on the Black-Scholes option-pricing model. Expected volatility was determined based on comparable publicly listed companies. The inputs used in the measurement of the fair values at grant dates of the share-based payments as at June 30, 2015 are the following: 18