TRANSGAMING INC. V.TNG

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INITIATING COVERAGE
TRANSGAMING INC. TNG-V, $0.34 January 14, 2014
Rating: STRONG BUY
Target Price: $0.60
Market Capitalization: $29.0M
Risk Profile: SPECULATIVE
TECHNOLOGY – SOFTWARE
Ralph Garcea, P.Eng, MBA – Analyst
647.776.1763 • [e-mail]
Anuj Nijhawan – Associate
647.776.1764 •[e-mail]
Chris Stringer – Associate
647.776.1762 • [e-mail]
Source: Bigcharts.com
CASUAL GAMING FOR NEXT-GEN CONNECTIVITY
 INVESTMENT THESIS TransGaming (“TNG” or “the Company”) is an emerging technology company that is well positioned to benefit from the worldwide growth occurring in casual gaming for Smart TVs and other connected devices. Building upon existing contracts with operators in the US and Europe, TV manufacturers such as Samsung (005930-KS, Not Rated) and Toshiba (6502-TYO, Not Rated), and further exploiting the Company’s intellectual property (IP) on other platforms and applications will allow TNG to increase revenue and be profitable. Partnerships with Google (GOOG-US, Not Rated) and Adobe (ADBE-US, Not Rated) to utilize TransGaming’s technology provide momentum for the Company’s enterprise IP strategy.
 FINANCIAL REVIEW F2013 revenue was $9.82M, up 58.7% yoy. The Company has consistently grown its top line, and with the recent pruning of its fixed operating costs, we forecast that TNG will break even in FQ214. For FQ214, we are looking for $1.97M in revenue and adj. EBITDA of $94K. We expect TNG to report FQ214 results during the last week of January.
 VALUATION We value TNG at $0.60/shr using a DCF model in which we forecast F2013-2017E CAGR of 32.5% for revenue.
 UPCOMING CATALYSTS NEAR TERM: Partnerships and revenue arrangement with various global managed service operators for GameTree TV™. Opportunities to expand the GameTree brand in various geographies. LONG TERM: Driving revenue growth with increased subscribers and advertising based revenue.
 We are initiating coverage on TransGaming with a STRONG BUY rating and a 12-month target price of $0.60, providing an upside of 76.5% to our target. Given the risks associated with an emerging technology company, we rate the risk profile as SPECULATIVE.
ForecastsF2012F2013F2014EF2015EF2016ERevenue ($M)$6.19$9.82$10.20$14.58$20.59EBITDA ($M)($5.09)($0.18)($0.02)$1.13$3.72EPS (FD)($0.13)($0.05)($0.02)($0.00)$0.02EPS (basic)($0.13)($0.05)($0.02)($0.00)$0.03CFPS$0.02$0.01$0.00$0.01$0.03P/ENMNMNMNM14.9xEV/Sales4.9x3.1x3.0x2.1x1.5xEV/EBITDANMNMNM26.9x8.2x
Financial SummaryLast Price$0.34Price Target$0.60, (+76.5%)Div/ Yield $0.00/0.0%52-week Range$0.08 - $0.55S/O Basic (M)85.4S/O FD (M)115.8 Market Float (%)87.7Market Cap (M)29.0 Net Debt (in $M)2.4Enterprise Value ($M)31.4 Avg. Weekly Vol. (M)2.59 Fiscal YE31-May
COMPANY PROFILE
TransGaming is a technology company engaged in the multi-platform deployment of interactive entertainment. TransGaming’s core businesses span the digital distribution of games for Smart TVs, next-generation set-top boxes (STBs), and the connected living room, as well as technology licensing for cross-platform game enablement, software 3D graphics rendering, and parallel computing. The Company is also involved in further licensing its Graphics Processing Unit technology in various applications to drive revenues. With ~65 employees, TransGaming is headquartered in Toronto, Canada, with offices in Ottawa, Israel, and Ukraine.
All figures in C$ unless otherwise noted.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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Table of Contents
INVESTMENT THESIS ................................................................................................................ 3
COMPANY OVERVIEW ................................................................................................................ 3
FINANCIAL REVIEW .................................................................................................................. 13
VALUATION ................................................................................................................................ 17
RISKS ............................................................................................................................................ 20
APPENDIX A – KEY HISTORICAL DEVELOPMENTS .......................................................... 21
APPENDIX B – MANAGEMENT AND BOARD OF DIRECTORS ........................................ 22
APPENDIX C – PRODUCT OVERVIEW ................................................................................... 24
APPENDIX D – FINANCIALS .................................................................................................... 27
RESEARCH DISCLOSURES ....................................................................................................... 30
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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INVESTMENT THESIS
TransGaming has opportunities to leverage its current position in the interactive entertainment space as well as expand and build on its GameTree TVTM platform. GameTree TVTM is an on-demand interactive entertainment platform for internet-connected televisions and next generation television set top boxes (together, “Smart TV”), allowing customers to discover and play games on-demand directly from a cloud-based service.
As casual gaming increases with the proliferation of Smart TVs and connected set top boxes (STBs), TNG’s customer base and GameTree TVTM revenues (subscription and advertising-based model) have ample opportunities for growth. The Company has a number of subscription based deals with North American, European, and Asian cable/telecom companies as well as a partnership with Samsung that places the GameTree TVTM app on Samsung’s Smart TV platform in order to drive advertising based revenue.
The Company recently increased its revenue by monetizing its technology related to Graphical Processing Units (GPUs) for various web-based applications through licensing agreements. Google licensed TNG’s SwiftShader for use with all Google products utilizing the OpenGL ES 2.0 graphics application programming interface (API).
We believe further opportunities to license TransGaming’s IP may also exist as the Company has integrated its core GPU technology in other web-based applications.
We expect TransGaming to be profitable in FQ214, as the Company matures and subscribers to the GameTree TVTM services offering increases. TransGaming’s management team has a vested interest in the Company with the Chief Executive Officer and Chief Technology Officer together owning over 15% of shares outstanding.
We are initiating coverage on TransGaming with a STRONG BUY recommendation and a 12-month target price of $0.60 per fully diluted share, providing an upside of 76.5% to our target. Given the risks associated with an emerging technology company, we rate the risk profile as SPECULATIVE.
COMPANY OVERVIEW
TransGaming is a software company engaged in the multi-platform deployment of interactive entertainment. The Company is also involved in further licensing its GPU technology in various applications in order to drive revenues.
TransGaming is headquartered in Toronto, Canada, and has presence in Ottawa, Canada; Tel Aviv, Israel; and Kiev, Ukraine (acquired through the Oberon iTV and Connected TV acquisition).
As of May 31, 2013, TNG had 46 full-time employees and 15 contractors (team in Ukraine, can be considered full-time employees for all intensive purposes), in the following areas: 8 in an engineering capacity, 39 in operations and product development, 3 in sales and marketing, and 11 in general and administrative.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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TRANSGAMING’S CORE TECHNOLOGY
At the crux of TransGaming’s products and services is the Company’s patented software 3D rendering toolkit, SwiftShader, which allows the Central Processing Unit (CPU) to support multi-core rendering in situations where a GPU is unavailable or unsuitable. SwiftShader is available for commercial licensing for applications, operating systems, device drivers, and embedded systems; its current licensees include Adobe, Google, and Citrix (CTXS-US, Not Rated).
EXHIBIT 1 – TRANSGAMING TECHNOLOGY
SWIFTSHADER 3D RENDERED
Source: Company Reports
Portability Technology - OpenGL (Open Graphics Library) is a vendor agnostic, cross-language, multi-platform API for rendering 2D and 3D computer graphics. It allows a game or an application to interact with a GPU to achieve hardware-accelerated rendering and has been widely adopted. The Intel-Mac implementation of the portability technology is embodied in TransGaming’s Cider product.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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TRANSGAMING’S BUSINESS SEGMENTS
The Company operates under two segments:
Graphics and Portability Group (GPG), which covers Cider and SwiftShader.
Digital Media Group (DMG), which covers GameTree TVTM and GameTree MacTM. GameTree TVTM is designed to bring interactive entertainment to consumers through connected consumer electronics (CE) devices. The GameTree TVTM infrastructure is based in the cloud and TransGaming utilizes Amazon Web Services and other global cloud providers for the provisioning of its GameTree TVTM services.
TRANSGAMING PRODUCTS AND SERVICES
Graphics & Portability Group
Cider (Intel Mac)
Allows Windows games to be deployed on the Intel Macintosh computers.
TNG licenses this product to game developers primarily on a royalty fee per unit sold basis and, for Massive Multiplayer Online Games (MMOGs), on a fee per user per month.
Graphics & Portability Group
SwiftShader (graphics rendering)
A high-speed pure software three-dimensional renderer. Customers include Google, Adobe, and Citrix.
Digital Media Group
GameTree TVTM and GameTree MacTM
TransGaming’s gaming platform. The existing footprint for GameTree TV is over 65M Smart TVs.
As of August 2013, GameTree MacTM has over 144,000 registered users (21% yoy increase) and features 190 compelling Mac games (150 in C2012).
Source: Company Reports
GameTree TVTM delivers interactive games on Smart TVs and other connected CE devices. TransGaming markets and sells GameTree TVTM solutions through Operators, TV Original Equipment Manufacturers (OEMs), and Over the Top (OTT) device makers.
In North America, GameTree TVTM is available to homes on the DISH Network and DirecTV; in Europe, users on FREE; and in Asia, users on Air Tel and Reliance. GameTree TVTM also expanded into the hospitality market with Select-TV (Private) Solutions, delivering interactive entertainment on Smart TVs to hotels in the Asia-Pacific and Middle East regions.
In January 2014, TNG also signed partnerships with Samsung and Toshiba to bring GameTree TVTM to their Smart TV app platforms. This is in addition to previous deals with Philips and Panasonic.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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EXHIBIT 2 – GAMETREE TV DISTRIBUTION
Source: Company reports
Select-TV raised venture capital funds from Intel Capital Corporation and Malaysian Venture Capital Berhad in 2010. Select-TV is a Malaysian based company specializing in IPTV (Internet Protocol television) technology for the hospitality and telecommunication sectors. Since its inception, it has delivered several IPTV projects to the Middle East and South East Asian region. On February 7, 2012, TNG and Select-TV Solutions announced a partnership to introduce TNG’s GameTree TVTM into the hospitality market internationally. The partnership allows GameTree TVTM to reach multiple geographies and consumer audiences including hotels, cruise liners, and hospitals in Asia and the Middle East.
In June 2012, Skyline Resorts and Hotels group (https://www.skylinehotelsandresorts.com) signed a group deal with Select-TV for the provision of Select-TV’s latest Hospitality Interactive TV solution in all its properties across Canada. Properties include Pointe Claire Holiday Inn, Kingston Marriott, Springhill Suites Marriott, and other properties within the Skyline Group, amounting to more than 1,200 rooms in total. On December 11, 2012, Select-TV announced that guests of Pantages Hotel Toronto Centre, Courtyard Marriott Kingston, and Holiday-Inn Pointe Claire, can now enjoy Select-TV’s Full HD Hospitality ITV System to further enhance their in-room experience and entertainment.
GROWTH DRIVERS
TransGaming’s growth prospects are driven by consumer demand for casual entertainment options. As the adoption of Smart TVs and STBs increase, customers demand to maximize experiences on these devices is expected to swell. The “casual video gamer” market comprises consumers from a broad background. Casual games are arcade-style games that involve puzzles, words, board and card games, game show and trivia and are fun and easy to learn and play. An estimated 200M people play casual games via the Internet and in 2010 the connected casual games industry had revenues of nearly $6B worldwide. The popularity of online casual games is skyrocketing: one in four of the world’s population regularly accesses games on the Internet; in the US alone, there are 145M users. In Europe, too, the market for casual gaming is expected to double in the coming years.
Source: www.casualgamesassociation.org
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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RISE OF CASUAL GAMING
According to the 2013 State of Online Gaming industry report by Spil Games, more than 1.2B people are playing games worldwide. Of those, about 700M play online games, which amounts to 44% of the world’s online population, according to comScore data cited by Spil Games.
Based on comScore data, in terms of territories, gaming has spread universally with a large majority of the population engaged in playing games (50% in the US, 46% in the UK, 62% in Argentina, 70% in Turkey, and 53% in Brazil).
EXHIBIT 3 – CASUAL GAMING STATISTICS
Source: Spil Games, 2013 State of Online Gaming report
Based on a 2012 report by Roland Berger, there are already ~145M casual gamers in the US. In Europe, the market for casual games is enjoying continued growth. While the Central European market was already worth more than US$1.2B in C2012, its volume is set to grow to US$1.9B by C2016. Asia is also quickly catching up as experts anticipate 14% annual growth in each of the next four years to almost US$30B. The strong growth is attributable to two major factors — the healthy development of the online market and the rapid spread of mobile devices.
Source: Roland Berger https://www.rolandberger.com/media/press_releases/512-press_archive2012_sc_content/Casual_Gaming.html
TOP GAME CATEGORIES PER GROUP0123456OnlineWatching TVIn hrsTime Spent20102013
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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SMART TV AND CONNECTED DEVICES MARKET GROWTH
According to IHS Screen Digest, more than a quarter of all televisions shipped in C2012 had “smart” Internet connectivity capabilities, with IHS projecting that they will account for more than half of all shipments by C2015. In total, 66M Smart TVs were shipped in C2012 (up 27% from 52M shipped in C2011). By C2015, that number is expected to reach 141M units, and account for 55% of the market.
Consumers are believed to be increasingly buying big-screen TVs that include Internet capabilities, whether they are specifically looking for those capabilities or not, and the inclusion of pay TV services in Smart TVs is believed to increase adoption rates even further. Services that use an app within the Smart TV are expected to further assist in the incremental sales of Smart TVs.
Source: MediaPost https://www.mediapost.com/publications/article/194101/smart-tv-growth-is-set-to-explode.html#ixzz2MhHcJmPD
EXHIBIT 4 – SMART TV GROWTH
Source: NPD Display Search Quarterly Smart TV Shipment and Forecast Report
https://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/121017_smart_tv_shipments_grow_worldwide_in_2012.asp
020406080100120140C2011C2012C2013C2014C2015C2016Shipments (
in M)Basic Connected TVSmart TV - Set Maker ControlledSmart TV - Consumer Controlled
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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EXHIBIT 5 – SMART TV SHIPMENTS GROWTH AND PRICE DECLINE
Source: Frost & Sullivan, GMCI
Frost & Sullivan suggests that software will be the main constraint for the Smart TV market in the coming years. We should see growth in Smart TV sales as the average selling price declines and consumers realize a positive price-performance ratio. The lower end of the pricing spectrum is a key driver for Smart TV adoption amongst developing nations. Frost & Sullivan forecasts Smart TV shipments at 23.2% CAGR (C2012-2017E), with the average selling price declining at (9.3%) CAGR (C2012-2017E).
IHS also predicted that in C2016, more than 800M actively connected TV devices would have exposure to monetized games content. This is up from 100M in C2012. Worldwide consumer spending on video games on connected TVs is forecast to grow from a projected $88.0M in C2012 to $1.6B in C2016. These revenues are driven by the growth in adoption of connected-TV devices.
EXHIBIT 6 – GLOBAL CONSUMER SPENDING ON CONNECTED TV GAMES (IN US$M)
Source: IHS Screen Digest, August 2012
05001000150020002500050100150200250300C2011C2012C2013EC2014EC2015EC2016EC2017EAverage Selling Price ($)Units Shipped (M)Units ShipmentAverage Selling Price$0$200$400$600$800$1,000$1,200$1,400$1,600$1,800C2010C2011C2012C2013C2014C2015C2016
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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RECENT EVENTS
• January 2014: Partnership with Toshiba Europe GmbH to bring the GameTree TVTM platform to Toshiba’s line of Smart TVs.
• January 2014: TNG announced a partnership with Samsung to bring the GameTree TVTM platform to Samsung Smart TVs. GameTree TVTM on Samsung Smart TVs will be accessible via the Samsung app store. The service launched with titles that include Moodies, Space Moodies, Super Collapse® 2, and Sahara Classic Solitaire. GameTree TVTM will be offered to consumers as a free-to-play service on Samsung Smart TVs, with in-game video-based advertising as the business model.
• December 2013: TNG and 2K (TTWO-US, Not Rated) announced The Bureau: XCOM Declassified availability for the Mac.
• November 2013: TNG and 2XL Games announced the release of the internationally acclaimed game, 2XL Supercross®, on GameTree TVTM. 2XL Supercross is a high-speed motocross racing adventure that has players racing and jumping around supercross and freestyle tracks custom designed by motocross champion Stephane Roncada.
• September 2013: TNG and Philips announced the launch of GameTree TVTM on TP Vision’s line of Philip’s TVs.
• June 2013: TNG and Rockstar Games (TTWO-US, Not Rated) announced the availability of Rockstar’s cinematic action-shooter, Max Payne 3, on the Mac platform through TNG’s proprietary game enablement technology.
• June 2013: TNG and Panasonic (6752-TO, Not Rated) announced a partnership to launch GameTree TV games on VIERA ConnectTM-enabled devices.
• May 2013: TNG announced the launch of an exclusive World Poker TourR game on GameTree TVv for the Freebox Revolution — the latest generation STB by Free, the French telecommunication company that first introduced a “triple-play” service in France, combining Internet, landline, and IPTV.
• April 9, 2013: TransGaming signed a licensing agreement (valued license fees of US$1M to be delivered by FQ214) with a cloud service provider to enable select products to run on various System-on-Chipsets using its core technology.
• February 20, 2013: Partnership to launch GameTree TVTM content on The Opera TV Store.
• January 06, 2012: Strategic acquisition of the Interactive TV & Connected TV division of Oberon Media Inc. (adding over 100 video game titles to TNG’s GameTree TVTM portfolio).
• May 30, 2012: TNG signed an agreement with IPTV solution provider, AT&T uVerse, to develop a series of GameTree TV™ based video games for distribution starting with a North American IPTV service operator.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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STRATEGIC OBJECTIVES
TransGaming’s three-pronged distribution strategy for GameTree TVTM includes a focus on the following segments:
1) The Managed Service Operators (MSOs) and cable operator market,
2) The TV OEM market, and
3) OTT device makers.
Each segment represents a slightly different type of user but each market segment is growing rapidly and has the potential to contribute a large consumer base to GameTree TVTM. With the global distribution shown in Exhibit 2, TNG has one of the largest connected TV distribution footprints in the world — with over 100M+ connected homes.
We believe TransGaming’s Graphics & Portability Group’s (GPG) strategy is at a pivot point. The Library Suite IP can address the multi-platform presentation of content (desktop, mobile, tablet), as well as the development of Linux gaming and next-generation consoles (PS4/Xbox One). The SwiftShader IP has broad scale applicability with the 3D systems of hardware companies that require a consistent graphics driver code.
We see the Company expanding its technology licensing toolkit to: 1) software enterprise based customers, 2) device makers, 3) continue PC to Mac licensing, and 4) bring Xbox One games to the PlayStation 4.
EXHIBIT 7 – GPG’S IP-BASED PRODUCT FOCUS
Source: Company reports
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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INTELLECTUAL PROPERTY
Since the Company’s inception, it has invested heavily in research and development and its GameTree TVTM platform. As a result, TNG has positioned itself with unique IP. This includes the F2012 acquisition of key assets and IP from Oberon Media, as well as distribution agreements and content licenses to accelerate the revenue growth potential of GameTree TVTM.
EXHIBIT 8 – TRANSGAMING PATENTS
Patent
Title/Description
USPTO 8,284,206
General purpose software parallel task engine
Abstract
A software engine for decomposing work to be done into tasks, and distributing the tasks to multiple, independent CPUs for execution is described. The engine utilizes dynamic code generation, with run-time specialization of variables, to achieve high performance. Problems are decomposed according to methods that enhance parallel CPU operation, and provide better opportunities for specialization and optimization of dynamically generated code.
USPTO 7,633,506
Parallel pipeline graphics system
Abstract
The present invention relates to a parallel pipeline graphics system. The parallel pipeline graphics system includes a back-end configured to receive primitives and combinations of primitives (i.e., geometry) and process the geometry to produce values to place in a frame buffer for rendering on screen. Unlike prior single pipeline implementation, some embodiments use two or four parallel pipelines, though other configurations having 2^n pipelines may be used. When geometry data is sent to the back-end, it is divided up and provided to one of the parallel pipelines. Each pipeline is a component of a raster back-end, where the display screen is divided into tiles and a defined portion of the screen is sent through a pipeline that owns that portion of the screen’s tiles. In one embodiment, each pipeline comprises a scan converter, a hierarchical-Z unit, a z buffer logic, a rasterizer, a shader, and a colour buffer logic.
Source: GMCI, Company reports
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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FINANCIAL REVIEW
TransGaming reported FQ114 results on October 29, 2013, with FQ114 revenue of $1.8M (+14% yoy) and adjusted EBITDA of ($34K). From a seasonality perspective, FQ1 is usually the weakest quarter and we expect revenue to grow qoq throughout F2014. The $1.0M licensing agreement with a cloud services provider announced in April 2013 was substantially completed in the quarter and delivered subsequent to quarter end. We expect FQ214 results to be reported in the last week of January.
During FQ214 the Company launched with Philips (PHIA-BIT, Not Rated), the world’s first video ad-supported games service on Smart TVs, and followed this up with the recently announced deals with Samsung and Toshiba.
In FQ114, Graphics and Portability Group’s (GPG) revenue was $1.2M (discussed above) and Digital Media Group (DMG) revenue was $0.6M. DMG revenue was driven by the various GameTree TV™ deals signed over the last two years with AT&T’s uVerse, Free (subscription-only model), and on DISH Network’s legacy OpenTV platform under a two-tiered subscription model. Between Free and DISH, average revenue per user (ARPU) increased to $2.91 from $1.53 yoy.
EXHIBIT 9 – REVENUE AND EBITDA
Source: Company reports
-200%-150%-100%-50%0%50%100% - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000Q112Q212Q312Q412Q113Q213Q313Q413Q114Q214EQ314EQ414EQ115EQ215EQ315EQ415EQ116EQ216EQ316EQ416EQ117EQ217EQ317EQ417EEBITDA Margin (%)Revenue ($000's)Total RevenueEBITDA
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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EXHIBIT 10 – SEGMENT REVENUE
Source: Company reports
EXHIBIT 11 – GEOGRAPHIC REVENUE SPLIT
Source: Company reports
48%52%F2012GPGDMG55%45%F2013GPGDMG2%85%13%F2013CanadaUSEurope and other4%58%38%F2012CanadaUSEurope and other
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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TRANSGAMING DEBT
On January 6, 2012, TransGaming completed $3.5M in debt financing from BEST Funds to fund working capital following payment of the cash due on closing of the Oberon acquisition. TNG issued Promissory Notes, bearing 16% interest per annum and maturing July 6, 2016, and, together with all of its subsidiaries, entered into general security and share pledge agreements and provided an absolute assignment of current and future refundable tax credits. Interest on the debt is payable monthly in arrears and principal is repayable monthly starting in February 2013 in an amount equal to 3% of the outstanding principal with annual lump sum payments of $0.5M less tax credits assigned. This accelerated payment schedule anticipates full extinguishment of the debt by July 6, 2014.
As of April 9, 2013, under the terms of the private placement of up to $1.8M announced on November 20, 2012, TransGaming has raised a total of $900,000 and issued 8,170,298 shares.
On July 6, 2013, TNG borrowed $3.5M new funds from BEST Funds, at interest of 10% per annum for the first 36 months and 16% per annum thereafter until they mature on July 5, 2018. Interest is payable monthly in arrears and principal is repayable starting in July 2014, with a payment of 18% of the outstanding principal, then monthly thereafter in an amount equal to 3% of the outstanding principal.
The funds were utilized to fully repay the remaining $2.5M outstanding in the previous notes payable and fund a US$1.1M payment to a successor in interest to Oberon to fully satisfy the US$2.8M in liabilities outstanding, including two contingent earn-out payments of US$1.0M each.
RECENT FINANCINGS
• October 22, 2013: TNG 2.14M warrants from previously announced private placement were exercised (@$0.105 with expiry of December 21, 2014).
• June 28, 2013: TNG closed final tranche of private placement of $300,000 (3M units @ $0.10 comprising a share and a warrant @ $0.15). TNG raised a total of $1.2M and issued a total of 11.1M shares under the terms of this agreement.
• April 8, 2013: TNG closed additional subscription tranche of private placement of $150,000 (1.33M units @ $0.1125, comprising a share and a warrant @ $0.1687).
• February 1, 2013: TNG closed additional subscription tranche of private placement of $300,000 (2.3M units @ $0.13, comprising a share and a warrant @ $0.20).
• January 17, 2013: TNG closed a private placement of $301,560 (3.77M units @ $0.08, comprising a share and a warrant @ $0.12).
• December 21, 2012: TNG closed third tranche of private placement of $150,000 (2.14M units @ $0.07, comprising a share and a warrant @ $0.105).
• December 4, 2012: TNG closed second tranche of private placement of $150,000 (1.57M units @ $0.0958, comprising a share and a warrant @ $0.1436).
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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• November 20, 2012: TNG closed first tranche of private placement of $150,000 (750K units @ $0.20, comprising a share and a warrant @ $0.30).
• January 6, 2012: TNG completed $3.5M in debt financing.
• November 30, 2011: TNG closed private placement of $1.5M (3M units @$0.50, comprising a share and a warrant).
• December 23, 2009: TNG closed private placement of $9M (12.73M units @0.70, comprising a share and a half-warrant).
INCOME TAXES
As at May 31, 2013, TNG had tax loss carry-forwards and research and development costs, which have not been deducted for federal and provincial tax purposes. As at May 31, 2013, $10.5M in accumulated tax losses and $5.1M in unclaimed research and development expenditures may be applied against taxable income in future years. As at May 31, 2013, $1.1M of accumulated non-refundable investment tax credits will further offset future income taxes payable.
TNG has not recognized net deferred income tax assets as at May 31, 2013, of ~$5.0M (F2012 - $4.9M) relating primarily to loss carry-forwards, unclaimed scientific research and experimental development expenses, and other temporary differences.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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VALUATION
We value TNG at $0.60/shr. using a DCF model in which we forecast F2013-2017E CAGR of 32.5% for revenue. As at October 29, 2013, the Company had 85,404,405 common shares outstanding and 24,919,965 warrants. TransGaming also had 5,435,875 outstanding employee stock options to acquire Company shares, of which 3,515,000 were vested and exercisable. For our DCF, our FD S/O is 115.76M shares (sum of 85,404,405 common S/O, 24,919,965 warrants and 5,435,875 outstanding employee stock options).
EXHIBIT 12 – DISCOUNTED CASH FLOW (DCF) ANALYSIS
Source: Company reports, GMCI
EXHIBIT 13 – SENSITIVITY ANALYSIS
Source: GMCI
Transgaming (TNG-V)Discounted Cash Flow AnalysisF2010F2011F2012F2013F2014EF2015EF2016EF2017ERevenue3,905,9155,068,6746,185,8599,817,80810,197,90414,579,93620,586,87030468,567Revenue Growth15.4%29.8%22.0%58.7%3.9%43.0%41.2%48.0%EBITDA-1,834,259-4,320,000-5,085,000-175,000-16,7311,129,5073,724,5697,494,984EBITDA Growth214.9%135.5%17.7% (96.6%) (90.4%) (6850.9%)229.8%101.2%EBITDA Margin-47.0%-85.2%-82.2%-1.8%-0.2%7.7%18.1%24.6%Depreciation and Amortization131,00692,772638,0411,375,4711,059,668695,036518,265396,510EBIT ($)-1,965,265-4,412,772-5,723,041-1,550,471-1,076,399434,4713,206,3047,098,475NOPAT-2,438,847-4,802,704-7,590,269-2,009,291-1,328,343-10,8912,786,0596,545,509Less Capital Expenditures ($)-278,052-112,711-161,559-15,791-12,896-64,970-64,459-64,433EPS (ex-non-recurring items)(0.05)(0.07)(0.13)(0.05)(0.02)(0.00)0.020.06Unlevered Free Cash Flow ($)-2,585,893-4,822,643-7,113,787-649,611-281,572619,1743,239,8646,877,586PV of Unlevered FCFs ($)-6,193,366-8,303,026-689,281-271,606542,9632,582,1314,983,044Valuation Assumptions:Discount Rate10.0%Terminal Multiple10.00xValuation Analysis:Current1-Yr Target2-Yr TargetTotal PV of FCFs ($)7,904,4338,264,9227,191,466Terminal Value ($)74,949,84574,949,84574,949,845PV of Terminal Value ($)59,734,07365,724,64072,297,104Net (debt) cash position(2,383,307)(1,824,913)(276,076)Q114Net DebtTotal Value ($)65,255,19972,164,64979,212,494Q115E0DCF Value/Share$0.56$0.62$0.68Q116E0FD Shares O/S115,760,245115,760,245115,760,245Terminal EV/EBITDA Multiplier$0.627.008.009.0010.0011.0012.0013.006.0%0.480.540.600.660.720.780.848.0%0.470.520.580.640.700.760.82Discount Rate10.0%0.450.510.570.620.680.740.7912.0%0.440.500.550.610.660.720.7714.0%0.430.480.540.590.640.700.7516.0%0.420.470.520.570.630.680.73
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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COMPETITORS
TransGaming has a number of indirect competitors, from growing private companies to small and large sized public companies. The competitors include companies that provide cloud-based gaming services and mobile games.
Gaikai (acquired by Sony (6752-TYO, Not Rated) in June 2012)| Gaikai is a cloud-based gaming service that allows users to play high-end PC and console video games rendered on remote servers via Internet streaming, and instantly demo games and applications from a webpage or Internet-connected device. Sony acquired Gaikai in June 2012 for US$380M.
Glu Mobile Inc. (GLUU-US)| Glu Mobile Inc. designs, markets, and sells mobile games based on its original brands as well as third-party licensed brands. Glu has developed and published a portfolio of action/adventure and casual games for smartphones and tablet devices. The games are sold through direct-to-consumer digital storefronts and feature phones served by wireless carriers and distributors.
Zynga (ZNGA-US)| Zynga, Inc., is a US-based company that provides online social gaming services for a number of global platforms, including Facebook, Zynga, Google+, Tencent, Apple iOS and Google Android.
On the GameTree Mac side of the business, TNG also partners with some of the companies in this competitor list (the likes of Activision, Electronic Arts)
Electronic Arts (EA-US)| Electronic Arts develops, markets, publishes, and distributes game software content and services that can be played by consumers on a variety of video game machines and electronic devices (platforms).
Activision Blizzard, Inc. (ATVI-US)| Activision, Inc. (Activision Blizzard) is a global publisher of online, personal computer (PC), console, handheld, and mobile interactive entertainment products.
Las Vegas From Home.com Entertainment Inc (LVH-V)| Las Vegas From Home.com Entertainment Inc. (LVFH) is a Canada-based company engaged in the development and marketing of software for online multi-player interactive card games including Poker, Casino games, and Asian games.
Square Enix Holdings Co. Ltd. (9684-TO)| Square Enix Holdings Co. Ltd. is a Japan-based company engaged in the entertainment industry. The company’s Digital Entertainment business involves design, development, sale, licensing, and operation of digital entertainment content focusing on computer games.
A number of other companies are direct competitors to TransGaming’s GameTree TV™ product. These include PlayJam (Private), Playcast Media Systems™ (Private), and G-Cluster Global (Private).
PlayJam has Smart TV games available for Samsung, Panasonic, LG, Vizio, GoogleTV, Western Digital, and Vestel.
Playcast Media Systems™ offers a platform that brands, markets, and sells video game subscriptions through TV distribution partners. Playcast has offices in Israel and the US.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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G-Cluster Global operates a white-label cloud gaming platform (with games from ~30 game publishers and game studios such as Disney (DIS-US, Not Rated), Ubisoft (UBI-EPA, Not Rated), Warner Brothers (TWX-US, Not Rated), Mumbo Jumbo (Private), Focus (Private), and others) that allows users to play across TV and multiple mobile devices. G-Cluster’s gaming solution operators include Broadmedia Corporation (4347-TYO, Not Rated), SFR, and Orange (ORA-EPA, Not Rated).
The following exhibit outlines management’s assessment of the competitive landscape for GameTree TV™. TNG has developed GameTree TV™ as a complete “solution” as opposed to a technology such as “streaming”. The table outlines the many attributes of GameTree TV™ that make it a viable and highly desired solution for operators and CE device makers alike.
EXHIBIT 14 – TNG GAMETREE TV™ COMPETITIVE LANDSCAPE
Source: Company reports
EXHIBIT 15 – COMPARABLE VALUATIONS
Source: Thomson ONE, GMCI
Div.Mkt. Cap.Ticker13-JanTarget Yield(US$M)C13EC14EC13EC14EC13EC14EC13EC14ETransgaming IncTNG-V0.340.60-261316NMF20.22.21.75.26.5Las Vegas From Home.com Entertainment IncLVH-V0.092.40-8N/AN/ANMFNMFNMFNMFNMFNMFGlu Mobile IncGLUU-US4.004.15-312103121NMFNMF2.82.3NMFNMFZynga IncZNGA-US4.033.69-3,131708634NMFNMF2.93.2NMFNMFSquare Enix Holdings Co Ltd9684-TO1,835.001,705.401.6%2,0361,4341,453NMF25.41.01.09.97.4Electronic Arts IncEA-US22.3827.63-6,9183,9704,17618.815.61.51.58.67.5Activision Blizzard IncATVI-US17.8720.681.0%12,4274,3084,66119.814.01.81.75.44.7Mean (excluding TNG-V)19.3x18.3x2.0x1.9x8.0x6.6xMean19.3x18.8x2.0x1.9x7.3x6.5xMedian19.3x15.6x1.8x1.7x8.6x7.4xEV/SalesP/ELocal PriceEV/EBITDAGAMING ENTERTAINMENT COMPARABLESRevenue (USD)
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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RISKS
TransGaming is an emerging technology company in a fast paced industry with strong competitors and has a number of risks related to rapid technological change and intense competition. TNG’s revenue growth also depends largely on its ability to successfully execute on its strategy, expand its network of distributors, resellers, and strategic alliances with major players in the interactive entertainment industry.
COMPETITIVE TECHNOLOGY ENVIRONMENT| TNG has the ability to leverage its technology platform and strategic relationships to grow at a fast pace, however, there are significant associated financing, marketing and product development risks. With operations in different countries, TransGaming also bears risks associated with currency conversion.
CUSTOMER CONCENTRATION| For F2013 (year ended May 31, 2013), TNG’s three largest customers accounted for 58% of sales (30% for F2012, 34% for F2011).
REVENUE RISK| The Company’s revenues are variable quarter to quarter and have a long sales cycle, which could significantly impact cash flow.
CURRENCY RISK| TransGaming’s functional currency is the Canadian Dollar; therefore, the Company is exposed to translation risk. TNG’s revenues and expenses are exposed to exchange risk from fluctuations in the US Dollar, Euro, Yen, Kroner, and GBP.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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APPENDIX A – KEY HISTORICAL DEVELOPMENTS
Source: Company Reports
0.02.04.06.08.010.012.014.0$0.00$0.10$0.20$0.30$0.40$0.50$0.60$0.70$0.80$0.90$1.00Volume (
M
Shares)Stock Price ($)Close Price, Daily200-Day MABCDEFHMSTJKGILNOPQRUVPointDateEventANovember 30, 2005IPO listing on the TSX Venture BJanuary 5, 2011TNG launches original Garage, Inc. game across various platforms CApril 26, 2011TNG partners with Free to deploy GameTree™ DJanuary 4, 2012TNG acquires Oberon Media's interactive TV and connected TV division for ~US$7MEJanuary 6, 2012TNG closes $3.5M financing with BEST Funds FMay 30, 2012TNG signs agreement with IPTV solutions provider to launch its game brands with North American service providers GJune 19, 2012TNG partners with a major Asian IPTV service provider to deploy GameTree™HJuly 10, 2012TNG and Select-TV partner to deploy GameTree™IOctober 9, 2012TNG partners with Visiware, Inc. to launch exclusive games channel on DISH JJanuary 24, 2013TNG announces additional subscription of private placement, raising a cumulative $0.75MKJanuary 29, 2013TNG secures SwiftShader software patentLFebruary 20, 2013TNG announces agreement with Opera Software to launch GameTree™ content on the Opera TV Store MApril 3, 2013TNG signs distribution agreement with Roku streaming platform for its GameTree™NApril 9, 2013TNG signs US$1M licensing agreement with a cloud services providerOApril 23, 2013TNG enters into licensing deal with Google, Inc. for its SwiftShader 3D rendering technology PMay 13, 2013TNG launches exclusive World Poker Tour® game on GameTree™ TVQJune 4, 2013TNG partners with Panasonic to launch GameTree™ TV games on VIERA Connect™ enabled devices RJune 21, 2013TNG partners with Rockstar Games to bring Max Payne 3 to MacSJuly 1, 2013TNG refinances notes payable that were issued to BEST FundsTSeptember 5, 2013GameTree™ TV launches on TP Vision's line of Philip's Smart TV'sUJanuary 7, 2014TNG partnership with Samsung to bring GameTree™ platform to Toshiba's line of Smart TVsVJanuary 8, 2014TNG partnership with Toshiba to bring GameTree™ platform to Toshiba's line of Smart TVs
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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APPENDIX B – MANAGEMENT AND BOARD OF DIRECTORS
EXHIBIT 16 – MANAGEMENT AND BOARD OF DIRECTORS SHAREHOLDINGS
Management/ Board Member
Shares
Options
Vikas Gupta, President, Chief Executive Officer and Director
2,267,848
380,000
Gavriel (Gav) State, Chief Technology Officer and Director
5,260,155
330,000
Dennis Ensing, Chief Financial Officer
163,185
432,500
Leo Lax, Chairman and Director
-
199,000
Anthony DeCirstofaro, Director
-
240,000
Damian Cristiani, Director
-
240,000
John Nemanic, Director
383,561
247,500
Brice Scheschuk, Director
N/A
N/A
Source: SEDI, Company Reports, August Circular
MANAGEMENT TEAM AND BOARD OF DIRECTORS
Vikas Gupta, President, Chief Executive Officer and Director since May 2006
Prior to joining TransGaming, Vikas was the founder and President of InterLogic Systems (Private), acquired by Prima Telematicin 1998. After the acquisition, Vikas served as President of Prima Canada and Executive Vice-President of Prima Telematic. Vikas is a graduate of the University of Waterloo, Ontario.
Gavriel (Gav) State, Chief Technology Officer and Director since May 2006
Prior to founding TransGaming, Gav founded and led Corel’s Linux Applications Development team, and later served as its Software Architect. Gav has also worked on development tools at both Microsoft MSFT-US) and Metrowerks (Private), as well as on network distributed virtual reality systems at the University of Waterloo.
Dennis Ensing, Chief Financial Officer & Secretary since May 2006
Dennis has 20+ years of experience in corporate finance, operations, planning and reporting. Prior to joining TransGaming, he was a Vice-President within the Corporate Finance practice of Ernst and Young. Dennis has also held various finance and operational positions, including CFO and COO, for various start-ups and high growth companies. Dennis is a Chartered Accountant and Chartered Business Valuator and holds a Bachelor of Business Administration from Wilfrid Laurier University.
Leo Lax, Chairman and Director since September 2010
Leo is the co-founder and CEO of Skypoint Capital Corporation (Private). Prior to launching Skypoint, Leo established and managed Newbridge Network (ALU-EPA) Corporation’s Affiliates Program. Prior to Newbridge, Leo held management positions in R&D, marketing and sales, and business development.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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Anthony DeCirstofaro, Director since May 2006
Anthony has 25+ years of experience in the technology business and is currently the President and Chief Executive Officer of iseemediainc. Prior to establishing iseemedia, Anthony was President and Chief Executive Officer of MGI Software (Private). Prior to MGI Software, he was a founding board member of Delrina Corp. (Private), which was purchased by Symantec (SYMC-US). Anthony also held senior management positions in various technology companies. Anthony holds an Advanced Business Administration degree from York University.
Damian Cristiani, Director since May 2006
In 1999, Damian sold Global Start Software, a company specializing in publishing software, and Jack of all Games, a software distribution company, to Take-Two Interactive Software Inc. (TTWO-US). Damian continued to oversee the growth of both companies, including serving as President of Take-Two Interactive Software, Inc. in Canada up to 2004.
John Nemanic, Director since May 2006
John is the Chairman of the Board of Hostopia.com, a wholesale provider of web, e-mail and e-commerce hosting solutions. Prior to Hostopia, John co-founded and served as CEO of TUCOWS Interactive Inc. (TC-T), a popular Internet software site, and I.D. Internet Direct (now Look Communications). In May 1999, a majority of TUCOWS was sold to the Steinmetz Group. John was also a final nominee for E&Y Entrepreneur of the Year in 1998.
Brice Scheschuk, Director since September 2013
Brice Scheschuk is a Co-founder and the Chief Financial Officer of Globalive Communications/WIND Mobile as well as Co-President of Brave Investment, investment holding companies focused on private and public company and fund investing. He is the Chairman and Director of Samba Days, a gift experiences company, and a past director of a number of public and private companies including Web Host Industry Review, iLookabout, Hy-Drive Technologies and Varicent Software. Brice is a Canadian Chartered Accountant and earned his designation at Coopers & Lybrand in 1997.
Source: Company reports, Bloomberg
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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APPENDIX C – PRODUCT OVERVIEW
TransGaming offers a number of products and services in interactive entertainment and 3D rendering.
GAMETREE TV™
GameTree TV™ delivers interactive games on Smart TVs and connected TVs. In North America, GameTree TV™ is available to homes on the DISH Network and DirecTV; in Europe, users on FREE; and in Asia, users on Air Tel and Reliance. GameTree TV™ also expanded into the hospitality market with Select-TV, delivering interactive entertainment on Smart TVs to hotels in the Asia-Pacific and Middle East regions.
The GameTree TV™ infrastructure is based in the cloud and the Company utilizes Amazon Web Services and other global giants for the provisioning of its GameTree TV™ services.
EXHIBIT 17 – GAMETREE TV™ SCREENSHOT
Source: Company website
EXHIBIT 18 – GAMETREE TV™ TITLES
Source: Company reports
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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GAMETREE TV™ STRATEGY
TNG’s management has developed a GameTree TV™ product roadmap and strategy aimed at growing average revenue per user and customer loyalty. Management has implemented and/or planned the following enhancements for the near future:
1) GameTree TV™ has been migrated from an “a la carte” business model to a subscription only service,
2) The addition of ‘Free To Play’ games that are supported through advertising based business models,
3) The addition of ‘Freemium’ and micropayment based games (one of the fastest growing new revenue streams for games),
4) Social features including multiplayer, leader boards, rewards, and postings to social networks, and
5) GameTree TV™ supports multi-screen to enhance the overall game play experience.
GRAPHICS PORTABILITY GROUP STRATEGY
TransGaming’s Graphics & Portability Group’s (GPG) strategy is at a pivot point. This includes management’s plans to expand technology licensing to:
1) Software enterprise based customers,
2) Device makers,
3) Continue PC to Mac licensing, and
4) License technology toolkit to bring Xbox games to PlayStation 4.
SWIFTSHADER
SwiftShader Software GPU Toolkit is TNG’s software 3D rendering technology. SwiftShader is available for commercial licensing for applications, operating systems, device drivers, and embedded systems; its current licensees include Adobe and Google.
On October 9 2012, TNG was awarded a patent titled “General Purpose Software Parallel Task Engine” by the United States Patent and Trademark Office for a key proprietary software engine that is a component of SwiftShader. The software is designed to eliminate the need for separate GPUs on devices, while maintaining performance levels by substantially improving the parallel computing abilities of a multi-core processor, and delivering 3D graphics on that processor with vastly improved performance.
SwiftShader is a component of Google’s Chrome web browser as well as multiple Adobe applications.
SwiftShader contributed 10% of total revenues for the year ended May 31, 2012 (15% in F2011).
Source: Company website, Company reports, GMCI
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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OpenGL (Open Graphics Library) is a cross-language, multi-platform API for rendering 2D and 3D computer graphics. The API is typically used to interact with a GPU, to achieve hardware-accelerated rendering and has been widely adopted. OpenGL is an evolving API. New versions of the OpenGL specification are regularly released by the Khronos Group, each of which extends the API to support various new features.
OpenGL for Embedded Systems (OpenGL ES) is a subset of the OpenGL computer graphics rendering API for rendering 2D and 3D computer graphics such as those used by video games, typically hardware-accelerated using a GPU. The lightweight API consumes minimal power, requires minimal storage space, and is designed for embedded systems like smartphones, computer tablets, video game consoles and PDAs. OpenGL ES 3.0 is vendor neutral and supported by operating systems (Android 4.3, iOS7, Blackberry 10.0) on devices with appropriate drivers.
OpenGL was developed by Silicon Graphics Inc. (SGI) in 1991 and released in January 1992 and is widely used in Computer Aided Design (CAD), virtual reality, scientific visualization, information visualization, flight simulation, and video games. OpenGL is managed by the non-profit technology consortium Khronos Group.
Source: www.opengl.org
EXHIBIT 19 – OPENGL ES MOMENTUM
Source: www.opengl.org
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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APPENDIX D – FINANCIALS
EXHIBIT 20 – INCOME STATEMENT
Source: GMCI, Company reports
Income Statement (YE May 31)201220132014E2015E2016EF2017ETotal Revenue6,185,8599,817,80810,197,90414,579,93620,586,87030,468,567Total Cost of Goods Sold2,434,4522,154,2782,357,7383,353,3854,323,2436,093,713Total Gross Profit3,751,4077,663,5307,840,16611,226,55116,263,62724,374,854Operations3,984,4543,536,2743,708,3224,373,9815,764,3247,921,827&A , Sales & Marketing4,667,9045,287,4874,626,8995,762,0026,407,7648,135,809Research & Development1,184,458533,983581,344656,097885,2351,218,743Stock based compensation1,474,783589,824219,799224,741308,803356,601Total Operating Expenses11,311,5999,947,5689,136,36411,016,82113,366,12617,632,980Operating Income-7,560,192-2,284,038-1,296,198209,7302,897,5016,741,874Total Other Income-110,11849,691-431,204-211,087-138,718-152,201EBT-7,670,310-2,234,347-1,727,402-1,3572,758,7836,589,673Income Taxes-30,394305,521-41,802-27,484-110,351-197,690Net Income (Loss) to Company-7,700,704-1,928,826-1,769,204-28,8412,648,4326,391,982Exchange difference371,627177,274233,009000Net Income to Common Shareholder-8,072,331-2,106,100-2,002,213-28,8412,648,4326,391,982EPS - Excluding Non-Recurring ItemsBasic EPS - ex-non-recurring items-0.13-0.05-0.020.000.030.08Diluted EPS - ex-non-recurring items-0.13-0.05-0.020.000.020.06Shares OutstandingBasic 63,550,79472,425,73784,640,43084,640,43084,640,43084,640,430Diluted 62,613,02272,425,73784,640,430115,760,245115,760,245115,760,245Operating MetricsGross Profit3,751,4077,663,5307,840,16611,226,55116,263,62724,374,854Adj. EBITDA-5,085,000-175,000-16,7311,129,5073,724,5697,494,984EBIT-7,560,192-2,284,038-1,296,198209,7302,897,5016,741,874EBT-7,670,310-2,234,347-1,727,402-1,3572,758,7836,589,673Net Income (ex-non-recurring items)-8,072,331-3,310,970-2,002,213-28,8412,648,4326,391,982* TNG switched to IFRS in 2010
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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EXHIBIT 21 – BALANCE SHEET
Source: GMCI, Company reports
Balance Sheet (As at May 31)201220132014E2015E2016EF2017ECurrent AssetsCash1,035,950 626,262 404,851 1,063,334 3,760,996 10,677,642 Trade & Other Receivables2,487,678 2,201,728 2,339,978 2,201,706 2,763,386 3,271,849 GST/ HST Refundable11,082 50,627 128,511 128,511 128,511 128,511 Investment Tax credit receivable377,129 669,312 488,747 488,747 488,747 488,747 Prepaid Expenses470,458 310,769 536,115 493,226 688,865 970,972 Total Current Assets4,382,297 3,858,698 3,898,202 4,375,524 7,830,505 15,537,721 Non-Current Assets- - - - - - Property & Equipment348,371 245,891 165,541 161,313 161,090 161,078 Goodwill341,800 - - - - - Intangible Assets4,524,532 3,282,172 2,318,905 1,693,069 1,239,486 907,420 Total Assets9,597,000 7,386,761 6,382,648 6,229,905 9,231,080 16,606,219 Current LiabilitiesTrade & Other Payables1,750,435 2,166,485 2,690,974 3,375,949 3,772,022 4,498,792 Current Portion of notes payable2,764,311 423,704 743,156 297,103 164,146 84,200 Current Portion of earn-out payables800,000 1,100,000 - - - - Deferred Revenue376,933 189,904 310,792 357,410 504,663 746,902 Current Portion of Long-Term Debt (IRAP loan)- - - - - - Total Current Liabilities5,691,679 3,880,093 3,744,922 4,030,463 4,440,831 5,329,894 Non-Current LiabilitiesEarn out payables1,524,151 - - - - - Long-Term Debt- 1,735,281 1,926,212 1,292,028 925,600 663,093 Total Liabilities7,215,830 5,615,374 5,671,134 5,322,491 5,366,431 5,992,987 Shareholders EquityCapital Stock15,900,184 16,885,135 17,046,625 17,046,625 17,046,625 17,046,625 Contributed Surplus6,850,686 7,362,052 8,142,902 8,367,643 8,676,446 9,033,047 Accumulated other comprehensive income254,512 77,238 155,771- 155,771- 155,771- 155,771- Deficit20,624,212- 22,553,038- 24,322,242- 24,351,083- 21,702,651- 15,310,669- Total Shareholders Equity2,381,170 1,771,387 711,515 907,415 3,864,649 10,613,233 Total Liabilities & Shareholders Equity9,597,000 7,386,761 6,382,648 6,229,905 9,231,080 16,606,219
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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EXHIBIT 22 – CASH FLOW STATEMENT
Source: GMCI, Company reports
Cash Flow Statement (YE May 31)201220132014E2015E2016EF2017ECash Provided By Operating ActivitiesNet Income(7,700,704)(1,928,826)(1,769,204)(28,841)2,648,432 6,391,982 Decrease in trade accounts receivable(533,429)263,341 (158,444)138,271 (561,680)(508,463)Decrease (increase) in GST/ HST refundable103,233 (41,796)(80,644)- - - Decrease (increase) in refundable tax credits13,161 (314,117)172,076 - - - (Increase) in prepaid expenses and other assets(209,799)156,024 (228,006)42,889 (195,639)(282,107)Increase in accounts payable and accrued liabilities690,202 459,264 553,811 684,975 396,072 726,770 Increase (decrease) in deferred revenue(58,494)(183,365)123,139 46,619 147,253 242,238 Change in Non-Cash Working CapitalNon-cash interest268,826 764,925 69,612 - - - Amortization638,041 1,375,471 1,059,668 695,036 518,265 396,510 Tax recovery on warrant expiry(44,829)(430,821)- - - - Stock based compensation expense1,474,783 589,824 219,799 224,741 308,803 356,601 Unrealised Exchange (Gain) Loss(186,693)(314,853)(254,910)- - - Other- (1,042,372)497,906 - - - Total Cash Provided By Operating Activities(5,545,702)(647,301)204,803 1,803,690 3,261,506 7,323,532 Investing ActivitiesPurchase of Property & Equipment(161,559)(15,791)(12,896)(64,970)(64,459)(64,433)Proceeds from Sale of Property & Equipment- 8,697 - - - - Business Acquisitions(2,023,218)- - - - - Total Cash From Investing Activities(2,184,777)(7,094)(12,896)(64,970)(64,459)(64,433)Financing ActivitiesProceeds from Issuance of Common Shares/Unit1,832,755 1,174,817 107,674 - - - Exercise of stock options2,000 - - - - - Issue of notes payable2,695,539 - 2,632,965 - - - Repayment of of Earn Out Payable- - (1,100,000)- - - Repayment of Long-Term Debt (31,473)(880,467)(2,060,458)(1,080,237)(499,385)(342,453)Total Cash From Financing Activities4,498,821 294,350 (419,819)(1,080,237)(499,385)(342,453)Effect of exchange rates on cash(110,046)(49,643)6,501 - - - Net Increase in cash(3,341,704)(409,688)(221,411)658,483 2,697,662 6,916,646 Beginning Cash4,377,654 1,035,950 626,262 404,851 1,063,334 3,760,996 Ending Cash1,035,950 626,262 404,851 1,063,334 3,760,996 10,677,642
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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RESEARCH DISCLOSURES
Analyst Certification
The Global Maxfin Capital Inc (“GMCI”) research analyst whose name appears on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about the company and the securities that are the subject of this report and all other companies and securities mentioned in this report and (ii) no part of the research analyst’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.
Analyst Ethics
As a condition of employment, analysts are required to adhere to the Code of Ethics and Standards of Professional Conduct of The CFA Institute.
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GMCI permits analysts to own and trade in the securities and/or derivatives of those companies under their research coverage, subject to the following restrictions. No trades can be executed in anticipation of the initiation of coverage or a change in recommendation, until 48 hours after the dissemination of such information to our clients. A transaction against an analyst’s recommendation can only be executed for a reason unrelated to the outlook for the stock and with the prior approval of the Chief Compliance Officer.
Conflicts of Interest
The research analyst and/or associates who prepared this report are compensated based on the overall profitability of GMCI, which includes the overall profitability of investment banking and related services. In the normal course of its business, GMCI or its affiliates may provide financial advisory and/or investment banking services for the issuers mentioned in this report in return for remuneration and may seek to become engaged for these services from any of the issuers mentioned in this report. GMCI may buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. GMCI, and/or its respective officers, directors or employees may from time to time acquire, hold or sell the securities discussed herein or in related securities or in options, futures or other derivative instruments based thereon.
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Equity Research Rating System
The rating system is based on the stock’s expected absolute total return over the next 6 to 12 months. STRONG BUY is expected to produce a total return of 25% or more, BUY a total return of 10% to 25%, HOLD a total return of 0% to 10%, and SELL a negative total return.
The risk rating is a summary measure of the authoring analyst's subjective assessment of the underlying fundamental risks of the issuer and the business environment in which it operates. In general, we regard large capitalization stocks with a consistent dividend history as being at the low end of the risk continuum and small capitalization early stage companies as speculative. Our rating system has four categories: LOW, MEDIUM, HIGH and SPECULATIVE.
Ralph Garcea, P.Eng, MBA – Analyst |647.776.1763|[e-mail]
Anuj Nijhawan – Associate | 647.776.1764 |[e-mail]
Chris Stringer –Associate | 647.776.1762 | [e-mail]
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General Disclosures
The opinions, estimates and projections contained in this report are those of GMCI as of the publication date of this report and are subject to change without notice. GMCI endeavours to ensure that its research reports are compiled or derived from sources that it believes are reliable and contain information and opinions that are accurate and complete. However, GMCI makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. This report is not to be construed as an offer or solicitation to buy or sell any security. The TransGamingInc. logo used on the front page of this report is a copyrighted trademark of TransGaming Inc, if applicable.
Applicable Disclosures for Issuer (TransGaming Inc.) (Yes ●/ No ○):
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1) As of the end of the month immediately preceding the date of issuance of this research report or the end of the second most recent month if the issue date is less than 10 calendar days after the end of the most recent month, GMCI and its affiliates collectively beneficially own 1% or more of any class of the issuer's equity securities.
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2) The authoring analyst and/or an associate of the analyst are long/short in any of the issuer’s securities directly or through derivative.
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3) A GMCI partner, director or officer has provided services to the issuer for remuneration during the preceding 12 months other than investment advisory or trading services.
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4) GMCI has provided investment banking services for the issuer during the 12 months preceding the date of issuance of the report.
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5) List name(s) of any partner, director, officer, employee or agent of GMCI, who is also an officer, director or employee of the issuer.
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6) The authoring analyst has visited the material operations of the issuer.
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7) The authoring analyst received reimbursement for travel expenses.
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Distribution of Recommendations
The particulars contained herein were obtained from sources, which we believe to be reliable, but are not guaranteed by us and may be incomplete or inaccurate. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or an offer to buy or sell the securities mentioned herein. GMCI may act as financial advisor, fiscal agent or underwriter for certain of the companies mentioned herein, and may receive remuneration for its services. GMCI and/or its principals, officers, directors, representatives, associates may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise. This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever nor may the information, opinions or conclusions contained herein be referred to without in each case the prior written consent of GMCI.