Emerging Tech Revisited: Swarmio

Last week, I focused on Orenda Software Solutions, one of “two Cape Breton IT companies” on the receiving end of federal funding announced by Sydney-Victoria MP Jaime Battiste.

This week, as promised, I’m taking a look at the other lucky winner, Swarmio Inc, formerly Ubique Networks.

Swarmio received a $338,369 Industrial and Research Assistance Program (IRAP) grant from the National Research Council of Canada (NRC) and a $250,000 ACOA loan. The ACOA backgrounder about the funding — headlined “Emerging Cape Breton tech firms help shape digital economy with artificial intelligence” — explained that Swarmio is:

…a global eSports technology and media company. The company offers a platform-as-a-service as a hosting solution for video game developers and eSports organizers. The company uses proprietary AI technology to move the game server geographically closer to the user to drastically reduce or eliminate lag in online gaming.

Artificial intelligence is clearly the theme of this release, presumably because “proprietary AI technology” that could “drastically reduce or eliminate lag in online gaming” would have applications beyond improving the experience of Fortnite addicts. (Driverless cars is the example most often given — such technology would allow the information gathered by the vehicles’ sensors to be processed more rapidly.)

As for what Swarmio has planned for this latest funding:

NRC IRAP funding will support a research and development project allowing the company to deploy and manage the operation of its technology. The ACOA contribution will help the company commercialize and launch its technology in Southern Asia and Brazil. As a result, the company anticipates reaching 10 million users worldwide in the next two years and creating six full-time positions.

Note that there’s no guarantee any of these positions will be in Sydney, where Swarmio apparently currently employs six people. Given that the company’s stated goal is to launch in Brazil (where it already has an employee) and Southern Asia, these positions probably won’t be in Sydney. Nor are any of the company’s higher-ranking employees in Sydney — in fact, none of the Sydney employees even makes the website where the “team” is listed as follows:

Vijai Karthigesu, CEO: Ajax, Ontario

Sorin Stoain, co-founder, CTO: Toronto, Ontario

Aseef Khan, VP, Gaming & Esports: Toronto, Ontario

John Smith, EVP, Global Strategy: Halifax

Joel Gallant, Lead Application Architect: Halifax

Lucas Gatta, Head of Brazil Operations: São Paulo

Tesh Kapadia, VP Global Sales: Toronto, Ontario

Josh Stanbury, VP Communications, Taunton, UK

The idea that this is a “Cape Breton tech firm” really stretches credulity, although ACOA clearly buys it.

Swarmio was founded in 2014 and although it has received some seed funding from Toronto-based Extreme Venture Capital, the value of which was not disclosed, it — like Orenda — seems to have received the bulk of its funding from government. This week’s announcement brings total federal and provincial assistance to Swarmio to, as best I can calculate, $6.3 million, including a $3.2 million investment by Innovacorp, the provincial crown corporation managing an early-stage venture capital fund:

Date	Amount	Type of Funding	Organization	Program	Purpose
Federal
23 October 2015	$500,000	Conditionally Repayable Contribution	ACOA	Business Development Program	Develop a gaming experience with no "lag" time
8 July 2015	$498,000	Contribution	National Research Council Canada	N/A	To support a firm in the Computer systems design and related services (except video game design and development) (NAICS: 541514) with a research and development project
18 July 2016	$499,657	Contribution	National Research Council Canada	N/A	To support a firm in the Computer systems design and related services (except video game design and development) (NAICS: 541514) with a research and development project
18 January 2017	$468,750	Conditionally Repayable Contribution	ACOA	Business Development Program	Commercialize recently developed "lagless" gaming technology
31 March 2017	$50,000	Non-Repayable Contribution	ACOA	BDP - Productivity and Business Skills	Hire a chief revenue officer
18 April 2018	$500,000	Conditionally Repayable Contribution	ACOA	Business Development Program	Execute go to market strategy
29 October 2018	$50,000	Non-Repayable Contribution	ACOA	BDP - Productivity and Business Skills	Hire a financial controller to streamline financial planning
15 October 2019	$250,000	Unconditionally Repayable Contribution	ACOA	REGI - Business Scale-up and Productivity	Commercialize Swarmio eSports Platform in South Asia
N/A	$338,369	Contribution	National Research Council of Canada	Industrial Research Assistance Program (IRAP)
Provincial
2015-2016	$500,000	Early stage VC investment	Innovacorp
2016-2017	$200,000	Early stage VC investment	Innovacorp
2017-2018	$300,000	Early stage VC investment	Innovacorp
2018-2019	$2,000,000	Early stage VC investment	Innovacorp
2019-2020	$180,000	Early stage VC investment	Innovacorp
TOTAL	$6,334,776

To date, what we know about Swarmio has come from Swarmio (the “news” section of its website contains nothing other than press releases and sponsored content, no links to so-called “earned” media) but that is starting to change because in October, the company announced plans to go public by means of a reverse takeover (RTO) of a company called Cairo Resources (about which, more later) and when you go public you have to report to securities regulators and those reports are available for all the world to see.

Stockwatch took note of Swarmio’s plans to list on the Calgary-based TSX Venture Exchange (TSX.V), writing that we’d soon find out (via filings) “whether the company makes money” but also noting, in an aside that struck me as pretty funny:

At one point, probably in late 2017 or early 2018, the company was describing its platform as being “blockchain-powered.” At the time, the word “blockchain” was trendy. Swarmio does not use that word any more.

Has “blockchain” been replaced by “AI” or am I even more cynical than the Stockwatch reporter? Also, it’s not hard to date Swarmio’s flirtation with blockchain — you can watch Karthigesu deliver a 50-plus minute address on the subject at a gaming festival in Brazil in July 2018.

In fact, the reporting has started and I’ve already learned a couple of things.

 

‘Wizzo’

First, according to an information circular filed by Cairo Resources, Craig Fletcher, a big name in UK gaming, will be joining the board of Swarmio post-RTO:

 

Swarmio_Media_board

 

Fletcher founded Multiplay, as explained on the company website:

To fill in a couple of blanks there, Game Digital bought Multiplay in 2015 then sold it to Unity Technologies in 2017 after which Fletcher left Game.

In November 2018, he was one of 14 “Tech Titans” to acquire a stake in a London and Birmingham-based investment firm called Ascension Ventures. Ascension CEO and co-founder Jean de Fougerolles told BusinessCloud the “venture partners,” as they are known, will help Ascension become the “leading brand” for tech entrepreneurs looking for early-stage investment.

Since 2013, Ascension has invested in more than 75 early-stage tech operations across the UK at least five of which have “gone on to raise multimillion-pound rounds” of funding. (I’m just quoting the BusinessCloud article which lists Vidsy, Moteefe, Wagestream, A Million Ads and Hazy as Ascension success stories, presumably there are others?)

I don’t know what this means for Swarmio, but I have to admit, it looks good, Fletcher seems to be the real deal. Interestingly, one of the things I read about Multiplay was that, before he sold it, he’d built it into a company that provided 100 “local” jobs. But let’s be clear-eyed about this: success, for investors in tech startups, doesn’t necessarily mean funding a company that grows and thrives and provides stable jobs for many people in a community. It means funding a company that gets acquired by a larger company and is then either absorbed into it or simply shut down. It’s good news for shareholders, not so great for non-shareholding employees or the communities in which they live.

A final note on Fletcher: last December, he ran for the UK parliament as a Liberal Democrat in Romsey and Southampton on a platform that actually included games and esports:

Over the last 20 years, I have built businesses in Games and Esports and am somewhat of a tech evangelist. So it’s probably no surprise that I have a very clear vision about the huge potential this industry offers for the UK economy and why more must be done to represent it in Parliament.

I wholeheartedly believe that the UK can, and should, become the ultimate destination for gaming and esports in Europe, attracting investment and top industry talent.

He lost to the incumbent, the Conservative Caroline Nokes.

 

 

RTO

Okay, the other thing I discovered was details about Swarmio’s planned RTO and they are less encouraging.

Swarmio wants to list on the TSX Venture Exchange (TSX.V), which is like the Toronto Stock Exchange’s (TSX) little brother. Headquartered in Calgary, the TSX.V focuses on companies too small – in terms of assets or business or market capitalization – to list on the TSX.

Rather than conducting an initial public offering (IPO), Swarmio intends to list on the exchange by means of a reverse takeover with Cairo Resources, a Capital Pool Company (CPC) already listed on the TSX.V. The two parties signed an agreement to this effect on 30 September 2019.

CPCs are designed precisely for this purpose: the TSX.V allows them to conduct an IPO and get listed even though they have no commercial operations and no assets other than cash. Their whole raison d’etre is to “evaluate and identify potential acquisitions.” Once a target acquisition is identified, the CPC completes a “Qualifying Transaction” (QT) — like a reverse takeover — a bunch of shares are exchanged and Hey presto! the private company is listed on the public stock exchange.

Ideally, according to the Venture Exchange’s guidelines, a CPC should accomplish this “within 24 months,” but it’s taken Cairo Resources – founded in 2011 – a bit longer. In fact, the interim (unaudited) financial statement it filed with the TSX.V at the end of January, shows that for the nine months ended 30 November 2019, Cairo incurred a loss of $52,482 and had a deficit of $594,815, which it explained this way:

The Company’s continuing operations as intended are dependent upon its ability to identify, evaluate and negotiate an acquisition of or participation in an interest in properties, assets or businesses. At present, the Company has not completed its Qualifying Transaction within the required period and consequently has no current operating income or cash flows.

More concerning, if you’re Swarmio, is that:

Without additional financing, the Company will be unable to fund its ongoing operations for the next twelve months and complete a Qualifying Transaction.

The document was filed on 29 January 2020 — four months after Cairo signed its agreement with Swarmio. But all is not entirely lost, Cairo says it intends to finance its “future requirements” through a “combination of debt and/or equity issuance.”

On the other hand:

There is no assurance that the Company will be able to obtain such financings or obtain them on favourable terms. These uncertainties cast significant doubt on the Company’s ability to continue as a going concern.

So that’s…encouraging.

I asked Josh Stanbury, who has been Swarmio’s VP of Communications since February 2020, if the reverse takeover (RTO) was still happening and he replied (by email):

Yes, RTO is still in progress and Swarmio’s public listing scheduled for May or close.

I then asked if Swarmio was concerned about Cairo Resource’s financial status, and Stanbury directed the question to CEO Vijai Karthigesu, who responded by email moments ago:

Cairo is a CPC Shell. It doesn’t have any operations. We are just using Cairo as a public shell to do the transaction. We are engaged with Canaccord for our fundraising. We are not concerned about the financials of Cairo. Since we are in Telecom, 5G and Gaming sector, we are confident that will have no issues with fundraising (hoping the coronovirus doesn’t bring the entire market down!)

Karthigesu offered to answer any other questions, so I will follow up with him on the fundraising for a future article.

 

Keep the receipts

Another factor keeping this reverse takeover from being a “done deal” is that Swarmio has some fundraising of its own to do. It intends to undertake a private placement of subscription receipts “for anticipated gross proceeds of a minimum of $4 million.” (Subscription receipts are less risky for investors because if the qualifying transaction happens, the receipts are converted into common shares, but if it doesn’t happen, the receipt holders get their money back.)

Karthigesu told the Chronicle Herald he is looking to sell $6 million in shares leading up to and during the transaction:

“We are at the stage where we need to scale,” said CEO Vijai Karthigesu in a phone interview on Monday. “There are 2.5 billion gamers in the world and two-thirds of them live in Asia and Latin America … We need to target these regions so what we need is a lot of money. We need to inject capital to scale.”

(Innovacorp vice president Andrew Ray, who will also serve on the Swarmio board, told the Herald that Innovacorp intended to hold onto its Swarmio shares after the listing.)

In a report of exempt distributions filed with the the Ontario Securities Commission (OSC) earlier this month, Swarmio listed its assets as “under” $5 million.

That same filing showed that in February, Swarmio raised $56,250 through the sale of Series A convertible notes to “accredited investors” i.e. investors with a lot of money. (The implication being, if you have a lot of money, you must be wise with it, to which I have one thing to say: Madoff.)

Following the successful completion of the RTO, the notes can be swapped for common shares at a rate of 1 common share per $0.075.

If the RTO is actually on track, then more information will be forthcoming, so I will keep you posted.