This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical
fact could be deemed forward-looking statements. Statements that include words such as “may,” “might,” “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,”
“pro forma” or the negative of these words or other words or expressions of and similar meaning may identify forward-looking
statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future
operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning
proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief
and any statement of assumptions underlying any of the foregoing.
These forward-looking statements are found at various
places throughout this Quarterly Report on Form 10-Q and the other documents referred to in this Quarterly Report on Form 10-Q and relate
to a variety of matters, including, but not limited to, other statements that are not purely statements of historical fact. These forward-looking
statements are made on the basis of the current beliefs, expectations and assumptions of management, are not guarantees of performance
and are subject to significant risks and uncertainty. These forward-looking statements should not be relied upon as predictions of future
events and Elys Game Technology, Corp. cannot assure you that the events or circumstances discussed or reflected in these statements will
be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate, the inaccuracy may be material. In
light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation
or warranty by Elys Game Technology, Corp. or any other person that we will achieve our objectives and plans in any specified timeframe,
or at all. These forward-looking statements should, therefore, be considered in light of various important factors, including those set
forth below, under Part II, “Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and those identified
under Part I, Item 1A in our Annual Report on Form 10-K/A for the year ended December 31, 2021 filed with the Securities and Exchange
Commission on April 15, 2022.
You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to publicly
update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise,
after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.
In this Quarterly Report on Form 10-Q, unless the
context indicates otherwise, references to “Elys Game” “our Company,” “the Company,” “we,”
“our,” and “us” refer to Elys Game Technology, Corp. a Delaware corporation, and its wholly owned subsidiaries.
As a result of the
global outbreak of the COVID-19 virus, on March 8, 2020 the Italian government issued a decree which imposed certain restrictions
on public gatherings and travel, and closures of physical venues that included betting shops, arcades and bingo halls across Italy.
Accordingly, we had temporarily closed all betting shop locations throughout Italy as a result of the decree until May 4, 2020.
Subsequently, on March 10, 2020 the Italian government imposed further restrictions on travel throughout Italy as well as transborder
crossings and had either postponed or cancelled most professional sports events which had an effect on the Company’s overall
sports betting handle and revenues and negatively impacted the Company’s operating results. On June 19, 2020 all land-based
betting shops, including corner locations such as coffee shops throughout Italy temporarily reopened until November 2020 when the
Italian government imposed new lockdowns that were lifted on June 14, 2021. The closing of physical betting shop locations did
not affect our online and mobile business operations which has mitigated some of the impact.
During Q2 2021, management
decided to close our Ulisse operations in Italy due to the uncertainty at that time of the duration and scope of the COVID-19 outbreak,
while focusing investments on growing our U.S. market and the more familiar Multigioco brand, the result of which management believes
has reduced the complexity and improved the efficiency of our gaming operations in Italy.
Currently there are no restrictive lockdowns in any of the markets
in which we operate.
ITEM 1. FINANCIAL STATEMENTS
ELYS GAME TECHNOLOGY, CORP.
Consolidated Balance Sheets
(Unaudited)
| |
June 30, 2022 | |
December 31, 2021 |
| |
| |
|
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 6,018,635 | | |
$ | 7,319,765 | |
Accounts receivable | |
| 458,627 | | |
| 271,161 | |
Gaming accounts receivable | |
| 901,779 | | |
| 2,418,492 | |
Prepaid expenses | |
| 1,977,571 | | |
| 968,682 | |
Related party receivable | |
| — | | |
| 1,413 | |
Other current assets | |
| 458,032 | | |
| 403,972 | |
Total Current Assets | |
| 9,814,644 | | |
| 11,383,485 | |
| |
| | | |
| | |
Non - Current Assets | |
| | | |
| | |
Restricted cash | |
| 355,643 | | |
| 386,592 | |
Property and equipment | |
| 567,135 | | |
| 490,079 | |
Right of use assets | |
| 1,117,563 | | |
| 589,288 | |
Intangible assets | |
| 14,781,491 | | |
| 15,557,561 | |
Goodwill | |
| 16,164,108 | | |
| 16,164,337 | |
Marketable securities | |
| 100,000 | | |
| 7,499 | |
Total Non - Current Assets | |
| 33,085,940 | | |
| 33,195,356 | |
Total Assets | |
$ | 42,900,584 | | |
$ | 44,578,841 | |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Bank overdraft | |
$ | — | | |
$ | 7,520 | |
Accounts payable and accrued liabilities | |
| 4,790,763 | | |
| 6,820,279 | |
Gaming accounts payable | |
| 2,716,199 | | |
| 2,610,305 | |
Taxes payable | |
| 192,497 | | |
| 47,787 | |
Advances from stockholders | |
| 173 | | |
| 502 | |
Promissory notes payable - related parties | |
| 321,144 | | |
| 51,878 | |
Operating lease liability | |
| 293,343 | | |
| 244,467 | |
Financial lease liability | |
| 7,584 | | |
| 8,347 | |
Bank loan payable - current portion | |
| 3,093 | | |
| 36,094 | |
Total Current Liabilities | |
| 8,324,796 | | |
| 9,827,179 | |
| |
| | | |
| | |
Non-Current Liabilities | |
| | | |
| | |
Contingent Purchase Consideration | |
| 13,775,173 | | |
| 12,859,399 | |
Deferred tax liability | |
| 3,132,901 | | |
| 3,291,978 | |
Operating lease liability | |
| 833,045 | | |
| 340,164 | |
Financial lease liability | |
| 3,330 | | |
| 7,716 | |
Bank loan payable | |
| 149,759 | | |
| 151,321 | |
Other long-term liabilities | |
| 371,242 | | |
| 359,567 | |
Total Non-Current Liabilities | |
| 18,265,450 | | |
| 17,010,145 | |
Total Liabilities | |
| 26,590,246 | | |
| 26,837,324 | |
| |
| | | |
| | |
Stockholders' Equity | |
| | | |
| | |
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued | |
| — | | |
| — | |
Common stock, $0.0001 par value, 80,000,000 shares authorized; 26,319,583 and 23,363,732 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | |
| 2,632 | | |
| 2,336 | |
Additional paid-in capital | |
| 71,681,523 | | |
| 66,233,292 | |
Accumulated other comprehensive income | |
| (761,314 | ) | |
| (251,083 | ) |
Accumulated deficit | |
| (54,612,503 | ) | |
| (48,243,028 | ) |
Total Stockholders' Equity | |
| 16,310,338 | | |
| 17,741,517 | |
Total Liabilities and Stockholders’ Equity | |
$ | 42,900,584 | | |
$ | 44,578,841 | |
See notes to the unaudited
condensed consolidated financial statements
4
ELYS GAME TECHNOLOGY, CORP.
Consolidated Statements of Operations and Comprehensive
Income (Loss)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
For the Three Months Ended June 30, | |
For the Six Months Ended June 30, |
| |
2022 | |
2021 | |
2022 | |
2021 |
Revenue | |
$ | 10,347,735 | | |
$ | 11,689,949 | | |
$ | 22,583,721 | | |
$ | 25,847,277 | |
| |
| | | |
| | | |
| | | |
| | |
Costs and Expenses | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 7,868,719 | | |
| 9,616,584 | | |
| 17,154,951 | | |
| 20,278,399 | |
General and administrative expenses | |
| 4,771,258 | | |
| 4,754,944 | | |
| 9,780,642 | | |
| 8,900,154 | |
Restructuring and severance expenses | |
| 1,205,689 | | |
| — | | |
| 1,205,689 | | |
| — | |
Total Costs and Expenses | |
| 13,845,666 | | |
| 14,371,528 | | |
| 28,141,282 | | |
| 29,178,553 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from Operations | |
| (3,497,931 | ) | |
| (2,681,579 | ) | |
| (5,557,561 | ) | |
| (3,331,276 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other (Expenses) Income | |
| | | |
| | | |
| | | |
| | |
Interest expense, net of interest income | |
| (9,678 | ) | |
| (2,194 | ) | |
| (13,537 | ) | |
| (10,043 | ) |
Amortization of debt discount | |
| — | | |
| — | | |
| — | | |
| (12,833 | ) |
Other income | |
| 29,103 | | |
| 89,018 | | |
| 68,852 | | |
| 370,362 | |
Changes in fair value of contingent purchase consideration | |
| (465,761 | ) | |
| — | | |
| (915,774 | ) | |
| — | |
Other expense | |
| (9,941 | ) | |
| (1,208 | ) | |
| (11,011 | ) | |
| (28,138 | ) |
Gain (loss) on marketable securities | |
| 15,000 | | |
| (287,500 | ) | |
| 92,500 | | |
| (92,500 | ) |
Total Other (Expenses) Income | |
| (441,277 | ) | |
| (201,884 | ) | |
| (778,970 | ) | |
| 226,848 | |
| |
| | | |
| | | |
| | | |
| | |
Loss Before Income Taxes | |
| (3,939,208 | ) | |
| (2,883,463 | ) | |
| (6,336,531 | ) | |
| (3,104,428 | ) |
Income tax provision | |
| 123,949 | | |
| 112,113 | | |
| (32,944 | ) | |
| (276,501 | ) |
Net Loss | |
$ | (3,815,259 | ) | |
$ | (2,771,350 | ) | |
$ | (6,369,475 | ) | |
$ | (3,380,929 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Comprehensive (Loss) Income | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| (358,456 | ) | |
| 84,743 | | |
| (510,231 | ) | |
| (259,347 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive Loss | |
$ | (4,173,715 | ) | |
$ | (2,686,607 | ) | |
$ | (6,879,706 | ) | |
$ | (3,640,276 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share – basic and diluted | |
$ | (0.16 | ) | |
$ | (0.13 | ) | |
$ | (0.27 | ) | |
$ | (0.16 | ) |
Weighted average number of common shares outstanding – basic and diluted | |
| 24,118,752 | | |
| 22,012,153 | | |
| 23,818,620 | | |
| 21,761,334 | |
See notes to the unaudited condensed consolidated financial
statements
5
ELYS GAME TECHNOLOGY, CORP.
Consolidated Statements of Changes in Stockholders'
Equity
Six months ended June 30, 2022 and June 30, 2021
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Common Stock | |
Additional | |
Accumulated Other | |
| |
|
| |
Shares | |
Amount | |
Paid-in Capital | |
Comprehensive Income | |
Accumulated Deficit | |
Total |
Six months ended June 30, 2021 | |
| |
| |
| |
| |
| |
|
Balance at December 31, 2020 | |
| 20,029,834 | | |
$ | 2,003 | | |
$ | 53,064,919 | | |
$ | 267,948 | | |
$ | (33,178,517 | ) | |
$ | 20,156,353 | |
Proceeds from open market sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from open market sales, shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Brokers Fees on open market sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from warrants exercised | |
| 1,488,809 | | |
| 149 | | |
| 3,909,832 | | |
| — | | |
| — | | |
| 3,909,981 | |
Common stock issued to settle liabilities | |
| 467,990 | | |
| 47 | | |
| 2,676,854 | | |
| — | | |
| — | | |
| 2,676,901 | |
Restricted stock compensation | |
| 24,476 | | |
| 2 | | |
| 139,998 | | |
| — | | |
| — | | |
| 140,000 | |
Stock based compensation expense | |
| — | | |
| — | | |
| 288,968 | | |
| — | | |
| — | | |
| 288,968 | |
Foreign currency translation adjustment | |
| — | | |
| — | | |
| — | | |
| (344,088 | ) | |
| — | | |
| (344,088 | ) |
Net Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (609,579 | ) | |
| (609,579 | ) |
Balance at March 31, 2021 | |
| 22,011,109 | | |
$ | 2,201 | | |
$ | 60,080,571 | | |
$ | (76,140 | ) | |
$ | (33,788,096 | ) | |
$ | 26,218,536 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from warrants exercised | |
| 5,000 | | |
| 1 | | |
| 12,499 | | |
| — | | |
| — | | |
| 12,500 | |
Stock based compensation expense | |
| — | | |
| — | | |
| 291,162 | | |
| — | | |
| — | | |
| 291,162 | |
Foreign currency translation adjustment | |
| — | | |
| — | | |
| — | | |
| 84,743 | | |
| — | | |
| 84,743 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,771,350 | ) | |
| (2,771,350 | ) |
Balance at June 30, 2021 | |
| 22,016,109 | | |
$ | 2,202 | | |
$ | 60,384,232 | | |
$ | 8,603 | | |
$ | (36,559,446 | ) | |
$ | 23,835,591 | |
| |
Common Stock | |
Additional | |
Accumulated Other | |
| |
|
| |
Shares | |
Amount | |
Paid-In Capital | |
Comprehensive Income | |
Accumulated Deficit | |
Total |
| |
| |
| |
| |
| |
| |
|
Six months ended June 30, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2021 | |
| 23,363,732 | | |
$ | 2,336 | | |
$ | 66,233,292 | | |
$ | (251,083 | ) | |
$ | (48,243,028 | ) | |
$ | 17,741,517 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from open market sales | |
| 56,472 | | |
| 6 | | |
| 131,559 | | |
| — | | |
| — | | |
| 131,565 | |
Brokers Fees on open market sales |
|
|
|
|
|
|
|
|
|
|
(3,949 |
) |
|
|
|
|
|
|
|
|
|
|
(3,949 |
) |
Restricted stock compensation | |
| 162,835 | | |
| 16 | | |
| 424,984 | | |
| — | | |
| — | | |
| 425,000 | |
Stock based compensation expense | |
| — | | |
| — | | |
| 597,972 | | |
| — | | |
| — | | |
| 597,972 | |
Foreign currency translation adjustment | |
| — | | |
| — | | |
| — | | |
| (151,775 | ) | |
| — | | |
| (151,775 | ) |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,554,216 | ) | |
| (2,554,216 | ) |
Balance at March 31, 2022 | |
| 23,583,039 | | |
$ | 2,358 | | |
$ | 67,383,858 | | |
$ | (402,858 | ) | |
$ | (50,797,244 | ) | |
$ | 16,186,114 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from open market sales | |
| 111,544 | | |
| 11 | | |
| 255,477 | | |
| — | | |
| — | | |
| 255,488 | |
Brokers Fees on open market sales |
|
|
|
|
|
|
|
|
|
|
(7,663 |
) |
|
|
|
|
|
|
|
|
|
|
(7,663 |
) |
Proceeds from private placement | |
| 2,625,000 | | |
| 263 | | |
| 2,486,925 | | |
| — | | |
| — | | |
| 2,487,188 | |
Proceeds from prefunded warrants | |
| — | | |
| — | | |
| 512,758 | | |
| — | | |
| — | | |
| 512,758 | |
Brokers fees on private placement | |
| — | | |
| — | | |
| (245,950 | ) | |
| — | | |
| — | | |
| (245,950 | ) |
Stock based compensation expense | |
| | | |
| | | |
| 1,296,118 | | |
| | | |
| | | |
| 1,296,118 | |
Foreign currency translation adjustment | |
| | | |
| | | |
| | | |
| (358,456 | ) | |
| | | |
| (358,456 | ) |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,815,259 | ) | |
| (3,815,259 | ) |
Balance at June 30, 2022 | |
| 26,319,583 | | |
$ | 2,632 | | |
$ | 71,681,523 | | |
$ | (761,314 | ) | |
$ | (54,612,503 | ) | |
$ | 16,310,338 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
See notes to the unaudited condensed consolidated financial
statements
6
ELYS GAME TECHNOLOGY, CORP.
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
| |
For the six months ended June 30, |
| |
2022 | |
2021 |
Cash flows from operating Activities | |
| | | |
| | |
Net Loss | |
$ | (6,369,475 | ) | |
$ | (3,380,929 | ) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | | |
| | |
Depreciation and amortization | |
| 892,232 | | |
| 460,320 | |
Amortization of debt discount | |
| — | | |
| 12,833 | |
Restricted stock awards | |
| 425,000 | | |
| 140,000 | |
Stock option compensation expense | |
| 1,894,090 | | |
| 580,130 | |
Non-cash interest | |
| 9,151 | | |
| 4,696 | |
Change in fair value of contingent purchase consideration | |
| 915,774 | | |
| — | |
Unrealized (gain) loss on trading securities | |
| (92,500 | ) | |
| 92,500 | |
Movement in deferred taxation | |
| (159,077 | ) | |
| (46,720 | ) |
Gain on Government relief loan forgiven | |
| — | | |
| (8,017 | ) |
Changes in Operating Assets and Liabilities | |
| | | |
| | |
Prepaid expenses | |
| (1,024,859 | ) | |
| (97,503 | ) |
Accounts payable and accrued liabilities | |
| (1,700,177 | ) | |
| 158,239 | |
Accounts receivable | |
| (132,614 | ) | |
| (19,623 | ) |
Gaming accounts receivable | |
| 1,313,461 | | |
| 214,012 | |
Gaming accounts liabilities | |
| 329,183 | | |
| 140,608 | |
Taxes payable | |
| 153,526 | | |
| 238,917 | |
Due from related parties | |
| 1,056 | | |
| (1,974 | ) |
Other current assets | |
| (86,891 | ) | |
| 66,449 | |
Long term liability | |
| 42,300 | | |
| (304,260 | ) |
Net Cash used in Operating Activities | |
| (3,589,820 | ) | |
| (1,750,322 | ) |
| |
| | | |
| | |
Cash Flows from Investing Activities | |
| | | |
| | |
Acquisition of property, plant and equipment and intangible assets | |
| (229,075 | ) | |
| (122,432 | ) |
Net Cash Used in Investing Activities | |
| (229,075 | ) | |
| (122,432 | ) |
| |
| | | |
| | |
Cash Flows from Financing Activities | |
| | | |
| | |
Proceeds from warrants exercised | |
| — | | |
| 3,922,481 | |
Proceeds from bank overdraft | |
| — | | |
| 1,053 | |
Repayment of bank overdraft | |
| (7,233 | ) | |
| — | |
Repayment of bank credit line | |
| — | | |
| (500,000 | ) |
Repayment of bank loan | |
| (33,184 | ) | |
| (67,336 | ) |
Redemption of convertible debentures | |
| — | | |
| (27,562 | ) |
Repayment of Government relief loan | |
| — | | |
| (24,050 | ) |
Repayment of deferred purchase consideration – non-related parties | |
| — | | |
| (410,383 | ) |
Proceeds from Subscriptions – Net of Fees | |
| 2,616,679 | | |
| — | |
Proceeds from pre-funded warrants | |
| 512,758 | | |
| — | |
Proceeds from related party promissory notes | |
| 260,000 | | |
| — | |
Capital Finance Lease Repaid | |
| (4,038 | ) | |
| (5,994 | ) |
Net Cash provided by Financing Activities | |
| 3,344,982 | | |
| 2,888,209 | |
| |
| | | |
| | |
Effect of change in exchange rate | |
| (858,166 | ) | |
| (506,503 | ) |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (1,332,079 | ) | |
| 508,952 | |
Cash, cash equivalents and restricted cash – beginning of the period | |
| 7,706,357 | | |
| 20,044,769 | |
Cash, cash equivalents and restricted cash – end of the period | |
$ | 6,374,278 | | |
$ | 20,553,721 | |
| |
| | | |
| | |
Reconciliation of cash, cash equivalents and restricted cash within the Balance Sheets to the Statement of Cash Flows | |
| | | |
| | |
Cash and cash equivalents | |
$ | 6,018,635 | | |
$ | 19,150,990 | |
Restricted cash included in non-current assets | |
| 355,643 | | |
| 1,402,731 | |
| |
$ | 6,374,278 | | |
$ | 20,553,721 | |
Supplemental disclosure of cash flow information |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
Interest |
|
$ |
4,898 |
|
|
$ |
17,528 |
|
Income tax |
|
$ |
47,311 |
|
|
$ |
118,266 |
|
Supplemental cash flow disclosure for non-cash activities |
|
|
|
|
|
Common stock issued to settle liabilities |
|
$ |
— |
|
|
$ |
2,676,901 |
|
|
|
|
|
|
|
|
|
|
See notes to the unaudited
condensed consolidated financial statements
7
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
1. Nature of Business
Established in the state
of Delaware in 1998, Elys Game Technology, Corp (“Elys” or the “Company”), provides gaming services
in the U.S. market via Elys Gameboard Technologies, LLC and Bookmakers Company US, LLC (“USB”) in certain licensed states
where the Company offers bookmaking and platform services to the Company’s customers. The Company’s intention is to focus
its attention on expanding the US market. The Company recently began operation in Washington D.C. through a Class B Managed
Service Provider and Class B Operator license to operate a sportsbook within the Grand Central Restaurant and Sportsbook located in the
Adams Morgan area of Washington, D.C., and in October 2021 the Company entered into an agreement with Ocean Casino Resort in Atlantic
City, New Jersey, to provide platform and bookmaking services. Ocean Casino Resort began using the Company’s platform and bookmaking
services in March 2022.
The Company also provides business-to-consumer (“B2C”)
gaming services in Italy through its subsidiary, Multigioco, which operations are carried out via both land-based or online retail
gaming licenses regulated by the Agenzia delle Dogane e dei Monopoli (“ADM”)
that permits the Company to distribute leisure betting products such as sports betting, and virtual sports betting products through
both physical, land-based retail locations as well as online through the Company’s licensed website www.newgioco.it or commercial
webskins linked to the Company’s licensed website and through mobile devices. Management implemented a consolidation strategy
in the Italian market by integrating all B2C operations into Multigioco and allowed the Austrian Bookmakers license, that was regulated
by the Austrian Federal Finance Ministry (“BMF”), to terminate.
Additionally, the Company
provides business-to-business (“B2B”) gaming technology through its Odissea subsidiary which owns and operates a betting software
designed with a unique “distributed model” architecture colloquially named Elys Game Board (the “Platform”). The
Platform is a fully integrated “omni-channel” framework that combines centralized technology for updating, servicing and operations
with multi-channel functionality to accept all forms of customer payment through the two distribution channels described above. The omni-channel
software design is fully integrated with a built in player gaming account management system, built-in sports book and a virtual sports
platform through its Virtual Generation subsidiary. The Platform also provides seamless application programming interface integration
of third-party supplied products such as online casino, poker, lottery and horse racing and has the capability to incorporate e-sports
and daily fantasy sports providers. Management implemented a growth strategy to expand B2B gaming technology operations in the U.S. and
is considering further expansion in Canada and Latin American countries in the near future.
Strategic agreements
entered into with Lottomatica (currently known as G.B.O, S.p.A)
During the course of
the second quarter, the Company entered into a Master Technology Development and License Agreement and a Technical Services
Agreement with Lottomatica to develop and provide a dedicated Sports Betting Platform (“SBP”) for use in both land-based
and on-line applications by Lottomatica in the U.S. and Canadian markets, as well as potentially worldwide. The contract is for a
period of ten years, after which the source code will be assigned to Lottomatica. An option was also granted to Lottomatica that
after a period of four years from the commencement of the provision of the SBP, that Lottomatica may acquire the source code to the
SBP for €4.0 million.
The Technical Services
Agreement was entered into with the Company’s subsidiary Odissea to provide engineering services, develop and deliver the software and
provide operational and product management support to Lottomatica on the SBP. The initial term of the agreement is for a period of
ten years and is based on cost plus a percentage of the services provided.
In a separate Virtual
Service Agreement entered into between the Company’s subsidiary Virtual Generation and Goldbet S.p.A., a subsidiary of Lottomatica, whereby
Virtual Generation will license virtual event content to be implemented on the Lottomatica’s Platform throughout the Lottomatica
vast network of retail outlets and on the online services in Italy. The agreement provides for an exclusivity period of two years
from the date of certification of the virtual platform by the Italian regulator (ADM), which will only allow Lottomatica and the Company
to make use of the platform. Virtual Generation will generate commission revenue based on a percentage of Net Gaming Revenues.
In a separate Assignment
Agreement entered into between the Company’s subsidiary, Multigioco, Lottomatica assigned ownership of approximately 100 Sports Rights to
Multigioco, which will allow Multigioco to expand its land-based distribution network to approximately 110 point-of-sale locations. Multigioco
expects to open the additional 100 outlets over the remainder of the calendar year. These rights are only valid until the ADM puts
new location rights up for tender, which could take place at any time, and therefore were assigned a minimal value.
The entities
included in these unaudited condensed consolidated financial statements are as follows:
Name |
|
Acquisition or Formation Date |
|
Domicile |
|
Functional Currency |
|
|
|
|
|
|
|
Elys Game Technology, Corp. (“Elys”) |
|
Parent Company |
|
USA |
|
U.S. Dollar |
Multigioco Srl (“Multigioco”) |
|
August 15, 2014 |
|
Italy |
|
Euro |
Ulisse GmbH (“Ulisse”) |
|
July 1, 2016 |
|
Austria |
|
Euro |
Odissea Betriebsinformatik Beratung GmbH (“Odissea”) |
|
July 1, 2016 |
|
Austria |
|
Euro |
Virtual Generation Limited (“VG”) |
|
January 31, 2019 |
|
Malta |
|
Euro |
Newgioco Group Inc. (“NG Canada”) |
|
January 17, 2017 |
|
Canada |
|
Canadian Dollar |
Elys Technology Group Limited |
|
April 4, 2019 |
|
Malta |
|
Euro |
Newgioco Colombia SAS |
|
November 22, 2019 |
|
Colombia |
|
Colombian Peso |
Elys Gameboard Technologies, LLC |
|
May 28, 2020 |
|
USA |
|
U.S. Dollar |
Bookmakers Company US LLC |
|
July 15, 2021 |
|
USA |
|
U.S. Dollar |
The Company
operates in two lines of business: (i) the operating of web based betting as well as land based leisure betting establishments situated
throughout Italy and; (ii) provider of certified betting Platform software services to global leisure betting establishments and operators.
The Company’s
operations are carried out through the following four geographically organized groups:
a) |
an operational group based in Europe that maintains administrative offices headquartered in Rome, Italy with satellite offices for operations administration in Naples and Teramo, Italy and San Gwann, Malta; |
b) |
an operational group based in the U.S. with offices in Las Vegas, Nevada; |
c) |
a technology group which is based in Innsbruck, Austria and manages software development, training, and administration; and |
d) |
a corporate group which is based in North America and maintains an executive suite in Las Vegas, Nevada and a Canadian office in Toronto, through which the Company carries-out corporate activities, handles day-to-day reporting and U.S. development planning, and through which various employees, independent contractors and vendors are engaged. |
8
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
2. Accounting Policies and Estimates
Basis of Presentation
The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2022. The balance sheet at December 31, 2021 has been derived from
the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements
and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as
filed with the U.S. Securities and Exchange Commission (“SEC”) on April 15, 2022.
All amounts
referred to in the Notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.
The Company previously had a secondary listing on
the NEO exchange in Canada, which was terminated on December 31, 2021. For the purposes of its previous listing in Canada, the Company
is an “SEC Issuer” as defined under National Instrument 52-107 “Accounting Principles and Audit Standards” and
is relying on the exemptions of Section 3.7 of NI 52-107 and of Section 1.4(8) of the Companion Policy to National Instrument 51-102 “Continuous
Disclosure Obligations” (“NI 51-102CP”) which permits the Company to prepare its financial statements in accordance
with U.S. GAAP.
Principles of consolidation
The unaudited condensed consolidated financial statements
include the financial statements of the Company and its subsidiaries, all of which are wholly owned. All significant inter-company accounts
and transactions have been eliminated in the unaudited condensed consolidated financial statements.
Foreign operations
The Company translated the assets and liabilities
of its foreign subsidiaries into U.S. Dollars at the exchange rate in effect at quarter end and the results of operations and cash flows
at the average rate throughout the quarter. The translation adjustments are recorded directly as a separate component of stockholders’
equity, while transaction gains (losses) are included in net income (loss).
All revenues
were generated in Euro, Colombian Peso and US Dollars during the periods presented.
Gains and losses
from foreign currency transactions are recognized in current operations.
Business Combinations
The Company allocates the fair value of purchase consideration
to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value
of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Such valuations require management to make significant
estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include,
but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant
perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Use of Estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ
from those estimates. These estimates and assumptions include valuing equity securities issued in share-based payment arrangements, determining
the fair value of assets acquired and liabilities assumed, allocation of purchase price, impairment of long-lived assets, the collectability
of receivables, leasing arrangements, contingent purchase consideration, contingencies and the value of deferred taxes and related valuation
allowances. Certain estimates, including evaluating the collectability of receivables and advances, could be affected by external conditions,
including those unique to the Company’s industry and general economic conditions. It is possible that these external factors could
have an effect on the Company’s estimates that could cause actual results to differ from the Company’s estimates. The Company
re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
9
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
2. Accounting Policies and Estimates (continued)
Loss Contingencies
The Company may be subject to claims, suits, government
investigations, and other proceedings involving competition and antitrust, intellectual property, gaming license, privacy, indirect taxes,
labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using
the Company’s website platforms, and other matters. Certain of these matters include speculative claims for substantial or indeterminate
amounts of damages. The Company records a liability when it believes that it is both probable that a loss has been incurred, and the amount
can be reasonably estimated. If the Company determines that a loss is possible, and a range of the loss can be reasonably estimated, it
discloses the range of the possible loss in the Notes to the unaudited condensed Consolidated Financial Statements.
The Company evaluates, on a regular basis, developments
in its legal matters that could affect the amount of liability that has been previously accrued, and the matters and related ranges of
possible losses disclosed and makes adjustments and changes to our disclosures as appropriate. Significant judgment is required to determine
both likelihood of there being and the estimated amount of a loss related to such matters. Until the final resolution of such matters,
there may be an exposure to loss in excess of the amount recorded, and such amounts could be material. Should any of the Company’s
estimates and assumptions change or prove to have been incorrect, it could have a material impact on its business, consolidated financial
position, results of operations, or cash flows.
To date, none of these types of litigation matters,
most of which are typically covered by insurance, has had a material impact on the Company’s operations or financial condition.
The Company has insured and continues to insure against most of these types of claims.
Fair Value Measurements
ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring
fair value. There are three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted)
in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are
observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no
market data exists, therefore using estimates and assumptions developed by us, which reflect those that a market participant would use.
The carrying value of the Company's accounts receivables,
gaming accounts receivable, lines of credit - bank, accounts payable, gaming accounts payable and bank loans payable approximate fair
value because of the short-term maturity of these financial instruments.
Derivative Financial Instruments
ASC 815 generally provides three criteria that, if
met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial
instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re- measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with
the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815.
ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
10
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
2. Accounting Policies and Estimates (continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
with maturities of three months or less at the time acquired to be cash equivalents. The Company had no cash equivalents as of June 30,
2022 and December 31, 2021, respectively.
The Company primarily places cash balances in the
USA with high-credit quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation
up to a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit of
CDN $100,000 per institution, in Italy which is insured by the Italian deposit guarantee fund Fondo Interbancario di Tutela dei Depositi
(FITD) up to a limit of €100,000 per institution, and in Germany which is a member of the Deposit Protection Fund of the Association
of German Banks (Einlagensicherungsfonds des Bundesverbandes deutscher Banken) up to a limit of €100,000 per institution.
Gaming Accounts Receivable
Gaming
accounts receivable represent gaming deposits made by customers to their online gaming accounts either directly by credit card, bank wire,
e-wallet or other accepted method through one of our websites or indirectly by cash collected at the cashier of a betting shop but not
yet credited to the Company’s bank accounts and subject to normal trade collection terms without discounts. The Company periodically
evaluates the collectability of its gaming accounts receivable and considers the need to record or adjust an allowance for doubtful accounts
based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates.
The Company does not require collateral to support customer receivables. The Company recorded no bad debt expense for the three and six
months ended June 30, 2022.
Gaming Accounts Payable
Gaming accounts payable represent customer balances,
including winnings and deposits, that are held as credits in online gaming accounts and have not as of yet been used or withdrawn by the
customers. Customers can request payment of winnings from the Company at any time and the payment to customers can be made through bank
wire, credit card, or cash disbursement from one of our locations. Online gaming account credit balances are non-interest bearing.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived
assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets when
events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the expected undiscounted future
cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged
to earnings.
Fair value is based upon discounted cash flows of
the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current
estimated net sales proceeds from pending offers.
Property
and Equipment
Property and
equipment is stated at acquisition cost less accumulated depreciation and adjustments for impairment losses. Expenditures are capitalized
only when they increase the future economic benefits embodied in an item of property and equipment. All other expenditures are recognized
as expenses in the statement of operations as incurred.
Depreciation
is charged on a straight-line basis over the estimated remaining useful lives of the individual assets. Amortization commences from the
time an asset is put into operation.
The range of
the estimated useful lives is as follows:
Plant and Equipment
Useful lives
Description |
|
Useful Life (in years) |
|
|
|
Leasehold improvements |
|
Life of the underlying lease |
Computer and office equipment |
|
3 |
to |
5 |
Furniture and fittings |
|
7 |
to |
10 |
Computer Software |
|
3 |
to |
5 |
Vehicles |
|
4 |
to |
5 |
11
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
2. Accounting Policies and Estimates (continued)
Intangible Assets
Intangible assets are stated at acquisition cost less
accumulated amortization, if applicable, less any adjustments for impairment losses.
Amortization is charged on a straight-line basis over
the estimated remaining useful lives of the individual intangibles. Where intangibles are deemed to be impaired the Company recognizes
an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.
The range of the estimated useful lives is as follows:
Intangible
Useful lives |
|
|
|
|
Description |
|
Useful Life
(in years) |
|
|
|
Betting Platform Software |
|
15 |
Ulisse Bookmaker License |
|
Indefinite |
Multigioco and Rifa ADM Licenses |
|
1.5 |
- |
7 |
Location contracts |
|
5 |
- |
7 |
Customer relationships |
|
10 |
- |
18 |
Trademarks/Tradenames |
|
10 |
- |
14 |
Websites |
|
5 |
Non-compete agreements |
|
4 |
Goodwill
The Company
allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill.
Such valuations
require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates
in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology,
and trade names from a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based
upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates.
The Company
annually assesses whether the carrying value of its reporting units exceed their fair values and, if necessary, records an impairment
loss equal to any such excess. Each interim reporting period, the Company assesses whether events or circumstances have occurred which
indicate that the carrying amount of the reporting units exceeds their fair value. If the carrying amount of the reporting units exceeds
their fair value, an asset impairment charge will be recognized in an amount equal to that excess.
Goodwill was
recently assessed on December 31, 2021 and as of June 30, 2022 there were no qualitative indications that impairment of intangible assets
or goodwill may be appropriate.
Leases
The Company accounts for leases in terms of ASC 842.
In terms of ASC 842, the Company assesses whether any asset based leases entered into for periods longer than twelve months meet the definition
of financial leases or operating leases, by evaluating the terms of the lease, including the following; the duration of the lease; the
implied interest rate in the lease; the cash flows of the lease; and whether the Company intends to retain ownership of the asset at the
end of the lease term. Leases which imply that the Company will retain ownership at the end of the lease term are classified as financial
leases, are included in plant and equipment with a corresponding financial liability raised at the date of lease inception. Interest incurred
on financial leases are expensed using the effective interest rate method. Leases which imply that the Company will not acquire the asset
at the end of the lease term are classified as operating leases, the Company’s right to use the asset is reflected as a non-current
right of use asset with a corresponding operational lease liability raised at the date of lease inception. The right of use asset and
the operational lease liability are amortized over the right of use period using the effective interest rate implied in the operating
lease agreement.
12
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
2. Accounting Policies and Estimates (continued)
Income Taxes
The Company uses the asset and liability method of
accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized
for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting
from matters that have been recognized in an entity's financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the
period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the
weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will
not be realized.
ASC Topic 740-10-30 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company has no material uncertain tax positions for any of the reporting periods presented.
In Italy, tax years beginning 2015 forward, are open
and subject to examination, while in Austria companies are open and subject to inspection for five years and ten years for inspection
of serious infractions. In the United States and Canada, tax years beginning 2015 forward, are subject to examination. The Company is
not currently under examination and it has not been notified of a pending examination.
Contingent Purchase Consideration
The Company
estimates and records the acquisition date estimated fair value of contingent consideration as part of the purchase price consideration
for acquisitions. At each reporting period, the Company estimates changes in the fair value of contingent consideration, and any change
in fair value is recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss). An increase in the earn-out
expected to be paid will result in a charge to operations in the year that the anticipated fair value of contingent consideration increases,
while a decrease in the earn-out expected to be paid will result in a credit to operations in the year that the anticipated fair value
of contingent consideration decreases. The estimate of the fair value of contingent consideration requires subjective assumptions to be
made regarding future operating results, discount rates, and probabilities assigned to various potential operating result scenarios. Future
revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore, materially
affect the Company’s future financial results. Additional information regarding contingent consideration is provided in Note 3.
Revenue Recognition
The Company recognizes revenue when control of its
products and services is transferred to its customers in an amount that reflects the consideration the Company expects to receive from
its customers in exchange for those products and services. Revenues from sports-betting, casino, cash and skill games, slots, bingo and
horse race wagers represent the gross pay-ins (also referred to as turnover) from customers less gaming taxes and payouts to customers.
Revenues are recorded when the game is closed which is representative of the point in time at which the Company has satisfied its performance
obligation. In addition, the Company receives commissions from the sale of scratch tickets and other lottery games. Commissions are recorded
when the ticket for scratch off tickets and lottery tickets are sold.
Revenues from the Betting Platform include software
licensing fees, training, installation, and product support services. The Company does not sell its proprietary software. Revenue is recognized
when transfer of control to the customer has been made and the Company’s performance obligation has been fulfilled.
|
· |
License fees are calculated as a percentage of each licensee’s level of activity and are contingent upon the licensee’s usage. The license fees are recognized on an accrual basis as earned. |
|
|
|
|
· |
Training fees and installation fees are recognized when each task has been completed. |
|
|
|
|
· |
Product support services are recognized based on the nature of the agreement with our customers, ad-hoc support service revenue will be recognized when the task is completed and revenue from product support service contracts will be recognized on a periodic basis where we charge a recurring fee to provide ongoing support services. |
13
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
2. Accounting Policies and Estimates (continued)
Stock-Based Compensation
The Company records its compensation expense associated
with stock options and other forms of equity compensation based on their fair value at the date of grant using the Black-Scholes option
pricing model. Stock-based compensation includes amortization related to stock option awards based on the estimated grant date fair value.
Stock-based compensation expense related to stock options is recognized ratably over the vesting period of the option. In addition, the
Company records expense related to Restricted Stock Units (“RSU’s”) granted based on the fair value of those awards
on the grant date. The fair value related to the RSUs is amortized to expense over the vesting term of those awards. Forfeitures of stock
options and RSUs are recognized as they occur.
Stock-based compensation expense for a stock-based
award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the
outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously
recognized compensation expense is reversed.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including
foreign currency translation adjustments.
Earnings Per Share
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 260, “Earnings Per Share” provides for calculation of “basic”
and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (loss)
available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution of securities that could share in the earnings of an entity and include options and warrants granted and convertible
debt, adding back any expenditure directly associated with the convertible instruments, if any. When the Company incurs a net loss, the
effect of the Company’s outstanding stock options and warrants and convertible debt are not included in the calculation of diluted
earnings (loss) per share as the effect would be anti-dilutive.
Related Parties
Parties are considered to be related to the Company
if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with
the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value
of the goods or services exchanged.
Recent Accounting Pronouncements
The FASB issued several updates during the period,
none of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material
impact on the consolidated financial statements upon adoption.
Reporting by segment
The Company has two operating segments from which
it derives revenue. These segments are:
(i) |
the operating of web based
as well as land-based leisure betting establishments situated throughout Italy and
recently added land-based operations in the U.S. and |
|
|
(ii) |
provider of certified betting Platform software services to global leisure betting establishments in Italy and 8 other countries. |
14
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
3. Acquisition of Subsidiaries
On July 5, 2021,
the Company entered into a Membership Purchase Agreement (the “Purchase Agreement”) to acquire 100% of Bookmakers Company
US LLC, a Nevada limited liability company doing business as U.S. Bookmaking (“USB”), from its members (the “Sellers”).
On July 15, 2021 the Company consummated the acquisition of USB and in terms of the Purchase Agreement the Company acquired 100% of USB,
from its members (the “Sellers”) and USB became a wholly owned subsidiary of the Company.
USB is a provider
of sports wagering services such as design and consulting, turn-key sports wagering solutions, and risk management.
Pursuant
to the terms of the Purchase Agreement, the consideration paid for all of the equity of USB was $6 million in cash plus the issuance
of 1,265,823 shares of the Company’s common stock with a market value of $4,544,304 on the date of acquisition.
The Sellers
will have an opportunity to receive up to an additional $38,000,000 (undiscounted) plus a potential undiscounted premium of 10%
(or $3,800,000) based upon achievement of stated adjusted cumulative EBITDA milestones during the next four years, payable 50%
in cash and 50% in the Company’s stock at a price equal to volume weighted average price of the company’s common stock
for the 90 consecutive trading days preceding January 1 of each subsequent fiscal year for the duration of the earnout period ending
December 31, 2025, subject to obtaining shareholder approval, if the aggregate number of shares to be issued pursuant to the Purchase
Agreement exceeds 4,401,020 and with a cap of 5,065,000 on the aggregate number of shares to be issued. Any excess not approved
by shareholders or exceeding the cap will be paid in cash. The fair value of the contingent purchase consideration of
$24,716,957 was estimated by applying the income approach, which uses significant assumptions (Level 3 assumptions) which are not
readily available in the market.
The goodwill of $27,024,383
arising at the time of acquisition consists largely of the reputation and knowledge of USB in the sports betting market in the
US markets which should facilitate the Company’s penetration into the U.S. market. All of the goodwill was assigned to the Betting
platform software and services segment.
None of the
goodwill is expected to be deducted for income tax purposes.
In terms of
the agreement, the purchase price was allocated to the fair market value of tangible and intangible assets acquired and liabilities assumed
as follows:
| |
Amount |
Consideration | |
| |
Cash | |
$ | 6,000,000 | |
1,265,823 shares of common stock at fair market value | |
| 4,544,304 | |
Contingent purchase consideration | |
| 24,716,957 | |
Total purchase consideration | |
$ | 35,261,261 | |
Recognized amounts of identifiable assets acquired and liabilities assumed | |
| | |
Cash | |
$ | 26,161 | |
Other current assets | |
| 151,284 | |
Property and equipment | |
| 788 | |
Other non-current assets | |
| 4,000 | |
Tradenames/Trademarks | |
| 1,419,000 | |
Customer relationships | |
| 7,275,000 | |
Non-compete agreements | |
| 2,096,000 | |
| |
$ | 10,972,233 | |
Less: liabilities assumed | |
| | |
Current liabilities assumed | |
$ | (264,135 | ) |
Non-current liabilities assumed | |
| (205,320 | ) |
Imputed Deferred taxation on identifiable intangible acquired | |
| (2,265,900 | ) |
| |
$ | (2,735,355 | ) |
Net identifiable assets acquired and liabilities assumed | |
| 8,236,878 | |
Goodwill | |
| 27,024,383 | |
| |
$ | 35,261,261 | |
15
ELYS GAME
TECHNOLOGY, CORP.
Notes to Unaudited
Condensed Consolidated Financial Statements
3. Acquisition
of Subsidiaries (continued)
The amount of
revenue and earnings included in the Company’s consolidated statement of operations and comprehensive income (loss) for the six months
ended June 30, 2022 and the revenue and earnings of the combined entity had the acquisition date been January 1, 2021.
|
|
Revenue |
|
Earnings |
|
|
|
|
|
|
|
|
|
Actual for the six months ended June 30, 2022 |
|
$ |
555,581 |
|
|
$ |
(735,291 |
) |
|
|
|
|
|
|
|
|
|
2021 Supplemental pro forma from January 1, 2021 to June 30, 2021 |
|
$ |
26,092,054 |
|
|
$ |
(4,380,937 |
) |
4. Restricted Cash
Restricted cash consists of cash
held in a segregated bank account at Intesa Sanpaolo Bank S.p.A. (“Intesa Sanpaolo Bank”) as collateral against the Company’s
operating line of credit with Intesa Sanpaolo Bank.
5. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June 30, 2022 | |
December 31, 2021 |
| |
Cost | |
Accumulated depreciation | |
Net book value | |
Net book value |
Leasehold improvements | |
$ | 57,347 | | |
$ | (36,094 | ) | |
$ | 21,253 | | |
$ | 27,260 | |
Computer and office equipment | |
| 1,028,017 | | |
| (768,735 | ) | |
| 259,282 | | |
| 223,214 | |
Fixtures and fittings | |
| 424,291 | | |
| (256,764 | ) | |
| 167,527 | | |
| 135,433 | |
Vehicles | |
| 91,770 | | |
| (60,061 | ) | |
| 31,709 | | |
| 44,837 | |
Computer software | |
| 221,098 | | |
| (133,734 | ) | |
| 87,364 | | |
| 59,335 | |
| |
$ | 1,822,523 | | |
$ | (1,255,388 | ) | |
$ | 567,135 | | |
$ | 490,079 | |
The aggregate depreciation charge to operations was
$111,156 and $108,470 for the six months ended June 30, 2022 and 2021, respectively. The depreciation policies followed by the Company
are described in Note 2.
6. Leases
Right of use assets included in the consolidated
balance sheet are as follows:
| |
June 30, 2022 | |
December 31, 2021 |
Non-current assets | |
| | | |
| | |
Right of use assets - operating leases, net of amortization | |
$ | 1,117,563 | | |
$ | 598,288 | |
Right of use assets - finance leases, net of depreciation – included in property and equipment | |
$ | 10,527 | | |
$ | 15,520 | |
Lease costs consists of the following:
|
|
|
|
|
|
|
|
|
| |
Six Months Ended June 30, |
| |
2022 | |
2021 |
Finance lease cost: | |
| | | |
| | |
Amortization of financial lease assets | |
$ | 3,920 | | |
$ | 5,970 | |
Interest expense on lease liabilities | |
| 257 | | |
| 454 | |
| |
| | | |
| | |
Operating lease cost | |
| 170,964 | | |
| 128,468 | |
| |
| | | |
| | |
Total lease cost | |
$ | 175,141 | | |
$ | 134,892 | |
16
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
6. Leases (continued)
Other lease information:
| |
Six Months Ended June 30, |
| |
2022 | |
2021 |
Cash paid for amounts included in the measurement of lease liabilities | |
| |
|
Operating cash flows from finance leases | |
$ | (257 | ) | |
$ | (454 | ) |
Operating cash flows from operating leases | |
| (170,964 | ) | |
| (128,468 | ) |
Financing cash flows from finance leases | |
$ | (4,038 | ) | |
$ | (5,994 | ) |
| |
| | | |
| | |
Weighted average remaining lease term – finance leases | |
| 1.47 years | | |
| 2.62 years | |
Weighted average remaining lease term – operating leases | |
| 4.30 years | | |
| 2.60 years | |
| |
| | | |
| | |
Weighted average discount rate – finance leases | |
| 3.73 | % | |
| 3.70 | % |
Weighted average discount rate – operating leases | |
| 2.72 | % | |
| 3.58 | % |
Maturity of Leases
Finance lease liability
The amount of future minimum lease payments under finance leases are as
follows:
Finance lease liability | |
|
Amount |
Remainder of 2022 | |
$ | 3,989 | |
2023 | |
| 6,488 | |
2024 | |
| 753 | |
Total undiscounted minimum future lease payments | |
| 11,230 | |
Imputed interest | |
| (316 | ) |
Total finance lease liability | |
$ | 10,914 | |
| |
| | |
Disclosed as: | |
| | |
Current portion | |
$ | 7,584 | |
Non-Current portion | |
| 3,330 | |
| |
$ | 10,914 | |
Operating lease liability
The amount of future minimum lease payments under
operating leases are as follows:
Operating lease liability | |
|
Amount |
Remainder of 2022 | |
$ | 165,030 | |
2023 | |
| 288,991 | |
2024 | |
| 218,147 | |
2025 | |
| 196,715 | |
2026 and thereafter | |
| 321,741 | |
Total undiscounted minimum future lease payments | |
| 1,190,624 | |
Imputed interest | |
| (64,236 | ) |
Total operating lease liability | |
$ | 1,126,388 | |
| |
| | |
Disclosed as: | |
| | |
Current portion | |
$ | 293,343 | |
Non-Current portion | |
| 833,045 | |
| |
$ | 1,126,388 | |
17
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
7. Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June 30, 2022 | |
December 31, 2021 |
| |
Cost | |
Accumulated amortization | |
Net book value | |
Net book value |
Betting platform software | |
$ | 6,149,537 | | |
$ | (1,608,626 | ) | |
$ | 4,540,911 | | |
$ | 4,745,895 | |
Licenses | |
| 957,420 | | |
| (955,065 | ) | |
| 2,355 | | |
| 3,413 | |
Location contracts | |
| 1,000,000 | | |
| (1,000,000 | ) | |
| — | | |
| — | |
Customer relationships | |
| 8,145,927 | | |
| (839,708 | ) | |
| 7,306,219 | | |
| 7,538,533 | |
Trademarks | |
| 1,537,111 | | |
| (198,938 | ) | |
| 1,338,173 | | |
| 1,413,887 | |
Non-compete agreements | |
| 2,096,000 | | |
| (502,167 | ) | |
| 1,593,833 | | |
| 1,855,833 | |
Websites | |
| 40,000 | | |
| (40,000 | ) | |
| — | | |
| — | |
| |
$ | 19,925,995 | | |
$ | (5,144,504 | ) | |
$ | 14,781,491 | | |
$ | 15,557,561 | |
The Company evaluates intangible
assets for impairment on an annual basis during the last month of each year and at an interim date if indications of impairment exist.
Intangible asset impairment is determined by comparing the fair value of the asset to its carrying amount with an impairment being recognized
only when the fair value is less than carrying value and the impairment is deemed to be permanent in nature.
The Company recorded $775,208
and $351,850 in amortization expense for finite-lived assets for the six months ended June 30, 2022 and 2021, respectively.
Licenses obtained by the
Company in the acquisitions of Multigioco and Rifa include a Gioco a Distanza (“GAD”) online license as well as a Bersani
and Monti land-based licenses issued by the Italian gaming regulator to Multigioco and Rifa, respectively as well as an Austrian Bookmaker
License through the acquisition of Ulisse, which has subsequently being impaired to $0.
The estimated amortization expense for all intangibles
over the next five year period is as follows:
Amortization Expense |
|
Amount |
|
|
|
|
|
Remainder of 2022 |
|
$ |
776,030 |
|
2023 |
|
|
1,549,490 |
|
2024 |
|
|
1,548,777 |
|
2025 |
|
|
1,308,610 |
|
2026 |
|
|
1,024,778 |
|
Total estimated amortization expense |
|
$ |
6,207,685 |
|
8. Goodwill
| |
June 30, 2022 | |
December 31, 2021 |
Opening balance | |
$ | 28,687,501 | | |
$ | 1,663,120 | |
Acquisition of Bookmakers company US LLC | |
| — | | |
| 27,024,383 | |
Foreign exchange movements | |
| (679 | ) | |
| (452 | ) |
| |
| 28,686,822 | | |
| 28,687,051 | |
Accumulated Impairment charge | |
| | | |
| | |
Opening Balance January 1 | |
| (12,522,714 | ) | |
| — | |
Impairment charge | |
| — | | |
| (12,522,714 | ) |
Closing Balance | |
| (12,522,714 | ) | |
| (12,522,714 | ) |
| |
| | | |
| | |
Goodwill net of impairment charge | |
$ | 16,164,108 | | |
$ | 16,164,337 | |
Goodwill represents
the excess purchase price paid over the fair value of assets acquired, including any other identifiable intangible assets.
The Company
evaluates goodwill for impairment on an annual basis during the last month of each year and at an interim date if indications of impairment
exist. Goodwill impairment is determined by comparing the fair value of the asset to its carrying amount with an impairment being recognized
only when the fair value is less than carrying value.
18
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
9. Marketable Securities
Investments in marketable securities consists of 2,500,000
shares of Zoompass Holdings (“Zoompass”) and is accounted for at fair value, with changes recognized into earnings.
The shares of Zoompass were last quoted on the OTC
market at $0.04 per share on June 30, 2022, resulting in an unrealized gain recorded to earnings related to these securities of $92,500
for the six months ended June 30, 2022.
10. Bank Loan Payable
In September 2016, the Company obtained a loan
of €500,000 (approximately $545,000) from Intesa Sanpaolo Bank in Italy, which loan is secured by the Company's assets. The
loan had an underlying interest rate of 4.5% above the Euro Inter Bank Offered Rate, subject to quarterly review and was amortized
over 57 months initially expected to end on March 31, 2021. Monthly repayments of €9,760 began in January 2017.
In terms of a directive by the Italian Government,
in order to provide financial relief due to the COVID-19 pandemic, Multigioco remained able to suspend repayments of the loan for a period
of six months and the maturity date of the loan was extended to March 31, 2022, the interest rate remained the same at 4.5% above the
Euro Inter Bank Offered Rate with monthly repayments revised to $9,971.
The Company made payments of €29,913 (approximately
$34,159)
which included principal of €29,059 (approximately
$33,184)
and interest of €854 approximately
$975) for the three months ended March 31, 2022, thereby extinguishing the loan.
Included in bank loans is a Small
Business Administration Disaster Relief loan (“SBA Loan”) assumed on the acquisition of USB with a principal outstanding of
$150,000. The SBA Loan bears interest at 3.75% per annum and is repayable in monthly installments of $731 which began
in June 2021, and matures in May 2050. The SBA Loan is collateralized by all of USB’s tangible and intangible assets.
Since
acquisition of USB, the Company has repaid principal of $1,389 and has total accrued and unpaid interest of $5,409 on this
loan as of June 30, 2022.
The maturity of bank loans payable
as of June 30, 2022 is as follows:
| |
Amount |
Within 1 year | |
$ | 3,093 | |
1 to 2 years | |
| 3,211 | |
2 to 3 years | |
| 3,333 | |
3 to 4 years | |
| 3,461 | |
5 years and thereafter | |
| 139,754 | |
Total | |
$ | 152,852 | |
Disclosed as: | |
| | |
Current portion | |
$ | 3,093 | |
Non-Current portion | |
| 149,759 | |
| |
$ | 152,852 | |
11. Contingent
Purchase Consideration
In terms of
the acquisition of USB disclosed in Note 3 above, the Sellers will have an opportunity to receive up to an additional $38,000,000 plus
a potential premium of 10% (or $3,800,000) based upon achievement of stated adjusted cumulative EBITDA milestones during the next four
years, payable 50% in cash and 50% in the Company’s stock at a price equal to volume weighted average price of the company’s
common stock for the 90 consecutive trading days preceding January 1 of each subsequent fiscal year for the duration of the earnout period
ending December 31, 2025, subject to obtaining shareholder approval, if the aggregate number of shares to be issued pursuant to the Purchase
Agreement exceeds 4,401,020 and with a cap of 5,065,000 on the aggregate number of shares to be issued. Any excess not approved by shareholders
or exceeding the cap will be paid in cash.
The Company
had an independent third party valuation entity perform a Purchase Price Analysis which included the probability of the Sellers achieving
the additional proceeds of $41,800,000.
19
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
11. Contingent
Purchase Consideration (continued)
At
each reporting period, the Company estimates changes in the fair value of contingent consideration, and any change in fair value is recognized
in the Consolidated Statements of Operations and Comprehensive Income (Loss). The estimate of the fair value of contingent consideration
requires subjective assumptions to be made regarding future operating results, discount rates, and probabilities assigned to various potential
operating result scenarios. Due to the uncertainty regarding the achievement of the stated unadjusted accumulated EBITDA milestones and
the methodology in determining the number of shares to be issued during each earnout period and the potential restriction on the number
of shares available for issue, the contingent purchase consideration is classified as a liability.
| |
June 30, 2022 | |
December 31, 2021 |
Opening balance | |
$ | 12,859,399 | | |
$ | — | |
Contingent purchase consideration measured on the acquisition of USB | |
| — | | |
| 24,716,957 | |
Changes in fair value | |
| 915,774 | | |
| (11,857,558 | ) |
Closing balance | |
$ | 13,775,173 | | |
$ | 12,859,399 | |
12. Other
Long-term Liabilities
Other long-term
liabilities represent the Italian “Trattamento di Fine Rapporto” which is a severance amount set up by Italian companies to
be paid to employees on termination or retirement.
Balances of
other long-term liabilities were as follows:
| |
June 30, 2022 | |
December 31, 2021 |
Severance liability | |
$ | 371,242 | | |
$ | 359,567 | |
| |
| | | |
| | |
13. Related Parties
Related Party (Payables) Receivables
Related party payables and receivables represent non-interest-bearing (payables) receivables that are due on demand.
The balances
outstanding are as follows:
Related Party Receivables |
| |
June 30, 2022 | |
December 31, 2021 |
|
Related Party payables | |
| | | |
| | |
Related Party payables |
Luca Pasquini | |
$ | (173 | ) | |
$ | (502 | ) |
Related Party payables |
Victor Salerno | |
| (321,144 | ) | |
| (51,878 | ) |
Related Party payables |
| |
$ | (321,317 | ) | |
$ | (52,380 | ) |
|
| |
| | | |
| | |
|
Related Party Receivables | |
| | | |
| | |
Related Party Receivables |
Luca Pasquini | |
$ | — | | |
$ | 1,413 | |
Luca
Pasquini
On January 31, 2019, the
Company acquired Virtual Generation for €4,000,000 (approximately $4,576,352), Mr. Pasquini, who at the time of acquisition was an executive officer and director
of the Corporation, was a 20% owner of Virtual Generation and was due gross proceeds of €800,000
(approximately $915,270). The gross proceeds of €800,000 was to be settled by a payment in cash of €500,000 over a twelve month
period and by the issuance of common stock valued at €300,000 over an eighteen month period. As of June 30, 2021, the Company has
paid Mr. Pasquini the full cash amount of €500,000 (approximately $604,380) and issued 112,521 shares valued at €300,000
(approximately $334,791).
On January 22, 2021, the
Company issued Mr. Pasquini 44,968 shares of common stock valued at $257,217, in settlement of accrued compensation due to him.
On July 11, 2021, the
Company entered into an agreement with Engage IT Services Srl.("Engage"), to provide gaming software and maintenance and
support of the system, the total contract price was €390,000 (approximately $459,572),
in addition, on October 14, 2021, the Company entered into a further agreement with Engage, to provide gaming software and
maintenance and support of the system for a period of 12 months, the total contract price was €1,980,000 (approximately $2,192,000).
Mr. Pasquini owns 34%
of Engage
On September 13,
2021, Mr. Pasquini, the Company’s Vice President of Technology, resigned as a director of the Company and on October 4,
2021, Mr. Pasquini became the Global Head of Engineering of the Company’s
subsidiary Odissea Betriebsinformatik Beratung GmbH and ceased to be Vice President of Technology and an executive
officer of the Company.
20
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
13. Related
Parties (continued)
Michele
Ciavarella
Mr. Ciavarella, the Company’s Executive Chairman of the Board, agreed to receive $140,000 of
his 2021 fiscal year compensation as a restricted stock award, on January 22, 2021, the Company issued Mr. Ciavarella 24,476 shares
of common stock valued at $140,000 on the date of issue.
On January 22, 2021,
the Company issued Mr. Ciavarella 175,396 shares of common stock valued at $1,003,265, in settlement of accrued compensation
due to him.
On July 15,
2021, Mr. Ciavarella, Executive Chairman of the Company, was appointed as the interim Chief Executive Officer and President of the
Company, effective July 15, 2021. Mr. Ciavarella will serve as the Company's Executive Chairman and interim Chief Executive Officer until
the earlier of his resignation or removal from office.
Mr. Ciavarella
agreed to receive his 2021 bonus and a portion of his 2022 salary as a restricted stock award. On January 7, 2022, the Company issued
Mr. Ciavarella 162,835 shares of common stock valued at $425,000 on the date of issue.
Carlo
Reali
On January 5, 2022, the Company
promoted Carlo Reali to the role of Interim Chief Financial Officer.
On March 29, 2022, the Company
issued Mr. Reali ten-year options exercisable for 100,000 shares of common stock, at an exercise price of $2.50 per share, vesting equally
over a 4 year period commencing on January 1, 2023.
The Company does not have a formal employment or other compensation
related agreement with Mr. Reali; however, Mr. Reali will continue to receive the same compensation that he currently receives which is
an annual base salary of €76,631 (approximately $83,847).
Victor
Salerno
On July
15, 2021 the Company consummated the acquisition of USB and in terms of the Purchase Agreement the Company acquired 100% of USB,
from its members (the “Sellers”). Mr. Salerno was a 68% owner of USB and received $4,080,000 of the $6,000,000 paid
in cash upon closing and 860,760 of the 1,265,823 shares of common stock issued on closing.
Together
with the consummation of the acquisition of USB, the Company entered into a 4 year employment agreement with Mr. Salerno terminating on
July 14, 2025 (the “Salerno Employment Agreement”), automatically renewable for a period of one year unless notified by either
party of non-renewal. The employee will earn an initial base salary of $0 and thereafter $150,000 per annum commencing on January
1, 2022. Mr. Salerno is entitled to bonuses, equity incentives and benefits consistent with those of other senior employees.
Mr.
Salerno may be terminated for no cause or resign for good reason, which termination would entitle him to the greater of one year’s
salary or the remaining term of the employment agreement plus the highest annual incentive bonus paid to him during the past two years.
If Mr. Salerno is terminated for cause he is entitled to all unpaid salary and expenses due to him at the time of termination. If the
employment agreement is terminated due to death, his heirs and successors are entitled to all unpaid salary, unpaid expenses and one times
his annual base salary. Termination due to disability will result in Mr. Salerno being paid all unpaid salary and expenses and one times
annual salary.
Pursuant
to the Salerno Employment Agreement, Mr. Salerno has also agreed to customary restrictions with respect to the disclosure and use of the
Company’s confidential information and has agreed that work product or inventions developed or conceived by him while employed with
the Company relating to its business is the Company’s property. In addition, during the term of his employment and if terminated
for cause for the 12 month period following his termination of employment, Mr. Salerno has agreed not to (1) perform services on behalf
of a competing business which was the same or similar to the type of services he was authorized, conducted, offered or provided to the
Company, (2) solicit or induce any of the Company’s employees or independent contractors to terminate their employment with the
Company, (3) solicit any actual or prospective customers with whom he had material contact on behalf of a competing business or (4) solicit
any actual or prospective vendors with whom he had material contact to support a competing business.
On September 13, 2021, the
Board appointed Mr. Salerno, the President and founder of the Company’s newly acquired subsidiary, USB, to serve as a member of
the Board.
21
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
13. Related
Parties (continued)
Victor
Salerno (continued)
Prior to the acquisition
of USB, Mr. Salerno had advanced USB $100,000 of which $50,000 was forgiven and the remaining $50,000 is still owing to Mr. Salerno, which
amount earns interest at 8% per annum, compounded monthly and is repayable on December 31, 2023.
Between February 23,
2022 and May 18, 2022, Mr. Salerno advanced USB a total of $260,000 in terms of purported promissory notes, bearing interest at 10%
per annum and repayable on June 30, 2022. These purported promissory notes contain a default clause whereby any unpaid principal
would attract an additional 25% penalty. These notes were advanced to USB without the consent of the Company, which is required as
per the terms of the Members Interest Purchase Agreement entered into on July 15, 2021. Therefore the Company acknowledges the
advance of funds to USB by Mr. Salerno, however the terms of the advance and the default penalty have not
been accepted and are subject to negotiation or dispute.
Paul
Sallwasser
On
September 13, 2021, the Company granted Mr. Sallwasser ten year options exercisable for 21,300 shares of common stock at an
exercise price of $5.10, vesting equally over a twelve month period commencing on September 13, 2021.
Steven
Shallcross
On
January 22, 2021, the Company issued to Mr. Shallcross, a director of the Company, 5,245 shares of common stock valued at $30,000,
in settlement of directors’ fees due to him.
On
September 13, 2021, the Company granted Mr. Shallcross ten year options exercisable for 13,600 shares of common stock at an
exercise price of $5.10, vesting equally over a twelve month period commencing on September 13, 2021.
Andrea
Mandel-Mantello
On
June 29, 2021, the board of directors of the Company appointed Mr. Mandel-Mantello to serve as a member of the Board. The appointment
was effective immediately. Mr. Mandel-Mantello serves on the audit committee of the Board.
On
September 13, 2021, the Company granted Mr. Mandel-Mantello ten year options exercisable for 13,600 shares of common stock at
an exercise price of $5.10, vesting equally over a twelve month period commencing on September 13, 2021.
14. Stockholders’
Equity
For the six
months ended June 30, 2022, the Company issued a total of 162,835 shares of common stock, valued at $425,000 for the settlement
of compensation and directors’ fees to the Company’s executive chairman, refer note 13 above.
Between March
28, 2022 and April 13, 2022, the Company sold 168,016 shares of common stock for gross proceeds of $387,053, less brokerage
fees of $11,612 pursuant to the Open Market Sales AgreementSM that the Company entered into with Jefferies LLC on
November 19, 2021.
On
June 10, 2022, the Company entered into an engagement letter (the “Engagement Letter”), with H.C. Wainwright & Co., LLC
(the “Placement Agent”), pursuant to which the Placement Agent agreed to serve as the exclusive placement agent for the Company,
on a reasonable best efforts basis, in connection with an offering of securities (the “Offering”). The Company agreed to pay
the Placement Agent an aggregate cash fee equal to 6.0% of the gross proceeds received in the Offering. The Company also agreed to pay
the Placement Agent $50,000 for fees and expenses of legal counsel and up to $15,950 for clearing fees.
On
June 13, 2022, the Company, entered into a securities purchase agreement (the “Purchase Agreement”) with an institutional
investor (the “Investor”) providing for the issuance of (i) 2,625,000 shares of the Company’s common stock, (ii) pre-funded
warrants to purchase up to 541,227 shares of Common Stock with an exercise price of $0.0001 per share, which Pre-Funded Warrants were
issued in lieu of shares of Common Stock to ensure that the Investor does not exceed certain beneficial ownership limitations, and
(iii) warrants to purchase an aggregate of up to 3,166,227 shares of Common Stock, with an exercise price of $0.9475 per share, subject
to customary adjustments thereunder. If after the six month anniversary of the issuance date there is no effective registration statement
registering the shares underlying the Warrants (the “Warrant Shares”) for resale, then the Warrants are exercisable on a cashless
basis.
22
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
14. Stockholders’
Equity (continued)
The
shares of Common Stock, the Pre-Funded Warrants, the Pre-Funded Warrant Shares and the Warrants are collectively referred
to as the “Securities.” Pursuant to the Purchase Agreement, the Investor agreed to purchase the Securities for an aggregate
purchase price of $3 million.
Pursuant to the Purchase
Agreement, on June 15, 2022, an aggregate of 2,625,000 Shares and Pre-Funded Warrants to purchase 541,227 shares of Common Stock were
issued to an Investor in a registered direct offering (the “Registered Offering”) and registered under the Securities Act
of 1933, as amended (the “Securities Act”), pursuant to a prospectus supplement to the Company’s currently effective
registration statement on Form S-3 (File No. 333-256815), which was initially filed with the U.S. Securities and Exchange Commission (the
“SEC”) on June 4, 2021, and was declared effective on June 14, 2021. The Company filed the prospectus supplement for the Registered
Offering on June 15, 2022.
Pursuant to the Purchase
Agreement, the Company issued a Warrant exercisable for 3,166,227 shares of common stock, exercisable at $0.9475 per share and expire
on December 15, 2027, to the Investor in a concurrent private placement pursuant to an exemption from the registration requirements of
the Securities Act provided in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.
The Company has agreed to
file a registration statement (the “Registration Statement”) to register the resale of the Warrant Shares within 90 days of
the date of the Purchase Agreement and to use its commercially reasonable efforts to obtain effectiveness of the Registration Statement
within 180 days following the closing of the Offering.
15. Warrants
In
terms of the Purchase Agreement discussed in note 14 above, on June 15, 2022, the Company issued, (i) Pre-Funded Warrants
to purchase 541,227 shares of Common Stock with an exercise price of $0.0001 per share, which Pre-Funded Warrants were issued in lieu
of shares of Common Stock to ensure that the Investor did not exceed certain beneficial ownership limitations, and
(ii) Warrants to purchase 3,166,227 shares of Common Stock, with an exercise price of $0.9475 per share, subject to customary adjustments
thereunder. If after the six month anniversary of the issuance date there is no effective registration statement registering the Warrant
Shares for resale, then the Warrants are exercisable on a cashless basis.
Each Pre-Funded Warrant is
exercisable for one share of Common Stock at an exercise price of $0.0001 per share. The Pre-Funded Warrants are immediately exercisable
and may be exercised at any time after their original issuance until all of the Pre-Funded Warrants are exercised in full.
Each Warrant is exercisable
for one share of Common Stock at an exercise price of $0.9475 per share, subject to customary adjustments thereunder. The Warrants have
a term of five years and six months, maturing on December 15, 2027 and are exercisable from
December 15, 2022.
A holder (together with its
affiliates) of the Pre-Funded Warrant or Warrant may not exercise any portion of the Common Stock underlying the Pre-Funded Warrant or
Warrant, as applicable, to the extent that the holder would own more than 4.99% (or, at the holder’s option upon issuance, 9.99%)
of the Company’s outstanding Common Stock immediately after exercise, as such percentage ownership is determined in accordance with
the terms of the Pre-Funded Warrant or Warrant, as applicable. In lieu of making the cash payment otherwise contemplated to be made to
the Company upon exercise of a Pre-Funded Warrant or Warrant in payment of the aggregate exercise price, the holder may elect instead
to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula
set forth in Warrants, provided that such cashless exercise shall only be permitted if the Registration Statement is not effective at
the time of such exercise or if the prospectus to which the Registration Statement is a part is not available for the issuance of shares
of Common Stock to the Warrant holder.
In addition, in certain circumstances,
upon a Fundamental Transaction, the holders of the Pre-Funded Warrants and Warrants will have the right to receive as alternative consideration,
for each share of Common Stock that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental
Transaction, the number of shares of Common Stock of the successor or acquiring corporation of the Company, if it is the surviving corporation,
and any additional consideration receivable upon or as a result of such transaction by a holder of the number of shares of Common Stock
for which the Pre-Funded Warrants or Warrants are exercisable immediately prior to such event. Notwithstanding the foregoing, in the event
of a Fundamental Transaction, the holders of the Warrants have the right to require the Company or a successor entity to redeem the Warrants
for an amount of consideration equal to the Black Scholes Value (as defined in the Warrants) of the remaining unexercised portion of the
Warrants concurrently with or within thirty (30) days following the consummation of a Fundamental Transaction. In the event of a Fundamental
Transaction, the holders of the Warrants will only be entitled to receive from the Company or its successor entity, as of the date of
consummation of such Fundamental Transaction the same type or form of consideration (and in the same proportion), at the Black Scholes
Value of the unexercised portion of the Warrant, that is being offered and paid to the holders of the Common Stock in connection with
the Fundamental Transaction, whether that consideration is in the form of cash, stock or any combination of cash and stock, or whether
the holders of Common Stock are given the choice to receive alternative forms of consideration in connection with the Fundamental Transaction.
23
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
15. Warrants (continued)
A summary of all of the Company’s warrant activity
during the period January 1, 2021 to June 30, 2022 is as follows:
Warrants |
|
Number of shares |
|
Exercise price per share |
|
Weighted average exercise price |
Warrants: Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants: Exercise price per share |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants: Weighted average exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2021 |
|
|
2,053,145 |
|
|
$ |
2.50 |
to |
5.00 |
|
|
$ |
2.63 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeited/cancelled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(1,506,809 |
) |
|
|
2.50 |
to |
3.75 |
|
|
|
2.63 |
|
Outstanding December 31, 2021 |
|
|
546,336 |
|
|
$ |
2.50 |
to |
5.00 |
|
|
$ |
2.66 |
|
Granted – pre-funded warrants* |
|
|
541,227 |
|
|
|
0.0001 |
|
|
|
0.0001 |
|
Granted |
|
|
3,166,227 |
|
|
|
0.9475 |
|
|
|
0.9475 |
|
Forfeited/cancelled |
|
|
(48,395 |
) |
|
|
3.75 |
|
|
|
3.75 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
Outstanding June 30, 2022 |
|
|
4,205,395 |
|
|
$ |
0.0001 |
to |
5.00 |
|
|
$ |
1.17 |
|
* The prefunded warrants have an indefinite maturity
date and have been excluded from the calculation of the weighted average remaining years and the weighted average exercise price disclosed
below.
The following tables summarize information about the
pre-funded warrants outstanding as of June 30, 2022:
|
|
Warrants outstanding |
|
Warrants exercisable |
Exercise price |
|
|
Number of shares |
|
|
|
Weighted average remaining years |
|
|
|
Weighted average exercise price |
|
|
|
Number of shares |
|
|
|
Weighted average exercise price |
|
$0.0001 |
|
|
541,227 |
|
|
|
Indefinite |
|
|
$ |
0.0001 |
|
|
|
541,227 |
|
|
$ |
0.0001 |
|
The following tables summarize information about warrants,
other than pre-funded warrants outstanding as of June 30, 2022:
Warrants outstanding, Exercise Price |
|
|
|
Warrants outstanding |
|
Warrants exercisable |
Exercise price |
|
|
Number of shares |
|
|
|
Weighted average remaining years |
|
|
|
Weighted average exercise price |
|
|
|
Number of shares |
|
|
|
Weighted average exercise price |
|
$0.9475 |
|
|
3,166,227 |
|
|
|
5.46 |
|
|
$ |
0.9475 |
|
|
|
— |
|
|
$ |
— |
|
$2.50 |
|
|
486,173 |
|
|
|
3.14 |
|
|
$ |
2.50 |
|
|
|
486,173 |
|
|
$ |
2.50 |
|
$5.00 |
|
|
11,768 |
|
|
|
0.92 |
|
|
|
5.00 |
|
|
|
11,768 |
|
|
|
5.00 |
|
|
|
|
3,664,168 |
|
|
|
5.14 |
|
|
$ |
1.17 |
|
|
|
497,941 |
|
|
$ |
2.56 |
|
16. Stock Options
In September 2018, the Company’s stockholders approved our 2018 Equity Incentive Plan, which provides for a maximum of 1,150,000 awards
that can be issued as options, stock appreciation rights, restricted stock, stock units, other equity awards or cash awards.
On
October 1, 2020, the Board approved an amendment to the Company’s 2018 Equity Incentive Plan (the “Plan”) to increase
the maximum number of shares that may be granted as an award under the Plan to any non-employee director during any one calendar year
to: (i) chairperson or lead director – 300,000 shares of common stock; and (ii) other non-employee director - 250,000 shares
of common stock, which reflects an increase in the annual limits for awards to be granted to non-employee directors under the Plan.
On November
20, 2020, the Company held its 2020 Annual Meeting of Stockholders. At the 2020 Annual Meeting, the Company’s stockholders approved
an amendment to the Company’s 2018 Equity Incentive Plan to increase the number of shares of common stock that the Company will
have authority to grant under the plan by an additional 1,850,000 shares of common stock. On December 8, 2021, the Company held
its 2021 Annual Meeting of Stockholders. At the 2021 Annual Meeting, the Company’s stockholders approved an amendment to the Company’s
2018 Equity Incentive Plan to increase the number of shares of common stock that the Company will have authority to grant under the plan
by an additional 4,000,000 shares of common stock
During
the period ended June 30, 2022, the Company issued ten year options to purchase 160,000 shares at an exercise price of $2.50 per
share, of which 100,000 were issued to our Interim CFO and 60,000 to an employee.
24
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
16. Stock Options (continued)
The
options awarded during the six months ended June 30, 2022 were valued at $2.317 per share at the date of issuance using a Black-Scholes
option pricing model.
The
following assumptions were used in the Black-Scholes model:
| |
Six months ended June 30, 2022 |
Exercise price | |
$ | 2.50 | |
Risk free interest rate | |
| 2.41 | % |
Expected life of options | |
| 10 years | |
Expected volatility of underlying stock | |
| 204.2 | % |
Expected dividend rate | |
| 0 | % |
A summary of
all of the Company’s option activity during the period January 1, 2021 to June 30, 2022 is as follows:
Stock Option Activity |
|
Number of shares |
|
Exercise price per share |
|
Weighted average exercise price |
Stock Option Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2021 |
|
|
1,622,938 |
|
|
$ |
1.84 |
to |
2.96 |
|
|
$ |
2.11 |
|
Granted |
|
|
1,193,500 |
|
|
|
2.62 |
to |
5.10 |
|
|
|
3.15 |
|
Forfeited/cancelled |
|
|
(50,000 |
) |
|
|
2.62 |
|
|
|
2.62 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding December 31, 2021 |
|
|
2,766,438 |
|
|
$ |
1.84 |
to |
5.10 |
|
|
$ |
2.92 |
|
Granted |
|
|
160,000 |
|
|
|
2.50 |
|
|
|
2.50 |
|
Forfeited/cancelled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding June 30, 2022 |
|
|
2,926,438 |
|
|
$ |
1.84 |
to |
5.10 |
|
|
$ |
2.90 |
|
The following
tables summarize information about stock options outstanding as of June 30, 2022:
Stock Options Outstanding |
|
|
Options outstanding |
|
Options exercisable |
Exercise price |
|
|
Number of shares |
|
|
|
Weighted average remaining years |
|
|
|
Weighted average exercise price |
|
|
|
Number of shares |
|
|
|
Weighted average exercise price |
|
$1.84 |
|
|
648,000 |
|
|
|
0.08 |
|
|
|
|
|
|
|
648,000 |
|
|
|
|
|
$2.03 |
|
|
659,000 |
|
|
|
8.26 |
|
|
|
|
|
|
|
444,833 |
|
|
|
|
|
$2.50 |
|
|
160,000 |
|
|
|
9.75 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
$2.72 |
|
|
25,000 |
|
|
|
4.01 |
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
$2.80 |
|
|
220,625 |
|
|
|
7.23 |
|
|
|
|
|
|
|
151,862 |
|
|
|
|
|
$2.96 |
|
|
70,313 |
|
|
|
7.02 |
|
|
|
|
|
|
|
70,313 |
|
|
|
|
|
$3.43 |
|
|
25,000 |
|
|
|
9.47 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
$4.03 |
|
|
1,020,000 |
|
|
|
9.01 |
|
|
|
|
|
|
|
206,667 |
|
|
|
|
|
$4.07 |
|
|
25,000 |
|
|
|
9.05 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
$4.20 |
|
|
25,000 |
|
|
|
8.84 |
|
|
|
|
|
|
|
9,000 |
|
|
|
|
|
$5.10 |
|
|
48,500 |
|
|
|
9.21 |
|
|
|
|
|
|
|
36,375 |
|
|
|
|
|
|
|
|
2,926,438 |
|
|
|
6.69 |
|
|
$ |
2.90 |
|
|
|
1,592,050 |
|
|
$ |
2.42 |
|
As of June 30,
2022, there were unvested options to purchase 1,334,388 shares of common stock. Total expected unrecognized compensation cost
related to such unvested options is $4,062,658 which is expected to be recognized over a period of 45 months.
As of June 30,
2022, there was an aggregate of 2,926,438 options to purchase shares of common stock granted under the Company’s 2018
Equity Incentive Plan, and an aggregate of 655,301 restricted shares granted to certain officers and directors of the Company
in settlement of liabilities owing to them, with 3,418,261 shares available for future grants.
25
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
17. Revenues
The following table represents disaggregated revenues from our gaming operations for the three and six months ended June 30, 2022 and
2021. Net Gaming Revenues represents Turnover (also referred to as “Handle”), the total bets processed for the period, less
customer winnings paid out, and taxes due to government authorities, while Service Revenues is revenue invoiced for our Elys software
service and royalties invoiced for the sale of virtual products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Three Months Ended | |
Six Months Ended |
| |
June 30, 2022 | |
June 30,
2021 | |
June 30, 2022 | |
June 30,
2021 |
Turnover | |
| |
| |
| |
|
Web-based | |
$ | 186,441,824 | | |
$ | 219,874,610 | | |
$ | 402,222,106 | | |
$ | 451,206,769 | |
Land-based | |
| 1,818,081 | | |
| 218,129 | | |
| 3,603,188 | | |
| 12,043,959 | |
Total Turnover | |
| 188,259,905 | | |
| 220,092,739 | | |
| 405,825,294 | | |
| 463,250,728 | |
| |
| | | |
| | | |
| | | |
| | |
Winnings/Payouts | |
| | | |
| | | |
| | | |
| | |
Web-based | |
| 173,924,052 | | |
| 205,048,852 | | |
| 374,777,873 | | |
| 420,647,267 | |
Land-based | |
| 1,557,874 | | |
| 166,369 | | |
| 2,958,287 | | |
| 10,331,307 | |
Total Winnings/payouts | |
| 175,481,926 | | |
| 205,215,221 | | |
| 377,736,160 | | |
| 430,978,574 | |
| |
| | | |
| | | |
| | | |
| | |
Gross Gaming Revenues | |
| | | |
| | | |
| | | |
| | |
Web-Based | |
| 12,517,772 | | |
| 14,825,758 | | |
| 27,444,233 | | |
| 30,559,502 | |
Land-Based | |
| 260,207 | | |
| 51,760 | | |
| 644,901 | | |
| 1,712,652 | |
Gross Gaming Revenues | |
| 12,777,979 | | |
| 14,877,518 | | |
| 28,089,134 | | |
| 32,272,154 | |
| |
| | | |
| | | |
| | | |
| | |
Less: Gaming Taxes | |
| 3,117,380 | | |
| 3,285,273 | | |
| 6,848,210 | | |
| 6,614,311 | |
Net Gaming Revenues | |
| 9,660,599 | | |
| 11,592,245 | | |
| 21,240,924 | | |
| 25,657,843 | |
| |
| | | |
| | | |
| | | |
| | |
Betting platform and services | |
| 687,136 | | |
| 97,704 | | |
| 1,342,797 | | |
| 189,434 | |
Revenue | |
$ | 10,347,735 | | |
$ | 11,689,949 | | |
$ | 22,583,721 | | |
$ | 25,847,277 | |
18. Net loss per Common Share
Basic income
(loss) per share is based on the weighted-average number of common shares outstanding during each period. Diluted income (loss) per share
is based on basic shares as determined above, plus the incremental shares that would be issued upon the assumed exercise of “in-the-money”
options and warrants using the treasury stock method and the inclusion of all convertible securities, including convertible debentures,
assuming these securities were converted at the beginning of the period or at the time of issuance, if later, adding back any direct incremental
expenses related to the convertible securities, including interest expense, present value discount amortization. The computation of diluted
net income (loss) per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share.
The computation
of the diluted income per share for the three and six months ended June 30, 2022 and 2021 was anti-dilutive due to the losses realized.
For the three
and six months ended June 30, 2022 and 2021, the following options and warrants were excluded from the computation of diluted loss per
share as the result of the computation was anti-dilutive:
|
|
|
|
|
|
|
|
Description |
Three and Six Months ended June 30, 2022 |
|
Three and Six Months ended June 31, 2021 |
Options |
|
2,926,438 |
|
|
|
1,697,938 |
|
Warrants |
|
4,205,395 |
|
|
|
562,336 |
|
|
|
7,131,833 |
|
|
|
2,260,274 |
|
26
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
19. Segmental Reporting
The Company
has two reportable operating segments. These segments are:
(i) |
Betting establishments |
The
operating of web based as well as land based leisure betting establishments situated throughout Italy; and only web based distribution
throughout Italy, and
(ii) |
Betting platform software and services |
Provider
of certified betting Platform software services to global leisure betting establishments in Italy, the U.S. and 8 other countries.
The operating
assets and liabilities of the reportable segments are as follows:
Segment
Reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June 30, 2022 |
| |
Betting establishments | |
Betting platform software and services | |
All other | |
Total |
Purchase of non-current assets | |
$ | 157,296 | | |
$ | 66,208 | | |
$ | 5,571 | | |
$ | 229,075 | |
Assets | |
| | | |
| | | |
| | | |
| | |
Current assets | |
| 5,694,098 | | |
| 2,286,286 | | |
| 1,834,260 | | |
| 9,814,644 | |
Non-current assets | |
| 2,524,416 | | |
| 30,455,689 | | |
| 105,835 | | |
| 33,085,940 | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Current liabilities | |
| (5,289,319 | ) | |
| (1,536,891 | ) | |
| (1,498,586 | ) | |
| (8,324,796 | ) |
Non-current liabilities | |
| (1,197,653 | ) | |
| (17,067,797 | ) | |
| — | | |
| (18,265,450 | ) |
Intercompany balances | |
| 5,098,265 | | |
| (3,198,714 | ) | |
| (1,899,551 | ) | |
| — | |
Net asset position | |
$ | 6,829,807 | | |
$ | 10,938,573 | | |
$ | (1,458,042 | ) | |
$ | 16,310,338 | |
The segment operating results of the reportable segments
are disclosed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Six months ended June 30, 2022 |
| |
Betting establishments | |
Betting platform software and services | |
All other | |
Adjustments | |
Total |
Revenue | |
$ | 21,498,130 | | |
$ | 1,085,591 | | |
$ | — | | |
$ | — | | |
$ | 22,583,721 | |
Intercompany Service revenue | |
| 76,591 | | |
| 1,090,245 | | |
| — | | |
| (1,166,836 | ) | |
| — | |
| |
| 21,574,721 | | |
| 2,175,836 | | |
| — | | |
| (1,166,836 | ) | |
| 22,583,721 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Intercompany service expense | |
| 1,090,245 | | |
| 76,591 | | |
| — | | |
| (1,166,836 | ) | |
| — | |
Selling expenses | |
| 16,991,805 | | |
| 163,146 | | |
| — | | |
| — | | |
| 17,154,951 | |
General and administrative expenses | |
| 2,941,303 | | |
| 3,943,324 | | |
| 2,896,015 | | |
| — | | |
| 9,780,642 | |
Restructuring and severance expenses | |
| — | | |
| — | | |
| 1,205,689 | | |
| — | | |
| 1,205,689 | |
| |
| 21,023,353 | | |
| 4,183,061 | | |
| 4,101,704 | | |
| (1,166,836 | ) | |
| 28,141,282 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Income (Loss) from operations | |
| 551,368 | | |
| (2,007,225 | ) | |
| (4,101,704 | ) | |
| — | | |
| (5,557,561 | ) |
Other (expenses) Income | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense, net of interest income | |
| (1,075 | ) | |
| (12,462 | ) | |
| — | | |
| — | | |
| (13,537 | ) |
Interest expense, net of interest income | |
| | | |
| | | |
| | | |
| — | | |
| | |
Amortization of debt discount | |
| — | | |
| — | | |
| | | |
| — | | |
| | |
Other income | |
| 66,473 | | |
| 2,379 | | |
| — | | |
| — | | |
| 68,852 | |
Change in Fair value of contingent purchase consideration | |
| — | | |
| (915,774 | ) | |
| — | | |
| — | | |
| (915,774 | ) |
Other expense | |
| (7 | ) | |
| (11,004 | ) | |
| — | | |
| — | | |
| (11,011 | ) |
Gain on marketable securities | |
| — | | |
| — | | |
| 92,500 | | |
| — | | |
| 92,500 | |
Total other income (expense) | |
| 65,391 | | |
| (936,681 | ) | |
| 92,500 | | |
| — | | |
| (778,970 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Income (Loss) before Income Taxes | |
| 616,759 | | |
| (2,944,086 | ) | |
| (4,009,204 | ) | |
| — | | |
| (6,336,531 | ) |
Income tax provision | |
| (192,021 | ) | |
| 159,077 | | |
| — | | |
| — | | |
| (32,944 | ) |
Net Income (Loss) | |
$ | 424,738 | | |
$ | (2,785,009 | ) | |
$ | (4,009,204 | ) | |
$ | — | | |
$ | (6,369,475 | ) |
27
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
19. Segmental Reporting (continued)
The operating assets and liabilities of the reportable segments are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June 30, 2021 |
| |
Betting establishments | |
Betting platform software and services | |
All other | |
Total |
| |
| |
| |
| |
|
Purchase of non-current assets | |
$ | 15,005 | | |
$ | 67,116 | | |
$ | 40,311 | | |
$ | 122,432 | |
Assets | |
| | | |
| | | |
| | | |
| | |
Current assets | |
| 10,877,808 | | |
| 913,319 | | |
| 9,385,445 | | |
| 21,176,572 | |
Non-current assets | |
| 6,939,721 | | |
| 6,077,751 | | |
| 1,364,113 | | |
| 14,381,585 | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Current liabilities | |
| (8,146,135 | ) | |
| (763,734 | ) | |
| (871,731 | ) | |
| (9,781,600 | ) |
Non-current liabilities | |
| (762,301 | ) | |
| (1,178,665 | ) | |
| — | | |
| (1,940,966 | ) |
Intercompany balances | |
| 3,874,380 | | |
| 208,117 | | |
| (4,082,497 | ) | |
| — | |
Net asset position | |
$ | 12,783,473 | | |
$ | 5,256,788 | | |
$ | 5,795,330 | | |
$ | 23,835,591 | |
The segment operating results of the reportable segments
are disclosed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Six months ended June 30, 2021 |
| |
Betting establishments | |
Betting platform software and services | |
All other | |
Adjustments | |
Total |
Revenue | |
$ | 25,657,843 | | |
$ | 189,434 | | |
$ | — | | |
$ | — | | |
$ | 25,847,277 | |
Intercompany Service revenue | |
| 207,118 | | |
| 2,608,669 | | |
| — | | |
| (2,815,787 | ) | |
| — | |
| |
| 25,864,961 | | |
| 2,798,103 | | |
| — | | |
| (2,815,787 | ) | |
| 25,847,277 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Intercompany service expense | |
| 2,608,669 | | |
| 207,118 | | |
| — | | |
| (2,815,787 | ) | |
| — | |
Selling expenses | |
| 20,269,209 | | |
| 9,190 | | |
| — | | |
| — | | |
| 20,278,399 | |
General and administrative expenses | |
| 3,507,099 | | |
| 2,505,973 | | |
| 2,887,082 | | |
| — | | |
| 8,900,154 | |
| |
| 26,384,977 | | |
| 2,722,281 | | |
| 2,887,082 | | |
| (2,815,787 | ) | |
| 29,178,553 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
(Loss) Income from operations | |
| (520,016 | ) | |
| 75,822 | | |
| (2,887,082 | ) | |
| — | | |
| (3,331,276 | ) |
Other income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense, net of interest income | |
| (4,890 | ) | |
| | | |
| (5,154 | ) | |
| — | | |
| (10,043 | ) |
Interest expense, net of interest income | |
| | | |
| 1 | | |
| | | |
| — | | |
| | |
Amortization of debt discount | |
| — | | |
| — | | |
| (12,833 | ) | |
| — | | |
| (12,833 | ) |
Other income | |
| 361,316 | | |
| 1,029 | | |
| 8,017 | | |
| — | | |
| 370,362 | |
Other expense | |
| (24,119 | ) | |
| (4,019 | ) | |
| — | | |
| — | | |
| (28,138 | ) |
Loss on marketable securities | |
| — | | |
| — | | |
| (92,500 | ) | |
| — | | |
| (92,500 | ) |
Total other income (expense) | |
| 332,307 | | |
| (2,989 | ) | |
| (102,470 | ) | |
| — | | |
| 226,848 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
(Loss) Income before Income Taxes | |
| (187,709 | ) | |
| 72,833 | | |
| (2,989,552 | ) | |
| — | | |
| (3,104,428 | ) |
Income tax provision | |
| (192,878 | ) | |
| (83,623 | ) | |
| — | | |
| — | | |
| (276,501 | ) |
Net Loss | |
$ | (380,587 | ) | |
$ | (10,790 | ) | |
$ | (2,989,552 | ) | |
$ | — | | |
$ | (3,380,929 | ) |
28
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial
Statements
21. Subsequent Events
Pre-funded warrants
In July 12, 2022, the investor
exercised its pre-funded warrant for 541,227 shares at an exercise price of $0.0001 per share for gross proceeds of $54.12.
Legal matters
On July 20, 2022, the
Company received notice that on July 17, 2022, an action was commenced in the Eighth Judicial District Court, Clark County, Nevada,
Case No. A-22-855524-B, by Victor J. Salerno, Robert Kocienski and Robert Walker (collectively “Plaintiffs”), against
the Company and Bookmakers Company US LLC d/b/a U.S. Bookmaking (“USB,” and together with the Company collectively
“Defendants”). Plaintiffs’ claims against the Company relate to the Membership Interest Purchase Agreement, dated
July 5, 2021, pursuant to which Plaintiffs sold their membership interests in USB to the Company. Plaintiffs’ claims for
relief asserted in the complaint include, without limitation, breach of contract, breach of implied covenants, intentional
interference with contract and negligent misrepresentation. Plaintiffs seek a judgment for damages against the Company, including
punitive damages, as well as declaratory relief against both the Company and USB. The Company believes the claims made by
Plaintiff’s against the Defendants are completely without merit and intends to vigorously defend against the claims.
Other
than the above, the Company has evaluated subsequent events through the date the financial
statements were issued, and did not identify any subsequent events that would have required adjustment or disclosure in the financial
statements.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report
on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act. All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words
such as “may,” “might,” “anticipate,” “estimate,” “expect,” “project,”
“intend,” “plan,” “believe,” “pro forma” or the negative of these words or other words
or expressions of and similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements
of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring
plans and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements
regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing.
Factors that might cause such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year
ended December 31, 2021 filed with the Securities and Exchange Commission on April 15, 2022 under the heading “Risk Factors”
and the Risk Factors as described in Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.
Overview
Except as expressly stated,
the financial condition and results of operations discussed throughout the Management's Discussion and Analysis of Financial Condition
and Results of Operations are those of Elys Game Technology, Corp. and its consolidated subsidiaries.
We currently provide our
B2C gaming services in Italy through our subsidiary, Multigioco Srl (“Multigioco”), which operations are carried out via both
land-based or online retail gaming licenses regulated by the Agenzia delle Dogane e dei Monopoli (“ADM”) that permits us to
distribute leisure betting products such as sports betting, and virtual sports betting products through both physical, land-based retail
locations as well as online through our licensed website www.newgioco.it or commercial webskins linked to our licensed website and through
mobile devices. Management implemented a consolidation strategy in the Italian market by integrating all B2C operations into Multigioco
and allowed the Austria Bookmaker license that was regulated by the Austrian Federal Finance Ministry (“BMF”) to terminate.
We also provide bookmaking
services in the U.S. market via our recently acquired subsidiary US Bookmaking in certain regulated states where we offer B2B bookmaking
and platform services to our customers. Our intention is to focus our attention on expanding the U.S. market. We recently began operation
is Washington, D.C. through a Class B Managed Service Provider and Class B Operator license
to operate a sportsbook within the Grand Central Restaurant and Sportsbook located in the Adams Morgan area of Washington, D.C., and in
October 2021 we entered into an agreement with Ocean Casino Resort in Atlantic City and commenced operations in the state of New Jersey
in March 2022.
Additionally, we provide
B2B gaming technology through our Odissea subsidiary which owns and operates a betting software designed with a unique “distributed
model” architecture colloquially named Elys Game Board (the “Platform”). The Platform is a fully integrated “omni-channel”
framework that combines centralized technology for updating, servicing and operations with multi-channel functionality to accept all forms
of customer payment through the two distribution channels described above. The omni-channel software design is fully integrated with a
built in player gaming account management system, built-in sports book and a virtual sports platform through our Virtual Generation subsidiary.
The Platform also provides seamless application programming interface integration of third-party supplied products such as online casino,
poker, lottery and horse racing and has the capability to incorporate e-sports and daily fantasy sports providers. Management implemented
a growth strategy to expand B2B gaming technology operations in the U.S. and is considering further expansion in Canada and Latin American
countries in the near future.
Our corporate group is based
in North America, which includes an executive suite situated in Las Vegas, Nevada and a Canadian office in Toronto, Ontario through which
we carry-out corporate activities, handle day-to-day reporting and U.S. development planning, and through which various employees, independent
contractors and vendors are engaged.
For the period ended June
30, 2022, transaction revenue generated through our subsidiary Multigioco consisted of wagering and gaming transaction income broken down
to: (i) spread on sports bet wagers, and (ii) fixed rate commissions on casino, poker, lotto and horse racing wagers from online based
betting web-shops and websites as well as land-based retail betting shops located throughout Italy; while our service revenue generated
by our Platform is primarily derived from bet and wager processing in Italy through Multigioco, and in the U.S., through Elys Gameboard
Technologies and USB. Since the majority of CTD locations were not expected to re-open after the COVID-19 related lockdowns in Italy subsided,
management simplified our Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence
in Italy during the second quarter of 2021.
30
We believe that our Platform
is considered one of the newest betting software platforms in the world and our plan is to expand our Platform offering to new jurisdictions
around the world on a B2B basis, including expansion through Europe, South America, South Africa and the developing market in the United
States. During the three and six months ended June 30, 2022 and 2021, we also generated service revenue from royalties through authorized
agents by providing our virtual sports products through our Virtual Generation subsidiary and generated service revenues through the provision
of bookmaking and platform services through our recently acquired subsidiary, US Bookmaking. We intend to leverage our partnerships in
Europe, South America, South Africa and the developing market in the United States to cross-sell our Platform services to expand the global
distribution of our betting solutions.
We operate two business segments
in the leisure gaming industry and our revenue is derived as follows:
1. |
Betting establishments |
Transaction revenue
through our offering of leisure betting products to retail customers directly through our online distribution on websites or a betting
shop establishment or through third party agents that operate white-label websites and/or land-based retail venues; and
2. |
Betting platform software and services |
SaaS based service
revenue through providing our Platform and virtual sports products to betting operators.
This Management’s Discussion
and Analysis includes a discussion of our operations for the three months and six months ended June 30, 2022 and 2021, which includes
the operations of US Bookmaking for the three months and six months ended June 30, 2022.
Recent Developments
Financing
On
June 15, 2022, we raised $3 million in gross proceeds and issued (i) an aggregate of 2,625,000 Shares and Pre-Funded Warrants to
purchase 541,227 shares of Common Stock to an Investor in a registered direct offering, pursuant to a prospectus supplement to the Company’s
currently effective registration statement on Form S-3 (File No. 333-256815), which was initially filed with the U.S. Securities and Exchange
Commission (the “SEC”) on June 4, 2021, and was declared effective on June 14, 2021 and (ii)in a concurrent private placement
, warrants to purchase an aggregate of up to 3,166,227 shares of Common Stock, with an exercise
price of $0.9475 per share and expiration date of December 15, 2027, subject to customary adjustments thereunder. If after the six month
anniversary of the issuance date there is no effective registration statement registering the shares underlying the Warrants (the “Warrant
Shares”) for resale, then the Warrants are exercisable on a cashless basis.
Strategic agreements entered
into with Lottomatica (currently known as G.B.O, S.p.A)
We entered into a Master
Technology Development and License Agreement and a Technical Services Agreement with Lottomatica to develop and provide a dedicated Sports
Betting Platform (“SBP”) for use in both land-based and on-line applications by Lottomatica in the U.S. and Canadian markets,
as well as potentially worldwide. The contract is for a period of ten years, after which the source code will be assigned to Lottomatica.
An option was also granted to Lottomatica that after a period of four years from the commencement of the provision of the SBP, that Lottomatica
may acquire the source code to the SBP for €4.0 million.
The Technical Services Agreement
was entered into with our subsidiary Odissea to provide engineering services, develop and deliver the software and provide operational
and product management support to Lottomatica on the SBP. The initial term of the agreement is for a period of ten years and is based
on cost plus a percentage of the services provided.
In a separate Virtual Service
Agreement entered into between our subsidiary Virtual Generation and Goldbet S.p.A., a subsidiary of Lottomatica, whereby Virtual Generation
will license virtual event content to be implemented on the Lottomatica’s Platform throughout the Lottomatica vast network of retail
outlets and on the online services in Italy. The agreement provides for an exclusivity period of two years from the date of certification
of the virtual platform by the Italian regulator (ADM), which will only allow Lottomatica and us to make use of the platform. Virtual
Generation will generate commission revenue based on a percentage of Net Gaming Revenues.
In a separate Assignment
Agreement entered into between our subsidiary, Multigioco, Lottomatica assigned ownership of approximately 100 Sports Rights to Multigioco,
which will allow us to expand our land-based distribution network to approximately 110 point-of-sale locations. We expect to open the
additional 100 outlets over the remainder of the calendar year. These rights are only valid until the ADM puts new location rights up
for tender, which could take place at any time, and therefore were assigned a minimal value.
Operational Developments
Management has implemented
a strategic business initiative to reduce expenditures, improve efficiencies and maximize profitability within the underlying operating
units. During the six months ended June 30, 2022, we managed to achieve a net income position of approximately $0.19 million in our European
operations which consist of Multigioco, Odissea, Ulisse, Virtual Generation and Elys Technology Services, despite the closure of all of
our Ulisse CTD locations in the prior year. Our U.S. USB subsidiary performance has been disappointing, producing a net loss of $1.16
million on revenues of $0.6 million for the six months ended June 30, 2022, primarily due to personnel costs which increased to $0.7 million
and amortization of intangibles of $0.5 million. We are attempting to address this operational performance with the USB management team.
Our other U.S. operation, Elys Gameboard, commenced operations in October 2021 and had produced a net loss of $0.37 million, with one
operational customer. We are pursuing several new customers both in the Washington D.C. area as well as in Maryland and Ohio and once
secured we expect to achieve profitable operations within the next twenty four months.
31
We are also taking steps
to reduce corporate overhead and have restructured our operations by streamlining roles and reducing non-essential operating expenditures.
Corporate overhead expenditures, net of one-time severance and restructuring expenses of $1.2 million, and non-cash option expense of
$1.17 million were reduced by approximately $0.58 million during the six month period. Non-cash stock option expense increased by $0.59
million over the prior year primarily due to the stock options granted to key members of management during the prior year.
Disclosure pertaining
to Russia’s invasion of Ukraine
Russia recently invaded Ukraine
with Belarus complicit in the invasion. The conflict between these two countries is ongoing.
We do not have any direct
or indirect exposure to Ukraine, Belarus or Russia, through our operations, employee base or any investments in any of these countries.
In addition, our securities are not traded on any stock exchanges in these three countries. We do not believe that the sanction levied
against Russia or Belarus or individuals and entities associated with these two countries will have a material impact on our operations
or business, if any.
We do not believe that we
have any direct or indirect reliance on goods sourced from Russia, Ukraine or Belarus or countries that are supportive of Russia.
We provide online gaming
services and platform services to several customers, including our own internal usage of our developed software, we employ the latest
encryption techniques and firewall practices and constantly monitor the usage of our software as is required for the regulated markets
which we operate in, this, however, may not be sufficient to prevent the heightened risk of cybersecurity attacks emanating from Russia,
Ukraine, Belarus, or any other country.
The impact of the invasion
by Russia of Ukraine has increased volatility in trading prices and commodities throughout the world, to date, we have not seen a material
impact on our operations, however, a prolonged conflict may impact on consumer spending, in general, which could have an adverse impact
on the leisure gaming industry as a whole.
Inflation
Macro-economic conditions
could affect consumer spending adversely and consequently our operations, however we have not seen any material impact to date.
Foreign Exchange
We operate in several foreign
countries, including Austria, Italy, Malta, Colombia and Canada and we incur operating expenses and have foreign currency denominated
assets and liabilities associated with these operations. Transactions involving our corporate expenditures are generally denominated in
U.S. dollars and Canadian dollars while the functional currency of our subsidiaries is in Euro. Changes and fluctuations in the foreign
exchange rate between the U.S. Dollar and the Euro, Canadian dollar and Colombian Peso will have an effect on our results of operations.
Critical Accounting Policies and Estimates
Preparation of our consolidated
financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires us to make estimates
and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure
of contingent assets and liabilities. Significant accounting policies are fundamental to understanding our financial condition and results
as they require the use of estimates and assumptions which affect the financial statements and accompanying notes. See Note 2 - Summary
of Significant Accounting Policies of the Notes to the condensed Consolidated Financial Statements included in Part I, Item I of this
Form 10-Q for further information.
The critical accounting policies
that involved significant estimation included the following:
Impairment of Indefinite
Lived Assets and Goodwill
We carried intangible assets
in the amount of $14.8 million and goodwill in the amount of $16.2 million as more fully described in Notes 7 and 8 to the condensed consolidated
financial statements. The intangible assets and goodwill are allocated between reporting units. The Company tests its goodwill and intangible
assets with an indefinite useful life annually for impairment or more frequently if indicators for impairment exist. Impairment for goodwill
is determined by comparing the fair value of the respective reporting unit to their carrying amount. For impairment testing of indefinite-lived
intangibles. The Company determines the fair value of the reporting units using an income-based approach which estimates the fair value
using a discounted cash flow model. Key assumptions in estimating fair values include projected revenue growth and the weighted average
cost of capital. In addition, management recently reviewed the future revenue and profit projections of US Bookmaking based on the
forecasts provided by the vendors at the time of performing the business valuation, which factored in the ability to source new customers.
The customer acquisition process has proven to take longer than expected with a resultant downward revision of new customers acquired
over the forecast period and the resultant downward impact on forecasted revenue streams. We reviewed the forecasts and made appropriate
adjustments based on our current understanding of the addressable market, the growth rates forecast by third party market analysts, our
expected share of revenue and the expectation of how many new clients we would realistically be able to add over the forecast period.
Since performing this analysis we have no reason to believe that further impairment is necessary as of June 30, 2022.
32
Fair Value of Contingent Consideration
As of June 30, 2022, the
Company carried contingent purchase consideration in the amount of $13.8 million as more fully described in Note 12 to the condensed consolidated
financial statements. The contingent consideration relates to the business combination of US Bookmaking on July 15, 2021. The contingent
consideration is based upon achievement of certain EBITDA milestones during the next 4 years, payable 50% in cash and 50% in stock, the
contingent consideration is up to $41.8 million. At each reporting period, the Company estimates changes in the fair value of the contingent
consideration and any change in fair value is recognized in the consolidated statements of operations and comprehensive (loss) income.
The
basis for determining contingent purchase consideration at each reporting period is based on cumulative EBITDA for the period July 15,
2021 to December 31, 2025, with the first measurement period being December 31, 2022. The forecasts provided by the vendors at the time
of performing the business valuation was based on achieving a certain number of new customers on an annual basis. The customer acquisition
process has proven to take longer than expected with a resultant impact on forecasted revenue streams over the contingent earnout period.
Management revised its estimated revenues as of December 31, 2021. These forecasts were reviewed and adjusted to ensure they appeared
reasonable based on our current understanding of the addressable market, the growth rates forecast by third party market analysts, our
expected share of revenue and the expectation of how many new clients we would realistically be able to add in a fiscal period. We
have no reason to believe that the contingent purchase consideration, which was remeasured at December 31, 2021, needs to be re-evaluated
as of June 30, 2022.
Recently Issued Accounting
Pronouncements
See Note 2 - Summary of Significant
Accounting Policies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for
information regarding recently issued accounting standards.
Results of Operations
Results of Operations for the three months ended
June 30, 2022 and the three months ended June 30, 2021
Revenues
The following table represents
disaggregated revenues from our gaming operations for the three months ended June 30, 2022 and 2021. Net Gaming Revenues represents Turnover
(also referred to as “Handle”), the total bets processed for the period, less customer winnings paid out, and taxes due to
government authorities. Service Revenues is revenue invoiced for our Elys software service and royalties invoiced for the sale of virtual
products.
| |
Three Months Ended | |
|
| |
June 30, 2022 | |
June 30, 2021 | |
Increase (decrease) | |
Percentage change |
Turnover | |
| |
| |
| |
|
Turnover web-based | |
$ | 186,441,824 | | |
$ | 219,874,610 | | |
$ | (33,432,786 | ) | |
| (15.2 | )% |
Turnover land-based | |
| 1,818,081 | | |
| 218,129 | | |
| 1,599,952 | | |
| 733.5 | % |
Total Turnover | |
| 188,259,905 | | |
| 220,092,739 | | |
| (31,832,834 | ) | |
| (14.5 | )% |
| |
| | | |
| | | |
| | | |
| | |
Winnings/Payouts | |
| | | |
| | | |
| | | |
| | |
Winnings web-based | |
| 173,924,052 | | |
| 205,048,852 | | |
| (31,124,800 | ) | |
| (15.2 | )% |
Winnings land-based | |
| 1,557,874 | | |
| 166,369 | | |
| 1,391,505 | | |
| 836.4 | % |
Total Winnings/payouts | |
| 175,481,926 | | |
| 205,215,221 | | |
| (29,733,295 | ) | |
| (14.5 | )% |
| |
| | | |
| | | |
| | | |
| | |
Gross Gaming Revenues | |
| 12,777,979 | | |
| 14,877,518 | | |
| (2,099,539 | ) | |
| (14.1 | )% |
| |
| | | |
| | | |
| | | |
| | |
Less: Gaming Taxes | |
| 3,117,380 | | |
| 3,285,273 | | |
| (167,893 | ) | |
| (5.1 | )% |
Net Gaming Revenues | |
| 9,660,599 | | |
| 11,592,245 | | |
| (1,931,646 | ) | |
| (16.7 | )% |
| |
| | | |
| | | |
| | | |
| | |
Add: Service Revenues | |
| 687,136 | | |
| 97,704 | | |
| 589,432 | | |
| 603.3 | % |
Total Revenues | |
$ | 10,347,735 | | |
$ | 11,689,949 | | |
$ | (1,342,214 | ) | |
| (11.5 | )% |
The change in turnover (handle) is primarily due to
the following:
Web-based
turnover decreased by approximately $33.4 million or 15.2%. The decrease in turnover is attributable to the following; (i) during the
current year the U.S. Dollar exchange rate against the Euro has strengthened from an average rate of $1.205 to $1.094 or 9.2%, resulting
in a net currency loss in turnover of approximately $25.7 million, (ii) the closure of the Ulisse Data Transmission Centers (“CTD”)
locations during the prior year, resulted in a decline in revenues of approximately $14.5 million; offset by an increase in turnover
from Multigioco of approximately $6.7 million or 3.6%. Despite the slow-down in the growth of web-based revenues due to the softening
of COVID restrictions, we still managed to grow this line of our business as we continue to gain market share. The percentage of payouts
on web-based turnover remained static at 93.3% for the three months ended June 30, 2022 and 2021 respectively.
33
Land-based turnover increased
by approximately $1.6 million or 733.5%. The increase is due to the softening of COVID restrictions during the current year, resulting
in more people frequenting land-based locations which led to an improvement in turnover at our Multigioco land based operations, we expect
this revenue to increase dramatically as we roll out our approximately 100 land-based locations from our recently acquired operating rights.
The percentage of payouts on land-based turnover declined to 85.7% from 76.3% for the three months ended June 30, 2022 and 2021 respectively.
The turnover mix impacts
our Gross Gaming Revenue (“GGR”). Our turnover for the three months ended June 30, 2022 is as follows; Sports betting turnover
represented 19.7% (June 30, 2021 – 23.0%); casino style games represented 79.5% (June 30, 2021 – 76.0%); and other was 0.8%
(June 30, 2021 - 1.0%). The shift towards more casino style games during the three months ended June 30, 2022, has a negative impact on
our gross gaming revenues as the margin earned on our sports book averaged 16.6% (June 30, 2021 – 14.8%) and for our casino style
games averaged 4.5% (June 30, 2021 - 4.4%), resulting in a blended GGR of 6.8% (June 30, 2021 6.8%). The percentage decrease in sports
book turnover and GGR is primarily due to the closure of all Ulisse Italian based locations in June 2021. Although the sports betting
hold improved to 16.6% from 14.8%, the lower sports betting turnover and GGR as a percentage of overall turnover and revenue resulted
in a static overall blended GGR (or hold) of 6.8%.
Gaming taxes decreased by
approximately $0.2 million or 5.1%, over the prior period. The relative rate of our gaming taxes, which is based on Gross Gaming Revenues
was 24.4% and 22.1% for the three months ended June 30, 2022 and 2021 respectively. The increase in tax rate is attributable to the closure
of the Ulisse CTD operations in June 2021, Ulisse had a significantly lower tax rate due to its incorporation being situated outside of
Italy.
Service revenues increased
by approximately $0.6 million or 603.3%. This is primarily due to; (i) revenues generated by USB operations of approximately $0.3 million
and (ii) a general increase in our other service-based revenues across our platform companies. This revenue remains insignificant to total
revenues during the periods presented.
Selling expenses
We incurred selling expenses
of approximately $7.9 million and $9.6 million for the three months ended June 30, 2022 and 2021, respectively, a decrease of approximately
$1.7 million or 17.7%. Selling expenses are commissions that are paid to our sales agents as a percentage of turnover (handle) and are
not affected by the winnings that are paid out. Therefore, increases in turnover (handle), will typically result in increases in selling
expenses but may not result in increases in overall revenue if winnings/payouts, that are subject to the unknown outcome of sports events
that we have no control over, are very high. The percentage of selling expenses to turnover was fairly consistent at 4.2% compared to
4.4% for the three months ended June 30, 2022 and 2021, respectively.
General and Administrative Expenses
General and administrative expenses were approximately
$4.8 million and $4.8 million for the three months ended June 30, 2022 and 2021, respectively. The general and administrative expenses
remained consistent over the prior year despite the addition of the current operating loss from USB business, which added approximately
$0.6 million of general and administrative costs for the three months ended June 30, 2022 and an increase in group non-cash stock based
compensation expense of approximately $0.3 million for the three months ended June 30, 2022. Management has embarked on a cost reduction
exercise, eliminating all unnecessary expenditure and focusing on returning the business to profitability, including the costs identified
in our USB subsidiary.
Restructuring and severance expenses
Restructuring and severance expenses was
approximately $1.2 million and $0 for the three months ended June 30, 2022 and 2021, respectively. As mentioned above, management
has embarked on a cost reduction exercise, streamlining operations and eliminating duplicated effort wherever possible, ensuring
that management is lean and efficient. We eliminated a senior role within the corporate office resulting in a severance expense of
approximately $0.4 million and an acceleration of a non-cash stock based compensation charge of approximately $0.75 million, for the
immediate vesting of options.
Loss from Operations
The loss from operations was approximately $3.5 million
and $2.7 million for the three months ended June 30, 2022 and 2021, respectively, an increase of approximately $0.8 million or 29.6%.
The increase in operating loss is directly attributable to the decrease in revenue, offset by the decreasing in selling expenses and the
increase in restructuring and severance expenses as discussed above.
Interest Expense, Net of Interest Income
Interest expense was immaterial for the three months
ended June 30, 2022 and 2021.
34
Other income
Other income was approximately
$0.03 million and $0.09 million for the three months years ended June 30, 2022 and 2021, respectively, a decrease of approximately $0.06
million or 66.7%. Other income includes additional Covid relief funds received in Ulisse during the prior period.
Change in fair value
of contingent purchase consideration
Change in fair value of contingent purchase consideration
was approximately $0.5 million and $0 for the three months ended June, 2022 and 2021 respectively, an increase of approximately $0.5 million.
The change in fair value of contingent purchase consideration is the accretion expense associated
with the present value of contingent purchase consideration due on the acquisition of USB.
Other expense
Other expense was immaterial
for the three months ended June 30, 2022 and 2021.
Gain (Loss) on Marketable Securities
The gain on marketable securities was approximately
$0.02 million for the three months ended June 30, 2022 and the loss on marketable securities was approximately $0.29 million for the three
months ended June 30, 2021, an increase of approximately $0.31 million or 107.1%. The losses and gains on marketable securities is directly
related to the stock price of our investment in Zoompass which is marked-to-market each quarter. The shares in Zoompass were acquired
by the Company as settlement of a litigation matter, we have no influence over the performance of Zoompass.
Loss Before Income Taxes
Loss before income taxes was approximately $3.9 million
and $2.9 million for the three months ended June 30, 2022 and 2021, respectively, an increase of approximately $1.0 million or 34.5%.
The increase is attributable to the increase in loss from operations, the change in the fair value of contingent purchase consideration,
offset by the movement in the gain on marketable securities during the current period.
Income Tax Provision
The income tax provision was a credit of approximately
$0.1 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, The current period credit is due to the
reversal of a portion of a tax provision raised in the previous quarter on our Multigioco operations and a deferred tax credit on intangible
amortization.
Net Loss
Net loss was approximately $3.8 million and $2.8 million
for the three months ended June 30, 2022 and 2021, respectively, an increase of approximately $1.0 million or 35.7% due to the increase
in loss before income taxes, discussed above.
Comprehensive Loss
Our reporting
currency is the U.S. dollar while the functional currency of our Italian, Maltese and Austrian subsidiaries is the Euro, the functional
currency of our Canadian subsidiary is the Canadian Dollar and the functional currency of our Colombian operation is the Colombian Peso.
The financial statements of our subsidiaries are translated into United States dollars in accordance with ASC 830, using year-end rates
of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical
rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S.
dollars are included in determining other comprehensive income.
We recorded a foreign currency translation
adjustment of approximately $(0.36) million and $0.085 for the three months ended June 30, 2022 and 2021, respectively. We expected a
translation adjustment loss due to the recent strengthening of the U.S. Dollar against the Euro, as the majority of our operations
are denominated in Euro’s.
35
Results of Operations for the six months ended June 30, 2022 and
the six months ended June 30, 2021
Revenues
The following table represents disaggregated revenues
from our gaming operations for the six months ended June 30, 2022 and 2021. Net Gaming Revenues represents Turnover (also referred to
as “Handle”), the total bets processed for the period, less customer winnings paid out, and taxes due to government authorities,
while Service Revenues represents commissions on lotto ticket sales and Service Revenues is revenue invoiced for our Elys software service
and royalties invoiced for the sale of virtual products.
| |
Six Months Ended | |
|
| |
June 30, 2022 | |
June 30, 2021 | |
Increase (decrease) | |
Percentage change |
Turnover | |
| |
| |
| |
|
Turnover web-based | |
$ | 402,222,106 | | |
$ | 451,206,769 | | |
$ | (48,984,663 | ) | |
| (10.9 | )% |
Turnover land-based | |
| 3,603,188 | | |
| 12,043,959 | | |
| (8,440,771 | ) | |
| (70.1 | )% |
Total Turnover | |
| 405,825,294 | | |
| 463,250,728 | | |
| (57,425,434 | ) | |
| (12.4 | )% |
| |
| | | |
| | | |
| | | |
| | |
Winnings/Payouts | |
| | | |
| | | |
| | | |
| | |
Winnings web-based | |
| 374,777,873 | | |
| 420,647,267 | | |
| (45,869,394 | ) | |
| (10.9 | )% |
Winnings land-based | |
| 2,958,287 | | |
| 10,331,307 | | |
| (7,373,020 | ) | |
| (71.4 | )% |
Total Winnings/payouts | |
| 377,736,160 | | |
| 430,978,574 | | |
| (53,242,414 | ) | |
| (12.4 | )% |
| |
| | | |
| | | |
| | | |
| | |
Gross Gaming Revenues | |
| 28,089,134 | | |
| 32,272,154 | | |
| (4,183,020 | ) | |
| (13.0 | )% |
| |
| | | |
| | | |
| | | |
| | |
Less: Gaming Taxes | |
| 6,848,210 | | |
| 6,614,311 | | |
| 233,899 | | |
| 3.5 | % |
Net Gaming Revenues | |
| 21,240,924 | | |
| 25,657,843 | | |
| (4,416,919 | ) | |
| (17.2 | )% |
| |
| | | |
| | | |
| | | |
| | |
Add: Service Revenues | |
| 1,342,797 | | |
| 189,434 | | |
| 1,153,363 | | |
| 608.8 | % |
Total Revenues | |
$ | 22,583,721 | | |
$ | 25,847,277 | | |
$ | (3,263,556 | ) | |
| (12.6 | )% |
The change in turnover (handle) is primarily due to
the following:
Web-based turnover decreased
by approximately $49.0 million or 10.9%. The decrease in turnover is attributable to the following; (i) during the current year the U.S.
Dollar exchange rate against the Euro has strengthened from an average rate of $1.205 to $1.094 or 9.2%, resulting in a net currency loss
in turnover of approximately $41.6 million, (ii) the closure of the CTD locations during the prior year, resulted in a decline in revenues
of approximately $31.5 million; offset by an increase in turnover from Multigioco of approximately $24.1 million or 6.4%. Despite the
slow-down in the growth of web-based revenues due to the softening of COVID restrictions, we still managed to grow this line of our business
as we continue to gain market share. The percentage of payouts on web-based turnover remained static at 93.2% for the six months ended
June 30, 2022 and 2021 respectively.
Land-based turnover decreased
by approximately $8.4 million or 70.1%. The decrease in turnover is attributable to the following; (i) during the current year the U.S.
Dollar exchange rate against the Euro has strengthened from an average rate of $1.205 to $1.094 or 9.2%, resulting in a net currency loss
in turnover of approximately $1.1 million, (ii) the closure of the CTD locations during the prior year, resulted in a decline in revenues
of approximately $10.7 million; offset by an increase in turnover from Multigioco of approximately $3.4 million or 1,666.7%, due to the
softening of COVID restrictions during the current year, resulting in more people frequenting land-based locations which led to an improvement
in turnover at our Multigioco land based operations. we expect this revenue to increase dramatically as we roll out our approximately
100 land-based locations from our recently acquired operating rights. The percentage of payouts on land-based turnover improved to 82.1%
from 85.8% for the six months ended June 30, 2022 and 2021 respectively.
The turnover mix impacts
our Gross Gaming Revenue (“GGR”). Our turnover for the six months ended June 30, 2022 is as follows; Sports betting turnover
represented 19.7% (June 30, 2021 – 23.9%); casino style games represented 79.5% ( June 30, 2021 – 75.1%); and other was 0.8%
(June 30, 2021 – 1.0%). The shift towards more casino style games during the six months ended June 30, 2022, has a negative impact
on our gross gaming revenues as the margin earned on our sports book averaged 17.5% (June 30, 2021 – 15.9%) and for our casino style
games averaged 4.4% (June 30, 2021 - 4.2%), resulting in a blended GGR of 6.9% (June 30, 2021 7.0%). The percentage decrease in sports
book turnover and GGR is primarily due to the closure of all Ulisse Italian based locations in June 2021. Although the sports betting
hold improved to 17.5% from 15.9%, the lower sports betting turnover and GGR as a percentage of overall turnover and revenue resulted
in a static overall blended hold of 6.9%.
Gaming taxes increased by
approximately $0.2 or 3.5% over the prior period. The relative rate of our gaming taxes, which is based on Gross Gaming Revenues was 24.4%
and 20.5% for the six months ended June 30, 2022 and 2021, respectively. The increase is attributable to the closure of the Ulisse CTD
operations in June 2021, Ulisse had a significantly lower tax rate due to its incorporation being situated outside of Italy.
Service revenues increased
by approximately $1.2 million or 608.8%. This is primarily due to; (i) revenues generated by USB operations of approximately $0.6 million
and (ii) a general increase in our other service-based revenues across our platform companies. This revenue remains insignificant to total
revenues during the periods presented.
36
Selling expenses
We incurred selling expenses
of approximately $17.2 million and $20.3 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of approximately
$3.1 million or 15.3%. Selling expenses are commissions that are paid to our sales agents as a percentage of turnover (handle) and are
not affected by the winnings that are paid out. Therefore, increases in turnover (handle), will typically result in increases in selling
expenses but may not result in increases in overall revenue if winnings/payouts, that are subject to the unknown outcome of sports events
that we have no control over, are very high. The percentage of selling expenses to turnover decreased to 4.2% from 4.4% for the six months
ended June 30, 2022 and 2021, respectively.
General and Administrative Expenses
General and administrative expenses were approximately
$9.8 million and $8.9 million for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $0.9 million
or 10.1%. The increase over the prior year is attributable to the following; an increase in general and administrative expenses of approximately
$1.3 million related to the acquisition of USB on July 15, 2021, of which approximately $0.7 million relates to personnel costs; which
was offset by a decrease in general and administrative expenses at our European operations and corporate office by approximately $0.9
million in line with our mandate to focus on profitability. Management continues to focus on cost reduction, eliminating all unnecessary
expenditure and focusing on returning the business to profitability, including the costs identified in our USB subsidiary.
Restructuring and severance expenses
Restructuring and severance expenses was approximately
$1.2 million and $0 for the six months ended June 30, 2022 and 2021, respectively. As mentioned above, management has embarked on a
cost reduction exercise, streamlining operations and eliminating duplicated effort wherever possible, ensuring that management is lean
and efficient. We eliminated a senior role within the corporate office resulting in a severance expense of approximately $0.4 million
and an acceleration of a non-cash stock based compensation charge of approximately $0.75 million, for an immediate vesting of options.
Loss from Operations
The loss from operations was approximately $5.6 million
and $3.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $2.3 million or 69.7%. The
increase in loss from operations is primarily due to the following: (i) the decrease in revenue, the increase in general and administrative
expenses and restructuring and severance costs, offset by the decrease in selling expenses, as discussed above.
Interest Expense, Net of Interest Income
Interest expense was immaterial for the six months
ended June 30, 2022 and 2021.
Amortization of debt
discount
The Amortization of debt
discount in the prior period related to convertible debentures which were repaid or converted in the prior year.
Other income
Other income was approximately
$0.07 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of approximately $0.03 million
or 82.5%. In the prior year, other income included a COVID tax credit of $0.09 million received from the Agenzia delle Dogane e dei Monopoli
(“ADM”) for taxes previously charged; $0.2 million of COVID relief funds received by Ulisse during the prior period.
Other expense
Other expense was approximately
$0.01 million and $0.03 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of approximately $0.02 million
or 66.7%. In the prior year, other expenses included an administrative penalty of $0.03 million related to ADM taxes provided for by Multigioco.
(Loss) gain on Marketable Securities
The gain on marketable securities was approximately
$0.09 million and the loss on marketable securities was approximately $0.09 million for the six months ended June 30, 2022 and 2021, respectively,
an increase of approximately $0.18 million. The losses and gains on marketable securities is directly related to the stock price of our
investment in Zoompass which is marked-to-market each quarter. The shares in Zoompass were acquired by the Company as settlement of a
litigation matter, we have no influence over the performance of Zoompass.
37
Loss Before Income Taxes
Loss before income taxes was approximately $6.3 million
and $3.1 million for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $3.2 million or 103.2%. The
increase is primarily attributable to the increase in loss from operations and the change in fair value of contingent purchase consideration,
as discussed above
Income Tax Provision
The income tax provision was approximately $0.03 million
and $0.28 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of approximately $0.25 million. The current
year charge decreased due to the closure of the Ulisse CTD operations in June 2021in the prior period.
Net Loss
Net loss was approximately $6.4 million and $3.4 million
for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $3.0 million or 88.2% due to the increase
in loss before income taxes and the reduction in income tax provision, discussed above.
Comprehensive Loss
Our reporting
currency is the U.S. dollar while the functional currency of our Italian, Maltese and Austrian subsidiaries is the Euro, the functional
currency of our Canadian subsidiary is the Canadian Dollar and the functional currency of our Colombian operation is the Colombian Peso.
The financial statements of our subsidiaries are translated into United States dollars in accordance with ASC 830, using year-end rates
of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical
rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S.
dollars are included in determining other comprehensive income.
We recorded a foreign currency translation adjustment
of approximately $0.5 million and $(0.26) million for the six months ended June 30, 2022 and 2021, respectively. We expected a translation
adjustment loss due to the recent strengthening of the U.S. Dollar against the Euro, as the majority of our operations are denominated
in Euro’s.
Liquidity and Capital Resources
Our principal cash requirements
have included the funding of acquisitions, repayments of convertible debt and deferred purchase consideration, the purchase of property
and equipment, and working capital needs. Working capital needs generally result from expenses incurred in developing our gaming platform
for the various markets we operate in and new markets we are developing as well as our intention to aggressively expand into the US market.
To date, we financed our
business primarily though debt and equity placements and cash generated from operations. Recently,
we have financed our business from the sale of shares of our common stock pursuant to the terms of the Open Market Sales AgreementSM that
we entered into with Jefferies LLC on November 19, 2021, and a registered direct offering and concurrent private placement with an investor
that closed on June 15, 2022.
Between March
28, 2022 and April 13, 2022, we sold 168,016 shares of common stock for gross proceeds of $387,053, less brokerage fees
of $11,612 pursuant to the Open Market Sales AgreementSM that we entered into with Jefferies LLC on November 19,
2021.
On
June 13, 2022, we entered into a Securities Purchase Agreement with a single investor (the “investor”) whereby we issued
an aggregate of 2,625,000 shares of our common stock and Pre-Funded Warrants to purchase 541,227 shares of common stock in a registered
direct offering, in addition we issued a warrant for 3,166,227 shares of common stock, exercisable at $0.9475 per share with a maturity
date of December 15, 2027, to the Investor in a concurrent private placement. The registered direct offering and concurrent private placement
closed on June 15, 2022. The gross proceeds from the offering were approximately $3,000,000 and
the net proceeds from the offering were approximately $2.6 million after deducting certain fees due to the Placement Agent and our estimated
transaction expenses.
Our ability to generate sufficient
cash flow from operations is dependent on the continued demand for our gaming services we offer to our customers through our land based
and web based locations as well as the gaming platforms we license to third parties.
Based on our forecasts, we
believe that we have adequate resources to continue operating for the next twelve months. We plan to continue our expansion plans in both
the U.S. and Italian markets at a rate of growth that we believe is sustainable and achievable by us. If additional accretive opportunities
arise during the execution of our business plans, we might consider raising additional cash through either debt or equity funding, if
such debt or equity raise is available at terms that are acceptable to us, if at all.
38
The ongoing COVID-19 pandemic
has impacted our Italian based operations, we have seen a shift towards web-based turnover (Handle) from our land-based turnover with
the permanent closure of our Ulisse betting shop locations. The percentage Hold or Gross Gaming Revenue generated from our turnover is
typically lower on web-based business which generally favors more casino type gaming at lower margins, as discussed above.
Assets
At June 30, 2022, we had
total assets of approximately $42.9 million compared to approximately $44.6 million at December 31, 2021. A decrease of approximately
$1.7 million, primarily due to a decrease in cash balances of approximately $1.3 million, a decrease in gaming receivables of approximately
$1.5 million, offset by an increase in prepaid expenditure of approximately $1.0 million, primarily related to prepaid software development
expenses for the US market, the balance of the movement is made up of several individually insignificant asset movements.
Liabilities
At June 30, 2022, we had
approximately $26.6 million and $26.8 million in total liabilities at December 31, 2021. The decrease is primarily attributable to a decrease
in accounts payable and accrued liabilities of approximately $2.0 million, primarily due to the concerted effort to reduce expenditure
and the payment of several significant corporate legal bills during the current period, an increase in operating lease liabilities of
approximately $0.5 million, due to a new Multigioco property lease entered into to accommodate the groups expansion, an increase in contingent
purchase consideration of approximately $0.9 million, and an increase in promissory notes payable to a shareholder and director of approximately
$0.26 million.
Working Capital
Working capital remained
static at approximately $1.5 million at June 30, 2022 and December 31, 2021.
Accumulated Deficit
As of June 30, 2022, we had
accumulated deficit of approximately $54.6 million compared to accumulated deficit of approximately $48.2 million at December 31, 2021.
Cash Flows from Operating Activities
Net cash used in operating activities was approximately
$3.6 million and $1.8 million for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $1.8 million.
The increase in cash used in operating activities is primarily due to the increase in operating loss of approximately $3.0 million as
discussed under results of operations above, offset by an increase in non-cash movements of approximately $2.6 million, primarily due
to an increase in the movement in stock based compensation expense of approximately $1.3 million, including the accelerated amortization
of stock options granted to a severed executive whose options vested immediately, the movement in the change in the fair value of contingent
purchase consideration of approximately $0.9 million, due to the accretion expense expected on the USB earnout, and the increase in the
movement of depreciation and amortization of approximately $0.45 million, primarily due the amortization of intangibles on the acquisition
of USB.
Cash Flows from Investing Activities
Net cash used in investing activities for the six
months ended June 30, 2022 was approximately $0.2 million compared to net cash used in investing activities of approximately $0.1 million
for the six months ended June 30, 2021. We invested funds in computer related software and hardware predominantly for the U.S. based expansion
strategy.
Cash Flows from Financing
Activities
Net cash provided by financing
activities for the six months ended June 30, 2022 was approximately $3.1 million compared to approximately $2.9 million for the six months
ended June 30, 2022. In the current period, a net amount of approximately $2.6 million was raised from a registered direct offering discussed
above, after broker fees and expenses of approximately $0.4 million, and a further, approximately $0.25 million was raised from ATM sales,
as discussed above. In the prior year net cash provided by financing activities consisted primarily of net proceeds of approximately $3.9
million raised from the exercise of warrants related to the underwritten public offering in August 2020, offset by the repayment of the
bank letter of credit of approximately $0.5 million and the payment of deferred purchase consideration of approximately $0.4 million.
Contractual Obligations
Current accounting standards
require disclosure of material obligations and commitments to make future payments under contracts, such as debt, lease agreements, and
purchase obligations.
39
The amount
of future minimum lease payments under finance leases are as follows:
| |
Amount |
| Remainder of 2022 | | |
$ | 3,989 | |
| 2023 | | |
| 6,488 | |
| 2024 | | |
| 753 | |
| Total undiscounted minimum future lease payments | | |
$ | 11,230 | |
The amount of future minimum lease payments under
operating leases are as follows:
| |
Amount |
| Remainder of 2022 | | |
$ | 165,030 | |
| 2023 | | |
| 288,991 | |
| 2024 | | |
| 218,147 | |
| 2025 | | |
| 196,715 | |
| 2026 and thereafter | | |
| 321,741 | |
| Total undiscounted minimum future lease payments | | |
$ | 1,190,624 | |
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue
or expenses, results of operations, liquidity, capital expenditures or capital resources that we expect to be material to investors. We
do not have any non-consolidated, special-purpose entities.
Related Party Transactions
Deferred
Purchase consideration, Related Party
During the first
and second quarter of the prior year, we paid the remaining balance of €312,500 (approximately $385,121) to related parties
in terms of the Virtual Generation promissory note.
The movement
on deferred purchase consideration consists of the following:
| |
December 31, 2021 |
Principal Outstanding | |
| | |
Promissory notes due to related parties | |
$ | 382,128 | |
Repayment in cash | |
| (385,121 | ) |
Foreign exchange movements | |
| 2,993 | |
| |
| — | |
Present value discount on future payments | |
| | |
Present value discount | |
| (5,174 | ) |
Amortization | |
| 5,133 | |
Foreign exchange movements | |
| 41 | |
| |
| — | |
Deferred purchase consideration, net | |
$ | — | |
Related Party (Payables) Receivables
Related party payables and receivables represent non-interest-bearing (payables) receivables that are due on demand.
The balances
outstanding are as follows:
| |
June 30, 2022 | |
December 31, 2021 |
Related Party payables | |
| | | |
| | |
Luca Pasquini | |
$ | (173 | ) | |
$ | (502 | ) |
Victor Salerno | |
| (321,144 | ) | |
| (51,878 | ) |
| |
$ | (321,317 | ) | |
$ | (52,380 | ) |
| |
| | | |
| | |
Related Party Receivables | |
| | | |
| | |
Luca Pasquini | |
$ | — | | |
$ | 1,413 | |
40
Luca
Pasquini
On January 31, 2019, we acquired
Virtual Generation for €4,000,000 (approximately $4,576,352), Mr. Pasquini, who at the time of acquisition was an executive
officer and director of the Corporation, was a 20% owner of Virtual Generation and was due gross proceeds of €800,000 (approximately
$915,270). The gross proceeds of €800,000 was to be settled by a payment in cash of €500,000 over a twelve month period
and by the issuance of common stock valued at €300,000 over an eighteen month period. As of June 30, 2021, we had paid Mr. Pasquini
the full cash amount of €500,000 (approximately $604,380) and issued 112,521 shares valued at €300,000 (approximately
$334,791).
On January 22, 2021, we issued
Mr. Pasquini 44,968 shares of common stock valued at $257,217, in settlement of accrued compensation due to him.
On July 11, 2021, we entered
into an agreement with Engage IT Services Srl.("Engage"), to provide gaming software and maintenance and support of the system,
the total contract price was €390,000 (approximately $459,572), in addition, on October 14, 2021, we entered into
a further agreement with Engage, to provide gaming software and maintenance and support of the system for a period of 12 months, the total
contract price was €1,980,000 (approximately $2,192,000). Mr. Pasquini owns 34% of Engage
On September 13, 2021, Mr.
Pasquini, the Company’s Vice President of Technology, resigned as a director of the Company and on October 4, 2021, Mr. Pasquini
became the Global Head of Engineering of the Company’s subsidiary Odissea Betriebsinformatik
Beratung GmbH and ceased to be Vice President of Technology and an executive officer of the Company.
Michele
Ciavarella
Mr. Ciavarella, the Company’s Executive Chairman
of the Board, agreed to receive $140,000 of his 2021 fiscal year compensation as a restricted stock award, on January 22, 2021, we
issued Mr. Ciavarella 24,476 shares of common stock valued at $140,000 on the date of issue.
On January 22, 2021, we issued
Mr. Ciavarella 175,396 shares of common stock valued at $1,003,265, in settlement of accrued compensation due to him.
On July 15,
2021, Mr. Ciavarella, our Executive Chairman y, was appointed as our interim Chief Executive Officer and President, effective July 15,
2021. Mr. Ciavarella will serve as our Executive Chairman and interim Chief Executive Officer until the earlier of his resignation or
removal from office.
Mr. Ciavarella
agreed to receive his 2021 bonus and a portion of his 2022 salary as a restricted stock award. On January 7, 2022, we issued
Mr. Ciavarella 162,835 shares of common stock valued at $425,000 on the date of issue.
Carlo
Reali
On January 5, 2022, we promoted
Carlo Reali to the role of Interim Chief Financial Officer.
On March 29, 2022, we issued
Mr. Reali ten-year options exercisable for 100,000 shares of common stock, at an exercise price of $2.50 per share, vesting
equally over a 4 year period commencing on January 1, 2023.
We do not have a formal employment or other compensation
related agreement with Mr. Reali; however, Mr. Reali will continue to receive the same compensation that he currently receives which is
an annual base salary of €76,631 (approximately $83,847).
Victor
Salerno
On
July 15, 2021, we consummated the acquisition of USB and in terms of the Purchase Agreement, we acquired 100% of USB, from its members
(the “Sellers”). Mr. Salerno was a 68% owner of USB and received $4,080,000 of the $6,000,000 paid in cash
upon closing and 860,760 of the 1,265,823 shares of common stock issued on closing.
Together
with the consummation of the acquisition of USB, we entered into a 4 year employment agreement with Mr. Salerno terminating on July 14,
2025 (the “Salerno Employment Agreement”), automatically renewable for a period of one year unless notified by either party
of non-renewal. The employee will earn an initial base salary of $0 and thereafter $150,000 per annum commencing on January
1, 2022. Mr. Salerno is entitled to bonuses, equity incentives and benefits consistent with those of other senior employees.
Mr.
Salerno may be terminated for no cause or resign for good reason, which termination would entitle him to the greater of one year’s
salary or the remaining term of the employment agreement plus the highest annual incentive bonus paid to him during the past two years.
If Mr. Salerno is terminated for cause he is entitled to all unpaid salary and expenses due to him at the time of termination. If the
employment agreement is terminated due to death, his heirs and successors are entitled to all unpaid salary, unpaid expenses and one times
his annual base salary. Termination due to disability will result in Mr. Salerno being paid all unpaid salary and expenses and one times
annual salary.
41
Pursuant
to the Salerno Employment Agreement, Mr. Salerno has also agreed to customary restrictions with respect to the disclosure and use of the
Company’s confidential information and has agreed that work product or inventions developed or conceived by him while employed with
the Company relating to its business is the Company’s property. In addition, during the term of his employment and if terminated
for cause for the 12 month period following his termination of employment, Mr. Salerno has agreed not to (1) perform services on behalf
of a competing business which was the same or similar to the type of services he was authorized, conducted, offered or provided to the
Company, (2) solicit or induce any of the Company’s employees or independent contractors to terminate their employment with the
Company, (3) solicit any actual or prospective customers with whom he had material contact on behalf of a competing business or (4) solicit
any actual or prospective vendors with whom he had material contact to support a competing business.
On September 13, 2021, the
Board appointed Mr. Salerno, the President and founder of our newly acquired subsidiary, USB, to serve as a member of the Board.
Prior to the acquisition
of USB, Mr. Salerno had advanced USB $100,000 of which $50,000 was forgiven and the remaining $50,000 is still
owing to Mr. Salerno, which amount earns interest at 8% per annum, compounded monthly and is repayable on December 31, 2023.
Between February 23, 2022 and May 18, 2022,
Mr. Salerno advanced USB a total of $260,000 in terms of purported promissory notes, bearing interest at 10% per annum and repayable on
June 30, 2022. These purported promissory notes contain a default clause whereby any unpaid principal would attract an additional 25%
penalty. These notes were advanced to USB without our consent, as per the terms of the Members Interest Purchase Agreement entered into
on July 15, 2021. Therefore we acknowledge the advances of funds to USB by Mr. Salerno, however the terms of the advance and the default
penalty have not been accepted and are subject to negotiation or dispute.
Paul
Sallwasser
On
September 13, 2021, we granted Mr. Sallwasser ten year options exercisable for 21,300 shares of common stock at an exercise
price of $5.10, vesting equally over a twelve month period commencing on September 13, 2021.
Steven
Shallcross
On
January 22, 2021, we issued to Mr. Shallcross, a director of the Company, 5,245 shares of common stock valued at $30,000, in
settlement of directors’ fees due to him.
On
September 13, 2021, we granted Mr. Shallcross ten year options exercisable for 13,600 shares of common stock at an exercise
price of $5.10, vesting equally over a twelve month period commencing on September 13, 2021.
Andrea
Mandel-Mantello
On
June 29, 2021, the board of directors appointed Mr. Mandel-Mantello to serve as a member of the Board. The appointment was effective immediately
and Mr. Mandel-Mantello serves on the audit committee of the Board.
On
September 13, 2021, we granted Mr. Mandel-Montello ten year options exercisable for 13,600 shares of common stock at an exercise
price of $5.10, vesting equally over a twelve month period commencing on September 13, 2021.