UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM
_________________
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended
or
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number
_________________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1-
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 12, 2021, the registrant had shares of common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
| PART I - | FINANCIAL INFORMATION | PAGE |
| Cautionary Statement Regarding Forward Looking Statements | 3 | |
| Item 1 | Financial Statements | |
| Consolidated Balance Sheets (unaudited) | 4 | |
| Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) | 5 | |
| Consolidated Statements of Changes in Stockholders' Equity (unaudited) | 6 | |
| Consolidated Statements of Cash Flows (unaudited) | 7 | |
| Notes to Consolidated Financial Statements (unaudited) | 9 | |
| Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operation | 36 |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 51 |
| Item 4 | Controls and Procedures | 51 |
| PART II - | OTHER INFORMATION | 51 |
| Item 1 | Legal Proceedings | 51 |
| Item 1A | Risk Factors | 52 |
| Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 55 |
| Item 3 | Defaults Upon Senior Securities | 55 |
| Item 4 | Mine Safety Disclosures | 55 |
| Item 5 | Other Information | 55 |
| Item 6 | Exhibits | 56 |
| SIGNATURES | 57 | |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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 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, 2020 filed with the Securities and Exchange Commission on April 13, 2021.
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.
COVID-19 UPDATE
As 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, which measures continue in effect as of the date of this Form 10-Q.
On March 10, 2020 the Italian government imposed further restrictions on travel throughout Italy as well as transborder crossings and have either postponed or cancelled most professional sports events which has had an effect on our overall sports betting handle and revenues and may negatively impact our 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 currently remain in place. The closing of physical betting shop locations did not affect our online and mobile business operations which has mitigated some of the impact. Due to the reduction in Covid-19 cases in Italy, all betting shops reopened on June 14, 2021. Due to the high percentage of vaccinations administered in Italy, we do not anticipate further severely restrictive lockdowns.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELYS GAME TECHNOLOGY, CORP.
Consolidated Balance Sheets
(Unaudited)
September 30, 2021 | December 31, 2020 | |||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Gaming accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Related party receivable | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Non-Current Assets | ||||||||
| Restricted cash | ||||||||
| Property, plant and equipment | ||||||||
| Right of use assets | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Marketable securities | ||||||||
| Total Non - Current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Current Liabilities | ||||||||
| Bank overdraft | $ | $ | ||||||
| Line of credit - bank | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Gaming accounts payable | ||||||||
| Taxes payable | ||||||||
| Related party payable | ||||||||
| Deferred purchase consideration, net of discount of $ | ||||||||
| Deferred purchase consideration, Related Party, net of discount of $ | ||||||||
| Convertible debentures | ||||||||
| Operating lease liability | ||||||||
| Financial lease liability | ||||||||
| Bank loan payable – current portion | ||||||||
| Total Current Liabilities | ||||||||
| Non-Current Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Operating lease liability | ||||||||
| Financial lease liability | ||||||||
| Bank loan payable | ||||||||
| Contingent purchase consideration | ||||||||
| Other long-term liabilities | ||||||||
| Total Non – Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity | ||||||||
| Preferred stock, $ par value; shares authorized, issued | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding as of September 30, 2021 and December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive (deficit) income | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
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 September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Costs and Expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Costs and Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (Expenses) Income | ||||||||||||||||
| Other income | ||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense, net of interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of contingent purchase consideration | ( | ) | ( | ) | ||||||||||||
| Amortization of present value discount | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss on extinguishment of convertible debt | ( | ) | ||||||||||||||
| (Loss) gain on marketable securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Total Other (Expenses) Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss Before Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax provision | ( | ) | ( | ) | ||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding – basic and diluted | ||||||||||||||||
See notes to the unaudited condensed consolidated financial statements
5
ELYS GAME TECHNOLOGY, CORP.
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 2021 and September 30, 2020
(Unaudited)
| Common Stock | Additional | Accumulated Other | ||||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Comprehensive Income | Accumulated Deficit | Total | |||||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Shares issued on conversion of convertible debentures | ||||||||||||||||||||||||
| Common stock issued to settle deferred purchase consideration | ||||||||||||||||||||||||
| Stock based compensation expense | — | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance, March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Shares issued on conversion of convertible debentures | ||||||||||||||||||||||||
| Common stock issued to settle deferred purchase consideration | ||||||||||||||||||||||||
| Stock based compensation expense | — | |||||||||||||||||||||||
| Fair value of warrants issued on convertible debt extensions | — | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Shares issued on conversion of convertible debentures | ||||||||||||||||||||||||
| Common stock issued to settle deferred purchase consideration | ||||||||||||||||||||||||
| Stock based compensation expense | — | |||||||||||||||||||||||
| Public offering proceeds | ||||||||||||||||||||||||
| Expenses related to public offering | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional | Accumulated Other | ||||||||||||||||||||||
| Shares | Amount | Paid-In Capital | Comprehensive Income | Accumulated Deficit | Total | |||||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Proceeds from warrants exercised | ||||||||||||||||||||||||
| Common stock issued to settle liabilities | ||||||||||||||||||||||||
| Restricted stock awards | ||||||||||||||||||||||||
| Stock based compensation expense | — | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Proceeds from warrants exercised | ||||||||||||||||||||||||
| Stock based compensation expense | — | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2021 | ( | ) | ||||||||||||||||||||||
| Shares issued in consideration of acquisition | ||||||||||||||||||||||||
| Proceeds from warrants exercised | ||||||||||||||||||||||||
| Stock based compensation expense | — | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See notes to the unaudited condensed consolidated financial statements
6
ELYS GAME TECHNOLOGY, CORP.
Consolidated Statements of Cash Flows
(Unaudited)
| For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash Used in Operating Activities | ||||||||
| Depreciation and amortization | ||||||||
| Change in fair value of contingent purchase consideration |
| |||||||
| Amortization of present value discount | ||||||||
| Restricted stock awards | ||||||||
| Stock option compensation expense | ||||||||
| Non-cash interest | ||||||||
| Loss on extinguishment of convertible debt | ||||||||
| Unrealized loss (gain) on trading securities | ( | ) | ||||||
| Movement in deferred taxation | ( | ) | ( | ) | ||||
| Bad debt expense | ||||||||
| Gain on Government relief loan forgiven | ( | ) | ||||||
| Changes in Operating Assets and Liabilities (Net of assets acquired and liabilities assumed) | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Accounts receivable | ||||||||
| Gaming accounts receivable | ||||||||
| Gaming accounts liabilities | ||||||||
| Taxes payable | ( | ) | ||||||
| Due from related parties | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Long term liabilities | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Acquisition of subsidiary, net of cash of $ | ( | ) | ||||||
| Acquisition of property, plant and equipment and intangible assets | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from public offering, less expenses related to public offering of $ | ||||||||
| Proceeds from warrants exercised | ||||||||
| Proceeds from bank overdraft | ||||||||
| Repayment of bank credit line | ( | ) | ( | ) | ||||
| Repayment of bank loan | ( | ) | ( | ) | ||||
| Redemption of convertible debentures | ( | ) | ( | ) | ||||
| Proceeds from promissory notes, related party | ||||||||
| Proceeds from Government relief loan | ||||||||
| Repayment of Government relief loan | ( | ) | ||||||
| Repayment of deferred purchase consideration – non-related parties | ( | ) | ( | ) | ||||
| Repayment of deferred purchase consideration – related parties | ( | ) | ( | ) | ||||
| Repayment of financial leases | ( | ) | ( | ) | ||||
| Net Cash Provided by (Used in) Financing Activities | ||||||||
| Effect of change in exchange rate | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash – beginning of the period | ||||||||
| Cash, cash equivalents and restricted cash – end of the period | $ | $ | ||||||
| Reconciliation of cash, cash equivalents and restricted cash within the Balance Sheets to the Statement of Cash Flows | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash included in non-current assets | ||||||||
| $ | 10,801,439 | $ | 11,146,746 | |||||
7
ELYS GAME TECHNOLOGY, CORP.
Consolidated Statements of Cash Flows
(Unaudited)
| For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income tax | $ | $ | ||||||
| Supplemental cash flow disclosure for non-cash activities | ||||||||
| Conversion of convertible debt to common stock | $ | $ | ||||||
| Deferred purchase consideration settled by the issuance of common stock | $ | $ | ||||||
| Common stock issued to settle liabilities | $ | $ | ||||||
| Common shares issued in consideration of acquisition (Refer Note 3 below) | $ | $ | ||||||
See notes to the unaudited condensed consolidated financial statements
8
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”) is an international, vertically integrated commercial-stage company engaged in various aspects of the leisure gaming industry. The Company’s subsidiaries hold gaming licenses to operate in the Italian and Austrian leisure betting markets offering gaming services, including a variety of lottery, casino gaming and sports betting products through two distribution channels: an online channel and a land-based retail channel. Additionally, the Company is a global gaming technology company (known as a “Provider”), which owns and operates a betting software designed with a unique “distributed model” (“shop-client”) software 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 and sports book.
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
shares of the Company’s common stock having a value of $
The Sellers
will have an opportunity to receive up to an additional $38
million
On September 1, 2021, the Company issued a press release announcing the approval of its first license in Washington DC, a Class B Managed Service Provider and Class B Operator licenses to operate a sportsbook within the Grand Central Bar and Grill located in the Adams Morgan area of Washington, D.C. which commenced sports betting in October 2021.
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.
9
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Business (continued)
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) | a recently acquired operational group based in the US 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 operates out of our principal executive suite in Toronto, Canada and satellite executive suites in the USA in San Francisco, California and Delray Beach, Florida, through which we carry-out corporate activities, handle day-to-day reporting and U.S. development planning, and through which various independent contractors and vendors are engaged. |
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 nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. The balance sheet at December 31, 2020 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/A for the fiscal year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (“SEC”).
All amounts referred to in the Notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.
For the purposes of its 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.
10
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Accounting Policies and Estimates (continued)
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, allocation of purchase price, impairment of long-lived assets, the collectability of receivables, leasing arrangements, convertible debentures, 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.
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.
11
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Accounting Policies and Estimates (continued)
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 contingent purchase consideration due on the acquisition of subsidiaries is measured at fair value on an annual basis. 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.
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.
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 September 30, 2021 and December 31, 2020, 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 $
12
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Accounting Policies and Estimates (continued)
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 months and nine months
ended September 30, 2021 and a bad debt expense of $
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, Plant and Equipment
Plant 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 plant 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:
| Description |
Useful Life (in years) | ||||||
| Leasehold improvements | Life of the underlying lease | ||||||
| Computer and office equipment | to | | |||||
| Furniture and fittings | to | ||||||
| Computer Software | to | | |||||
| Vehicles | to | ||||||
13
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:
| Description |
Useful Life (in years) | |||
| Betting Platform Software | ||||
| Ulisse Bookmaker License | Indefinite | |||
| Multigioco and Rifa ADM Licenses | - | |||
| Location contracts | - | |||
| Customer relationships | - | |||
| Trademarks/Tradenames | - | |||
| Websites | ||||
| Non-compete agreements | ||||
The Ulisse Bookmaker License has no expiration date and is therefore not amortized but is tested for impairment on an annual basis in terms of ASC 350 using estimated fair value.
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.
As of September 30, 2021, there were no qualitative indications that impairment of intangible assets or goodwill may be appropriate. Although the COVID-19 pandemic has had and is expected to continue to have a significant impact on our land-based business, the impact is expected to be mitigated because web-based turnover generated by the Company has increased.
14
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Accounting Policies and Estimates (continued)
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 operation 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 property, 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.
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.
15
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Accounting Policies and Estimates (continued)
Revenue Recognition (continued)
Revenues from the Betting Platform include license fees, training, installation, and product support services. 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.
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.
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 only web based distribution through our Austrian subsidiary in the Italian market until June 2021; | |
| (ii) | provider of certified betting Platform software services to global leisure betting establishments and operators. |
The recent acquisition of Bookmakers Company US LLC is reported under the Company’s certified betting platform software services segment.
16
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 on consolidation 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 US 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 preliminary purchase price was allocated to the fair market value of tangible and intangible assets acquired and liabilities assumed as follows:
| Amount | ||||
| Consideration | ||||
| Cash | ||||
1,265,823 shares of common stock at fair market value | ||||
| Contingent purchase consideration | ||||
| Total purchase consideration | $ | |||
| Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
| Cash | ||||
| Other Current assets | ||||
| Property, plant and equipment | ||||
| Other non-current assets | ||||
| Tradenames/Trademarks | ||||
| Customer relationships | ||||
| Non-compete agreements | ||||
| Less: liabilities assumed | ||||
| Current liabilities assumed | ( | ) | ||
| Non-current liabilities assumed | ( | ) | ||
| Imputed Deferred taxation on identifiable intangible acquired | ( | ) | ||
| (2,735,355 | ) | |||
| Net identifiable assets acquired and liabilities assumed | ||||
| Goodwill | ||||
| $ | 35,261,261 | |||
The amount of revenue and earnings include in the Company’s consolidated statement of operations and comprehensive income (loss) for the nine months ended September 30, 2021 and the revenue and earnings of the combined entity had the acquisition date been January 1, 2020.
17
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
| Revenue | Earnings | |||||||
| Actual from July 15, 2021 to September 30, 2021 | $ | 121,552 | $ | (395,566 | ) | |||
| 2021 Supplemental pro forma from January 1, 2021 to September 30, 2021 | $ | 34,288,462 | $ | (7,154,851 | ) | |||
| 2020 Supplemental pro forma from January 1, 2020 to September 30, 2020 | $ | 24,992,504 | $ | (4,810,317 | ) | |||
The 2021 Supplemental pro forma information was adjusted to exclude $120,479 of non-recurring acquisition costs, in addition, the 2021 and 2020 supplemental pro forma information was adjusted to account for amortization of intangibles on acquisition of $579,619 and $802,550 , respectively.
4. Restricted Cash
Restricted cash consists of the following:
| 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. |
| The Company maintains a $ |
5. Property, plant and equipment
| September 30, 2021 | December 31, 2020 | |||||||||||||||
| Cost | Accumulated depreciation | Net book value | Net book value | |||||||||||||
| Leasehold improvements | $ | $ | ( | ) | $ | $ | ||||||||||
| Computer and office equipment | ( | ) | ||||||||||||||
| Fixtures and fittings | ( | ) | ||||||||||||||
| Vehicles | ( | ) | ||||||||||||||
| Computer software | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||
The aggregate
depreciation charge to operations was $
6. Leases
Right of use assets are included in the consolidated balance sheet are as follows:
September 30, 2021 | December 31, 2020 | |||||||
| Non-current assets | ||||||||
| Right of use assets - operating leases, net of amortization | $ | $ | ||||||
| Right of use assets - finance leases, net of depreciation – included in property, plant and equipment | $ | $ | ||||||
Lease costs consists of the following:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Finance lease cost: | ||||||||
| Amortization of financial lease assets | $ | $ | ||||||
| Interest expense on lease liabilities | ||||||||
| Operating lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
18
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
6. Leases (continued)
Other lease information:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from finance leases | $ | ( | ) | $ | ( | ) | ||
| Operating cash flows from operating leases | ( | ) | ( | ) | ||||
| Financing cash flows from finance leases | ( | ) | ( | ) | ||||
| Weighted average remaining lease term – finance leases | ||||||||
| Weighted average remaining lease term – operating leases | ||||||||
| Weighted average discount rate – finance leases | % | % | ||||||
| Weighted average discount rate – operating leases | % | % | ||||||
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 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( | ) | ||
| Total finance lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| $ | 18,453 | |||
Operating lease liability
The amount of future minimum lease payments under operating leases are as follows:
| Operating lease liability | Amount | |||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| $ | 563,789 | |||
19
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
7. Intangible Assets
Intangible assets consist of the following:
|
September 30, 2021 |
December 31, 2020 | ||||||||||||||
| Cost | Accumulated amortization | Net book value | Net book value | ||||||||||||
| Betting platform software | $ | $ | ( |
) | $ | $ | |||||||||
| Licenses | ( |
) | |||||||||||||
| Location contracts | ( |
) | |||||||||||||
| Customer relationships | ( |
) | |||||||||||||
| Trademarks | ( |
) | |||||||||||||
| Non-compete agreements | ( |
) | — | ||||||||||||
| Websites | ( |
) | |||||||||||||
| $ | $ | ( |
) | $ | $ | ||||||||||
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 $
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.
The estimated amortization expense over the next five year period is as follows:
| Amortization Expense | Amount | |||||
| Remainder of 2021 | $ | |||||
| 2022 | ||||||
| 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| Total estimated amortization expense | $ | |||||
8. Goodwill
September 30, 2021 | December 31, 2020 | |||||||
| Opening balance | $ | $ | ||||||
| Acquisition of Bookmakers company US LLC | ||||||||
| Foreign exchange movements | ( | ) | ( | ) | ||||
| Closing balance | $ | $ | ||||||
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.
20
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
9. Marketable Securities
Investments in marketable securities consists of shares of Zoompass Holdings (“Zoompass”) and is accounted for at fair value, with changes recognized in earnings.
The shares of
Zoompass were last quoted on the OTC market at per share on September 30, 2021, resulting in an unrealized loss recorded to earnings
related to these securities of $
10. Line of Credit - Bank
The Company
maintains a $
11. Convertible Debentures
The accounting treatment relating to the convertible debentures issued was in accordance with the guidance in ASC 480 and ASC 815.
As of September
30, 2021 and December 31, 2020, the Company has outstanding, Canadian Dollar denominated convertible debentures in the aggregate principal
amount of CDN $
Convertible debentures of
$
During the year
ended December 31, 2020, investors in Canadian Dollar convertible debentures converted the aggregate principal amount of CDN $
The Aggregate convertible debentures outstanding consists of the following:
| Convertible Debentures | September 30, 2021 | December 31, 2020 | ||||||
| Principal Outstanding | ||||||||
| Opening balance | $ | $ | ||||||
| Repaid | ( | ) | ( | ) | ||||
| Conversion to equity | ( | ) | ||||||
| Foreign exchange movements | ( | ) | ||||||
| Accrued Interest | ||||||||
| Opening balance | ||||||||
| Interest expense | ||||||||
| Repaid | ( | ) | ( | ) | ||||
| Conversion to equity | ( | ) | ||||||
| Foreign exchange movements | ( | ) | ||||||
| Debenture Discount | ||||||||
| Opening balance | ( | ) | ||||||
| Amortization | ||||||||
| Convertible Debentures, net | $ | $ | ||||||
21
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
12. Deferred Purchase Consideration
During the nine month current period, the Company paid the remaining balance of €20,800 (approximately $25,262) to non-related parties in terms of the Virtual Generation promissory note.
The movement on deferred purchase consideration to non-related parties consists of the following:
| Deferred Purchase Consideration | September 30, 2021 | December 31, 2020 | ||||||
| Principal Outstanding | ||||||||
| Promissory note due to non-related parties | $ | $ | ||||||
| Settled by the issuance of common shares | ( | ) | ||||||
| Repayment in cash | ( | ) | ( | ) | ||||
| Foreign exchange movements | ( | ) | ||||||
| Present value discount on future payments | ||||||||
| Present value discount | ( | ) | ( | ) | ||||
| Amortization | ||||||||
| Foreign exchange movements | ( | ) | ||||||
| ( | ) | |||||||
| Deferred purchase consideration, net | $ | $ | ||||||
13. Bank Loan Payable
In September 2016, the Company obtained a loan
of €
The Company
made payments under the loan in the aggregate principal amount of €
14. 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.
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 EBITA 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.
22
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
14. Contingent purchase consideration (continued)
| September 30, 2021 | ||||
| Contingent purchase consideration | ||||
| Contingent purchase consideration measured on the acquisition of USB | $ | |||
| Settled by the issuance of common shares | — | |||
| Repayment in cash | — | |||
| Changes in fair value | ||||
| Contingent consideration at September 30, 2021 | ||||
15. 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 as well as shop deposits that are held by Ulisse.
Balances of other long-term liabilities were as follows:
| Other long-term liabilities | September 30, 2021 | December 31, 2020 | ||||||
| Severance liability | $ | $ | ||||||
| Customer deposit balance | ||||||||
| Total other long-term liabilities | $ | $ | ||||||
16. Related Parties
Notes Payable, Related Party
On March 11,
2020, the Company received an advance of $
The movement on notes payable, Related Party, consists of the following:
| Note Payable, Related Party | September 30, 2021 | December 31, 2020 | ||||||
| Principal Outstanding | ||||||||
| Additions | $ | $ | ||||||
| Repayment | ( | ) | ||||||
| Applied to warrant exercise | ( | ) | ||||||
| — | — | |||||||
| Accrued Interest | ||||||||
| Opening balance | ||||||||
| Interest expense | ||||||||
| Repayment | ( | ) | ||||||
| Applied to warrant exercise | ( | ) | ||||||
| Promissory Notes Payable – Related Party | $ | $ | ||||||
23
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
16. Related Parties (continued)
Convertible notes acquired, Related party
Forte Fixtures and Millworks
acquired certain convertible notes from third parties that had matured on May 31, 2020. The convertible notes had an aggregate principal
amount of $
As an incentive for extending
the maturity date of the convertible debentures, Forte Fixtures was granted year warrants exercisable for shares of common
stock at an exercise price of $
Deferred Purchase consideration, Related Party
During the first
and second quarter, the Company paid the remaining
balance of €
The movement on deferred purchase consideration consists of the following:
| Description | September 30, 2021 | December 31, 2020 | ||||||
| Principal Outstanding | ||||||||
| Promissory notes due to related parties | $ | $ | ||||||
| Settled by the issuance of common shares | ( | ) | ||||||
| Repayment in cash | ( | ) | ( | ) | ||||
| Foreign exchange movements | ||||||||
| Present value discount on future payments | ||||||||
| Present value discount | ( | ) | ( | ) | ||||
| Amortization | ||||||||
| Foreign exchange movements | ( | ) | ||||||
| ( | ) | |||||||
| 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:
September 30, 2021 | December 31, 2020 | |||||||
| Related Party payables | ||||||||
| Luca Pasquini | $ | ( | ) | $ | ( | ) | ||
| Victor Salerno | ( | ) | ||||||
| ( | ) | $ | ( | ) | ||||
| Related Party Receivables | ||||||||
| Luca Pasquini | $ | $ | ||||||
24
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
16. Related Parties (continued)
Gold Street Capital
Gold Street Capital is wholly owned by Gilda Ciavarella, the spouse of Mr. Ciavarella.
Gold Street Capital acquired
certain convertible notes that had matured on May 31, 2020, amounting to CDN $
As an incentive for extending
the maturity date of the convertible debentures, all debenture holders, including Gold Street Capital, were granted two-year warrants
exercisable at an exercise price of $
Luca Pasquini
On January 31, 2019, the
Company acquired VG for €
On January 22, 2021, the Company issued Mr. Pasquini 44,968 shares of common stock valued at , 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 €
On September 13, 2021, Mr. Pasquini, the Company’s Vice President of Technology, resigned as a director of the Company.
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 $
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.
25
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
16. Related Parties (continued)
On September 13, 2021, the board of directors of the Company appointed Mr. Salerno, the President and founder of the Company’s newly acquired subsidiary, Bookmakers Company US LLC (“US Bookmaking”), 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 repayable on December 31, 2023.
Michele Ciavarella
Mr. Ciavarella agreed to receive $ of his 2021 fiscal year compensation as a restricted stock award, on January 22, 2021, the Company issued Mr. Ciavarella shares of common stock valued at $140,000 on the date of issue.
On January 22, 2021, the Company issued Mr. Ciavarella shares of common stock valued at $, in settlement of accrued compensation due to him.
On July 15, 2021, Michele 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.
Matteo Monteverdi
Mr. Monteverdi resigned as the Company’s Chief Executive Officer and President to become the Company’s Head of Special Projects.
Gabriele Peroni
On January 31, 2019,
the Company acquired Virtual Generation Limited for €
On January 22, 2021, the Company issued Mr. Peroni shares of common stock valued at $, in settlement of accrued compensation due to him.
Alessandro Marcelli
On January 22, 2021, the Company issued Mr. Marcelli shares of common stock valued at $, in settlement of accrued compensation due to him.
Franco Salvagni
On January 22, 2021, the Company issued Mr. Salvagni shares of common stock valued at $, in settlement of accrued compensation due to him.
Beniamino Gianfelici
On January 22, 2021, the Company issued Mr. Gianfelici shares of common stock valued at $, in settlement of accrued compensation due to him.
Paul Sallwasser
On September 13, 2021, the Company granted Mr. Sallwasser ten year options exercisable for shares of common stock at an exercise price of $, vesting equally over a twelve month period commencing on September 13, 2021.
26
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
16. Related Parties (continued)
Steven Shallcross
On January 22, 2021, the Company issued to Mr. Shallcross, a director of the Company, shares of common stock valued at $, in settlement of directors’ fees due to him.
On September 13, 2021, the Company granted Mr. Shallcross ten year options exercisable for shares of common stock at an exercise price of $, vesting equally over a twelve month period commencing on September 13, 2021.
Mark Korb
On July 5, 2021,
the Company entered into an employment agreement dated July 1, 2021 with Mark Korb, the Company’s Chief Financial Officer, (the
“Korb Employment Agreement”), to employ Mr. Korb, on a full-time basis commencing September 1, 2021, as Chief Financial Officer
for a term of four (4) years, at an annual base salary of $
In addition, the Korb Employment Agreement also provides for certain payments and benefits in the event of a termination of his employment under specific circumstances. If his employment is terminated by the Company other than for “Cause,” death or Disability or by Mr. Korb for “Good Reason” (each as defined in the Korb Employment Agreement), he will be entitled to receive from the Company in equal installments over a six month period (1) an amount equal to one (1) times the sum of: (A) his base salary and (B) an amount equal to the highest annual MBO Bonus (as defined in the Korb Employment Agreement”) paid to him (if any) in respect of the two (2) most recent fiscal years of the Company but not more than his MBO Bonus for the-then current fiscal year (provided if such termination occurs within the first twelve (12) months of the Agreement, the amount shall be Mr. Korb’s MBO Bonus for the-then current fiscal year); (2) in lieu of any MBO Bonus for the year in which such termination occurs, payment of an amount equal to (A) the MBO Bonus (if any) which would have been payable to Mr. Korb had he remained in employment with the Company during the entire year in which such termination occurred, multiplied by (B) a fraction the numerator of which is the number of days Mr. Korb was employed in the year in which such termination occurs and the denominator of which is the total number of days in the year in which such termination occurs. In addition, he will be entitled to continue to receive under the Employment Agreement an amount equal to the reimbursement of up to $2,000 a month in third-party medical and welfare benefits for Mr. Korb and his dependents, until the earlier of: (A) a period of twelve (12) months after the termination date, or (B) the date Mr. Korb becomes eligible to receive such coverage under a subsequent employer’s insurance plan. Mr. Korb’s receipt of the termination payments and benefits is contingent upon execution of a general release of any and all claims arising out of or related to his employment with the Company and the termination of his employment, and compliance with the restrictive covenants described in the following paragraph.
If the Korb Employment Agreement is terminated by the Company for cause or by Mr. Korb for Good Reason, then Mr. Korb will be entitled to receive accrued and unpaid base salary, earned and unused vacation days through the termination date and all expenses incurred by him prior to the termination date. The Korb Employment Agreement also provides that upon the Disability ( as defined in the Korb Employment Agreement) of Mr. Korb or his death, Mr. Korb will be entitled to receive accrued and unpaid base salary, earned and unused vacation days through the date of his declared Disability or death and all expenses incurred by him prior to such date and one times his base salary.
27
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
16. Related Parties (continued)
Pursuant to the Korb Employment Agreement, Mr. Korb 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. Korb has agreed not to (1) perform services on behalf of a competing business which was the same or similar to the types 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.
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 and Mr. Mandel-Mantello will serve on the audit committee.
On September 13, 2021, the Company granted Mr. Mandel-Montello ten year options exercisable for shares of common stock at an exercise price of $, vesting equally over a twelve month period commencing on September 13, 2021.
Phillipe Blanc
On July 1, 2021,
Philippe Blanc resigned as a director of the Company, simultaneously with Mr. Blanc’s resignation as a director of the Company,
the Company entered into a consulting agreement with Mr. Blanc to provide for his future services in a consulting capacity over two years.
Mr. Blanc will receive €
17. Stockholders’ Equity
For the nine months ended September 30, 2021, the Company issued a total of shares of common stock, valued at $ for the settlement of compensation and directors’ fees to certain of the Company’s related parties, refer note 16 above.
Between January
4, 2021, and September 21, 2021, investors exercised warrants for shares of common stock for gross proceeds of $
On January 22, 2021, the Company issued restricted shares of common stock valued at $ to Michele Ciavarella in terms of a compensation election he made for the 2021 fiscal year.
On July 15, 2021, the Company issued 1,265,823 shares of common stock to the Sellers of USB, at $4.74 per share for a total of $6,000,000, representing 50% of the initial purchase consideration.
28
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
18. Warrants
A summary of all of the Company’s warrant activity during the period January 1, 2020 to September 30, 2021 is as follows:
| Warrants | Number of shares | Exercise price per share | Weighted average exercise price | |||||||||||
| Outstanding January 1, 2020 | $ | $ | ||||||||||||
| Granted | to | |||||||||||||
| Forfeited/cancelled | ( |
) | ||||||||||||
| Exercised | ( |
) | to | |||||||||||
| Outstanding December 31, 2020 | $ | to | ||||||||||||
| Granted | — | |||||||||||||
| Forfeited/cancelled | — | |||||||||||||
| Exercised | ( |
) | to | |||||||||||
| Outstanding September 30, 2021 | $ | to | $ | |||||||||||
The following tables summarize information about warrants outstanding as of September 30, 2021:
| 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 | |||||||||||||||
| $2.50 | $ | 486,173 | $ | 2.50 | ||||||||||||||||
| $3.75 | 48,395 | 3.75 | ||||||||||||||||||
| $5.00 | 11,768 | 5.00 | ||||||||||||||||||
| $ | 546,336 | $ | 2.66 | |||||||||||||||||
29
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
In September 2018, our stockholders approved our 2018 Equity Incentive Plan, which provides for a maximum of 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 – shares of common stock; and (ii) other non-employee director - 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 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 shares of common stock.
In addition, pursuant to the employment agreement entered into with Mr. Monteverdi, the Company granted Mr. Monteverdi a non-plan option to purchase shares of common stock at an exercise price ofthat vest pro rata on each of September 1, 2021, September 1, 2022, September 1, 2023 and September 1, 2024.
During the period ended September 30, 2021, the Company issued ten year options to purchase shares at exercise prices ranging from $ to $ per share to employees.
On July 1, 2021, in compliance with the terms of an employment agreement entered into with Mr. Korb, the Company’s CFO, the Company granted him ten year options to purchase shares of common stock at an exercise price of per share vesting annually commencing on September 1, 2022.
On August 31, 2021, due to the resignation of an employee, unvested options for shares of common stock were forfeited by the employee.
On September 13, 2021, the Company granted the non-executive members of its board ten year options to purchase shares of common stock at an exercise price of $ per share, as a component of annual compensation.
The options awarded during the nine months ended September 30, 2021 were valued using a Black-Scholes option pricing model.
The following assumptions were used in the Black-Scholes model:
| Assumptions |
Nine months ended September 30, 2021 | |||||
| Exercise price | $ | to | ||||
| Risk free interest rate | to | % | ||||
| Expected life of options | years | |||||
| Expected volatility of underlying stock | to | % | ||||
| Expected dividend rate | % | |||||
30
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
19. Stock Options (continued)
A summary of all of the Company’s option activity during the period January 1, 2020 to September 30, 2021 is as follows:
| Stock Option Activity | Number of shares | Exercise price per share | Weighted average exercise price | |||||||||||
| Outstanding January 1, 2020 | $ | to | $ | |||||||||||
| Granted | to | |||||||||||||
| Forfeited/cancelled | — | |||||||||||||
| Exercised | — | |||||||||||||
| Expired | — | |||||||||||||
| Outstanding December 31, 2020 | $ | to | ||||||||||||
| Granted | to | |||||||||||||
| Forfeited/cancelled | ( |
) | ||||||||||||
| Exercised | — | |||||||||||||
| Outstanding September 30, 2021 | $ | to | $ | |||||||||||
The following tables summarize information about stock options outstanding as of September 30, 2021:
| Options outstanding | Options exercisable | |||||||||||||||||||
|
Exercise price |
Number of shares | Weighted average remaining years | Weighted average exercise price | Number of shares | Weighted average exercise price | |||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ |
||||||||||||||||||||
| $ | $ | |||||||||||||||||||
As of September 30, 2021, there were unvested options to purchase shares of common stock. Total expected unrecognized compensation cost related to such unvested options is which is expected to be recognized over a period of 45 months.
The intrinsic value of the options at September 30, 2021 was $.
As of September 30, 2021, there was an aggregate of options to purchase shares of common stock granted under the Company’s 2018 Equity Incentive Plan, and an aggregate of restricted shares granted to certain officers and directors of the Company in settlement of liabilities owing to them, with shares available for future grants.
31
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
20. Revenues
The following table represents disaggregated revenues from our gaming operations for the three months and nine months ended September 30, 2021 and 2020. 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 | Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Turnover | ||||||||||||||||
| Turnover web-based | $ | $ | $ | $ | ||||||||||||
| Turnover land-based | ||||||||||||||||
| Total Turnover | ||||||||||||||||
| Winnings/Payouts | ||||||||||||||||
| Winnings web-based | ||||||||||||||||
| Winnings land-based | ||||||||||||||||
| Total Winnings/payouts | ||||||||||||||||
| Gross Gaming Revenues | ||||||||||||||||
| Less: ADM Gaming Taxes | ||||||||||||||||
| Net Gaming Revenues | ||||||||||||||||
| Service Revenues | ||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
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 months and nine months ended September 30, 2021 and 2020 was anti-dilutive due to the losses realized.
For the three months and nine months ended September 30, 2021 and 2020, the following options, warrants and convertible debentures were excluded from the computation of diluted loss per share as the result of the computation was anti-dilutive:
| Description | Three and nine Months ended September 30, 2021 | Three and nine Months ended September 30, 2020 | |||||
| Options | |||||||
| Warrants | |||||||
| 3,287,774 | 6,338,309 | ||||||
32
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
22. 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 through our Austrian subsidiary in the Italian market until June 2021, and
(ii) Betting platform software and services
Provider of certified betting Platform software services to global leisure betting establishments and operators.
The operating assets and liabilities of the reportable segments are as follows:
Segment Reporting
| September 30, 2021 | ||||||||||||||||
| Betting establishments | Betting platform software and services | All other | Total | |||||||||||||
| Purchase of non-current assets | $ | $ | $ | $ | ||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Non-current assets | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-current liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ( | ) | ||||||||||||
| Net asset position | $ | $ | $ | ( | ) | $ | ||||||||||
33
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
22. Segmental Reporting (continued)
The segment operating results of the reportable segments are disclosed as follows:
| Nine months ended September 30, 2021 | ||||||||||||||||||||||
| Betting establishments | Betting platform software and services | All other | Adjustments | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||||
| Intercompany Service revenue | ( | ) | ||||||||||||||||||||
| Total revenue | ( | ) | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||
| Intercompany service expense | ( | ) | ||||||||||||||||||||
| Selling expenses | ||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||
| Total operating expenses | 34,894,354 | 4,490,865 | 4,518,758 | (3,595,366 | ) | 40,308,611 | ||||||||||||||||
| (Loss) Income from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other income (expense) | ||||||||||||||||||||||
| Other income | ||||||||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Change in fair value of contingent purchase consideration | ( | ) | ( | ) | ||||||||||||||||||
| Amortization of present value discount | ( | ) | ( | ) | ||||||||||||||||||
| Loss on marketable securities | ( | ) | ( | ) | ||||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| (Loss) Income before Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income tax provision | ( | ) | ||||||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||
The operating assets and liabilities of the reportable segments are as follows:
| September 30, 2020 | ||||||||||||||||
| Betting establishments | Betting platform software and services | All other | Total | |||||||||||||
| Purchase of non-current assets | $ | $ | $ | $ | ||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Non-current assets | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-current liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ( | ) | ||||||||||||
| Net asset position | $ | $ | $ | ( | ) | $ | ||||||||||
34
ELYS GAME TECHNOLOGY, CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
22. Segmental Reporting (continued)
The segment operating results of the reportable segments are disclosed as follows:
| Nine months ended September 30, 2020 | ||||||||||||||||||||
| Betting establishments | Betting platform software and services | All other | Adjustments | Total | ||||||||||||||||
| Net Gaming Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Intercompany Service revenue | ( | ) | ||||||||||||||||||
| Total Revenue | ( | ) | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Intercompany service expense | ( | ) | ||||||||||||||||||
| Selling expenses | ||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||
| Total operating expenses | 22,504,275 | 2,823,701 | 2,893,315 | (2,033,248 | ) | 26,188,043 | ||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other (expense) income | ||||||||||||||||||||
| Other income | ||||||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Amortization of present value discount | ( | ) | ( | ) | ||||||||||||||||
| Loss on conversion of debt | ( | ) | ( | ) | ||||||||||||||||
| Loss on marketable securities | ||||||||||||||||||||
| Total other (expenses) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income (Loss) before Income Taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income tax provision | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net Income (Loss) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||
23. Subsequent Events
The Company has evaluated subsequent events through the date the financial statements were issued and did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.
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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/A for the year ended December 31, 2020 filed with the Securities and Exchange Commission on April 13, 2021 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 September 30, 2021.
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 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. Our Austria Bookmaker license that is regulated by the Austrian Federal Finance Ministry (“BMF”) permits us to operate online sports betting in certain European jurisdictions outside of Italy through our subsidiary Ulisse GmbH (“Ulisse”) under the free-trade principles incorporated within bilateral Intra-EU trade agreements that refers to all trade, including e-commerce transactions in most goods, services and products between member states of the European Union (“EU”).
We also provide Gaming services in the US market via our recently acquired subsidiary Bookmakers Company US, LLC in certain licensed states where we offer bookmaking and platform services to our customers. Our intention is to focus our attention on expanding the US market. We recently began operation is Washington DC through a Class B Managed Service Provider and Class B Operator license to operate a sportsbook within the Grand Central Bar and Grill located in the Adams Morgan area of Washington, D.C., and in October 2021 we entered into an agreement with Ocean Resort Casino in Atlantic City to commence operations in the state of New Jersey in March 2022.
Additionally, we are a global gaming technology company which owns and operates a betting software designed with a unique “distributed model” architecture colloquially named Elys Game Board (the “Platform”) through our Odissea subsidiary. 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 VG 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.
Our corporate group is based in North America, which includes an executive suite situated in San Francisco, California 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 September 30, 2021, transaction revenue generated through our subsidiaries Multigioco and Ulisse 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 through Multigioco and Ulisse. Since the majority of Ulisse Data Transmission Centers (CTD) locations were not expected to re-open after the COVID-19 related lockdowns in Italy subside, management decided to simplify our Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence in Italy during Q2-2021 and focusing Ulisse operations to online operations in Austria and other potential European regions.
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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 year ended December 31, 2020 and the nine months ended September 30, 2021, we also generated service revenue from royalties through authorized agents by providing our virtual sports products through our VG subsidiary and generated service revenues through the provision of bookmaking and platform services through our recently acquired subsidiary, Bookmakers Company US, LLC. We intend to leverage our partnerships in these countries to cross-sell our Platform services to expand the global distribution of our betting solutions.
Recent Developments
Impact of COVID-19
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. Due to the high percentage of vaccinations administered in Italy, we do not anticipate further severely restrictive lockdowns.
We anticipate that COVID-19 will continue to negatively impact our operating results in future periods, and we expect that a significant number of locations will not re-open after the COVID-19 related lockdowns in Italy subside. Since the duration and scope of the COVID-19 outbreak worldwide, including the impact to the local economies and retail business is not precisely determinable at this time, management decided to close our Ulisse operations in Italy during Q2 2021, while focusing investments on growing our more familiar Multigioco brand, the result of which management believes has reduced the complexity and improve the efficiency of our gaming operations in Italy.
Expansion and New Markets
United States Operations Development
On July 15, 2021, we completed the acquisition of Bookmakers Company US LLC dba US Bookmaking (“USB”) in accordance with the terms of the Membership Purchase Agreement that we entered into on July 5, 2021 with the members of USB (the “Sellers”), making USB a wholly owned subsidiary of the Company. USB’s management team includes a long time sports book operator Victor Salerno, with over 40 years of experience in the Nevada sports book business managing risk for over 100 properties and who was inducted into the American Gaming Association's Gaming Hall of Fame in 2015 and SBC's Hall of Fame in 2020; Bob Kocienski, CEO, with over 40 years of experience in the gaming industry including oversight on the sports books at several high profile casinos; Robert Walker, Director of Bookmaking, with over 30 years of experience in managing sports books at several casinos including the Stardust, Mirage, and the MGM; and John Salerno, Director of Operations and Compliance with over 20 years of experience. USB currently operates in 4 states (New Mexico, Colorado, North Dakota and Michigan) providing services to 6 clients (Sky Ute Casino Resort, Santa Ana Star Casino, Isleta Resort & Casino, Santa Claran Hotel & Casino, Odawa Casino, and 4 Bears Casino) with pending operations in 2 additional states (Washington, DC and Iowa).
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 our common stock having a value of $6,000,000 based upon a price of $4.74 per share which was the volume weighted average closing price of the stock for the 90 trading days preceding the closing date. The Sellers will have an opportunity to receive up to an additional $38 million plus a potential premium of 10% (or $3.8 million) based upon achievement of stated adjusted cumulative EBITDA milestones during the next four years, payable 50% in cash and 50% in Elys stock at a price equal to volume weighted average price of our 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 exceed 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.
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The Purchase Agreement contains customary representations, warranties and covenants of us and the Sellers. Subject to certain customary limitations, the Sellers have agreed to indemnify us and ours officers and directors against certain losses related to, among other things, breaches of the Sellers’ representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the Purchase Agreement.
The commencement of betting transactions in the United States are subject to obtaining the required certification, licensing and approvals from the respective state gambling control agency, in addition to any other state or federal regulatory approval required by law, On September 1, 2021, we issued a press release announcing the approval of our first license in Washington DC, a Class B Managed Service Provider and Class B Operator licenses to operate a sportsbook within the Grand Central Bar and Grill located in the Adams Morgan area of Washington, D.C. which commenced sports betting in October 2021, and in October 2021 we entered into an agreement with Ocean Resort Casino in Atlantic City to commence operations in the state of New Jersey in March 2022.
Inflation
We do not believe that general price inflation will have a material effect on our business in the near future.
Foreign Exchange
We operate in several foreign countries, including Austria, Italy, Malta 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 US 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 unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles 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.
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.
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Results of Operations
Results of Operations for the three months ended September 30, 2021 and the three months ended September 30, 2020
Revenues
The following table represents disaggregated revenues from our gaming operations for the three months ended September 30, 2021 and 2020. 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 | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | Increase (decrease) | Percentage change | |||||||||||||
| Turnover | ||||||||||||||||
| Turnover web-based | $ | 162,471,799 | $ | 117,879,687 | $ | 44,592,112 | 37.8 | % | ||||||||
| Turnover land-based | 1,193,779 | 25,823,099 | (24,629,320 | ) | (95.4 | )% | ||||||||||
| Total Turnover | 163,665,578 | 143,702,786 | 19,962,792 | 13.9 | % | |||||||||||
| Winnings/Payouts | ||||||||||||||||
| Winnings web-based | 152,328,199 | 110,841,093 | 41,487,106 | 37.4 | % | |||||||||||
| Winnings land-based | 1,031,217 | 21,495,660 | (20,464,443 | ) | (95.2 | )% | ||||||||||
| Total Winnings/payouts | 153,359,416 | 132,336,753 | 21,022,663 | 15.9 | % | |||||||||||
| Gross Gaming Revenues | 10,306,162 | 11,366,033 | (1,059,871 | ) | (9.3 | )% | ||||||||||
| Less: ADM Gaming Taxes | 2,515,570 | 1,698,192 | 817,378 | 48.1 | % | |||||||||||
| Net Gaming Revenues | 7,790,592 | 9,667,841 | (1,877,249 | ) | (19.4 | )% | ||||||||||
| Add: Service Revenues | 239,490 | 33,955 | 205,535 | 605.3 | % | |||||||||||
| Total Revenues | $ | 8,030,082 | $ | 9,701,796 | $ | (1,671,714 | ) | (17.2 | )% | |||||||
The Company generated total revenues of $8,030,082 and $9,701,796 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $1,671,714 or 17.2%.
The change in turnover (handle) is primarily due to the following:
Web-based turnover increased by $44,592,112 or 37.8%. The increase was due to the significant number of new online players while the physical betting shops were closed for a significant portion of the prior year and up until June 14, 2021 due to the pandemic. The reopening of physical land-based locations during June 2021 resulted in a lower percentage growth in our web-based turnover for the current quarter, however it still remains significant and reinforces our belief that web based turnover will continue its growth trajectory. In addition, due to the closure of our Ulisse operations in Italy, we generated no revenue from this entity. We expect the business mix to continue to trend towards online channels, and we still expect quarterly growth for the foreseeable future as we gain market share. The percentage of payouts on web-based turnover improved to 93.8% from 94.0% for the three months ended September 30, 2021 and 2020, respectively.
Land-based turnover decreased by $24,629,320 or 95.4%. The decrease over the prior period was impacted by the closure of the Ulisse Italian operations during June 2021, with no revenue generated from this entity during the current period. The impact of the closure of our Ulisse operations was offset by increased online gaming in Multigioco. We expect the business mix to continue trending towards online channels. The percentage of payouts on land-based turnover increased to 86.4% from 83.2% for the three months ended September 30, 2021 and 2020, respectively.
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The turnover mix impacts our Gross Gaming Revenue. In the prior year three-month period ended September 30, 2020 sports betting represented 31.4% of turnover and casino style games represented 67.8% and other was 0.8%, in the current year three-month period ended September 30, 2021 sports betting represented 19.2% of turnover and casino style games represented 80.1% of turnover and other was 0.7%. Although the shift towards sports betting had a positive impact on our gross gaming revenue, the closure of all Ulisse Italian based locations in the second quarter, had a negative impact on the overall sports betting turnover resulting in our blended Hold (sports betting combined with i-gaming and online poker) decreasing to 6.3% compared to 7.9% for the three months ended September 30, 2021 and 2020, respectively. Casino style games generally have a lower Hold compared to our sports betting business.
Disaggregated sportsbook hold, before gaming taxes, decreased to 14.8% from 17.0% of handle for the three months ended September 30, 2021 and 2020, respectively, a decrease of 2.2 percentage points in sportsbook hold. The closure of the Ulisse operations had a negative impact on overall sports betting during the current three month period compared to the same prior year period and the lower sports betting hold had a negative impact on our overall gross gaming revenue, or our blended hold (sports betting combined with i-gaming and online poker). Although the Casino style games hold improved to 4.2% from 3.6% for the three months ended September 30, 2021 and 2020, respectively, the shift of overall revenue towards on-line casino style games with a lower hold and lower margin poker rake, resulted in an overall blended conversion of turnover to revenue hold of 6.3% compared to 7.9% for the three months ended September 30, 2021 and 2020, respectively, a year-over-year decrease of 1.6 percentage points in blended hold.
Gaming taxes increased by $817,378 or 48.1% over the prior period. The relative rate of our gaming taxes, which is based on Gross Gaming Revenues was 24.4% and 14.9% for the three months ended September 30, 2021 and 2020, respectively. The increase is attributable to all of our Italian based gaming business shifting to Multigioco. In the prior period Ulisse had a significantly lower tax rate due to its incorporation being situated outside of Italy.
The majority of Ulisse CTD locations were not expected to re-open after the COVID-19 related lockdowns in Italy, management simplified its Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence in Italy at the end of the second quarter of 2021, re-focusing our Ulisse online operations in Austria and other potential European regions.
Service revenues increased by $205,535 or 605.3%. This is primarily due to; (i) revenues generated by our Colombian operations of $99,524, which started trading in the last quarter of the prior year and revenues generated of $121,552 from our recent acquisition of USB. This revenue remains insignificant to total revenues during the periods presented.
Selling expenses
We incurred selling expenses of $6,054,757 and $7,154,623 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $1,099,866 or 15.4%. 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 improved to 3.7% compared to 5.0% for the three months ended September 30, 2021 and 2020, respectively. The improvement is due to the wind down of Ulisse during the second quarter, which had a commission percentage of 9.8% in the prior year.
General and Administrative Expenses
General and administrative expenses were $5,075,300 and $3,156,505 for the three months ended September 30, 2021 and 2020, respectively, an increase of $1,918,795 or 60.8%. The increase over the prior year is attributable to the following: (i) an increase in personnel costs of $1,074,838 in our European operations as well as in our US operations as we gear up for our expansion into the US markets, this includes both administrative personnel and engineering personnel to develop the platform for the US market; (ii) an increase in stock based compensation expense of $626,376 primarily due to the periodic amortization expense of options granted to senior management during the second half of the prior year and the third quarter of the current year; (iii) an increase in platform and IT related services to support the services offered by the group of $54,322, and (iv) an increase in depreciation and amortization expense of $185,557 offset by (v) a foreign exchange gain realized predominantly in our corporate operations of $423,452 due to the improvement in the US Dollar exchange rate against the Euro. The balance of the increase of $401,154 consists of numerous individually insignificant expenses that have increased due to the increased activity as we gear up for our expansion into the US market.
Loss from Operations
The loss from operations was $3,099,975 and $609,332 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,490,643 or 408.8%. The increase in operating loss is directly attributable to the decrease in revenues of $1,671,714 and the increase in general and administrative expenses of $1,918,795, offset by a reduction in selling expenses of $1,099,866, as discussed above.
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Other income
Other income was $74,327 and $37,237 for the three months ended September 30, 2021 and 2020, respectively, an increase of $37,090 or 99.6%. Other income includes a gain realized on reconciling our accounting records to the platform records.
Other expense
Other expense was $384 and $109,623 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $109,239 or 99.6%. The prior year expense consists primarily of a contribution made to an Italian sporting Association to relaunch sporting operations post the COVID-19 shut down.
Interest Expense, Net of Interest Income
Interest expense was $4,705 and $56,093 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $51,388 or 91.6%. The decrease is primarily related to the repayment and the conversion into equity of convertible debentures during the prior year resulting in lower interest-bearing debt. The last convertible debenture was repaid during the first quarter of 2021.
Change in fair value of contingent purchase consideration
Change in fair value of contingent purchase consideration was $569,076 and $0 for the three months ended September 30, 2021 and 2020, respectively, an increase of $569,076. 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.
Amortization of present value discount
Amortization of present value discount was $0 and $43,604 for the three months ended September 30, 2021 and 2020, respectively, an increase of $514,892. The amortization of present value discount in the prior period, related to deferred purchase consideration on the acquisition of Virtual Generation which was fully amortized in the first quarter of the current period.
(Loss) gain on Marketable Securities
The loss on marketable securities was $200,000 and $250,000 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $50,000 or 20.0%. 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 $3,799,813 and $1,031,379 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,768,434 or 268.4%. 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 a credit of $284,636 and a charge of $(181,902) for the three months ended September 30, 2021 and 2020, respectively, a decrease of $466,538 or 256.5%. The current period credit is due to the reversal of a tax provision raised in the previous quarter due to the current period reduction in profitability in our Multigioco and Odissea operations and an adjustment to a prior period income tax charge in Ulisse related to incentive bonuses reversed during the current period of $119,660.
Net Loss
Net loss was $3,515,177 and $1,213,281 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,301,896 or 189.7% 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 loss of $(154,572) and a foreign currency translation gain of $218,193 for the three months ended September 30, 2021 and 2020, respectively, primarily due to the strengthening of the US Dollar against the Euro during the current period and the weakening against the Euro in the prior period.
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Results of Operations for the nine months ended September 30, 2021 and the nine months ended September 30, 2020
Revenues
The following table represents disaggregated revenues from our gaming operations for the nine months ended September 30, 2021 and 2020. 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 revenue invoiced for our Elys software service and royalties invoiced for the sale of virtual products.
| Nine Months Ended | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | Increase (decrease) | Percentage change | |||||||||||||
| Turnover | ||||||||||||||||
| Turnover web-based | $ | 613,678,568 | $ | 300,111,151 | $ | 313,567,417 | 104.5 | % | ||||||||
| Turnover land-based | 13,237,738 | 53,635,357 | (40,397,619 | ) | (75.3 | )% | ||||||||||
| Total Turnover | 626,916,306 | 353,746,508 | 273,169,798 | 77.2 | % | |||||||||||
| Winnings/Payouts | ||||||||||||||||
| Winnings web-based | 572,975,466 | 281,541,363 | 291,434,103 | 103.5 | % | |||||||||||
| Winnings land-based | 11,362,524 | 43,286,978 | (31,924,454 | ) | (73.8 | )% | ||||||||||
| Total Winnings/payouts | 584,337,990 | 324,828,341 | 259,509,649 | 79.9 | % | |||||||||||
| Gross Gaming Revenues | 42,578,316 | 28,918,167 | 13,660,149 | 47.2 | % | |||||||||||
| Less: ADM Gaming Taxes | 9,129,881 | 4,294,680 | 4,835,201 | 112.6 | % | |||||||||||
| Net Gaming Revenues | 33,448,435 | 24,623,487 | 8,824,948 | 35.8 | % | |||||||||||
| Add: Service Revenues | 428,924 | 58,752 | 370,172 | 630.1 | % | |||||||||||
| Total Revenues | $ | 33,877,359 | $ | 24,682,239 | $ | 9,195,120 | 37.3 | % | ||||||||
The Company generated total revenues of $33,877,359 and $24,682,239 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $9,195,120 or 37.3%.
The change in turnover (handle) is primarily due to the following:
Web-based turnover increased by $313,567,417 or 104.5%. The increase was due to the significant number of new online players while the physical betting shops were closed for a significant portion of the prior year and up until June 14, 2021 due to the pandemic. The reopening of physical land-based locations during June 2021 resulted in a lower percentage growth in our web-based turnover for the current quarter, however it still remains significant and reinforces our belief that web based turnover will continue its growth trajectory. In addition, due to the closure of our Ulisse operations in Italy during the second quarter, we generated no revenue from this entity. The percentage of payouts on web-based turnover improved to 93.4% from 93.8% for the nine months ended September 30, 2021 and 2020, respectively.
Land-based turnover decreased by $40,397,619 or 75.3%. The decrease over the prior period was impacted by the closure of the Ulisse Italian operations during June 2021, with no revenue generated from this entity during the third quarter. The impact of the closure of our Ulisse land-based operations which were severely impacted by Covid-19, was offset by increased online gaming in Multigioco. We, however, expect the business mix to continue trending towards online channels. The percentage of payouts on land-based turnover increased to 85.8% from 80.7% for the nine months ended September 30, 2021 and 2020, respectively.
The turnover mix impacts our Gross Gaming Revenue. In the prior year nine-month period ended September 30, 2020 sports betting represented 28.3% of turnover and casino style games represented 71.1% and other was 0.6%, in the current year nine-month period ended September 30, 2021 sports betting represented 22.7% of turnover and casino style games represented 76.4% of turnover and other was 0.9%. The payout percentage varies based on the skill and luck of our customers and the outcome of sporting events which are inherently unpredictable and can fluctuate significantly from period to period.
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Disaggregated sportsbook hold decreased to 14.2% from 19.3% of handle for the nine months ended September 30, 2021 and 2020, respectively, a decrease of 5.1 percentage points in sportsbook hold. The decrease in sports betting during the current nine month period compared to the same prior year period has a negative impact on our overall gross gaming revenue, or our blended Hold (sports betting combined with i-gaming and online poker). Casino style games generally have a lower Hold compared to our sportsbook hold. The shift towards growing our online channel, with higher pay-out casino games and lower margin poker rake, resulted in an overall blended conversion of turnover to revenue hold to 6.8% from 8.2% for the nine months ended September 30, 2021 and 2020, respectively, a year-over-year decrease of 1.4 percentage points in blended hold.
Gaming taxes increased by $4,835,201 or 112.6% over the prior period. The relative rate of our gaming taxes, which is based on Gross Gaming Revenues was 21.4% and 14.9% for the nine months ended September 30, 2021 and 2020, respectively. The increase is attributable to the shift of our gaming business to Multigioco which has an average gaming tax of approximately 24.5% compared to Ulisse with a significantly lower tax rate due to its incorporation being situated outside of Italy.
Since the majority of Ulisse CTD locations were not re-opened after the COVID-19 related lockdowns in Italy were lifted as management had decided to simplify our Italian footprint by focusing our investment towards our Multigioco operations and discontinued our Ulisse distribution in Italy at the end of the second quarter of 2021, re-focusing our Ulisse online operations in Austria and other potential European regions.
Service revenues increased by $370,172 or 630.1%. This is predominantly due to revenues generated by our Colombian operations and our newly acquired USB operations. Our Colombian operations only started trading in the current year. Our Platform services customer base is currently limited primarily to services provided to external US and international retail customers and internal group operations of Multigioco, Ulisse and VG. This revenue remains insignificant to total revenues during the periods presented.
Selling expenses
We incurred selling expenses of $26,333,156 and $17,327,150 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $9,006,006 or 52.0%. 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 4.9% for the nine months ended September 30, 2021 and 2020, respectively.
General and Administrative Expenses
General and administrative expenses were $13,975,455 and $8,860,893 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $5,114,562 or 57.7%. The increase over the prior year is attributable to the following: (i) an increase in personnel costs of $1,791,192 in our European operations as well as in our US operations as the Company gears up for its expansion into the US markets and includes both administrative personnel and engineering personnel to develop the platform for the US market; (ii) stock based compensation increased by $1,158,967 primarily due to the periodic amortization expense of options granted to senior management during the second half of the prior year and the current quarter; (iii) an increase in professional fees of $382,611, primarily legal fees incurred on licensing, acquisitions and corporate restructuring; (iv) investor relations expenses of $315,825 primarily related to programs undertaken to promote the company to its US investors; (v) an increase in depreciation and amortization expense of $184,443, primarily due to the amortization of intangibles on the acquisition of USB; and(vi) an increase in platform and IT related services to support the services offered by the group of $552,780, including third party provider revenue shares. The balance of the increase of $728,744 consists of numerous individually insignificant expenses that have increased due to the increased activity as we gear up for our expansion into the US market.
Loss from Operations
The loss from operations was $6,431,252 and $1,505,804 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $4,925,448 or 327.1%. The increase in loss from operations is primarily due to the following: (i) the increase in selling expenses of $9,006,006; (ii) the increase in general and administrative expenses of $5,114,562; partially offset by (iii) the increase in revenue of $9,195,120, as discussed above.
Other income
Other income was $444,689 and $62,933 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $381,756 or 606.6%. Other income includes a COVID tax credit of $85,874 received from the Agenzia delle Dogane e dei Monopoli (“ADM”) for taxes previously charged; $204,888 of COVID relief funds received by Ulisse during the current period, a gain of $35,507 realized on reconciling our accounting records to the platform records, and other immaterial non-operating amounts received.
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Other expense
Other expense was $28,522 and $109,623 the nine months ended September 30, 2021 and 2020, respectively, an increase of $81,101 or 74.0%. Other expense includes an administrative penalty of $26,930, related to ADM taxes provided for by Multigioco. The prior year expense consists primarily of a contribution made to an Italian sporting Association to relaunch sporting operations post the COVID-19 shut down.
Interest Expense, Net of Interest Income
Interest expense was $14,748 and $229,166 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $214,418 or 93.6%. The decrease is primarily related to the repayment and the conversion into equity of convertible debentures during the prior year resulting in lower interest-bearing debt. The last convertible debenture was repaid during the first quarter of 2021.
Change in fair value of contingent purchase consideration
Change in fair value of contingent purchase consideration was $569,076 and $0 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $569,076. 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.
Amortization of present value discount
Amortization of present value discount was $12,833 and $780,678 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $767,845. The prior year charge relates to the amortization of present value discounts on the convertible debentures which matured during the second quarter of 2020 and deferred purchase consideration on the acquisition of Virtual Generation which was fully amortized in the first quarter of the current period.
Loss on extinguishment of convertible debt
The loss on extinguishment of convertible debt was $0 and $719,390 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $719,390 or 100%. In the prior period, we issued additional warrants to certain debenture holders who agreed to extend the maturity date of their debentures by between 90 and 120 days to allow us to complete a fund raising exercise. These warrants were valued using a Black-Scholes valuation model.
(Loss) gain on Marketable Securities
The loss on marketable securities was $(292,500) and the gain on marketable securities was $472,500 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $765,000 or 161.9%. 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 $6,904,242 and $2,809,228 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $4,095,014 or 145.8%. The increase is attributable to the increase in loss from operations, the loss on extinguishment of convertible debt in the prior period and the increase in loss on marketable securities, offset by the increase in other income, as discussed above.
Income Tax Provision
The income tax provision was a credit of $8,136 for the nine months ended September 30, 2021 and a charge of $771,999 for the nine months ended September 30, 2020, a decrease of $780,135 or 101.1%. The prior period tax charge included a withholding tax charge on dividends declared by one of our subsidiaries to our holding company of €150,000 (Approximately $162,000). The current year charge decreased due to losses incurred at our Ulisse operation during the current period and lower profitability at our Multigioco operation during the current period.
Net Loss
Net loss was $6,896,106 and $3,581,227 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $3,314,879 or 92.6% due to the increase in loss before income taxes, the increase in the change in fair value of contingent purchase consideration offset by 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.
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We recorded a foreign currency translation loss of $(413,917) and a foreign currency translation gain of $124,679 for the nine months ended September 30, 2021 and 2020, respectively, primarily due to the strengthening of the US Dollar against the Euro during the current period and the weakening against the Euro in the prior period.
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 plant 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.
We finance our business primarily though debt and equity placements and cash generated from operations. 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.
We finance our business to provide adequate funding for at least 12 months, based on forecasted profitability and working capital needs, and in the future, we anticipate that we would need to raise additional cash through equity or debt funding.
We believe that our cash and cash equivalents and our ability to access public equity markets provide us with sufficient liquidity to meet our current and foreseeable cash flow needs.
On July 15, 2021, we closed on the acquisition of US Bookmakers for a cash consideration of $6,000,000.
The ongoing Covid-19 pandemic has impacted on our Italian based operations, we have seen a significant increase in Turnover (Handle) from our web-based operations and a significant decline in turnover from our land-based operations 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. The selling expenses, which primarily consists of commissions, paid to our agents is based on turnover and not Gross Gaming Revenues, therefore the significant increase in web-based turnover at lower hold margins, resulted in a significant increase in selling expenses, offsetting the benefit we realized on the increased web-based turnover, whilst increasing the complexity of our business with significantly higher transaction volumes.
Assets
At September 30, 2021, we had total assets of $63,732,313 compared to $35,857,979 at December 31, 2020, an increase of $27,874,334. The increase is primarily related to the increase in goodwill of $27,024,036 and intangible assets of $10,066,732 recognized on the acquisition of USB, offset by a decrease in cash of $9,537,782 primarily due to the net cash payment to the USB sellers of $5,973,839 and the absorption of negative operating cash flows of $5,258,606, offset by net from financing activities of $2,891,186
Liabilities
At September 30, 2021, we had $38,310,489 in total liabilities compared to total liabilities of $15,701,626 at December 31, 2020, an increase of $22,608,863. The increase is primarily attributable to the contingent purchase consideration on the acquisition of USB of $25,286,033, the increase in the deferred tax liability of $2,149,004, offset by a decrease in accounts payable and accrued liabilities of $3,735,582, the repayment of the bank line of credit of $500,000, the repayment of deferred purchase consideration of $394,627 and the redemption of convertible debt of $34,547.
Working Capital
We had $9,408,035 in cash and cash equivalents at September 30, 2021 compared to $18,945,817 on December 31, 2020. On July 15, 2021, we closed on the acquisition of US Bookmakers which required a net cash payment of $5,973,839.
We had a working capital surplus of $3,485,411 at September 30, 2021, compared to a working capital surplus of $7,879,631 at December 31, 2020. The working capital position was affected by the payment of a net $5,973,839 upon the acquisition of USB, the absorption of negative operating cash flows of $5,258,607, offset by net from financing activities of $2,891,186.
Accumulated Deficit
As of September 30, 2021, we had accumulated deficit of $40,074,623 compared to accumulated deficit of $33,178,517 at December 31, 2020.
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Cash Flows from Operating Activities
Net cash used in operating activities was $5,258,609 and $412,867 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $4,845,742, primarily related to; (i) the increase in net loss of $(2,745,803), discussed under operating results; and (ii) the movements in working capital of $(2,247,489), primarily due to the movement in accounts payable of $1,243,866, prepaid expenses and other current assets of $621,447, taxes payable of $542,126, the movement in long term liabilities of $287,243 offset by the increase in gaming accounts liabilities of $513,332.
Cash Flows from Investing Activities
Net cash used in investing activities was $6,109,674 and $172,674 for the nine months ended September 30, 2021 and 2020, an increase of $5,937,000, primarily due to the initial net cash payment on the acquisition of USB of $5,973,839.
Cash Flows from Financing Activities
Net cash provided by financing activities was $2,891,186 and $4,697,328 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $1,806,142. The decrease is primarily due to; (i) a decrease in proceeds from subscriptions, net of fees of $8,966,121; (ii) a decrease in proceeds from related party promissory notes of $301,071; offset by (iii) an increase in proceeds from warrants exercised of $3,962,482; (iv) a reduction in the repayment of convertible debentures of $2,983,092 and (v) a reduction in the repayment of bank credit lines of $500,000.
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.
The amount of future minimum lease payments under finance leases are as follows:
| Amount | |||
| Remainder of 2021 | $ | 2,272 | |
| 2022 | 8,957 | ||
| 2023 | 7,177 | ||
| 2024 | 833 | ||
| Total undiscounted minimum future lease payments | $ | 19,239 | |
The amount of future minimum lease payments under operating leases are as follows:
| Amount | |||
| Remainder of 2021 | $ | 76,162 | |
| 2022 | 269,988 | ||
| 2023 | 209,319 | ||
| 2024 | 29,637 | ||
| Total undiscounted minimum future lease payments | $ | 585,106 | |
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.
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Related Party Transactions
The following includes a summary of transactions during our fiscal year ended December 31, 2020 and our current period ended September 30, 2021 to which we have been a party, in which the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements.
Related party payables and receivables represent non-interest-bearing (payables) receivables that are due on demand.
The balances outstanding are as follows:
September 30, 2021 | December 31, 2020 | |||||||
| Related Party payables | ||||||||
| Luca Pasquini | $ | (543 | ) | $ | (565 | ) | ||
| Victor Salerno | (50,854 | ) | — | |||||
| (51,397 | ) | (565 | ) | |||||
| Related Party Receivables | ||||||||
| Luca Pasquini | $ | 1,438 | $ | 1,519 | ||||
Amounts due to Luca Pasquini are for advances made to various subsidiaries for working capital purposes.
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 repayable on December 31, 2023.
Gold Street Capital is wholly owned by Gilda Ciavarella, the spouse of Mr. Ciavarella. Amounts due to Gold Street Capital Corp., the major stockholder of Elys, are for reimbursement of expenses.
On September 4, 2019, we issued to Gold Street 15,196 shares of our common stock as payment in settlement of $48,508 of the reimbursable expenses owing to Gold Street. There was no balance owing to Gold Street as of September 30, 2021 and December 31, 2020, respectively.
Gold Street Capital acquired certain convertible notes that had matured on May 31, 2020, amounting to CDN $35,000 from third parties, the maturity date of these convertible notes was extended to September 28, 2020. The convertible notes together with interest thereon, amounting to CDN $44,062 (approximately $34,547) was outstanding at December 31, 2020. This amount was repaid during the current period end.
As an incentive for extending the maturity date of the convertible debentures, all debenture holders, including Gold Street Capital, were granted two-year warrants exercisable at an exercise price of $3.75 per share, and three-year warrants exercisable at an exercise price of $5.00 per share. Gold Street Capital was granted two year-warrants exercisable for 9,533 shares of common stock at $3.75 per share and three-year warrants exercisable for 2,383 shares of common stock at $5.00 per share.
In February 2018 we provided a loan of €39,048 (approximately $45,000) to Engage IT Services Srl to finance hardware purchased by third-party betting shops. In June 2018, we increased the loan by €45,675 (approximately $53,000). The loan bears interest at 4.47% and is due in February 2019. This loan has been repaid in full. During the year ended December 31, 2020, we contracted with Engage IT to provide us software development services of approximately €706,300 (approximately $806,029) of which approximately €20,000 (approximately $24,456) was outstanding at December 31, 2020. Luca Pasquini, one of our officers and directors, holds a 34% stake in Engage IT Services Srl.
As of September 30, 2021, we had settled the balance outstanding to the former shareholders of VG under the VG Share Purchase Agreement by making cash payments equal to €2,500,000 (approximately $2,946,978), and we issued 562,605 shares amounting to €1,500,000 (approximately $1,673,959) of common stock pursuant to the promissory note. Mr. Pasquini has been paid cash of €500,000 (approximately $604,380) and issued 112,521 shares of common stock valued at €300,000 (approximately $399,061). Mr. Peroni has been paid cash of €500,000 (approximately $604,380) and issued 112,521 shares of common stock valued at €300,000 (approximately $334,792).
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In addition, pursuant to the terms of the VG purchase agreement, we agreed to pay the sellers as an earnout payment in shares of our common stock within one month from the end of the 2019 fiscal year such number of shares as shall equal to an aggregate amount of €500,000 (approximately $561,000), if the amounts of bets made by the users through the VGS platform related to our 2019 fiscal year are at least 5% higher than the amounts of bets made by the users through the VGS platform related to our 2018 fiscal year. Based on 18,449,380 tickets sold in 2019 the VG sellers qualified for the earnout payment of 132,736 shares of common stock equal at a price of $4.23 per share.
We issued promissory notes in the principal amounts of $300,000 during the year ended December 31, 2020 to Forte Fixtures and Millwork, Inc., a Company controlled by the brother of our Executive Chairman. The aggregate principal amount of $300,000 together with interest thereon of $22,521 was repaid in full during the year.
Forte Fixtures and Millwork acquired certain convertible notes from third parties that had matured on May 31, 2020. The convertible notes had an aggregate principal amount of $150,000 and only the accrued interest of $70,000 on a note with an aggregate principal amount of $350,000 and notes with an aggregate principal amount of CDN $207,000, the maturity date of these convertible notes was extended to September 28, 2020. The convertible notes together with interest thereon, amounting to $445,020 were repaid between August 23, 2020 and October 21, 2020.
As an incentive for extending the maturity date of the convertible debentures, Forte Fixtures was granted two year warrants exercisable for 134,508 shares of common stock at an exercise price of $3.75 per share and three year warrants exercisable for 33,627 shares of common stock at an exercise price of $5.00 per share. These warrants were exercised on December 30, 2020, for gross proceeds of $630,506.
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The movement on deferred purchase consideration consists of the following:
| Description |
September 30, 2021 |
December 31, 2020 | |||||
| Principal Outstanding | |||||||
| Promissory notes due to related parties | $ | 382,128 | $ | 1,279,340 | |||
| Settled by the issuance of common shares | — | (482,978 | ) | ||||
| Repayment in cash | (385,121 | ) | (471,554 | ) | |||
| Foreign exchange movements | 2,993 | 57,230 | |||||
| — | 382,128 | ||||||
| Present value discount on future payments | |||||||
| Present value discount | (5,174 | ) | (80,069 | ) | |||
| Amortization | 5,133 | 76,222 | |||||
| Foreign exchange movements | 41 | (1,327 | ) | ||||
| — | (5,174 | ) | |||||
| Deferred purchase consideration, net | $ | — | $ | 376,954 | |||
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.
Mr. Ciavarella agreed to receive $140,000 of his 2021 fiscal year compensation as a restricted stock award, on January 22, 2021, we issued Mr. Ciavarella 24,976 shares of common stock valued at $140,000 on the date if 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 January 22, 2021, we issued Mr. Peroni 74,294 shares of common stock valued at $424,962, in settlement of accrued compensation due to him.
On January 22, 2021, we issued Mr. Marcelli 34,002 shares of common stock valued at $194,491, in settlement of accrued compensation due to him.
On January 22, 2021, we issued Mr. Salvagni 70,807 shares of common stock valued at $405,016, in settlement of accrued compensation due to him.
On January 22, 2021, we issued Mr. Gianfelici 63,278 shares of common stock valued at $361,950, in settlement of accrued compensation due to him.
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 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 and Mr. Mandel-Mantello will serve on the audit committee.
On July 1, 2021, Philippe Blanc resigned as a director of the Company, simultaneously with Mr. Blanc’s resignation as a director of the Company, the Company entered into a consulting agreement with Mr. Blanc to provide for his future services in a consulting capacity over two years. Mr. Blanc will receive €105,000 per annum as compensation.
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On July 5, 2021, the Company entered into an employment agreement dated July 1, 2021 with Mark Korb, the Company’s Chief Financial Officer, (the “Korb Employment Agreement”), to employ Mr. Korb, on a full-time basis commencing September 1, 2021, as Chief Financial Officer for a term of four (4) years, at an annual base salary of $360,000 and such additional performance bonus payments as may be determined by the Company’s board of directors with a target bonus of 40% of his base salary. Mr. Korb will also be entitled to pension, medical, retirement and other benefits available to other Company senior officers and directors and he will receive an allowance of up to $2,000 per month towards medical and welfare benefits. In connection with the Korb Employment Agreement, On July 1, 2021, the Compensation Committee of the Board granted Mr. Korb, an option to purchase 400,000 shares of the Company’s common stock. The shares of common stock underlying the option award vest pro rata on a monthly basis over a thirty-six month period. The options are exercisable for a period of ten years from the date of grant and have an exercise price of $4.03 per share.
On July 11, 202.1, 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). Mr. Pasquini owns 34% of Engage
On July 15, 2021, Michele 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.
On September 13, 2021, the board of directors of the Company appointed Mr. Salerno, the President and founder of the Company’s newly acquired subsidiary, Bookmakers Company US LLC (“US Bookmaking”), to serve as a member of the Board. 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, 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 in January 1, 2022. Mr. Salerno is entitled to bonuses, equity incentives and benefits consistent with those of other senior employees.
On September 13, 2021, Mr. Pasquini, the Company’s Vice President of Technology, resigned as a director of the Company.
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.
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.
On September 13, 2021, the Company 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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Elys Game Technology, Corp is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 4. Controls and Procedures.
Management's Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), our management, under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021. Based on the foregoing evaluation, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), concluded that due to our limited resources our disclosure controls and procedures were not effective. Specifically, our internal control over financial reporting was not effective due to material weaknesses related to a limited segregation of duties due to our limited resources and the small number of employees. Management has determined that this control deficiency constitutes a material weakness which can result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual financial statements that would not be prevented or detected. In addition, due to limited staffing, we are not always able to detect minor errors or omissions in reporting.
Going forward, management anticipates that additional staff will be necessary to mitigate these weaknesses, as well as to implement other planned improvements. The Company is currently in the process of improving its disclosure controls and procedures by implementing new policies and guidelines for internal controls and governance as well as increasing the number additional staff that should enable us to document and apply transactional and periodic controls procedures, permit a better review and approval process and improve quality of financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On August 1, 2019, an action was filed against the Company by Elizabeth J. MacLean, the Company’s former CFO, in the Superior Court of Arizona, Maricopa County (the “Arizona Court”), Case No. C2019-008383. The action challenged the Company’s termination of Ms. MacLean’s employment in May 2019 as unlawful under her employment agreement, dated September 19, 2018, with the Company and seeks damages in the amount of $1,050,204. On October 10, 2019, a default judgment was filed in the Arizona Court. On November 4, 2019, the Company filed a motion to set aside the default judgment based on, among other things, the failure by plaintiff’s counsel to follow the notice provisions of Arizona law which led to the default judgment. On January 29, 2020, the Arizona Court ruled in favor of the Company to set aside the default judgement. On March 16, 2021, the Arizona Court of Appeals denied Ms. MacLean’s appeal of the trial court’s decision to set aside a default judgement previously obtained by Ms. MacLean and has awarded costs to the Company, which Ms. MacLean is contesting. The Company believes this action to be wholly without merit and that it has various meritorious defenses to this action, including that Ms. MacLean was terminated during the stated probationary period set forth in her employment agreement with the Company and that the Company had good cause to affect any such termination, whether within or without the probationary period. The Company does not expect this action will have a material adverse effect on its business or its current and expected future operations.
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Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item1A, “Risk Factors,” contained in our Annual Report on Form 10-K/A for the year ended December 31, 2020. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2020.
Risks related to our financial position
The effects of the COVID-19 pandemic have strained and negatively impacted our businesses and operations, and the duration and extent to which COVID-19 may impact our future results of operations and overall financial performance remains uncertain.
The outbreak and spread of COVID-19 and the related adverse public health developments, have adversely affected work forces, economies and financial markets globally. The outbreak has caused the closures of physical locations throughout Italy where we provide our gaming services, of which closures could continue indefinitely for a significant number of these locations if the outbreak intensifies. In 2020, the cancellation of March Madness, suspension of the European Soccer Championship and NHL Hockey, the shortened NBA playoffs, the delay in the MLB season, and other events affected by the COVID-19 pandemic has had an adverse impact on our operations and revenue. Additionally, although most major sporting events and leagues have recently recommenced, the suspension of professional sports competitions throughout the world negatively impacted our ability to offer sports gaming products, and COVID-19 could have a continued material adverse impact on economic and market conditions and trigger a period of continued global economic slowdown, especially in light of potential subsequent waves or new strains of the virus. Our revenue depends on the continuation of major league sports and other sporting events, and we may not generate as much revenue as we would have without the cancellations or postponements that occurred in the wake of COVID-19.
In response to the spread of COVID-19 as well as guidance from public health directives, and orders of national and local government and health authorities, we have implemented work-from-home policies to support community efforts to reduce the transmission of COVID-19 and protect employees. We implemented a number of measures to ensure employee safety and business continuity. Business travel has been suspended, and online and teleconference technology is used to meet virtually rather than in person. The effects of the governmental orders and our work-from-home policies have negatively impact productivity, disrupted our business and delayed our progress in implementing our business plan, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course.
In addition, the outbreak of the COVID-19 coronavirus could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our offices or other workplaces, or due to quarantines. COVID-19 illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.
The global outbreak of the COVID-19 coronavirus continues to rapidly evolve. The extent to which the COVID-19 outbreak may continue to impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.
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We have incurred substantial losses in the past and it may be difficult to achieve profitability.
We have a history of losses and are anticipated to incur additional losses in the development of our business. For the year ended December 31, 2020, we had a net loss of $9.9 million and for the period ended September 30, 2021 we had a net loss of $6.9 million. As of December 31, 2020, and September 30, 2021 we had accumulated deficits of $33.2 million, and $40.1 million, respectively. Since we are currently in the early stages of our development and strategy, we intend to continue to invest in sales and marketing, product and solution development and operations, including by hiring additional personnel, upgrading our technology and infrastructure and expanding into new geographical markets. To the extent we are successful in increasing our customer base, we expect to also incur increased losses in the short term despite the fact that our Platform is easily scalable because costs associated with entering new markets, acquiring clients, customers and operators are generally incurred up front, while service and transactional revenues are generally recognized at future dates if at all. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this section, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease. If we are unable to maintain our profitability, the value of our business and common stock may decrease. Although we cannot assure that we will be able to maintain a profitable level of operations to meet our obligations arising from normal business operations, in recent years we have generated sufficient revenue to maintain our existing operations and continue our moderate organic growth.
The exercise of currently outstanding securities would dilute current holders of our common stock.
If all of the holders of our outstanding securities exercised their outstanding warrants and options, we would be obligated to issue 3,287,774 common shares.
Risks Related to our Business
We expect that competition from internet gaming will continue to grow and intensify in the United States.
We intend to expand the use of our Platform in the United States; however, that will be dependent upon changes in legislation and we expect that we will face increased competition from other leisure betting operators as the potential for legalized internet gaming continues to grow. Several states in the United States are currently considering legislation that would legalize internet gaming at the state level. As a result of the Justice Department’s (“DOJ”) December 2011 opinion concerning the applicability of the Wire Act to internet gaming, certain states including Nevada, Delaware and New Jersey have enacted legislation to authorize various forms of intrastate internet gaming. Based on a recent U.S. Court of Appeals for the First Circuit ruling in New Hampshire Lottery Com’n v. Barr, the 2011 DOJ opinion remains in play, including its conclusion regarding the Wire Act, which permits competition from internet lotteries and other internet, non-sports wagering gaming services that allow their customers to play Las Vegas-style casino games, among others, from home, which could divert customers from our products and thus adversely affect our business. Such internet wagering services are likely to expand in future years and become more accessible to domestic customers as a result of initiatives in some states to consider legislation to legalize internet wagering, including the authorization of intrastate sports wagering. There have also been proposals that would specifically legalize internet gaming under federal law. If we are unable to execute our U.S. strategy, anticipate, react to or penetrate the U.S. market in a timely manner, our competitive position could weaken, which could adversely affect our business and results of operations.
If we have a security incident or breach involving unauthorized access to customer data, our Platform may be perceived as lacking sufficient security, customers may reduce their use of, or stop using our Platform and we may incur significant liabilities, including facing potential criminal proceedings as a result of a violation of Italian gaming and tax laws.
Our Platform involves the storage and transmission of our customer’s confidential and proprietary information, which may include the personal data and information on their customers, players, suppliers and agents. As a result, unauthorized access or use of customer data could expose us to regulatory actions, litigation, investigations, cyber-crime, remediation costs, damage to our reputation and brand, disclosure obligations, loss of customer and partner confidence in the security of our solutions and resulting fees, costs, expenses, loss of revenues, and other potential liabilities including criminal proceedings. While our Platform has security measures in place designed to protect the integrity of customer information and prevent data loss, misappropriation, and other security breaches, if these measures are inadequate or are compromised as a result of third-party action, unauthorized entry and use by our webshop operators, including intentional misconduct by the webshop operators or by computer hackers, theft, employee error, malfeasance or otherwise, our reputation could be damaged, a violation of Italian gaming and tax laws may occur, and our business may suffer and we could incur significant liabilities including facing potential criminal proceedings as a result of a violation of Italian gaming and tax laws. Cybersecurity challenges, including threats to our IT infrastructure or those of our customers or third-party providers, are often targeted at companies such as ours, and may take a variety of forms ranging from malware, phishing, ransomware, man-in-the-middle attacks, session hijacking, denial-of-service, password attacks, viruses, worms and other malicious software programs or cybersecurity attacks to “mega breaches” targeted against hosted software and cloud based IT services. A cybersecurity incident or breach could result in disclosure of confidential information and intellectual property, or cause production downtimes and compromised data. Because cybersecurity attacks and techniques change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect to terminate their business with us or switch their business to a competitor, result in reputational damage, cause us to pay remediation costs or issue service credits or refunds to customers for improper bets or false claims of improper bets, or result in lawsuits, regulatory fines or other action or liabilities including criminal proceedings, which could adversely affect our business and results of operations.
Many states in the United States as well as foreign governments have enacted laws requiring companies to provide notice of data security breaches involving certain types of personal data, and significant fines on companies involved in such incidents may be imposed. In addition, some of our regulators and certifying agents contractually require notification of data security breaches. Security compromises experienced by us or by our competitors may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new clients, cause existing clients to switch to a competing betting software provider, or subject us to third-party lawsuits, regulatory fines or other action or liability including criminal proceedings, which could materially and adversely affect our business and operating results.
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We have and may in the future become the subject of Italian federal and provincial investigations and our business may be adversely affected.
A governmental investigation or criminal trial could divert our management’s attention, result in significant expenses, forfeiture of our licenses, as well as result in negative publicity and adversely affect our business. Both Italian federal and provincial government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing national investigations to detect and prevent anti-money laundering and the misuse of licenses issued by state authorities for banking, money transfer, gaming and other such businesses. A national probe conducted by Guardia di Finanza (the Italian tax police) known as Operation Fantascommesse (Phantom Bet), has targeted for investigation several online licensed gaming operators in Italy for alleged gaming law violations, including the Company and certain members of its senior management that reside and work in Italy. These investigations could lead to criminal proceedings against both licensed businesses and its management because European corporations impose individual responsibility on the legal representatives of each company. In this regard, certain third-party webshop owners have been accused of violations of Italian gaming or tax laws for inappropriate land-based wagering via an online channel. Based thereon, a similar accusation towards the Company was reported to the ADM, the Italian regulatory authority. The ADM completed its inspection of the Company’s operations and Platform and determined that the Platform performed in compliance with the ADM certification requirements. Although no action has been taken by the ADM, there can be no assurance that any action, if any, will not be taken in the future. Due to their positions as the legal representatives of the subsidiary, two senior officers of our Italian subsidiary, have been investigated for and are now believed by the Italian tax police to have criminal legal responsibility for, gaming law violations based on the alleged actions performed at webshops. No charges have been brought against the Company, its senior officers or our Italian subsidiary, and we intend to vigorously defend our two senior officers from any claim or criminal proceeding that may be commenced against them on the basis that they acted improperly in any way or should be personally responsible. We expect that the matter will come before an Italian judge in the next few months for a preliminary hearing to determine whether criminal indictment is warranted and if court proceedings should commence. At the hearing, the judge can dismiss the matter, settle the matter or it can decide to send the matter to a criminal trial to be decided by a jury of trial judges. There can be no assurance that our two senior officers will be successful. If unsuccessful, we could incur significant legal expenses and could be forced to terminate the employment of such officers with whom we are dependent.
Risks Related to Our Acquisition of USB
Our current expansion strategy, which includes expansion through USB in the various states in which it operates, may be difficult to implement because the licensing and certification requirements to operate in the United States are currently indeterminable.
Our current expansion strategy includes offering sports betting in states where USB currently operates as well as expanding to additional states. USB currently operates in 4 states (New Mexico, Colorado, North Dakota and Michigan) providing services to 6 clients (Sky Ute Casino Resort, Santa Ana Star Casino, Isleta Resort & Casino, Santa Claran Hotel & Casino, Odawa Casino, and 4 Bears Casino) with pending operations in 2 additional states (Washington, DC and Iowa). There can be no assurance that we will be successful in operating in the states in which USB currently operates or that we will eb able to expand our operations or those of USB to additional states.
The stock consideration issuable to the Sellers will cause our current stockholders to experience dilution.
The issuance of shares of common stock to the Sellers upon attainment of certain milestones specified in the Purchase Agreement will dilute an investor's equity ownership in our company and, as a result, could have the effect of depressing the market price for our securities, especially if the anticipated benefits of the acquisition do not materialize or otherwise result in increased stockholder value or revenue stream to the combined company.
The combined company may not experience the anticipated strategic benefits of the acquisition.
We believe that the acquisition will provide certain strategic benefits that may not be realized by us if USB was not acquired. Specifically, we believe the acquisition would provide certain strategic benefits which would enable us to accelerate our business plan through increased access to the U.S. sports betting and online gaming market. The market price of our common stock may decline as a result of the acquisition if the combined company does not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by our investors, financial or industry analysts. There can be no assurance that these anticipated benefits of the acquisition will materialize or that if they materialize will result in increased stockholder value or revenue stream to the combined company.
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We may be unable to successfully integrate the USB business with our current management and structure.
Our failure to successfully complete the integration of USB could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. Integration challenges may include the following:
| · | assimilating USB’s technology and retaining personnel in Nevada; |
| · | estimating the capital, personnel and equipment required for USB based on the historical experience of management with the businesses they are familiar with; |
| · | minimizing potential adverse effects on existing business relationships; and |
| · | successfully developing the new products and services. |
USB has had limited operations to date.
USB has had limited operations to date. USB is subject to many of the risks common to an entity in operations for only a short number of years, including its ability to implement its business plan, market acceptance of its proposed business and products, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, competition from better funded and experienced companies, and uncertainty of its ability to generate revenues. There is no assurance that its activities will be successful or will result in any revenues or profit, and the likelihood of its success must be considered in light of the stage of its development. Even if it generates revenue, there can be no assurance that it will be profitable. In addition, no assurance can be given that it will be able to consummate its business strategy and plans, as described herein, or that financial, technological, market, or other limitations may force it to modify, alter, significantly delay, or significantly impede the implementation of such plans, including due to COVID-19.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None that were not previously disclosed in other filings with the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
On July 11, 2021, we entered into an agreement with Engage IT Services Srl. ("Engage"), to provide gaming software and maintenance support of the system, the total contract price was €390,000 (approximately $459,572). Mr. Pasquini owns 34% of Engage. Mr. Pasquini was a director of the Company until September 13, 2021 and served as an executive officer of the Company until October 4, 2021.
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Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 15, 2021 | Elys Game Technology, Corp. |
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By: /s/ Michele Ciavarella | |
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Michele Ciavarella Interim Chief Executive Officer and President (Principal Executive Officer) |
| By: /s/ Mark J. Korb | |
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Mark J. Korb Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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