ELYS GAME TECHNOLOGY, DISCUSSION AND ANALYSIS OF THE MANAGEMENT OF THE COMPANY ON THE FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
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 endedDecember 31, 2020 filed with theSecurities and Exchange Commission onApril 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
endedSeptember 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 ofElys Game Technology, Corp. and its consolidated subsidiaries. We currently provide our gaming services inItaly 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 theAustrian Federal Finance Ministry ("BMF") permits us to operate online sports betting in certain European jurisdictions outside ofItaly through our subsidiaryUlisse 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 theEuropean Union ("EU"). We also provide Gaming services in the US market via our recently acquired subsidiaryBookmakers 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 isWashington DC through a Class B Managed Service Provider and ClassB Operator license to operate a sportsbook within theGrand Central Bar and Grill located in the AdamsMorgan area ofWashington, D.C. , and inOctober 2021 we entered into an agreement withOcean Resort Casino inAtlantic City to commence operations in the state ofNew Jersey inMarch 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 inNorth America , which includes an executive suite situated inSan Francisco, California and a Canadian office inToronto, Ontario through which we carry-out corporate activities, handle day-to-day reporting andU.S. development planning, and through which various employees, independent contractors and vendors are engaged. For the period endedSeptember 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 throughoutItaly ; 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 inItaly subside, management decided to simplify our Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence inItaly during Q2-2021 and focusing Ulisse operations to online operations inAustria and other potential European regions. 36 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 throughEurope ,South America ,South Africa and the developing market inthe United States . During the year endedDecember 31, 2020 and the nine months endedSeptember 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, onMarch 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 acrossItaly . Accordingly, we had temporarily closed all betting shop locations throughoutItaly as a result of the decree untilMay 4, 2020 . Subsequently, onMarch 10, 2020 the Italian government imposed further restrictions on travel throughoutItaly 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. OnJune 19, 2020 all land-based betting shops, including corner locations such as coffee shops throughoutItaly temporarily reopened untilNovember 2020 when the Italian government imposed new lockdowns that were lifted onJune 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 inItaly , 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 inItaly 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 inItaly 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 inItaly . Expansion and New Markets
OnJuly 15, 2021 , we completed the acquisition ofBookmakers Company US LLC dba US Bookmaking ("USB") in accordance with the terms of the Membership Purchase Agreement that we entered into onJuly 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 operatorVictor Salerno , with over 40 years of experience in theNevada sports book business managing risk for over 100 properties and who was inducted into theAmerican Gaming Association's Gaming Hall of Fame in 2015 andSBC'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 theMGM ; andJohn Salerno , Director of Operations and Compliance with over 20 years of experience. USB currently operates in 4 states (New Mexico ,Colorado ,North Dakota andMichigan ) providing services to 6 clients (Sky Ute Casino Resort ,Santa Ana Star Casino ,Isleta Resort & Casino ,Santa Claran Hotel & Casino ,Odawa Casino , and 4Bears Casino ) with pending operations in 2 additional states (Washington, DC andIowa ). 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 precedingJanuary 1 of each subsequent fiscal year for the duration of the earnout period endingDecember 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. 37 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 inthe 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, OnSeptember 1, 2021 , we issued a press release announcing the approval of our first license inWashington DC , a Class B Managed Service Provider and ClassB Operator licenses to operate a sportsbook within theGrand Central Bar and Grill located in the Adams Morgan area ofWashington, D.C. which commenced sports betting inOctober 2021 , and inOctober 2021 we entered into an agreement withOcean Resort Casino inAtlantic City to commence operations in the state ofNew Jersey inMarch 2022 . Inflation
We do not believe that general price inflation will have a significant effect on our business in the near future.
Foreign Exchange We operate in several foreign countries, includingAustria ,Italy ,Malta andCanada 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 inU.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 conventions and estimates
Preparation of our unaudited condensed consolidated financial statements in accordance withU.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 published accounting position papers
See note 2 – Summary of significant accounting policies in the notes to the condensed consolidated financial statements included in this quarterly report on Form 10-Q for information on recently issued accounting standards.
38 Results of Operations
Operating results for the three months ended
Revenues The following table represents disaggregated revenues from our gaming operations for the three months endedSeptember 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 Increase September 30, 2021 September 30, 2020 (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 endedSeptember 30, 2021 and 2020, respectively, a decrease of$1,671,714 or 17.2%.
The change in turnover (handle) is mainly due to the following elements:
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 untilJune 14, 2021 due to the pandemic. The reopening of physical land-based locations duringJune 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 inItaly , 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 endedSeptember 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 duringJune 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 endedSeptember 30, 2021
and 2020, respectively. 39 The turnover mix impacts our Gross Gaming Revenue. In the prior year three-month period endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 ofItaly . The majority of Ulisse CTD locations were not expected to re-open after the COVID-19 related lockdowns inItaly , management simplified its Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence inItaly at the end of the second quarter of 2021, re-focusing our Ulisse online operations inAustria 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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. 40 Other income Other income was$74,327 and$37,237 for the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 the fair value of the contingent purchase consideration
The change in the fair value of the contingent purchase consideration was
for the three months ended
Amortization of the present value discount
Amortization of present value discount was$0 and$43,604 for the three months endedSeptember 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
The loss on marketable securities was$200,000 and$250,000 for the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and 2020, respectively, an increase of$2,301,896 or 189.7% due to the increase in loss before income taxes and the reduction in income tax provision, discussed above. Comprehensive Loss
Our reporting currency is theU.S. dollar while the functional currency of our Italian, Maltese and Austrian subsidiaries is the Euro, the functional currency of our Canadian subsidiary is the Canadian Dollar and the functional currency of our Colombian operation is the Colombian Peso. The financial statements of our subsidiaries are translated intoUnited States dollars in accordance with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements intoU.S. dollars are included in determining other comprehensive income. We recorded a foreign currency translation loss of$(154,572) and a foreign currency translation gain of$218,193 for the three months endedSeptember 30, 2021 and 2020, respectively, primarily due to the strengthening of the US Dollar against the Euro during the current period and the weakening against the Euro in the prior period. 41
Operating results for the nine months ended
Revenues The following table represents disaggregated revenues from our gaming operations for the nine months endedSeptember 30, 2021 and 2020. Net Gaming Revenues represents Turnover (also referred to as "Handle"), the total bets processed for the period, less customer winnings paid out, and taxes due to government authorities, while Service Revenues represents revenue invoiced for our Elys software service and royalties invoiced for the sale of virtual products. Nine Months Ended Increase September 30, 2021 September 30, 2020 (decrease) Percentage change Turnover Turnover web-based$ 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
The change in turnover (handle) is mainly due to the following elements:
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 untilJune 14, 2021 due to the pandemic. The reopening of physical land-based locations duringJune 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 inItaly 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 endedSeptember 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 duringJune 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 endedSeptember 30, 2021 and 2020, respectively. The turnover mix impacts our Gross Gaming Revenue. In the prior year nine-month period endedSeptember 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 endedSeptember 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. 42 Disaggregated sportsbook hold decreased to 14.2% from 19.3% of handle for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 ofItaly . Since the majority of Ulisse CTD locations were not re-opened after the COVID-19 related lockdowns inItaly were lifted as management had decided to simplify our Italian footprint by focusing our investment towards our Multigioco operations and discontinued our Ulisse distribution inItaly at the end of the second quarter of 2021, re-focusing our Ulisse online operations inAustria 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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. 43 Other expense
Other expense was$28,522 and$109,623 the nine months endedSeptember 30, 2021 and 2020, respectively, an increase of$81,101 or 74.0%. Other expense includes an administrative penalty of$26,930 , related toADM 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 endedSeptember 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 the fair value of the contingent purchase consideration
Change in fair value of contingent purchase consideration was$569,076 and$0 for the nine months endedSeptember 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 the present value discount
Amortization of present value discount was$12,833 and$780,678 for the nine months endedSeptember 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 extinction of convertible debt
The loss on extinguishment of convertible debt was$0 and$719,390 for the nine months endedSeptember 30, 2021 and 2020, respectively, a decrease of$719,390 or 100%. In the prior period, we issued additional warrants to certain debenture holders who agreed to extend the maturity date of their debentures by between 90 and 120 days to allow us to complete a fund raising exercise. These warrants were valued using a Black-Scholes valuation model.
(Loss) gain on
The loss on marketable securities was$(292,500) and the gain on marketable securities was$472,500 for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and a charge of$771,999 for the nine months endedSeptember 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 endedSeptember 30, 2021 and 2020, respectively, an increase of$3,314,879 or 92.6% due to the increase in loss before income taxes, the increase in the change in fair value of contingent purchase consideration offset by the reduction in income tax
provision, discussed above. Comprehensive Loss
Our reporting currency is theU.S. dollar while the functional currency of our Italian, Maltese and Austrian subsidiaries is the Euro, the functional currency of our Canadian subsidiary is the Canadian Dollar and the functional currency of our Colombian operation is the Colombian Peso. The financial statements of our subsidiaries are translated intoUnited States dollars in accordance with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements intoU.S. dollars are included in determining other comprehensive income. 44
We recorded a foreign currency translation loss of$(413,917) and a foreign currency translation gain of$124,679 for the nine months endedSeptember 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 needs.
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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 AtSeptember 30, 2021 , we had total assets of$63,732,313 compared to$35,857,979 atDecember 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
AtSeptember 30, 2021 , we had$38,310,489 in total liabilities compared to total liabilities of$15,701,626 atDecember 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 atSeptember 30, 2021 compared to$18,945,817 onDecember 31, 2020 . OnJuly 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 atSeptember 30, 2021 , compared to a working capital surplus of$7,879,631 atDecember 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
From
45
Cash flow from operating activities
Net cash used in operating activities was$5,258,609 and$412,867 for the nine months endedSeptember 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 flow from investing activities
Net cash used in investing activities was$6,109,674 and$172,674 for the nine months endedSeptember 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 flow from financing activities
Net cash provided by financing activities was$2,891,186 and$4,697,328 for the nine months endedSeptember 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$500,000 . Contractual Obligations
Current accounting standards require disclosure of significant obligations and commitments to make future payments under contracts, such as debts, leases and purchase obligations.
The amount of future minimum lease payments under finance leases are as follows: Amount Remainder of 2021$ 2,272 2022 8,957 2023 7,177 2024 833
Total undiscounted future minimum lease payments
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 future minimum lease payments
Off-balance sheet provisions
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. 46 Related Party Transactions The following includes a summary of transactions during our fiscal year endedDecember 31, 2020 and our current period endedSeptember 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.
Debts and receivables between related parties represent receivables (debts) that do not bear interest and are due on demand.
The outstanding balances are as follows:
September 30, December 31, 2021 2020Related 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
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 toMr. Salerno , which amount earns interest at 8% per annum, compounded monthly and repayable onDecember 31, 2023 .
OnSeptember 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 ofSeptember 30, 2021 andDecember 31, 2020 , respectively.Gold Street Capital acquired certain convertible notes that had matured onMay 31, 2020 , amounting to CDN$35,000 from third parties, the maturity date of these convertible notes was extended toSeptember 28, 2020 . The convertible notes together with interest thereon, amounting to CDN$44,062 (approximately$34,547 ) was outstanding atDecember 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, includingGold 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. InFebruary 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. InJune 2018 , we increased the loan by €45,675 (approximately$53,000 ). The loan bears interest at 4.47% and is due inFebruary 2019 . This loan has been repaid in full. During the year endedDecember 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 atDecember 31, 2020 .Luca Pasquini , one of our officers and directors, holds a 34% stake in Engage IT Services Srl. As ofSeptember 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 ). 47
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 endedDecember 31, 2020 toForte 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 onMay 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 toSeptember 28, 2020 . The convertible notes together with interest thereon, amounting to$445,020 were repaid betweenAugust 23, 2020 andOctober 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 onDecember 30, 2020 , for gross proceeds of$630,506 . 48
The movement on deferred purchase consideration consists of the following:
September 30, December 31, Description 2021 2020
Main unpaid promissory notes owed to related parties
Settled by the issuance of ordinary 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
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OnJanuary 22, 2021 , we issued toMr. Shallcross , a director of the Company, 5,245 shares of common stock valued at$30,000 , in settlement of directors'
fees due to him.
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OnJuly 1, 2021 ,Philippe Blanc resigned as a director of the Company, simultaneously withMr. Blanc's resignation as a director of the Company, the Company entered into a consulting agreement withMr. Blanc to provide for his future services in a consulting capacity over two years.Mr. Blanc will receive €105,000 per annum as compensation. 49 OnJuly 5, 2021 , the Company entered into an employment agreement datedJuly 1, 2021 withMark Korb , the Company's Chief Financial Officer, (the "Korb Employment Agreement"), to employMr. Korb , on a full-time basis commencingSeptember 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, OnJuly 1, 2021 , the Compensation Committee of the Board grantedMr. 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. OnJuly 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 OnJuly 15, 2021 ,Michele Ciavarella , Executive Chairman of the Company, was appointed as the interim Chief Executive Officer and President of the Company, effectiveJuly 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. OnSeptember 13, 2021 , the board of directors of the Company appointedMr. 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. OnJuly 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 withMr. Salerno terminating onJuly 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 inJanuary 1, 2022 .Mr. Salerno is entitled to bonuses, equity incentives and benefits consistent with those of other senior employees.
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OnSeptember 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 onSeptember 13, 2021 . 50
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