ITEM 1. FINANCIAL STATEMENTS
* The number of shares of common stock has
been retroactively restated to reflect the 2-for-1 forward stock split effected on December 20, 2017.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Nature of Business
Basis of Presentation
The unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information
and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated
financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2018 and the results
of operations and cash flows for the period ended June 30, 2018 and 2017. The financial data and other information disclosed in
these notes to the interim financial statements related to these periods is unaudited. The results for the three and six months
ended June 30, 2018 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year
ending December 31, 2018. The balance sheet at December 31, 2017 has been derived from the audited financial statements at that
date.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. These unaudited consolidated
financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December
31, 2017 as included in our Annual Report on Form 10-K.
On December 20, 2017, the Company completed
a two-for-one stock split effected in the form of a stock dividend. All references made to share or per share amounts in the accompanying
consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock
split. See Notes 2 and 11 for additional information about the stock split effected in the form of a stock dividend.
Nature of Business
Newgioco Group, Inc. ("Newgioco
Group" or "the Company") was incorporated in the state of Delaware on August 26, 1998 as Pender International
Inc. On September 30, 2005, the Company changed its name to Empire Global Corp., and on July 20, 2016 changed its name to
Newgioco Group, Inc. The Company maintains its principal executive offices headquartered in Toronto, Canada with wholly owned
subsidiaries in Canada, Italy and Austria.
Our subsidiaries include: Multigioco Srl (“Multigioco”),
acquired on August 15, 2014, Rifa Srl (“Rifa”), acquired on January 1, 2015, and Ulisse Gmbh (“Ulisse”)
and Odissea Betriebsinformatik Beratung Gmbh (“Odissea”) which were both acquired on July 1, 2016 and a non-operating subsidiary Newgioco Group, Inc. based in Canada.
Newgioco Group is now a vertically integrated
company which owns and operates an innovative, certified Betting Platform Software (“BPS”), offering a complete suite
of online and offline leisure gaming services including sports betting, a variety of lottery and casino gaming on a business to
business basis and also operates a retail distribution network through regulated websites and licensed betting locations situated
throughout Italy.
2. Summary of Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include
the financial statements of the Company and its subsidiaries, all of which are wholly owned. All significant inter-company transactions
are eliminated upon consolidation.
Certain amounts of prior periods were reclassified
to conform with current period presentation.
8
Use of estimates
The preparation of the financial statements
in conformity with Generally Accepted Accounting Principles ("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 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 our industry, and general economic
conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to
differ from our estimates. We re-evaluate all of our accounting estimates at least quarterly based on these conditions and record
adjustments when necessary.
Goodwill
Goodwill is recognized for the excess of the
purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Goodwill is not being
amortized but is reviewed at least annually for impairment. In our evaluation of goodwill impairment, we perform a qualitative
assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If the qualitative assessment is not conclusive, we proceed to a two-step process to test goodwill for impairment including comparing
the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value for our reporting units
is determined using an income or market approach incorporating market participant considerations and management's assumptions on
revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair value determinations may include
both internal and third-party valuations. Unless circumstances otherwise dictate, we perform our annual impairment testing in the
fourth quarter.
There was no goodwill impairment recorded as
a result of the last quantitative assessment in the fourth quarter of 2017.
Loss Contingencies
We may be subject to claims, suits, government
investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, indirect taxes, labor
and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using
our website platforms, and other matters. Certain of these matters include speculative claims for substantial or indeterminate
amounts of damages. We record a liability when we believe that it is both probable that a loss has been incurred, and the amount
can be reasonably estimated. If we determine that a loss is possible, and a range of the loss can be reasonably estimated, we disclose
the range of the possible loss in the Notes to the Consolidated Financial Statements.
We evaluate, on a monthly basis, developments
in our 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 make 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 our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our 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 our operations or financial condition.
We have insured and continue to insure against most of these types of claims.
Business Combinations
We allocate 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.
9
Long-Lived Assets
We evaluate the carrying value of our 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.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including
convertible notes and stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income.
For option-based simple derivative financial
instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period.
Earnings Per Share
FASB 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 similar to fully diluted earnings per share. These potentially dilutive securities were not included in the calculation
of loss per share for the three and six months ended June 30, 2018 because the effect would have been anti-dilutive. Accordingly,
basic and diluted loss per common share is the same for three and six months ended June 30, 2018.
On December 20, 2017, the Company completed
a two-for-one stock split effected in the form of a stock dividend. All references made to share or per share amounts in the accompanying
consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock
split.
Currency translation
The Company's subsidiaries operate in
Europe with a functional currency of Euro and in Canada with a functional currency in Canadian dollars. In the consolidated financial statements, revenue and expense accounts are
translated at the average rates during the period, assets and liabilities are translated at period-end rates and equity
accounts are translated at historical rate. Translation adjustments arising from the use of different exchange rates from
period to period are included as a component of stockholders' equity. Gains and losses from foreign currency transactions are
recognized in current operations.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers (Topic 606),” which requires revenue to be recognized when promised goods or services are transferred
to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09
(“ASC Topic 606”) supersedes the existing revenue recognition guidance and is effective for interim and annual reporting
periods beginning after December 15, 2017. The Company has adopted ASC Topic 606 on January 1, 2018 and has determined that the
new standard does not have a material impact on the nature and timing of revenues recognized.
Revenues from sports-betting, casino, cash
and skill games, slots, bingo and horse race wagers represent the gross pay-ins (also referred to as Turnover) from customers less
gaming taxes and payouts to customers. Revenues are recorded when the game is closed which is representative of the point in time
at which the Company has satisfied its performance obligation. In addition, the Company receives commissions from the sale of scratch
tickets and other lottery games. Commissions are recorded when the ticket for scratch off tickets and lottery tickets are sold.
Revenues from the Betting Platform Software
(“BPS”) 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
were recognized on an accrual basis as earned.
10
Cash and equivalents
The Company considers all highly liquid debt
instruments with maturities of three months or less at the time acquired to be cash equivalents. Cash equivalents represent short-term
investments consisting of investment-grade corporate and government obligations, carried at cost, which approximates market value.
The Company had no cash equivalents as of June 30, 2018 and December 31, 2017.
The Company primarily places its cash with
high-credit quality financial institutions located in the United States which is insured by the Federal Deposit Insurance Corporation,
in Canada which is insured by the Canadian Deposit Insurance Corporation, in Italy which is insured by the Italian government and
in Germany which is a member of the Deposit Protection Fund of the Association of German Banks (Einlagensicherungsfonds des Bundesverbandes
deutscher Banken).
Gaming accounts receivable
Gaming accounts
receivable represents 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 our 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 bad debt expense
$0
and $63,166
for the three months ended June 30, 2018 and 2017, and $6,354 and $63,166 bad debt expense
for the six months ended June 30, 2018 and 2017, respectively. All balances previously recorded as allowance for doubtful accounts
were written off as uncollectible.
Gaming account balances
Gaming account balances 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 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.
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 market 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 developed using estimates and assumptions developed by us, which reflect those that
a market participant would use.
The carrying value of the Company's short-term
investments, prepaid expenses, accounts receivables, other current assets, accounts payable and accrued liabilities, gaming account
balance, and advances from shareholder approximate fair value because of the short-term maturity of these financial instruments.
The derivative liability in connection with
the conversion feature of the convertible debt and warrants is classified as a level 3 liability and is the only financial liability
measured at fair value on a recurring basis.
11
The change in the Level 3 financial instrument
is as follows:
Balance at December 31, 2016
|
|
$
|
211,262
|
|
Issued during the year ended December 31, 2017
|
|
|
268,884
|
|
Exercised during the year ended December 31, 2017
|
|
|
—
|
|
Change in fair value recognized in operations
|
|
|
(257,231
|
)
|
Balance at December 31, 2017
|
|
$
|
222,915
|
|
Issued during the six months ended June 30, 2018
|
|
|
31,010,535
|
|
Canceled during the six months ended June 30, 2018
|
|
|
(470,070
|
)
|
Change in fair value recognized in operations
|
|
|
(18,268,653
|
)
|
Balance at June 30, 2018
|
|
$
|
12,494,727
|
|
Property, plant and equipment
Property, plant and equipment are stated at
acquisition cost less accumulated depreciation and adjustments for impairment losses. Expenditures are capitalized only when they
increase the future economic benefits embodied in an item of property, plant and equipment. All other expenditures are recognized
as expenses in the statement of income 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:
Trademarks / names
|
|
|
14 years
|
|
Office equipment
|
|
|
5 years
|
|
Office furniture
|
|
|
8 1/3 years
|
|
Signs and displays
|
|
|
5 years
|
|
Leases
Leases are reviewed and classified as capital
or operating at their inception in accordance with ASC Topic 840, Accounting for Leases. For leases that contain rent escalations,
the Company records rent expense on the straight-line method. The difference between rent expense recorded and the amount paid
is credited or charged to deferred rent account and is included in accrued expenses and other current liabilities.
All lease agreements of the Company as lessees
are accounted for as operating leases as of June 30, 2018 and 2017.
Income Taxes
We use 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. We have no material uncertain tax positions for any of the reporting periods presented.
12
The recently passed comprehensive tax reform
bill could adversely affect our business and financial condition.
The Company has elected to include interest
and penalties related to uncertain tax positions, if determined, as a component of income tax expense.
In Italy, tax years beginning 2012 forward,
are open and subject to examination, while in Austria companies are open and subject to inspection for 5 years and 10 years for
inspection of serious infractions. The Company is not currently under examination and it has not been notified of a pending examination.
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 and unrealized gains and losses on marketable securities.
The Company adopted FASB ASC 220-10-45, "Reporting
Comprehensive Income". ASC 220-10-45 establishes standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains (losses) on
available for sale marketable securities; foreign currency translation adjustments and changes in market value of future contracts
that qualify as a hedge; and negative equity adjustments.
Investment in Non-Consolidated Entities
Investments in non-consolidated entities are
accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company's ability to exercise
significant influence over the operating and financial policies of the investee, except where investments have a readily determinable
fair value. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the
Company's proportionate share of the investees' net income or losses after the date of investment. When net losses from an investment
are accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional
losses are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently
reports net income and the Company's share of that net income exceeds the share of net losses not recognized during the period
the equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is
other than temporary has occurred.
The
Company’s investment in Banca Veneto SPA was accounted for at cost. The Company monitors its investment for impairment
annually and makes appropriate reductions in the carrying value if it determines that an impairment charge is required based on
qualitative and quantitative information.
Equity investments with readily determinable
fair value, are measured at fair value with changes in fair value recognized in earnings. The Company’s investment in Zoompass
Holdings Inc was accounted for at fair value. These securities have readily determinable fair values and subsequent to the adoption
of ASU 2016-01 on January 1, 2018, changes in fair value are recorded to earnings. Net unrealized (losses) recorded to earnings
related to these securities were $155,000 for the three and six months ended June 30, 2018.
Recent Accounting Pronouncements
On January 1, 2018 we adopted ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The
ASU provides guidance related to the recognition and measurement of financial assets and financial liabilities with changes primarily
affecting equity investments and disclosure of financial instruments. Under the new guidance, equity investments with readily determinable
fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair
value recognized in earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous
accounting guidance.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02 (ASU 2016-02) which amends the FASB Accounting Standards Codification and created Topic 842, "Leases."
Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provides for
enhanced disclosures. Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual
reporting periods, and interim periods within those years beginning after December 15, 2018. Entities are required to use a modified
retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the
financial statements. Full retrospective application is prohibited and early adoption by public entities is permitted. The Company
is currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
In May 2017, the FASB issued ASU
2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. The adoption of ASU 2017-09 does not have any
material impact on the Company’s consolidated financial statements.
13
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments
in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The
amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. The Company is currently assessing the impact of ASU 2016.
There are no other recently issued accounting
standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
3. Acquisition of betting software technology;
offline and land-based gaming assets
Odissea Betriebsinformatik Beratung Gmbh
(“Odissea”) Acquisition
On June 30, 2016, the Company entered into
a Share Exchange Agreement (“Odissea SPA”), which closed on July 1, 2016, with the shareholders of Odissea organized
under the laws of Austria. Odissea operates a proprietary Betting Operating System. Pursuant to the agreement, the Company issued
8,772,200 shares of common stock in consideration for 100% of the issued and outstanding shares of Odissea. As a result of this
acquisition, the sellers now hold approximately 11.61% of the issued and outstanding shares of common stock of the Company.
Pursuant to the Odissea SPA, upon completion
of certification of the Betting Operating System by Italy’s online gaming and betting regulator, Agenzia delle Dogane e dei
Monopoli, “ADM”, which was obtained on June 30, 2017, the sellers may exercise the option to resell to the Company
50% of the shares of common stock issued in consideration for the purchase price (or 4,386,100 shares) at a fixed price of USD
$0.50 per share (the “Odissea Put Option”). As of the date of this report, the Odissea Put Option has been extended
indefinitely by mutual consent.
The purchase price was allocated to the fair
market value of tangible and intangible assets acquired and liabilities assumed. Intangible assets will be amortized over their
remaining useful life as follows:
|
|
|
|
Remaining Useful Life
|
Current assets
|
|
$
|
210,505
|
|
|
|
Property, Plant and Equipment
|
|
|
30,638
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
Betting Operating System
|
|
|
1,685,371
|
|
|
15 years
|
Less: liabilities assumed
|
|
|
(215,935
|
)
|
|
|
Total identifiable assets less liabilities assumed
|
|
|
1,710,579
|
|
|
|
Total purchase price
|
|
|
1,710,579
|
|
|
|
Excess purchase price
|
|
$
|
—
|
|
|
|
Ulisse Gmbh (“Ulisse”) Acquisition
On June 30, 2016, the Company entered into
a Share Exchange Agreement (“Ulisse SPA”), which closed on July 1, 2016, with the shareholders of Ulisse organized
under the laws of Austria. Ulisse operates an existing network of approximately 170 land-based Agency locations. Pursuant to the
agreement, the Company issued 3,331,200 shares of common stock in consideration for 100% of the issued and outstanding shares of
Ulisse.
14
Pursuant to the Ulisse SPA, the purchase price
was subject to an adjustment equal to two times earnings before income taxes calculated on a pro rata basis from the Closing Date
upon completion of the ADM license tender auction. The sellers were also permitted to exercise the option to resell to the Company
50% of the shares of common stock (or 1,665,600 shares) issued in consideration for the purchase price at a fixed price of USD
$0.50 per share (the “Ulisse Put Option”).
The purchase price was allocated to the fair
market value of tangible and intangible assets acquired and liabilities assumed. Intangible assets will be amortized over their
remaining useful life as follows:
|
|
|
|
Remaining Useful Life
|
Current assets
|
|
$
|
984,647
|
|
|
|
Property, Plant and Equipment
|
|
|
2,917
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
|
|
83,996
|
|
|
10 years
|
Less: liabilities assumed
|
|
|
(421,976
|
)
|
|
|
Total identifiable assets less liabilities assumed
|
|
|
649,584
|
|
|
|
Total purchase price
|
|
|
649,584
|
|
|
|
Excess purchase price
|
|
$
|
—
|
|
|
|
On May 31, 2018, the Company and Ulisse mutually
agreed to exercise the Ulisse Put Option in lieu of completion of the ADM license tender auction. The company repurchased and retired
the shares issued in June 2016 with a purchase price adjustment to $10 million Euro (approximately USD $11.7 million). The purchase
price adjustment was settled half in cash and half in shares. 4,735,600 shares were reissued to the sellers on May 31, 2018.
Multigioco Acquisition
On May 31, 2018, the Company and Multigioco
mutually agreed to exercise the Multigioco Put Option. The company repurchased and retired the balance of 2,040,000 shares issued
to the Multigioco sellers in exchange for EUR 510,000 (approximately $595,000).
4. Intangible Assets
Intangible assets consist of the following:
|
|
June 30,
2018
|
|
December 31,
2017
|
|
Life (years)
|
Betting Platform Software
|
|
$
|
1,685,371
|
|
|
$
|
1,685,371
|
|
|
|
15
|
|
Multigioco ADM license
|
|
|
9,724,244
|
|
|
|
-
|
|
|
|
15
|
|
Licenses
|
|
|
970,422
|
|
|
|
967,328
|
|
|
|
1.5 - 7
|
|
Location contracts
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
5 - 7
|
|
Customer relationships
|
|
|
870,927
|
|
|
|
870,927
|
|
|
|
10 - 15
|
|
Trademarks/names
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
14
|
|
Websites
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
5
|
|
|
|
|
14,400,964
|
|
|
|
4,673,626
|
|
|
|
|
|
Accumulated amortization
|
|
|
(1,652,630
|
)
|
|
|
(1,427,878)
|
|
|
|
|
|
Balance
|
|
$
|
12,748,334
|
|
|
$
|
3,245,748
|
|
|
|
|
|
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. The Company recorded $111,664 and $224,752
in amortization expense for the three and six months ended June 30, 2018 and
$117,823
and $228,908 for the three and six months ended June 30, 2017, respectively.
Licenses obtained by the Company in the acquisitions
of Multigioco and Rifa include a GAD online license as well as a Bersani and Monti land-based licenses issued by the Italian gaming
regulator to Multigioco and Rifa, respectively.
15
5. Restricted Cash
Restricted Cash is cash held in a segregated
bank account at Intesa Sanpaolo Bank S.p.A. (“Intesa Sanpaolo Bank”) as collateral against our operating line of credit
with Intesa Sanpaolo Bank as well as Wirecard Bank as a security deposit for Ulisse betting operations.
6. Other long term liabilities
Other long term liabilities represents the
Italian "Trattamento di Fine Rapporto" (TFR) 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:
|
|
June 30,
2018
|
|
December 31,
2017
|
Severance liability
|
|
$
|
152,366
|
|
|
$
|
131,904
|
|
Customer deposit balance
|
|
|
458,660
|
|
|
|
400,776
|
|
Total other long term liabilities
|
|
$
|
611,026
|
|
|
$
|
532,680
|
|
7. Line of Credit – Bank
The Company currently maintains an operating
line of credit for a maximum amount of EUR 300,000 (approximately USD $350,000) for Multigioco and EUR 50,000 (approximately USD
$58,000) for Rifa from Intesa Sanpaolo Bank in Italy. The line of credit is secured by restricted cash on deposit at Intesa Sanpaolo
Bank and guaranteed by certain shareholders of the Company and bears a fixed rate of interest at 5% per annum on the outstanding
balance with no minimum payment, maturity or due date.
8. Liability in connection with acquisition
Liability in connection with acquisition
represent non-interest-bearing amount due by the Company’s subsidiaries toward the purchase price as per a purchase
agreement between Newgioco Srl and the Company’s subsidiaries. An officer of the Company owns 50% of Newgioco Srl. In
connection with the Multigioco Acquisition, on May 31, 2018 the Company paid the amount due to Newgioco Srl in full.
9. Related party transactions and balances
Related Party Loans
In February 2018 the Company provided a loan
of EUR 39,048 (approximately USD $45,000) to Engage IT Services Srl to finance hardware purchased by third-party betting shops.
In June 2018, the Company increased the loan by EUR 45,675 (approximately USD $53,000). The loans bears interest at 4.47% and will
be due in February 2019. An officer of the Company holds a 34% stake in Engage IT Services.
Advances from stockholders represent non-interest-bearing
loans that are due on demand. Interest was imputed at 5% per annum. Balances of Advances from stockholders are as follows:
|
|
June 30,
2018
|
|
December 31,
2017
|
Gold Street Capital Corp.
|
|
$
|
62,773
|
|
|
$
|
41,143
|
|
Doriana Gianfelici
|
|
|
—
|
|
|
|
58,792
|
|
Luca Pasquini
|
|
|
—
|
|
|
|
(119,939
|
)
|
Other stockholders
|
|
|
—
|
|
|
|
567,813
|
|
Total advances from stockholders
|
|
$
|
62,773
|
|
|
$
|
547,809
|
|
16
Amounts due to Gold Street, the major stockholder
of Newgioco Group, are for reimbursement of expenses. During the three and six months ended June 30, 2018, the Company paid
management fees of $36,000 and $72,000 to Gold Street Capital Corp.
In January, 2018, the Company advanced EUR
100,000 (approximately USD $117,000) to an officer to cover fees related to an application for a gaming license in Malta. As of
the date of this report the application is pending and there is no assurance that the gaming license in Malta would be obtained.
Changes in the balance of the advance were due to the fluctuations in foreign exchange rates.
During the six months ended June 30, 2018,
the Company paid management fees of approximately $6,000 to Luca Pasquini. Also, the Company paid service fees of EUR 240,000
(approximately USD $280,000) to Ulisse Services Ltd., a company owned by Luca Pasquini.
The amounts due to the stockholders at June
30, 2018 are non-interest bearing and due on demand.
Related-Party Debt
Promissory notes payable to related parties
with a principal of approximately $318,000 represents amounts due to Braydon Capital Corp., a company owned by Claudio Ciavarella,
the brother of our CEO. These notes bear interest at a rate of 1% per month and have no fixed maturity date. Accounts payable and
accrued liabilities include approximately $94,000 in accrued interest on these notes.
10. Investment in Non-Consolidated Entities
Investments in non-consolidated entities consists of the following:
|
|
June 30,
2018
|
|
December 31,
2017
|
2336414 Ontario Inc
|
|
$
|
—
|
|
|
$
|
875,459
|
|
Banca Veneto
|
|
|
—
|
|
|
|
1
|
|
Zoompass Holdings Inc.
|
|
|
195,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
875,459
|
|
|
|
|
|
|
|
|
|
|
Less impairment
|
|
|
—
|
|
|
|
(875,459)
|
|
Total investment in non-consolidated entities
|
|
$
|
195,000
|
|
|
$
|
1
|
|
In December 2014, the Company invested CDN $1,000,000
(approximately USD $778,000) in a private placement of common shares of 2336414 Ontario Inc. (“2336414”)
representing 666,664 common shares or 2.3% of 2336414. 2336414 is an Ontario corporation and was the parent company of
Paymobile Inc. a carrier-class, PCI compliant transaction platform, delivering Visa prepaid card programs for social
disbursements, corporate payroll and check replacement. The Company also had warrants to purchase additional shares in
2336414 that were not exercised and have since expired.
On December 31, 2014 the Company set up a 100%
impairment on the investment in 2336414 because Paymobile did not produce any meaningful income and the Company determined that
it may not be able to realize its investment in 2336414.
In August 2016, 2336414 transferred its interest
in Paymobile to Zoompass Holdings, Inc a Nevada corporation (“Zoompass”). On March 31, the Company entered into a Settlement
Agreement with 2336414, Paymobile and a director of 2336414. Pursuant to the terms and conditions of the Settlement Agreement,
the Company received 2,500,000 shares of common stock in Zoompass and Paymobile agreed to discharge debt and interest of approximately
CDN $210,000 due under the promissory note. The investment in Zoompass has been recorded as an investment in non-consolidated entities
and is revalued every quarter with fluctuations in value recorded to earnings. In connection with the settlement, the Company recorded
a gain on litigation settlement of $516,120 in the first quarter of 2018. See also Note 13.
On December 31, 2017, the Company recorded
an impairment of $1 for the shares of Banca Veneto held.
At June 30, 2018, the Company recorded a loss
of $155,000 related to the investment in Zoompass.
17
11. Stockholders’ Equity
On November 28, 2017, the Board of Directors
approved a 2 for 1 forward split of our common stock. The common stock dividend payment date was December 20, 2017 to stockholders
of record as at December 18, 2017. Share and per-share amounts disclosed as of June 30, 2018 and for all other comparative periods
provided have been retroactively adjusted to reflect the effects of the stock split.
In May 2018, the company repurchased and retired
3,331,200 shares issued in June 2016 to the Ulisse sellers. In addition, 4,735,600 new shares were issued to the sellers based
on the purchase price adjustment of Ulisse per the Stock Purchase Agreement between the Company and Ulisse GmbH dated July 1, 2016.
In May 2018, the Company repurchased and retired
2,040,000 shares issued to the Multigioco sellers in exchange for EUR 510,000 (approximately $595,000) based on the Stock Purchase
Agreement between the Company and Multigioco Srl dated August 15, 2014.
In May 2018 a warrant holder exercised cashless
warrants and was issued 201,088 shares of stock.
In connection to the debenture units issued
in the second quarter of 2018 the Company issued an aggregate of 1,720,064 shares of common stock at 100% of the market price to
the debenture holders. See also Note 12.
In connection to the debenture units issued
in the first quarter of 2018 the Company issued an aggregate of 111,000 shares of common stock at 100% of the market price to the
debenture holders. See also Note 12.
12. Debentures and Convertible Notes
The conversion price of the convertible debentures
per share of common stock has been retroactively restated to reflect the 2-for-1 forward stock split effected on December 20, 2017.
February 2016 and
April 2016 Convertible Notes
In February 2016, the
Company closed a Securities Purchase Agreement with an unaffiliated private investor, to raise up to $750,000. The Company received
gross proceeds from the initial private placement of $600,000. On April 4, 2016, the Company received the balance of gross proceeds
of $150,000, less legal expenses of $15,000. Also, the company paid $75,000 in commissions for these notes. As part of the purchase
agreement, the Company also issued a warrant to purchase 326,088 shares of Company’s common stock at $0.575 per share. These
notes bear an interest rate of 12% per annum and were due in one year. The company continued to accrue interest at 22% past the
due date. The notes were guaranteed by Confidi Union Impresa, an unrelated party.
During the three and six months ended June
30, 2018, the Company paid approximately $1 million to pay the entire amount due under the Note in full, including penalty and
interest towards the consent judgement related to the Settlement Agreement with the investor dated May 15, 2017. Accounts payable
and accrued liabilities included an accrued interest on this Note of $8,425 at June 30, 2018 and $139,041 at December 31, 2017.
Q1 2018 Convertible
Debenture
In February 2018,
the Company closed a private placement agreement with a group of accredited investors to raise up to CDN $1,800,000 (approximately
USD $1,396,000). The Company received gross proceeds from the initial private placement of CDN $670,000 (approximately USD $520,000).
The Company incurred a total of CDN $33,500 (approximately USD $26,000) in finder’s fees to facilitate this transaction
for net proceeds of CDN $636,500 (approximately USD $494,000) as well as 5% of the gross amount in broker warrants with terms
identical to the debenture’s warrants. The convertible debentures bear an interest rate of 10% per annum and is due in two
years and is convertible at a price of $0.40 per share for a period of 2 years from the issue date. As part of the purchase agreement,
the Company also issued warrants to purchase 343,375 of the Company’s common stock at $0.50 per share for a period of two
years from the issue date.
Q2 2018 Convertible Debentures
In April 2018, the Company
received gross proceeds from the private placement of CDN $135,000 (approximately USD $105,940) with a group of accredited investors.
The Company incurred a total of CDN $6,750 (approximately USD $5,297) in finder’s fees to facilitate this transaction for
net proceeds of CDN $128,250 (approximately USD $101,000). The convertible debentures issued bear an interest rate of 10% per
annum and is due in two years and is convertible at a price of $0.40 per share for a period of 2 years from the issue date. As
part of the purchase agreement, the Company also issued warrants to purchase 718,000 of the Company’s common stock at $0.50
per share for a period of two years from the issue date.
18
In April 2018, the Company re-issued debenture
units first issued between January 24, 2017 and January 31, 2018 in order to simplify the various debentures into a single series
with the same terms as new convertible debenture units issued on February 26, 2018. Each re-issued debenture unit is comprised
of (i) the issuance of CDN $1,000 of debentures bearing interest at a rate of 10% per annum, with a maturity date of two (2) years
from the date of issuance which may be converted in whole or in part at a price of $0.40 per share, (ii) 250 warrants which may
be exercised at a price equal to $0.50 per share price per warrant to receive one common share prior to February 15, 2020, and
(iii) 160 shares of restricted common stock issued pursuant to an exemption under Rule 144 of the US Securities and Exchange Act.
In May 2018, the Company received gross proceeds
from the private placement of CDN $131,000 (approximately USD $102,802) with a group of accredited investors. The Company incurred
a total of CDN $6,550 (approximately USD $5,140) in finder’s fees to facilitate this transaction for net proceeds of CDN
$124,450 (approximately USD $97,662). The convertible debentures issued bear an interest rate of 10% per annum and is due in two
years and is convertible at a price of $0.40 per share for a period of 2 years from the issue date. As part of the purchase agreement,
the Company also issued warrants to purchase 72,550 of the Company’s common stock at $0.50 per share for a period of two
years from the issue date.
On May 31, 2018, the Company closed its private
placement offering of up to 7,500 units and entered into Subscription Agreements (the "Agreements") with a group of 130
unaffiliated accredited investors (the "Investors"). The Company offered Subscription Agreements in both US and Canadian
dollar denomination. Each Unit sold to US Investors was sold at a per unit price of $1,000 and was comprised of (i) a 10% convertible
debenture in the principal amount of $1,000 (the “Debentures”), (ii) 208 shares of the Company’s common stock
and (ii) 1082.25 warrants to purchase shares of the Company’s common stock (the “Warrants”). Each Unit sold to
Canadian Investors was sold at a per unit price of CDN $1,000 and was comprised of (i) a 10% convertible debenture in the principal
amount of CDN $1,000 (the “Debentures”), (ii) 160 shares of the Company’s common stock and (ii) 832 warrants
to purchase shares of the Company’s common stock (the “Warrants”).
The Investors purchased a total 2,343 US units
and 4,790 Canadian units and the Company issued Debentures for the total principal amount of CDN $7,316,838 (approx. USD $5,628,337)
(the "Principal Amount") to the Investors, 1,253,744 shares of common stock and warrants to purchase 13,041,984 shares
of common stock of the Company.
The Debentures mature two years from their
date of issuance and bear interest at a rate of 10% per annum compounded annually and payable on the maturity date. Each Debenture
is convertible, at the option of the holder, at any time, into such number of shares of common stock of the Company equal to the
principal amount of the Debenture plus all accrued and unpaid interest divided by $0.40. The holder is guaranteed to receive a
minimum of five months of interest in the event of an early repayment (‘Redemption”) by the Company.
If at any time that the common shares issuable
to the Investors on conversion of the Debenture in whole or in part would be free trading without resale restrictions or statutory
hold periods, the Debenture is redeemable by the Company at any time or times prior to the Maturity Date on not less than ten (10)
Business Days prior written notice from the Company to the Investor of the proposed date of Redemption (the “Redemption Date”),
without bonus or penalty, provided, however, that prior to the Redemption Date, the Investor has the right to convert the whole
or any part of the principal and accrued and unpaid interest of the Debenture into common shares of the Company.
The warrants are exercisable at an exercise
price of $0.50 per share and expire two years after the issuance date. Each warrant is exercisable on a cashless basis in the event
that there is not an effective registration statement registering the shares underlying the warrant at the time of exercise.
The Company paid finders fees equal to 5% of
the gross proceeds in cash plus broker warrants to purchase 5% of the number of Warrants sold to Investors. The broker warrants
had like terms as the Warrants issued to Investors, to facilitate the transaction resulting in net proceeds of approximately $6,628,337.
One of the Investors, Mr. Harold Wolkin through
his company Princeville Capital, purchased 200 Canadian Units on May 31, 2018. Mr. Wolkin received 32,000 shares of common stock
and warrants to purchase 100,000 of common stock at $0.50 per share until May 31, 2020. Mr. Wolkin has since become a director
of the Company and has been elected as Chair of the Audit Committee.
In addition, on June 18, 2018 the Company received
proceeds from the second closing tranche in relation to the May 31, 2018 debenture equal to USD $950,000 and CDN $9,500 (approximately
USD $7,455) net of commissions with identical terms of the May 31, 2018 debenture. In addition, the Company also issued warrants
to purchase 505,000 of the Company’s common stock at $0.50 per share for a period of two years from the issue date.
19
The commissions and finders' fees related to
the notes and debentures were amortized over the life of the notes.
The Company has determined that the conversion
feature embedded in the convertible notes and debentures constitutes a derivative and has been bifurcated from the note and recorded
as a derivative liability, with a corresponding discount recorded to the associated debt, on the accompanying balance sheet, and
revalued to fair market value at each reporting period. See Note 16.
Warrants issued in relation to the debentures
and promissory notes are discussed in Note 15.
13. Promissory Notes Payable – Other
In December 2014, the Company issued a promissory
note for CDN $500,000 (approximately USD $380,000) from Paymobile Inc., a subsidiary of 2336414 Ontario Inc. (“2336414”)
of which the Company owned 666,664 common shares, that bears interest at a rate of 1% per month on the outstanding balance.
On March 31, 2018, the Company entered into
a Settlement Agreement with 2336414, Paymobile and Zoompass. Pursuant to the terms and conditions of the Settlement Agreement,
CDN $210,000 (approximately USD $162,000), in principal and accrued interest was forgiven and written off. See Note 10.
14. Bank Loan Payable
In September 2016, the Company obtained a loan
of EUR 500,000 (approximately USD $584,000) from Intesa Sanpaolo Bank in Italy, which is secured by the Company's assets. The loan
has an underlying interest rate of 4.5 points above Euro Inter Bank Offered Rate ("EURIBOR"), subject to quarterly review
and is amortized over 57 months ending September 30, 2021. Monthly repayments of EUR 9,760 (approximately USD $11,400) began in
January 2017.
The company made payments of EUR 58,555 (approximately
USD $68,000) during the six months ended June 30, 2018 which included principal of approximately $58,000 and interest of approximately
$10,000.
15. Warrants
The exercise price of the warrants per share
of common stock has been retroactively restated to reflect the 2-for-1 forward stock split effected on December 20, 2017.
20
In February 2016, as per a Securities Purchase Agreement, the Company issued warrants to purchase 260,870
shares of the Company’s common stock at $0.575 per share in connection with the February 2016 convertible Promissory Note
which may be exercised by the warrant holders between August 28, 2016 and February 28, 2019 In April 2016, the Company issued warrants
to the same holder to purchase 65,218 shares of the Company’s common stock at $0.575 per share in connection with the April
4, 2016 Convertible Promissory Note which may be exercised by the warrant holder until April 4, 2019 (See Note 12).
In May 2018, the warrant holder exercised
warrants to receive 201,088 shares of common stock on a cashless basis.
On April 4, 2016, the Company issued warrants
to purchase 124,440 shares of the Company’s common stock at $0.575 per share which may be exercised by the warrant holders
until April 4, 2019. The warrants were issued to placement agents in relation to securing the February 29, 2016 and April 4, 2016
convertible Promissory Notes (See Note 12).
In connection with the private placement agreements
entered into with a group of accredited investors between February 26, 2018 and June 18, 2018, for each USD $1,000 debenture unit
the Company issued 1082.25 warrants and for each CDN $1,000 debenture unit the Company issued 832 warrants, each to purchase one
common share of the Company’s common stock per warrant at a price of $0.50 per share up to two years from the closing date.
(See Note 12) The issuance dates for these warrants with corresponding number of warrants, including broker warrants are as follows:
|
Number of Warrants
|
|
|
February 26, 2018
|
|
565,815
|
|
April 10, 2018
|
|
74,970
|
|
April 17, 2018
|
|
24,960
|
|
April 20, 2018
|
|
17,640
|
|
April 23, 2018
|
|
1,194,752
|
|
May 11, 2018
|
|
116,042
|
|
May 31, 2018
|
|
7,004,749
|
|
June 18, 2018
|
|
1,094,730
|
|
The fair value of the above warrants was calculated
using the Black-Scholes model on the date of issuance and was recorded as debt discount, which has been amortized as interest expense
over the life of the debt. The fair value of the warrants on the date of issuance as calculated using the Black-Scholes model was:
Warrant
|
|
Fair Value at issuance
|
|
|
|
|
|
|
|
|
April 4, 2016
|
|
|
$
|
27,901
|
|
|
February 26, 2018
|
|
|
$
|
76,671
|
|
|
April 10, 2018
|
|
|
$
|
33,722
|
|
|
April 17, 2018
|
|
|
$
|
12,115
|
|
|
April 20, 2018
|
|
|
$
|
8,870
|
|
|
April 23, 2018
|
|
|
$
|
524,335
|
|
|
May 11, 2018
|
|
|
$
|
157,902
|
|
|
May 31, 2018
|
|
|
$
|
8,092,301
|
|
|
June 18, 2018
|
|
|
$
|
766,412
|
|
21
The following assumptions were used to calculate
the fair value at issuance:
Warrant Date
|
|
Exercise Price/sh
|
|
Common Stock Price/sh
|
|
Volatility
|
|
Term(Years)
|
|
Dividend Yield
|
|
Interest Rate
|
|
Forfeiture Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4, 2016
|
|
$
|
0.575
|
|
|
$
|
0.475
|
|
|
|
195
|
%
|
|
|
3
|
|
|
|
0
|
%
|
|
|
0.91
|
%
|
|
|
0
|
%
|
February 26, 2018
|
|
$
|
0.625
|
|
|
$
|
0.50
|
|
|
|
222
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.91
|
%
|
|
|
0
|
%
|
April 10, 2018
|
|
$
|
0.50
|
|
|
$
|
0.54
|
|
|
|
218
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.70
|
%
|
|
|
0
|
%
|
April 17, 2018
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
|
217
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.74
|
%
|
|
|
0
|
%
|
April 20, 2018
|
|
$
|
0.50
|
|
|
$
|
0.60
|
|
|
|
218
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.80
|
%
|
|
|
0
|
%
|
April 23, 2018
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
|
218
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.85
|
%
|
|
|
0
|
%
|
May 11, 2018
|
|
$
|
0.50
|
|
|
$
|
1.52
|
|
|
|
243
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.74
|
%
|
|
|
0
|
%
|
May 31, 2018
|
|
$
|
0.50
|
|
|
$
|
1.18
|
|
|
|
294
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.87
|
%
|
|
|
0
|
%
|
June 18, 2018
|
|
$
|
0.50
|
|
|
$
|
0.72
|
|
|
|
301
|
%
|
|
|
2
|
|
|
|
0
|
%
|
|
|
0.70
|
%
|
|
|
0
|
%
|
A summary of warrant transactions during the
six months ended June 30, 2018 is as follows:
|
|
Warrant Shares
|
|
Weighted Average Exercise Price Per Common Share
|
|
Weighted Average Life
|
|
Outstanding at December 31, 2016
|
|
|
|
467,928
|
|
|
$
|
0.58
|
|
|
|
2.13
|
|
|
Issued
|
|
|
|
162,000
|
|
|
$
|
0.50
|
|
|
|
2.00
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(17,400)
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding at December 31, 2017
|
|
|
|
612,528
|
|
|
$
|
0.54
|
|
|
|
1.37
|
|
|
Exercisable at December 31, 2017
|
|
|
|
561,528
|
|
|
$
|
0.56
|
|
|
|
1.21
|
|
|
Issued
|
|
|
|
10,148,158
|
|
|
$
|
0.51
|
|
|
|
|
|
|
Canceled
|
|
|
|
216,500
|
|
|
$
|
0.50
|
|
|
|
|
|
|
Exercised
|
|
|
|
326,088
|
|
|
$
|
0.58
|
|
|
|
|
|
|
Expired
|
|
|
|
124,440
|
|
|
$
|
0.58
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
10,093,658
|
|
|
$
|
0.51
|
|
|
|
1.92
|
|
|
Exercisable at June 30, 2018
|
|
|
|
0
|
|
|
$
|
—
|
|
|
|
—
|
|
The following assumptions were used to calculate
the fair value of warrants at June 30, 2018:
Exercises price
|
|
$0.50 - $0.625
|
Common stock price per share
|
|
$
|
0.41
|
|
Volatility
|
|
|
316%
|
|
Weighted average life
|
|
|
1.89 years
|
|
Dividend yield
|
|
|
0%
|
|
Interest rate
|
|
|
0.58%
|
|
Forfeiture risk
|
|
|
0%
|
|
22
16. Derivative Liability and Fair Value
The Company has evaluated the application of
ASC 815 Derivatives and Hedging and ASC 815-40-25 to the warrants to purchase common stock issued with the convertible notes and
debentures. Based on the guidance in ASC 815 and ASC 815-40-25, the Company concluded these instruments were required to be accounted
for as derivatives due to the down round protection feature on the conversion price and the exercise price. The Company records
the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected
in the statements of operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated
as hedging instruments under ASC 815 and are disclosed on the balance sheet under Derivative Liabilities.
The Convertible Debenture issued February 26,
2018, and accrued interest are convertible into common shares at a fixed price of $0.40 prior to February 26, 2020. The gross proceeds
from the sale of the debenture were recorded net of $351,450 related to the conversion feature and $73,020 was allocated to the
warrants issued.
The Convertible Debenture issued in the second
quarter of 2018, and accrued interest are convertible into common shares at a fixed price of $0.40 prior to the second quarter
of 2020. The gross proceeds from the sale of the debenture were recorded net of $8,318,276 related to the conversion feature.
The Company accounted for the convertible debentures
in accordance with ASC 815 “Derivatives and Hedging.” Accordingly, the embedded conversion option is a derivative liability
and is marked to market through earnings at the end of each reporting period.
23
17. Revenues
The following table represents disaggregated
revenues from our gaming operations for the three and six months ended June 30, 2018 and 2017. Turnover represents the total bets
processed for the period.
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
June 30,
2018
|
|
June 30,
2017
|
Turnover
|
|
|
|
|
|
|
|
|
Turnover web-based
|
|
$
|
55,025,859
|
|
|
$
|
27,499,233
|
|
|
$
|
101,091,758
|
|
|
$
|
56,249,069
|
|
Turnover land-based
|
|
|
45,013,592
|
|
|
|
22,072,383
|
|
|
|
89,507,552
|
|
|
|
46,042,050
|
|
Total Turnover
|
|
$
|
100,039,451
|
|
|
$
|
49,571,616
|
|
|
$
|
190,599,310
|
|
|
$
|
102,291,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winnings/Payouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winnings web-based
|
|
|
54,687,682
|
|
|
|
26,063,667
|
|
|
|
97,305,678
|
|
|
|
53,286,149
|
|
Winnings land-based
|
|
|
35,765,405
|
|
|
|
19,241,356
|
|
|
|
74,511,647
|
|
|
|
40,945,9997
|
|
Total Winnings/payouts
|
|
|
90,453,086
|
|
|
|
45,305,023
|
|
|
|
171,817,325
|
|
|
|
94,232,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Gaming Revenues
|
|
$
|
9,586,364
|
|
|
$
|
4,266,593
|
|
|
$
|
18,781,985
|
|
|
$
|
8,058,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: ADM Gaming Taxes
|
|
|
799,016
|
|
|
|
460,750
|
|
|
|
1,595,849
|
|
|
|
825,211
|
|
Net Gaming Revenues
|
|
$
|
8,787,349
|
|
|
$
|
3,805,843
|
|
|
$
|
17,216,136
|
|
|
$
|
7,233,762
|
|
Add: Commission Revenues
|
|
|
18,152
|
|
|
|
81,654
|
|
|
|
117,153
|
|
|
|
163,499
|
|
Add: Service Revenues
|
|
|
17,159
|
|
|
|
206,926
|
|
|
|
83,238
|
|
|
|
572,363
|
|
Total Revenues
|
|
$
|
8,822,659
|
|
|
$
|
4,094,423
|
|
|
$
|
17,416,527
|
|
|
$
|
7,969,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. Income Taxes
The Company is incorporated in the United States
of America and is subject to United States federal taxation. No provisions for income taxes have been made as the Company had no
U.S. taxable income for the three months ended June 30, 2018 and June 30, 2017.
The Company's Italian subsidiaries are governed
by the income tax laws of Italy. The corporate tax rate in Italy is 28.82% (IRES at 24% plus IRAP ordinary at 4.82%) on income
reported in the statutory financial statements after appropriate tax adjustments.
The Company's Austrian subsidiaries are governed
by the income tax laws of Austria. The corporate tax rate in Austria is 25% on income reported in the statutory financial statements
after appropriate tax adjustments.
The Company's Canadian subsidiary is governed
by the income tax laws of Canada and the Province of Ontario. The combined Federal and Provincial corporate tax rate in Canada
is 26.5% on income reported in the statutory financial statements after appropriate tax adjustments.
On December 22, 2017, the President of the
United States signed into law Public Law No. 115-97, commonly referred to as the Tax Reform Act, following its passage by the United
States Congress. The Tax Act made significant changes to U.S. federal income tax laws, including reduction of the corporate tax
rate from 35.0% to 21.0%, limitation of the deduction for net operating losses to 80.0% of current year taxable income and elimination
of net operating loss carrybacks, one-time taxation of offshore earning at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions.
24
On December 22, 2017, Staff Accounting
Bulletin No. 118, or SAB 118, was issued to address the application of GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain
income tax effects of the Tax Act. Additional work is necessary for a more detailed analysis of the deferred tax assets and liabilities
and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will
be recorded to current tax expense within the measurement period.
The reconciliation of income tax expense at
the U.S. statutory rate of 21% and 35% during 2018 and 2017, respectfully, the to the Company’s effective tax rate is as
follows:
|
|
June 30,
2018
|
|
June 30,
2017
|
U.S. Statutory rate
|
|
$
|
(1,040,057
|
)
|
|
$
|
(198,540)
|
Tax rate difference between Italy, Austria, Canada and U.S.
|
|
|
(154,405
|
)
|
|
|
18,156
|
Change in Valuation Allowance
|
|
|
1,628,336
|
|
|
|
270,565
|
Permanent difference
|
|
|
323,568
|
|
|
|
(28,726)
|
Effective tax rate
|
|
$
|
757,442
|
|
|
$
|
61,455
|
The Company has accumulated a net operating
loss carry forward ("NOL") of approximately $12.3 million as of June 30, 2018 in the U.S. This NOL may be offset against
future taxable income through the year 2038. The use of these losses to reduce future income taxes will depend on the generation
of sufficient taxable income prior to the expiration of the NOL. The Company periodically evaluates whether it is more likely than
not that it will generate sufficient taxable income to realize the deferred income tax asset. At the present time, management cannot
presently determine when the Company will be able to generate sufficient taxable income to realize the deferred tax asset; accordingly,
a 100% valuation allowance has been established to offset the asset.
Utilization of NOLs are subject to limitation
due to any ownership change (as defined under Section 382 of the Internal Revenue Code of 1986) which resulted in a change in business
direction. Unused limitations may be carried over to future years until the NOLs expire. Utilization of NOLs may also be limited
in any one year by alternative minimum tax rules.
Under Italian tax law, the operating loss carryforwards
available for offset against future profits can be used indefinitely. Operating loss carryforwards are only available for offset
against national income tax, up to the limit of 80% of taxable annual income. This restriction does not apply to the operating
loss incurred in the first three years of the Company's activity, which are therefore available for 100% offsetting.
Under Austrian tax law, the operating loss
carryforwards available for offset against future profits can be used indefinitely. Operating loss carryforwards are only available
for offset against national income tax, up to the limit of 75% of taxable annual income.
Under Canadian tax law, the operating loss
carryforwards available for offset against future profits can be used indefinitely.
The provisions for income taxes consist of
currently payable income tax in Italy and Austria. The provisions for income taxes are summarized as follows:
|
|
June 30,
2018
|
|
June 30,
2017
|
|
Current
|
|
|
$
|
757,442
|
|
|
$
|
61,455
|
|
|
Deferred
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
$
|
757,442
|
|
|
$
|
61,455
|
|
25
The tax effects of temporary differences that
give rise to the Company’s net deferred tax asset are as follows:
|
|
June 30,
2018
|
|
June 30,
2017
|
Net loss carryforward - Foreign
|
|
$
|
58,332
|
|
|
$
|
38,531
|
|
Net loss carryforward - US
|
|
|
4,469,258
|
|
|
|
4,280,529
|
|
|
|
|
4,527,590
|
|
|
|
4,319,060
|
|
Less valuation allowance
|
|
|
(4,527,590
|
)
|
|
|
(4,319,060
|
)
|
Deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
19. Subsequent Events
On July 5, 2018, the Company filed a certificate of amendment to amend Article 4 of its Certificate
of Incorporation with the State of Delaware, increasing the number of authorized shares of the Company from 100,000,000
shares to 180,000,000 shares of which 160,000,000 shares are designated common stock, par value $0.0001 per share, and 20,000,000
shares are designated preferred stock, par value $0.0001 per share.
26