Item 1. Business
Company Overview
Established in 1998, Newgioco Group is an international commercial-stage, vertically integrated company engaged in various aspects of the leisure gaming industry. We
own and operate a state-of-the-art, innovative betting platform software (“Platform”) and are a licensed leisure
lottery and gaming operator offering online and offline leisure gaming services, including a variety of lottery and casino
gaming products, as well as sports betting products through a distribution network of retail betting locations situated
throughout Italy and internationally through various agents in Africa and South America.
The Platform, colloquially known as “Elys”,
is owned by our subsidiary Odissea Betriebsinformatik Beratung GmbH (“Odissea”) and was developed and built on the
latest Microsoft.Net Core framework, supporting both online customer gaming accounts as well as land-based bet processing capability
with multi-channel functionality accepting all forms of payment methods (i.e., cash, e-wallet, bank card and wire transfer, etc.)
backed by a real-time customer relationship management (“CRM”) and business intelligence (“BI”) program
for streamlined cross-platform marketing as well as a synchronized financial accounting processes. Data is communicated directly
to on-the-ground sales and marketing agents that manage and maintain both our online and land-based retail distribution. The Platform
allows our independent business-to-business (“B2B”) and white-label end users to (i) rapidly and effectively model
their gaming businesses and client gaming accounts, (ii) monitor and analyze performance on an ongoing basis, (iii) share dashboards,
and (iv) generate management reports all within a fully integrated solution. In addition, our clients can use the built-in artificial
intelligence and adaptive business intelligence modules to evaluate actual performance and leverage insights from analytics to
make informed, timely decisions to drive future business. The unique ’shop-client’ architecture of the Platform to
our knowledge, is the first of its kind in the leisure betting industry. Elys was built around the specific needs of leisure betting
opertors through our existing Multigioco distribution throughout Italy.
We currently provide retail land-based (onsite)
and web-based (online) gaming services through our subsidiaries, Multigioco Srl (“Multigioco”), acquired on August
15, 2014, Rifa Srl (“Rifa”), acquired on January 1, 2015, and Ulisse GmbH (“Ulisse”), acquired on July
1, 2015. These operations are carried out under both land-based and online retail gaming licenses regulated by the Agenzia delle
Dogane e dei Monopoli (“ADM”) in Italy, (formerly known as the Amministrazione Autonoma. dei Monopoli di Stato or AAMS),
and our Austrian Bookmaker license, that permit us to distribute leisure betting products such as sports betting, lotto tickets,
virtual sports betting, online poker and casino gaming products through both physical, land-based retail locations as well as online
through our licensed principal website www.newgioco.it or commercial webskins linked to our principal website and through mobile
devices. The information contained in, and that can be accessed through, our website is not incorporated into and is not part of
this annual report.
In Italy, our gaming products and services
are offered through the following three distribution methods: (1) agencies (the principal business situated at the location is
gaming); (2) corners (the principal business situated at the location is primarily other than gaming); and (3) websites that customers
can access through a personal computer (“PC”), tablet or mobile device, or alternatively visit a web-café that
is under contract to promote our websites. We use a combination of all three distribution methods and currently service approximately
90,000 online user accounts through the three distribution methods: 1,000 web cafés (or “web-shops”), 7 corners
and 172 agency locations.
The following describes the three distribution
methods used by us in Italy in greater detail:
(1) Negozio Sportivo (“agency”) (translated as Sporting
Store): An agency is an arcade location that is a gaming specific venue meeting strict regulatory standards and must have at least
70% of its square-footage dedicated specifically to gaming space. In addition, each Agency must have a cash cage for the primary
purpose of gaming and gaming related transactions serving an indefinite number of anonymous walk-in customers.
(2) Punto Sportivo (“corner”) (translated as Sporting
Point): A corner is distinguished from an agency insofar as the principal business situated at the location is an activity that
is primarily different from gaming (such as a coffee shop or bakery) with a terminal connected to the ADM network. The primary
purpose of the facility is not gaming, but rather, there is only a small ‘corner’ for extra cash flow in exchange for
a fee and/or commission. Specifically, a maximum of 30% of floor space of a corner location can be dedicated to gaming where gaming
transactions are collected and processed by a counter clerk.
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(3) Punti Virtuali di Recarica (“PVR”; “web-shops”;
“web cafe” or “websites”) (translated as Virtual Reload Points): A web shop is a physical location where
computers are connected to the web and directed to our website where customers may also make cash deposits that are credited electronically
to their online gaming accounts (i.e., virtual account reloading). Customers can play games and wager through their online account
while at the web-shop or just re-load their gaming account and play remotely through a PC, tablet or mobile device.
Our revenue streams, through our subsidiaries
Multigioco, Rifa and Ulisse, consist of wagering and gaming transaction income from online betting and land-based betting shops
located throughout Italy, and our revenue stream through our subsidiary, Odissea, consists of the service revenue generated from
the provision of our Platform services to third party operators on a B2B basis. We generated revenue of $34.6 million for the year
ended December 31, 2018, compared to revenue of $22.9 million for the year ended December 31, 2017.
Recent Developments
On January 30, 2019, we acquired all of the
issued and outstanding ordinary shares of Virtual Generation Limited, a company organized under the laws of Republic of Malta (“VG”)
that owns and has developed a virtual gaming software platform (“VGS”), together with all the ordinary shares of Naos
Holding Limited, a company organized under the laws of Republic of Malta (“Naos”) that owns 3,999 of the 4,000 issued
and outstanding ordinary shares of VG. The sellers included Mr. Luca Pasquini, our Vice President of Technology and a member of
our board of directors, and Mr. Gabriele Peroni, our Vice President of Business Development, each of whom owned 800 ordinary shares
of Naos (20% of the issued and outstanding shares of Naos).
VG is a Gaming Laboratories International (“GLI”)
certified virtual sports and gaming software developer with a portfolio of products including: greyhound and horse racing; league
play football (i.e., soccer), keno; and American Roulette. In addition, VG’s platform allows for customization for country-specific
sports generation including applications in Latin American and African markets as well as unique U.S. tribal games tailored for
the U.S. tribal gaming market.
VG’s operations, which have been running
on our Platform, have grown in the highly competitive virtual sports market from approximately 67,000 tickets in 2014 to over 20
million bet tickets traded in 2018. VG now operates in 12 countries including: Italy, Peru, Nigeria, Paraguay, Albania, Honduras,
Colombia, Mexico, Dominican Republic, Uganda, Nicaragua, and Turkey.
Pursuant to the purchase agreement that we
entered into with the prior owners of the shares of VG and Naos (the “Sellers”), on the closing date, we paid the Sellers
Four Million Euro (€4,000,000) (approximately U.S. $4,580,000) in consideration for all the ordinary shares of VG and Naos,
which was paid as follows:
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(i)
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a cash payment of One Hundred and Eight Thousand Euro (€108,000)
(approximately U.S. $124,000);
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(ii)
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the issuance of shares of our common stock valued at Eighty-Nine
Thousand Euro (€89,000) (approximately U.S. $102,000); and
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(iii)
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the delivery of a non-interest bearing promissory note providing
for the payment of (a) an aggregate of €2,392,000 (approximately U.S. $2,737,000) in cash in 23 equal and consecutive monthly
installments of €104,000 (approximately U.S. $119,000) with the first such payment due and payable on the date that is one
(1) month after the closing date; and (b) an aggregate of €1,411,000 (approximately U.S. $1,615,000) in shares of our common
stock in seventeen (17) equal and consecutive monthly installments of €83,000 (approximately U.S. $95,000) as determined by
the average of the closing prices of such shares on the last ten (10) trading days immediately preceding the determination date
of each monthly issuance, commencing on March 1, 2019.
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In addition, pursuant to the terms of the Purchase
Agreement, we agreed to pay the Sellers an earn-out payment to be paid in shares of our common stock within one month from the
end of the business year 2019 equal to an aggregate amount of €500,000 (approximately U.S. $570,000), 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.
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Market Opportunity
According to H2 Gambling Capital, a provider
of data and market intelligence regarding the interactive and land-based gambling industry in Europe and the United States, the
global online gambling industry’s (including online poker, casino, sports betting, bingo, lotteries and skill-based and other
games) gross gaming revenue (“GGR”) has grown from approximately $8.2 billion in 2003 to $53.1 billion in 2018. GGR
is defined as wagers, poker rake plus bonuses, promotions, overlays and loyalty rewards, less prizes or winnings. It is estimated
that the combined global online gambling GGR could grow to approximately $83 billion by 2025 for a compound annual growth rate
(CAGR) of approximately 7.8%. The overall global gambling market (including online, land-based and tribal casinos) is expected
to exceed $600 billion by 2025 while the online gambling segment is expected to increase from approximately 8% of overall GGR in
2010 to about 20% by 2025; while the mobile channel is expected to increase from about 12% of online GGR in 2010 to over 55% by
2025.
Until recently, the Interstate Wire Act of
1961, combined with the Professional and Amateur Sports Protection Act of 1992 (“PASPA”), prohibited sports betting
in the U.S. in all but four grandfathered states (Montana, Oregon, Nevada, Delaware). Despite its illegal status, sports betting
has been a thriving underground business, with the American Gaming Association (AGA) estimating that $150 billion was wagered on
an annual basis illegally on U.S. sports events. By way of example, the 2019 Super Bowl LIII alone drew $6 billion in illegal wagers,
with only about $300 million placed legally through Nevada and other legal state bookmakers.
In mid-May 2018, the U.S. Supreme Court overturned
PASPA in a 6-3 decision that found the law unconstitutional, resulting in it being up to individual states to decide whether to
allow its residents to bet on sports. Many states are expected to move quickly to establish sports betting as a means to increase
their respective capital resources. While several states have recently passed legislation to allow online gambling, we believe
that the U.S. sports betting market will take 5 – 10 years to fully develop. We believe that due to the recent U.S. Supreme
Court decision, the United States represents an addressable market opportunity for us with our Elys betting Platform in addition
to developing new opportunities in Canada, South America, Africa as well as several European countries.
Our Strengths
We have established ourselves as one of the leaders in the Italian
leisure betting market. Below are our strengths that we believe will enable us to capture a meaningful share of the global leisure
betting market:
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1.
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Highly Differentiated Technology Platform. Built from the ground-up, the Platform is designed
to be a highly flexible and robust sportsbook engine able to cope with the huge demands of today’s betting operators and
players. The Platform is designed as an industry specific ‘shop-client’ architecture and can offer any type of sport
(or non-sport) event and any type of betting market (i.e., soccer, football, basketball, hockey, baseball, tennis, etc.) in both
pre-match and in-game modes across both fixed-odds and pari-mutuel betting styles and through all channels (i.e., online, mobile
or land-based). Our proprietary Platform, which we intend to continuously update with gaming technology developments, should address
the independent operator’s ability to effectively and inexpensively compete against larger and established franchise operators.
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2.
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Market Momentum. We are a pioneer with our unique ‘shop-client’ designed Platform
and gaining momentum in the Italian leisure betting market with our fully integrated shop-client based Platform architecture with
integrated gaming account, artificial intelligence and business intelligence modules. We currently have approximately 90,000 online
user accounts through the three distribution methods: 1,000 web cafés (or “web-shops”), 7 corners, and 172 agency
locations.
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3.
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Scalable Platform at Minimal Cost. Our Platform is highly scalable. Expansion of the Platform
under our existing infrastructure requires little to no overhead and will create in-house efficiencies for our corporate operations
and for our agents and operator clients. Many of the inherent functions and features of our Italian Platform certification have
received prior approval and adhere to multi-jurisdictional standards which should enable us to receive certification in new markets
and expand into new markets in a timely manner.
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4.
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Growing Industry. Online gambling is growing in popularity and consumer confidence and is steadily
becoming one of the fastest growing sectors of the e-commerce industry. Gamblers worldwide are broadly preferring Internet channels
for their betting activities due to the ease of access offered and safety provided. Extensive usage of digital processes and growing
bettor demand is driving the market for online betting platforms. Recent liberalization and state-by-state legislation in the United
States has resulted in new opportunities in the United States sports betting market. We anticipate that the United States market
will begin to have a strong and steady uptake in active wagers. We further anticipate the first select states (i.e., Nevada, Delaware,
New Jersey, Mississippi, West Virginia, Pennsylvania, Rhode Island and New Mexico) to provide the regulatory framework and foundation
to build upon for other states and locations. In December 2018, New Jersey generated approximately $21 million in revenue from
approximately $319 million in sports bet wagers, with Mississippi generating approximately $6.2 million in revenue from approximately
$42 million in sports bet wagers. According to a recent study by Eilers & Krejcik Gaming (“EKG”), 32 states will
likely have legalized sports gambling within five years and as many as 14 could be ready for legislation within two years. Based
on 32 states, EKG estimates that the overall U.S. sports betting market could generate approximately $6 billion in revenue, where
a legalized U.S. sports gambling industry could generate an annual handle (turnover) of $100 billion.
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5.
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Highly Experienced Senior Management Team. We are led by a dedicated and highly experienced senior
management team with significant industry experience and proven ability to develop novel solutions. Each of the members of our
senior management has more than 20 years of relevant experience and many members of our board of directors have industry experience.
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Our Strategy
Our goal is to expand our market presence by
entering new foreign markets while at the same time further penetrating the Italian and additional European markets. We expect
new markets to be a large source of our future growth, in particular, the United States market is one where we intend to offer
the use of our Platform to existing commercial and tribal casinos, retail betting operators and franchise enterprises. Principal
growth drivers include, but are not limited to:
Development of Foreign Markets
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The U.S. Sports Betting Market
. With the recent repeal of the 1992 PASPA law by the U.S.
Supreme Court, the U.S. sports betting and online gaming market presents a huge opportunity to deploy our Platform as a Service
(PaaS) product to several potential independent and tribal casino and gaming operators throughout the United States. We expect
GLI-33 certification (the Gaming Laboratories International technical standard for event wagering systems) of our Platform to be
processed in a timely manner as many of the inherent functions and features of our Italian platform certification have received
prior approval and adhere to multi-jurisdictional standards. Upon completing the GLI certification and if successful in partnering
with a key tribal casino operator, we expect to be well-positioned to commence processing sports bets in the U.S. during 2019.
Once our Platform is online and processing live wagers on sports such as American football and basketball (both professional and
college level), we believe we will have established a solid foundation to build out our U.S. market strategy.
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Mergers and Acquisition in the Global Gaming Industry
. In an effort to scale and grow
the business, we will evaluate potential acquisitions that can be easily integrated into our business. Our recent acquisition of
VG is expected to allow us to expand our product offerings in additional countries. The global gaming industry is still very much
fragmented. There has been a significant number of noteworthy consolidations such as: (1) Stars Group/SkyBet/CrownBet/William Hill
Australia; (2) Paddy Power/Betfair; (3) Ladbrokes/Coral, GVC/BWIN; and (4) in lottery concentration (IGT/GTECH; as well as others
such as Pollard/Innova; NYX Gaming Group/Scientific Games) which we believe provides us with an opportunity to capitalize on the
acquisition of smaller operators forced to compete against newly formed larger consolidated entities.
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Further Penetration In the Italian Market
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Acquisitions of Smaller Operators. Government legislated consolidation of the regulated Italian
lottery and gaming market have driven smaller regional operators in Italy to our licensed brand “New Gioco”
TM
in both the online and land-based sales channels. The Italian regulated gaming market is the largest in the European Union (“EU”)
and is extremely fragmented. It is estimated that about 60% of betting handle (turnover) in Italy is controlled by 5 operators,
with the remaining 40% of online handle (turnover) divided between approximately 150 - 200 licensed operators. Recent new regulations
in Italy have made it more difficult for smaller regional operators throughout Italy to operate and we believe that our innovative
and cost-effective Platform will be a welcome alternative for such smaller regional operators throughout Italy that will not be
able to maintain the new standards set out by the Italian regulator on their own.
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Organic Growth. The strong and growing Italian online gaming market continues to drive substantial
growth in our core operations. The number of monthly average active online gambling players increased by over 25% year over year
to 959 thousand out of 2.2 million online gambling players in Italy in 2017. In 2017, the Italian online gaming market grew by
approximately 34% on a year over year basis to €1.38 billion (approximately U.S. $1.58 billion). A key characteristic of the
Italian market is that the online channel represents only about 7% of the market compared to the UK’s gaming market where
41% comes from online channels. We believe there is ample room for growth in the Italian market.
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8
Products and Services and Distribution Methods
Betting Platform
We believe that our Platform, engineered and
launched by our software development team at Odissea, is a highly efficient, cutting edge betting Platform technology that supports
the processing of online client gaming account protocols as well as land-based betting protocols with seamless multi-channel functionality
accepting all forms of payment methods (i.e., cash, e-wallet, bank card and wire transfer, etc.) and integrated with a real-time
CRM and BI program for streamlined cross-platform marketing as well as a synchronized financial accounting process.
Online payment channels for both deposit and
withdrawals are as set forth below:
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Player indirect meaning that the customer makes a deposit indirectly
to their gaming account through a licensed agent (such as a cash deposit to their gaming account at a web-shop counter (e-credit
to player account)).
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Player direct meaning that the customer makes a deposit directly
to their own gaming account through one or more of the following methods:
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o
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All credit card brands;
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Debit card (Interac/Bancomat);
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o
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e-wallet or e-credit transfer.
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Land-based retail payment channels for both
play of wagers and settlement of winnings at the agency or corner counter is as follows:
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Player direct meaning that the customer pays for the wager in cash,
accepted debit or credit cards.
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We currently employ a customizable client-focused
and cost-effective “hands-on” method, rather than a “general approach” to our Platform design with the
goal of empowering our player-facing agents and employees to enhance the players’ experience by allowing personalized dashboard
design and customer care for all customer call-in’s to our service agents. We believe that this strategy has been highly
effective in the Italian retail betting market and has been instrumental in increasing our revenues, net earnings and player retention.
Gaming Product Offerings
Our online sales channel (websites and web-shops)
offers a full suite of gaming products which include:
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Sports Betting: Considered the largest and most well-known industry
segment offering both pre-match and live in-game betting events on a wide variety of sports.
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Online Casino: includes the following:
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Traditional Online Casino Games: Automated (using random number generated
(“RNG”)) casino games such as roulette, blackjack and baccarat and slot machines.
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Live Online Casino Games: Table games broadcast via live video stream
with real dealers and croupiers that simulate the atmosphere of a physical casino.
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Poker: Texas Hold’em and Omaha in both cash and tournament
format.
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Bingo and Skilled and Interactive Games: Games that are programmed
with a RNG to ensure constant fairness for all parties and can be played for real money or free play. These games include card
games such as tresette (3 Sevens), scopa (Sweep) and briscola (Trump).
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Virtual Sports Betting: Various computer generated sport and racing
events that are programmed with a RNG.
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Horse Racing: Live track horse racing events.
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Our land-based locations generally offer only
sports betting, virtual sports betting, horse racing and physical slot machines.
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Other Services and Facilities
In addition to complementing gaming offerings
originally provided by our acquired operators with our Newgioco branding, we intend to add new products and services with the assistance
of gaming specialists, software providers and market research professionals, such as we have done with our acquisition of VG. We
believe that we can generate additional revenues by establishing additional marketing centers and kiosks.
Our Target Markets
The following table sets forth certain information
regarding our target markets and is consistent with on our own internal ad hoc survey we conducted between January 1, 2014 and
August 15, 2014.
Age Group
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Demographic
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Nexus
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18 – 24
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Pre-gaming future
client
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New-gaming audience
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Desires experiential,
e-gaming, imaginative fantasy games
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A majority of this
age group owns a cellular or smart mobile phone with data packages and internet access
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Technologically
savvy consumer spending more on experiences compared to material goods
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25 – 44
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Mature-gaming audience
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Desires games of
chance, casino, traditional gambling tables, and sports betting
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Majority of online
gamers are 30 years old and currently heads of households
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Male and female
balanced across the group
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45 – 79
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Grounded gamer
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Desires social interaction,
easy play, bingo slots, nickel games
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Largest growing
segment of the population and largest market size
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Significantly underserved
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Needs are more social
interaction rather than self-fulfilling
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High disposable
income
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We currently service approximately 90,000 online
user accounts and estimate that our user base will increase to over 100,000 in two years based on projections of both organic growth
and acquisitions of existing operators. Our clients range in age from ages 18 through 79 and are a mix of 70% male and 30% female.
In addition, we separate our revenue source by (a) sports betting, (b) casino and card game betting and (c) poker. Our in-house
analysis indicates that sports betting and casino games are more popular than poker and other card games among our customer base.
In addition, sports betting is our most profitable revenue stream yielding the highest percentage of our gross gaming revenue at
51% of revenues, which is representative of industry metrics when measured by completed sports seasons on a year over year basis.
Our internal analysis further indicates different
gaming patterns among our male and female online users. Male players prefer sports-bets, while approximately 10% of them also explore
casino and poker. Conversely, female players prefer casino and bingo while approximately 1% try our other games such as poker,
sports-betting or lotteries.
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Sports-Bet: We currently have an average of 5,500 players per month
(approximately 22% of our total gaming accounts) that place at least three bets per week, for a total of twelve bets per month
per player. The total number of monthly bets on our Platform averages between 160,000 and 180,000 tickets. The average of the amount
played per ticket is approximately $8 such that each player that places twelve bets spends approximately $96 per month.
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Casino: We have an average of 900 players monthly who participate
in our casino games (approximately 2.5% of all gaming accounts and 14.6% of the sports-bet players), with approximately 26% of
players playing on our mobile platform. Each casino player generates approximately $3,172 per month of coin-in handle (or turnover)
which represents gross gaming revenue (“GGR”) of approximately $99 per player per month. We also use the GGR metric
of $99 to measure our casino performance in “spending” of a casino player.
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Poker: We have an average of 1,080 players participating in poker
games through our website (approximately 3% of all gaming accounts and 19.6% of the sports-bet players) per month. Each poker player
generates approximately $3,063 per month of coin-in handle which represents GGR of approximately $109 per player per month. We
also use the GGR metric of approximately $109 to measure our casino performance in “spending” of a poker player.
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Most of our users are located throughout Italy
with the highest concentrations in larger centers such as Rome and Naples.
We expect that users from any operators that
we acquire will continue to utilize our services and anticipate that any operators we acquire will have existing revenues from
users who frequent their establishments and venues or use their websites. In addition to acquiring customers through the acquisition
of operators, we intend to obtain additional licenses and pursue contracts and relationships with institutions, both from private
and publicly listed companies that we believe will attract and secure new users.
Mobile App
Based upon customer demand for improved performance,
speed, and ease-of-use for sports betting on mobile devices, we engaged a dedicated team of engineers to this distribution channel
and have already launched and intend to launch several additional innovative, market-leading features through this channel on an
ongoing basis.
In October 2017, we launched a new mobile betting
application on our Platform. The new mobile app is dedicated to improving the user experience with respect to sports betting, with
casino and poker brands rolled out in November 2017 and our artificial intelligence (AI) learning bot in February 2018.
Our Websites
Our main licensed gaming website,
www.newgioco.it
,
currently processes sports bets and mobile betting transactions through our Platform, while online casino and poker operates under
a third-party service provider agreement with Microgame SpA, and Lotto products through Lottomatica SpA. Odissea provides and operates
all aspects of our online gaming website including servers, routers, software development (for the Newgioco branded website operations),
sportsbook trading, telephone betting, licensing, website hosting, payment solutions, security, and gaming related customer support
needs.
Our main and white-label websites are tailored
for the Italian gaming market. We maintain a web-based platform directly under the branded website
www.newgioco.it
which
serves both players directly and web-shops (i.e., internet café’s). Information contained on our website does not
form a part of this report on form 10-K and is intended for informational purposes only. There are some variations in website style
because we offer different services through distinctive marketing campaigns:
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Our direct sales campaigns are conducted through our main page:
www.newgioco.it.
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www.newgioco.it
is mainly devoted to marketing for shops which
includes marketing with respect to campaigns, branding, and proposals/marketing for prospective operators to become a “Newgioco
shop” and is the landing page for all white-label websites. A landing page refers to a webpage that is generally owned by
a promoter (which can also be referred to as a betting shop) which redirects their marketing (social network, friends or other
forms of marketing) to this main webpage. Apart from a few advertisements, the landing page links patrons to sign-up or register
directly on the newgioco.it main page except that a promotional code is tied to the link, such that the web promoter can funnel
his marketing through a subnet. In the case of Italy, the entire subnet (a subnet is a logical grouping of connected network devices.
Nodes on a subnet tend to be located in close physical proximity to each other such as on a LAN) must be connected to the ADM network.
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While the
www.newgioco.it
website offers
wagering in many categories of sports events, we intend to capture a larger share of the Italian sports betting market by focusing
on the Serie A, B, and C soccer as well as virtual sports betting, online poker, online casino and slots, skill games, and Italian
horse racing through agent-based sales campaigns. Agent based sales campaigns are offered through white-label pages or webskins
that direct gaming transactions through our main website www.newgioco.it. We currently operate nine such webskins as follows:
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www. originalbet.it
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www.timetobet.it
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www.lovingbet.it
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www.imperialbet.it
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www.clubgames.it
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www.gamesmart.it
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www.quibet.it
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www.mixbet.it
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www.782sport.it
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webskins or white-label pages are dedicated to the end-user, or players,
and focus on regional campaigns and gaming offerings directed at local players, such as welcome bonuses, poker rake rebate for
poker players, etc. A white-label page is a complete gaming website (similar to the main website of the licenser (in our case Multigioco))
but with the interface and logo of the promoter. The promoter earns fees based on a percentage of the handle (turnover) generated
through their website.
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In relation to the third-party websites, the
promoter (“partner”, “shop”, “agent” or “promoter”) is responsible for marketing
strategies, administration and costs. The promoter may utilize special promotions, draws and incentives to drive players to their
website to increase gaming handle (turnover) or visits. Generally, these regional promoters operate in areas that are remote or
distant from our central operations based in Rome. Therefore, some promotions may be tied to local events in the jurisdictions
surrounding the “home base” of the promoter rather than originating from our main operations. The relationship with
local shops and players from the promoter region remains with the promoter since there may be regional nuances that attract their
clientele to our gaming offerings. Notwithstanding the foregoing, the gaming business is owned by the underlying licensor (i.e.,
Multigioco) and is included in our overall financial results as gaming handle (turnover).
The promoter does not have direct access to
our client gaming accounts and is therefore not legally responsible or liable for maintaining gaming account balances but rather,
the licensor is legally responsible for compliance and client gaming account control such as anti-money laundering, know-your-client
and minimum age restrictions, and is also required to ensure that all payouts due to players are credited to each players’
gaming account and are available to players within seven business days of the completion of the play.
The foregoing websites are only published in
Italian. We may include additional languages if we determine that such services are commercially viable and if we agree to pay
the related development fees. We currently do not have any plans to expand our websites to include additional languages.
The ADM requires that all websites be owned
only by the license holder (Multigioco). We own our branded url (uniform resource locator)
www.newgioco.it
in accordance
with our ADM licensing requirements and either directly operate our websites (main page - newgioco.it) and all white-label websites
or alternatively contract the websites to third party agents or promoters operating webskin urls under the licensed main page.
Although we have a diverse portfolio of product
and service offerings through our websites, we intend to focus on creating in-house cost savings and synergies by undertaking strategic
acquisitions of competing webskin operators and to operate them under our Newgioco branding.
Intellectual Property
We do not own any patents or have any patent
applications pending in Italy or any other jurisdiction. As a result of our acquisitions of Multigioco, Rifa and the gaming assets
of Newgioco Srl, we obtained the rights to the domestic distribution brand known throughout Italy as New Gioco, and in July 2015,
we obtained a trademark on the brand and logo for New Gioco.
As a result of the acquisition of Odissea,
we obtained the technical rights, intellectual property and technical know-how behind our Elys betting Platform.
In addition to the foregoing, we have proprietary
rights to a number of trademarks, service marks and trade names used in this prospectus which are important to our business including
“Aleabet”, “OriginalBet”, “LovingBet” and “Elys.”
Research and Development
We are continually updating the Platform and
the products that we offer. During the years ended December 31, 2018 and 2017 we incurred approximately $0.8 million and no expenses,
respectively, for research and development. We expect that expenses we incur for development and improving our betting software
to be continuous recurring research and development expenses.
Overview of the Leisure Betting Industry Including Italian Sports
Betting and Leisure Gaming Market
Leisure betting describes consumer entertainment
products which customers purchase on a daily or regular basis. With a population of approximately 60.6 million, of which 75.9%
are between the ages of 15 and 64, Italy is one of the leading betting markets in the world and has recently surpassed the UK to
become the largest betting market in Europe. [Source: Agenzia della Dogane e dei Monopoli] With 640,000 active monthly players,
the Italian market accounts for approximately 23% of the global gaming market worth over $400 billion [Source: American Gaming
Association].
12
According to Agenzia della Dogane e dei Monopoli,
in recent years, the Italian leisure betting market has grown significantly, reaching an estimated $102 billion in 2013, an increase
of 12.3% compound annual growth rate (“CAGR”) between 2007 and 2013, driven by new products with higher pay-out, the
expansion of the distribution network and the development of the online channel. The Italian state works with operators to promote
a responsible approach to gaming through national advertising campaigns as well as social, cultural and sports initiatives by curtailing
excessive gambling advertisements.
Gambling has been culturally rooted since Roman
times, and as such, Italian gaming laws are governed by a well-defined set of regulations which are considered to be some of the
most advanced and robust regulations in the world. The Italian regulator, ADM, has created an environment that fosters competition
and guards against illegal gaming as well as by implementing a consolidated licensing mechanism, creating favorable conditions
for operators such as Newgioco.
Overview of the Mobile Betting Market in
Italy
Agenzia della Dogane e dei Monopoli estimates
that approximately 64.9% of mobile users between the ages of 15 and 64 use smart phones with approximately 53.1 million using mobile
broadband. Mobile applications in the online leisure betting space are forecasted to become the leading technology channel for
customer transactions in the near future.
Overview of the Global Leisure Gaming Market
The easing of government regulations on sports
betting is expected to be a primary growth driver for the global online gambling market. In May 2018, the U.S. Supreme Court ruled
that the national ban on sports betting (PASPA) was unconstitutional, paving the way for states to enact laws authorizing sports
gambling.
In addition to the repeal of PASPA, as of December
2018, three states, Delaware, Nevada and New Jersey, as well as the U.S. Virgin Islands, allowed online gaming, while other states
have indicated their support for enacting laws authorizing land-based and/or online sports betting (Mississippi, West Virginia,
Pennsylvania, Rhode Island and New Mexico).
According to “Global Gaming Outlook”,
the PricewaterhouseCoopers 2015 global report on global casino and online gaming industries, governments facing social constraints
are now entertaining the potential source of tax revenue from online gaming. We believe that the tax revenue in addition to increase
in employment opportunities derived from online gambling will motivate governments around the globe to legalize online gambling.
The American Gaming Association expects the industry to grow at a CAGR of more than 6% by 2025.
The global online gambling market is gaining
popularity in Europe, the Middle East and Africa (EMEA) because online sports betting sites generate substantial revenues for governments
and foster a safe environment for players to place wagers. Their significant contribution to national revenues is encouraging several
countries to legalize online gambling.
The global online gambling market is characterized
by the presence of several vendors competing to gain market dominance. Some small vendors are operating only in specific product
verticals such as casino and lottery, while, other vendors are operating in multiple areas including poker and retail sports betting.
The growth opportunity for these vendors is increasing due to the rise in the number of online gambling providers and improved
access to the internet around the world, as well as the increase in the number of players.
Certain key vendors in the global online gambling
market are:
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Bet 365 (Hillside Group);
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Stars Group (formerly Poker Stars);
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IGT/GTECH Lottomatica SpA;
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Ladbrokes Coral Group (now merged with GVC Holdings);
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Paddy Power Betfair; and
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Kindred (Unibet Group).
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Other notable product vendors in the market
also include Betsson, Gamenet/Intralot/Goldbet, Camelot Group, Genting UK, NetEnt, Playtech (acquired Snaitech), and Rank Group.
See “—Competition” below for additional information on major operators in Italy.
The sports betting segment is expected to grow
with the increased popularity of global soccer sporting events such as the recently completed 2018 FIFA World Cup in Russia and
ongoing global growth of cricket and rugby tournaments. In addition, online betting is popular in many sports events that take
place around the globe including basketball, horse and greyhound racing, ice hockey, baseball, golf, tennis and football. Sports
betting is becoming more popular due to the expansion of wagering on these sports on the online channel.
Industry Growth Trends
The unregulated global betting sector is understood
to be many times larger than the regulated sector, although no verifiable or precise financial reporting is available. It is believed
that 70-85% of the unregulated bets collected, excluding horse racing, are placed on American football [Source: H2 Gaming].
According to Statista, the European online
market was projected to increase to US$24.75 billion. The largest share of online gambling revenues in Europe came from sports
betting with 37%, followed by online poker with 24% and online casinos with 22%.
Competition
Competition in the online gaming industry is
moderate with operators competing for customers in various geographic markets. These include online operations of ‘land based’
casino operators, poker rooms, sports/race books, bingo, skills games, lottery, betting exchanges as well as internet or web only
based operators. The global reach of the internet together with the abundant supply of games and operators means that users can
easily switch gaming platforms and operators, thereby increasing competition. Government and other regulations make it more difficult
for operators to expand their footprint in certain markets leading to the consolidation of operators in such markets, while the
easing of regulations in some markets has permitted more operators to enter the marketplace.
We compete with several private and publicly
listed companies that provide land-based and/or online gaming, many of which have greater sources of financing, greater name recognition
and have been engaged in the industry longer than we have. In addition, current land-based casino competitors, many of which have
longer operating histories, greater brand recognition and greater financial and other resources than us, may provide Internet gaming
services in the future.
Our subsidiaries face direct competition in
Italy from established online gaming sites including, but not limited to:
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GTECH (IGT/Lottomatica): focused on providing software and services
in the Internet, lottery and sports betting market;
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Snaitech: (recently acquired by Playtech) an Italian corporation that
deals with the management of betting odds and horse racing contests;
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Sisal: one of the longest running Italian gaming companies offering
Internet betting, lotteries, scratch to win, poker and casino, slots and arcade games;
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GVC Holdings/BWIN: one of the largest online gaming companies in the
world focused primarily on sports betting, as well as online casino and poker;
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Ladbrokes/Gala Coral Group/Eurobet: a UK based betting and gambling
company which was acquired by GVC Holdings in March 2018;
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Bet365 (Hillside Media): a UK based online gambling company offering
sports betting, poker, casino, games, and bingo, as well as video streams on sporting events;
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PaddyPower/Betfair: is a London Stock Exchange company and a constituent
of the FTSE 100 Index. The company is a bookmaking business created by the merger of Paddy Power and Betfair, and operates under
various brands including Betfair, Paddy Power, Sportsbet, TVG and FanDuel;
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888 Holdings: a multinational online gambling company which operates
several international gambling websites including 888casino (one of the oldest online casino websites); 888poker and 888bingo;
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William Hill: a UK based bookmaker founded in 1934 is listed on the
London Stock Exchange and a constituent of the FTSE 250 Index operates an online sportsbook and offers online casino games, ‘skill
games’, online bingo and online poker. The company operates approximately 2,300 betting shops and employs over 16,000 people
worldwide; and
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The Stars Group (PokerStars): a Canadian online gaming company formerly
known as Amaya Gaming Group produces and offers online gaming products and services including poker, casino and sportsbook through
its online gaming division, Stars Interactive under the brands PokerStars, PokerStars Casino, BetStars and Full Tilt Poker.
14
Government Regulations
We are subject to various government regulations
in the jurisdictions in which we currently operate or intend to operate in as set forth below. Current and future laws and regulations
may impede the growth of regulated online and offline gaming and wagering. Any noncompliance with the various laws and regulations
that our operations are subject to may harm our business and results of operations.
Italy
In Italy, the operation of land-based and online
gaming activities requires a license awarded by the ADM. The ADM is responsible for, among other things:
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regulating games and enforcing relevant regulatory provisions;
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issuing licenses, and supervising
compliance by licensees;
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monitoring the distribution
of gaming services; and
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collecting gaming taxes.
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There are currently two main categories of
licenses (land-based and online) in circulation, issued or awarded by the ADM in three series:
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Series 1 first issued by legal decree in 1992, renewed in 2009 under
the Abruzzo decree and are colloquially branded as “Monti” licenses, that expired in 2016 and are expected to be called
for renewal tender between 2020 and 2022;
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Finance Act series which were awarded by tender in 2006 and are known
as “Bersani” Licenses that expired in 2016 and are expected to be called for renewal tender between 2020 and 2022;
and
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New series Gioco a Distanza (Games at a Distance) (“GAD”)
issued by application process under the Comunitaria decree in 2010 expire in 2021 and are expected to be renewed through a license
tender auction.
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The Monti and Bersani licenses provide distribution
authorization to operate both Negozio Sportivo and Punto Sportivo land-based agencies and corners as well as GAD online (web-based)
distribution. Land-based Monti licenses and Bersani licenses are subject to and expected to be consolidated under a new decree
at renewal auction which is expected to be called for renewal tender between 2020 and 2022, to match up with the limited number
of Comunitaria Series GAD licenses expiring in 2021.
We currently hold, through our subsidiaries
four gaming licenses upon which our business is dependent: (i) a Bersani license, (ii) a Monti license, (iii) a GAD license and
(iv) an Austrian bookmaker license. Our Italian Bersani, Monti and GAD licenses are issued by the ADM, while our Austrian bookmaker
license is issued by the Austrian Gambling Authority (BMF). Each Italian license is typically valid for a term of nine (9) years
while the Austrian license has a lifetime duration and, in both cases, can be terminated if we fail to comply with required regulations
in each country. The renewal process for the Bersani license and Monti license, is a call to tender auction process held at the
same time for all licensees approximately once every nine years with the highest bidders being awarded not only licenses but rights
to operate a certain number of land-based locations. In addition, the maximum number of land-based license rights that any one
operator may bid on at auction is 20% of the total market being auctioned.
15
The Bersani and Monti land-based licenses allow
us to offer specific gaming products through physical retail locations. The rights granted under the Bersani and Monti licenses
are not fixed to any specific physical location and can be moved at the discretion of the licensee to any physical address so long
as the physical address has a municipal license to sell gaming products and the physical locations meets the ADM requirements,
most of which are zoning requirements that require that the location is situated at a minimum distance from schools, churches and
ATM’s and banks. Multigioco currently holds one land-based Bersani license which provides the right to operate seven (7)
corners that was issued to it in 2006, expired in 2016 and is up for renewal at such time as the ADM determines to hold an auction,
which is expected to be held between 2020 and 2022. Rifa holds one land-based Monti license that was issued to it in 2010 which
provides it with rights to operate two (2) agencies, expired in 2016 and is up for renewal at such time as the ADM determines to
hold an auction, which is expected to be held between 2020 and 2022. Although both Monti and Bersani land-based licenses expired
in 2016, until the ADM holds the auction for renewal of the licenses, we have been granted a Letter of Authority which permits
us to continue our operations until the next government organized license renewal is held. For a description of the risks associated
with the licenses and their renewal see the Risk Factors entitled “If we should lose our online or land-based licenses or
if the licenses are not renewed for any reason, including our failure to successfully bid for location rights at the renewal auction,
our business would be materially adversely impacted” and “In order to expand our land-based operations in Italy, we
will be required to acquire additional location rights under our licenses or acquire operators that have location rights under
their licenses and our inability to acquire such additional rights or operators or restrictions from using any license associated
with such acquired operators, will result in an adverse effect on our revenues and profits.” Our failure to successfully
acquire the requisite number of location rights we desire at the renewal auction in Italy, will most likely result in us either
acquiring rights in the secondary market from someone selling rights they acquired at auction at prices which are typically higher
than the auction prices of the ADM or opening additional webshops, which will be less expensive but also have lower profit margins
than the land-based operations.
Multigioco was awarded a Comunitaria Series
GAD license by the ADM in 2011. The licenses provide Multigioco the right to:
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offer gaming products that ADM authorizes for deployment in Italy
through online channels which include websites and apps displayed on a PC, tablet or mobile phone;
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enter into licensing, joint venture and acquisition agreements with
shops and private enterprises as concessionaires that provide various local services such as convenience stores, bars, cafes, and
restaurants in Italy;
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establish web cafe`s as permitted by the regulations enforced by
the ADM regional office within Italy; and
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take such steps such as know your client (“KYC”) and
anti-money laundering controls (“AML”) that are deemed necessary to develop the business of regulated gaming in Italy.
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An online account allows a player to fund an
account through a variety of electronic payment channels such as credit cards, ATM/debit cards and bank wires. The GAD license
provides us with the opportunity to open an unlimited number of web-shops and to close any of the web-shops that we open in our
sole discretion. Our GAD license expires on June 15, 2021 and can renewed by a licensee provided that they have not violated any
regulations. We believe that we will be able to renew this license through a tender notice process, no assurances can be given
that the renewal will be timely, if at all.
Ulisse holds one Austrian bookmaker license
that it was issued in June 2018 which has no termination date but may be terminated or cancelled by the regulator if Ulisse fails
to comply with any regulations.
In addition, our software Platform has been
certified for use in Italy in accordance with the ADM requirements by Quinel M. Limited, a global technology auditor that conducted
an audit of the Platform in June 2017. The purpose of the certification is to prove the effectiveness and accuracy of communications
between the supplier interface and the user/operator interface. Any updates to the software or changes to key functions that we
implement, require recertification, for which there can be no assurance that our software will qualify.
United States
There is no federal United States legislation
that explicitly addresses the legality of online gambling. However, there are several acts that impact online gambling.
The Federal Wire Act of 1961 makes the placing
of sports bets over the telephone illegal, given its age, The Federal Wire Act of 1961 does not explicitly refer to online gambling,
leaving the applicability of the Act on online gambling open to interpretation.
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The Unlawful Internet Gambling Enforcement
Act of 2006 (“UIGEA”) prohibits any person engaged in the business of betting or wagering from knowingly accepting
payments related to unlawful bets or wagers transmitted over the Internet. While the UIGEA does not define online gambling as being
illegal, the UIGEA instructs the U.S. Treasury Department and Federal Reserve to impose obligations upon financial institutions
and other payment processors to establish procedures designed to block online gaming-related financial transactions. It also expressly
requires Internet bets and wagers to comply with the law of the jurisdiction where the wagers are initiated and received (i.e.,
within state borders). As a result of the UIGEA we may not accept bets received by use of wire communications facilities, including
telephones and computers, unless such bets originated in jurisdictions where such betting or wagering is legal.
In May 2018, the U.S. Supreme Court ruled that
the Professional and Amateur Sports Protection Act (the “PASPA”) is unconstitutional as it violates the Tenth Amendment
prohibition against forcing states to implement federal laws. Enacted in 1992, PASPA generally prohibited states from authorizing,
licensing or sponsoring betting on competitive games in which amateur or professional athletes participate. PASPA did not make
sports betting a federal crime; but rather, it allowed the attorney general for the Department of Justice, as well as professional
and amateur sports organizations, to bring civil actions to enjoin violations of the act. The U.S. Supreme Court decision opens
the door for all states to legalize and regulate sports gambling within their borders. States such as New Jersey, Delaware, West
Virginia and Mississippi have passed laws that were ready to be enacted once the federal ban on sports betting was lifted. Other
states have since legalized sports betting (Pennsylvania, Rhode Island and New Mexico). Furthermore, additional states including
California, Connecticut, Louisiana, South Carolina, Oklahoma, Kansas, Missouri, Iowa, Indiana, Illinois, Kentucky, Michigan, Ohio,
Maryland, South Dakota and North Dakota are considering active bills.
United Kingdom and European Union
The United Kingdom and certain European Union
countries such as Germany, France, Spain and Greece have enacted online gaming laws and regulations. To the extent that we operate
in any of these jurisdictions, our operations will need to be in compliance with the laws and regulations of such jurisdiction.
Additional Government Regulations
We are subject to general business regulations
and laws which cover among others, taxation, virtual currencies, identity theft, account management guidelines, privacy, disclosure
rules, security and marketing.
Employees
As of December 31, 2018, two persons are directly
employed, and three persons are engaged as independent contractors by us, while our subsidiaries Multigioco employed 19 full-time
and five part-time employees, and approximately 27 independent contractors which includes risk management specialists and sales
agents, Odissea employed 14 full-time employees and Ulisse employed 10 full-time employees.
None
of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be very
good.
Corporate Information
Newgioco Group is a Delaware corporation incorporated
on August 26, 1998.
Our principal headquarters are located at 130
Adelaide Street, West, Suite 701, Toronto, Ontario M5H 2K4, and the offices of our wholly-owned subsidiaries are located in Canada,
Italy, Malta and Austria. Our subsidiaries include: Multigioco Srl (acquired on August 15, 2014), Rifa Srl (acquired on January
1, 2015), as well as Ulisse GmbH and Odissea Betriebsinformatik Beratung GmbH (both acquired on July 1, 2016) and Newgioco Group,
Inc. (Canada). Our telephone number is +39-391-306-4134. Our corporate website address is www.newgiocogroup.com. The information
contained on our website is not incorporated by reference into this annual report, and you should not consider any information
contained on, or that can be accessed through, our website as part of this annual report or in deciding whether to purchase or
sell our securities.
We have proprietary rights to a number of trademarks,
service marks and trade names used in this annual report which are important to our business including “New Gioco”,
“Aleabet”, “OriginalBet”, “LovingBet” and “Elys”. Solely for convenience, the trademarks,
service marks and trade names in this annual report are referred to without the ® and TM symbols, but such references should
not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their
rights thereto. All other trademarks, trade names and service marks appearing in this annual report are the property of their respective
owners.
17
Available Investor Information
We file electronically with the Securities
and Exchange Commission (“SEC”) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of 15(d) of the Securities Exchange Act
of 1934, as amended. We make available through our website, free of charge, copies of these reports as soon as reasonably practicable
after we electronically file or furnish them to the SEC. Our website is located at www.newgiocogroup.com. You can also request
copies of such documents by contacting us at 39-391-306-4134 or sending an email to investor@newgiocogroup.com.
Item 1A. Risk Factors
In addition to the other information contained
in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating us. Our business, financial
condition, liquidity, or results of operations could be materially adversely affected by any of these risks. The risks and uncertainties
described below are not the only ones facing our company, additional risks and uncertainties not presently known to us or that
we currently consider immaterial may also have an adverse effect on us. If any of the matters discussed in the following risk factors
were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially and adversely
affected.
Risks Related to Our Business
Because we have a limited operating history,
we may not be able to successfully manage our business or achieve profitability.
We have a limited operating history with respect
to our gaming operations upon which you can evaluate our prospects and our potential value. We began our gaming operations in 2014,
when we completed the acquisition of 100% ownership in Multigioco, a corporation organized under the laws of the Republic of Italy,
which is now our wholly owned subsidiary and was granted its ADM Comunitaria GAD (Online Gaming) license on July 4, 2012. As a
result of the acquisition of Multigioco, our principal business became a licensed leisure gaming operator offering web-based and
land-based sports betting, lottery and gaming products for our customers. The subsidiary that owns our Platform, Odissea, was acquired
by us along with our Austrian bookmaker subsidiary, Ulisse in June 2016. In January 2019 we acquired VG. Therefore, it is difficult
to evaluate our business. If we cannot successfully manage our business, we may not be able to generate future profits and may
not be able to support our operations.
The likelihood of our success and performance
must be considered in light of the expenses, complications and delays frequently encountered in connection with the establishment
and expansion of new business and the highly competitive environment in which we operate.
We have incurred substantial losses in
the past and it may be difficult to achieve profitability.
We have a history of losses and are anticipated
to incur additional losses in the development of our business. For the year ended December 31, 2018, we had a net loss of $3.0
million. Although we had net income of $1.4 million for the year ended December 31, 2017, as of December 31, 2018 and December
31, 2017 we had accumulated deficits of $13.0 million, and $9.9 million, respectively. Since we are currently in the early stages
of our development and strategy, we intend to continue to invest in sales and marketing, product and solution development and operations,
including by hiring additional personnel, upgrading our technology and infrastructure and expanding into new geographical markets.
To the extent we are successful in increasing our customer base, we expect to also incur increased losses in the short term despite
the fact that our Platform is easily scalable because costs associated with entering new markets, acquiring clients, customers
and operators are generally incurred up front, while service and transactional revenues are generally recognized at future dates
if at all. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenues
enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including
the other risks described in this section, and unforeseen expenses, difficulties, complications and delays and other unknown events.
If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease. If
we are unable to maintain our profitability, the value of our business and common stock may decrease. Although we cannot assure
that we will be able to maintain a profitable level of operations to meet our obligations arising from normal business operations,
in recent years we have generated sufficient revenue to maintain our existing operations and continue our moderate organic growth.
We have recently initiated an ambitious investment strategy including taking steps to enter the U.S. market which has led to an
increase in some recurring and a number of non-recurring expenses. Our ability to execute our growth plan is dependent upon our
ability to continue to generate profits from operations in the future and/or our ability to obtain necessary financing required
and to fund our ambitious investment strategy if such financing is available on reasonable terms, if at all.
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If we should lose our online or land-based
licenses, or if the licenses are not renewed for any reason, including our failure to successfully bid for location rights at the
renewal auction, our business would be materially adversely impacted.
Our ability to generate revenue from gaming
operations in Italy is dependent upon our ability to maintain our online and land-based licenses. Each of the four licenses that
we hold can be terminated by the regulator at any time if we fail to comply with their regulations. In addition, our GAD license
that was issued to Multigioco in 2011 that is up for renewal in 2021 and our Bersani land-based license that provides rights to
seven corners and was issued to Multigioco in 2006 is currently up for renewal at such time as the ADM should determine as is our
Monti land-based license that provides rights to two agencies and was issued in 2010 to Rifa. Inasmuch as the renewal process for
licenses is conducted through a call to tender auction process, even if we have fully complied in all respects with all requirements
of the ADM, there is no guarantee that we will be the highest bidder at auction and therefore there is no guarantee that our licenses
or location rights will be renewed. In addition, although our software is currently certified for use in Italy, any updates to
the software or changes to key functions that we implement, require recertification, for which there can be no assurance that our
software will qualify.
In order to expand our land-based operations
in Italy, we will be required to acquire additional location rights under our licenses or acquire operators that have location
rights under their licenses and our inability to acquire such additional rights or operators or restrictions from using any license
associated with such acquired operators, will result in an adverse effect on our revenues and profits.
Rights to online and land-based licenses are
only available in Italy at limited times when licenses are being renewed. In addition, the maximum number of land-based location
rights that any one operator may bid on at auction is 20% of the total market being auctioned. Due to such limitations on acquiring
new location rights in Italy, our ability to expand the number of land-based locations that we operate will depend in large part
upon our ability to acquire operators that hold land-based licenses and location rights. We expect a significant portion of our
revenue to be derived from gaming revenue earned by operators that we have recently acquired or will acquire in the future. Although
the operators which we have acquired and those that we acquire in the future may have an active gaming licenses and location rights,
we can provide no assurance that the existing license and location rights of any particular operator we have acquired or that we
acquire in the future will be renewed or retained or that we will be able to acquire additional operators and increase our client
base. If we are restricted from acquiring target operators or their client base, our revenue and profit potential will be adversely
affected.
If we are unable to respond to changes
in consumer preferences, attract new customers or sell new or additional products, our revenue growth and business will be adversely
affected.
Our retail leisure betting business, website
and web-shops operate in an industry that is subject to:
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rapid technological change;
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the proliferation of new and changing online gaming sites;
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frequent new product introductions and updates; and
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changes in customer preferences and demands.
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If we fail to anticipate and effectively respond
to any of the above changes, the demand for our products and services that we currently offer or that we may offer in the future
may be reduced. Additionally, increasing incremental sales to our current customer base will require additional sales and marketing
efforts, which may not be successful. Any failure to attract new customers or maintain and expand current customer relationships
will have an adverse effect on our business and results of operations. Failure to anticipate and respond to changes in consumer
preferences and demands could lead to, among other things, customer dissatisfaction and failure to attract and retain consumers
of our products which could have a material adverse effect on our business, financial condition and operating results.
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If we fail to acquire, integrate and
develop operators and new technologies on favorable economic terms, our future growth and operating results could be adversely
affected.
We anticipate that the future growth and success
of our business will be dependent upon our successful acquisition of operators and development of new technologies. We may in the
future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our solutions,
enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the
attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions,
whether or not the acquisition purchases are completed. In addition, we have limited experience in acquiring other businesses.
If we acquire additional businesses, we may not be able to integrate successfully the acquired personnel, operations and technologies,
or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition
targets or be successful in entering into an agreement with any particular target. Acquisitions could also result in dilutive issuances
of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired
business fails to meet our expectations, our operating results, business and financial condition may suffer. The difficulties and
risks associated with the integration of the operations of new operators into our existing business, include, but are not limited
to:
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the possibility that we will fail to implement our business plans
for the integrated company, including as a result of new legislation or regulation in the gaming industry that affects the timing
or costs associated with our operations or our acquisition plans;
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possible inconsistencies between our standards, controls, procedures,
policies and compensation structures and those of operators that we acquire;
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the increased scope and complexity of our operations following the
acquisition of multiple operators;
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the potential loss of key employees and the costs associated with
our efforts to retain key employees;
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provisions in contracts that we and the acquired operators have with
third parties that may limit our flexibility to take certain actions;
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risks and limitations on our ability to consolidate the corporate
and administrative infrastructures of new operators with our existing infrastructures;
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failure to discover liabilities of operators prior to our acquisitions
of such operators; and the possibility of unanticipated delays, costs or inefficiencies associated with the integration of operations
of new operators with our existing operations.
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As a result of these difficulties and risks,
we may not be able to successfully manage our growth within our budgetary expectations and anticipated timetable. Accordingly,
we may fail to realize some or all of the anticipated benefits of acquiring new operators, including scaling and diversification
of our operations achieving operational efficiencies and increasing our cash flow.
In order to grow our business, we anticipate
that we will continue to depend on relationships with third parties, such as deployment partners, and technology and content providers.
Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors
may be more effective in providing incentives to third parties to favor their products or services or to prevent or reduce the
use of our services. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of our
current and potential customers, as our partners may no longer facilitate the adoption of our solutions by potential customers.
If we are unsuccessful in establishing or maintaining
our relationships with third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our
operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased
customer usage of our solutions or increased revenues.
We may not be able to successfully implement
our business strategy.
Our business strategy includes expanding our
products and services and we may seek acquisitions of synergistic companies to do so. Acquisitions involve numerous risks, including
substantial cash expenditures; potentially dilutive issuance of equity securities; the potential incurrence of debt and contingent
liabilities, some of which may be difficult or impossible to identify at the time of acquisition; difficulties in assimilating
the acquired technologies or the operations of the acquired companies; diverting our management’s attention away from other
business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of our key
employees or key employees of the acquired companies.
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We cannot assure you that any acquisition
will result in short-term or long-term benefits to us.
We may misjudge the value or worth of an acquired
product, company or business. In addition, our future success would depend in part on our ability to manage the rapid growth associated
with acquisitions. We cannot assure you that we will be able to make the combination of our business with that of acquired products,
businesses or companies work or be successful. Furthermore, the development or expansion of our business or any acquired products,
business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not
be available to us on acceptable terms or at all. We may also seek to raise funds by selling shares of our preferred or common
stock, which could dilute each current shareholder’s ownership interest in our company. Our operating results and financial
condition will be adversely affected if we fail to implement our business strategy or if we invest resources in a strategy that
ultimately proves unsuccessful.
If we do not have sufficient capital
resources to complete acquisitions and develop our operators, our ability to implement our business plan could be adversely affected.
We intend to continue to make investments to
support our business growth and may require additional funds to respond to business challenges, including the need to develop new
features or enhance our existing solutions, improve our operating infrastructure or acquire complementary businesses and technologies.
Accordingly, we will need capital to implement our business plan, and may seek to finance operator acquisitions and development
projects through debt or equity financings. Disruptions to financial markets or other challenging economic conditions may adversely
impact our ability to complete any such financings or the terms of any such financings may be unacceptable or unfavorable to us.
To the extent that we issue equity securities in connection with our proposed acquisition, our current stockholders will experience
dilution of their holdings. To the extent we incur debt, we may be subject to restrictive covenants that impact our ability to
conduct our business. We can provide no assurance that we will be able to obtain financing necessary to implement our business
plan or that any such financing will be on terms acceptable to us.
We derive substantially all of our revenue
and service fees from gaming sales through our website and websites of our betting Platform clients. A decline in the popularity
of our website or those of our Platform clients will negatively impact our business and risk our future growth.
We currently derive and expect to continue
to derive substantially all of our primary source of revenue and service fees from the sales of gaming products and services sold
through our website or websites operated by clients of our betting Platform. As such, the continued growth and market demand for
our products and services are dependent upon, among other things, our ability to attract and retain new users and having existing
users increase their activity on these websites. If we are unable to maintain or extend web traffic to, and use of, these websites,
our future growth and revenues may be adversely affected.
Because our gaming operations are concentrated within Italy,
we are subject to greater risks than a gaming company that is more geographically and internationally diversified.
Due to the fact that our gaming operations
are concentrated within Italy, we are subject to greater risks than a gaming company that is more geographically and internationally
diversified. As such, our business may be significantly affected by risks common to the Italian leisure betting market. For example,
the changing government regulations on gaming licenses as well as general economic conditions in Italy and the impact of any events
that disrupt our ability to offer our products and services can adversely affect our business. We cannot control the government
process that awards gaming licenses to operators. Reductions in the number of licenses and frequency of issuing licenses by any
government regulator can impact our ability to operate our business.
Our current expansion strategy, which
includes expansion through VG in the various countries in which it operates and in the United States through the use of our Platform
certifications, may be difficult to implement because the licensing and certification requirements to operate in the United States
are currently indeterminable.
Our current expansion strategy includes soliciting
existing licensed operators in the United States offering sports betting in states that allow sports betting to use our Platform.
We have taken steps to commence GLI-33 certification for our Platform, which is the latest level of GLI certification; however,
since the United States has not yet determined what certifications will be required for our Platform to be used in the United States,
it is impossible for us to know with certainty whether our Platform will meet the certification requirements to operate in the
United States.
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We depend upon our officers and other
key employees. Our inability to retain such officers and key employees or recruit additional qualified personnel may have a material
adverse effect on our business.
Our future operations and successes depend
in large part upon the continued service of our officers and other key employees. Changes in our management could have an adverse
effect on our business. This is especially an issue while our staff is small. We are dependent upon the active participation of
several key management personnel, including Michele Ciavarella, our Chief Executive Officer (CEO), Alessandro Marcelli, our Vice
President of Operations, and Luca Pasquini, our Vice President of Technology, all of whom provide our strategic direction and have
built and maintained what we believe is an attractive workplace culture. Any failure to preserve the culture we have established
could negatively affect our ability to recruit and retain personnel. We do not carry key person life insurance on any of our senior
management or other key personnel. In addition, our Chief Executive Officer is a Canadian citizen with a principal residence in
Canada, and our VP Operations and VP Technology are Italian citizens with their principal residences in Italy. If they become unable
or ineligible to legally travel to and work in the United States, their ability to perform some of their duties for our company
could be materially adversely affected.
We must hire highly skilled technical personnel
as employees and/or as independent contractors in order to develop our products. As of the date of this annual report we have approximately
45 full-time employees. The competition for highly skilled technical, managerial and other personnel is intense and we may not
be able to retain or recruit such personnel. Our recruiting and retention success is substantially dependent on our ability to
offer competitive salaries and benefits to our employees. We must compete with companies that possess greater financial and other
resources than we do and that may be more attractive to potential employees and contractors. To be competitive, we may have to
increase the compensation, bonuses, stock options and other fringe benefits offered to employees in order to attract and retain
such personnel. The costs of retaining or attracting new personnel may have a material adverse effect on our business and operating
results. If we fail to attract and retain the technical and managerial personnel we need to be successful, our business, operating
results and financial condition could be materially adversely affected.
If we cannot maintain our corporate culture,
we could lose the customer service, innovation, collaboration, transparency and passion that we believe contribute to our success,
and our business may be harmed.
We believe that a critical component of our
success has been our corporate culture, which emphasizes customer service, innovation, collaboration, transparency, family atmosphere
and passion. We have invested substantial time and resources in building our team with an emphasis on these shared values. As we
continue to grow, both organically and through acquisitions of employee teams, and develop the infrastructure associated with being
a more mature public company, we will need to maintain our corporate culture among a larger number of employees dispersed in various
geographic regions. Any failure to preserve our culture could negatively affect our future success, including our ability to retain
and recruit personnel and to effectively focus on and pursue our corporate objectives.
If we are not able to maintain and enhance
our brand, our business, operating results and financial condition may be adversely affected.
We believe that maintaining and enhancing our
reputation for our advanced, cost effective sports betting and gaming technology software is critical to our relationships with
our existing customers and operators and to our ability to attract new customers and operators. We also believe that the importance
of brand recognition and software creativity will increase as competition in our market increases. We devote significant resources
to developing and maintaining our brand and innovative betting technology leadership, with a focus on identifying and interpreting
emerging trends in the market, shaping and guiding industry dialogue, and expanding the adoption of online sports betting and gaming
software solutions. Our brand promotion activities may not ultimately be successful or yield increased revenue. In addition, independent
industry analysts provide reviews of our platform, as well as products and services offered by our competitors, and perception
of our betting platform in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or
less positive as compared to those of our competitors’ products and services, our brand may be adversely affected.
The promotion of our brand requires us to make
substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand
into new markets and as more sales are generated. To the extent that these activities yield increased revenue, this revenue may
not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow,
we may have reduced pricing power relative to competitors, and we could lose customers and operators or fail to attract potential
new customers and operators, all of which would adversely affect our business, results of operations and financial condition.
The failure to comply with the terms
of our Line of Credit Agreements could result in a default which could potentially result in action against our pledged assets.
We maintain a $1 million secured revolving
line of credit from Metropolitan Commercial Bank in New York, which bears a fixed rate of interest of 3% on the outstanding balance
with an interest only monthly minimum payment, no maturity or due date and is secured by a $1 million security deposit.
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If we or our subsidiaries fail to comply with
the terms of the loans, the lender could declare a note default and, if the default were to remain uncured, the secured creditor
would have the right to proceed against any or all of the collateral securing their loans. Any action by our secured or unsecured
creditors to proceed against our assets would likely have a serious disruptive effect on our business operations.
We currently depend on and may continue
to be dependent on third parties to provide certain components and products we distribute through our online gaming platform, and
any increased costs associated with third party developers or any delay or interruption in production may negatively affect both
our ability to provide access to the Platform and our ability to continue our operations.
We currently depend on third parties to provide
some products through our Platform. The costs associated with relying on third parties may increase our operating and development
costs and negatively affect our ability to operate because we cannot control the developer's personnel, schedule or resources.
We may experience delays in finalizing Platform updates. In addition, our reliance upon third party developers exposes us to risks,
including reduced control over quality assurance and costs of development. If any of the foregoing occurs, we could lose our current
and prospective consumers. In addition, we may be required to rely on certain technology that we will license from third-parties,
including software that we integrate and use with software that we may develop internally. We cannot provide any assurances that
these third-party technology licenses will be available to us on commercially reasonable terms, if at all. The inability to establish
any of these technology licenses, or the loss of such licenses if established, could result in delays in completing any Platform
updates or changes until equivalent technology can be identified, licensed and integrated. Any such delays could materially adversely
affect our business, operating results and financial condition.
We depend on payments from third-party
service providers, including government regulated gaming agencies. If we are unable to collect such payments or these payments
decrease or do not increase as our costs increase, our financial condition and operating results may be adversely affected.
We depend, in part, on private entities and
regulated third-party sources of payment for the gross gaming revenue earned by our operators. The amount our operators receive
for their services may be adversely affected by market and cost factors as well as other factors over which we have no control,
including, but not limited to, future changes to the payment systems the cost containment and utilization decisions of third-party
service providers and the global economy. We provide no assurance that future changes to betting odds from data providers for sporting
events, table rake from poker providers and tax rates on game offerings, cost containment measures implemented by private third-party
service providers, the global economy or other factors affecting payments for gaming services will not adversely affect our, financial
condition and operating results.
If we have a security incident or breach
involving unauthorized access to customer data, our Platform may be perceived as lacking sufficient security, customers may reduce
their use of, or stop using our platform and we may incur significant liabilities
Our Platform involves the storage and transmission
of our clients’ confidential and proprietary information, which may include the personal data and information on their customers,
players, suppliers and agents. As a result, unauthorized access or use of customer data could expose us to regulatory actions,
litigation, investigations, remediation costs, damage to our reputation and brand, disclosure obligations, loss of customer and
partner confidence in the security of our solutions and resulting fees, costs, expenses, loss of revenues, and other potential
liabilities. While we have security measures in place designed to protect the integrity of customer information and prevent data
loss, misappropriation, and other security breaches, if these measures are inadequate or are compromised as a result of third-party
action, including intentional misconduct by computer hackers, theft, employee error, malfeasance or otherwise, our reputation could
be damaged, our business may suffer, and we could incur significant liabilities. Cybersecurity challenges, including threats to
our own IT infrastructure or those of our customers or third-party providers, are often targeted at companies such as ours, and
may take a variety of forms ranging from malware, phishing, ransomware, man-in-the-middle attacks, session hijacking, denial-of-service,
password attacks, viruses, worms and other malicious software programs or cybersecurity attacks to “mega breaches”
targeted against hosted software and cloud based IT services, which could be initiated by individual or groups of hackers or sophisticated
cyber criminals. A cybersecurity incident or breach could result in disclosure of confidential information and intellectual property,
or cause production downtimes and compromised data. Because cybersecurity attacks and techniques change frequently, we may be unable
to anticipate these techniques or implement adequate preventative measures. Any or all of these issues could negatively affect
our ability to attract new customers, cause existing customers to elect to terminate their business with us or switch their business
to a competitor, result in reputational damage, cause us to pay remediation costs or issue service credits or refunds to customers
for improper bets or false claims of improper bets, or result in lawsuits, regulatory fines or other action or liabilities, which
could adversely affect our business and results of operations.
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Many states in the United States as well as
foreign governments have enacted laws requiring companies to provide notice of data security breaches involving certain types of
personal data, and significant fines on companies involved in such incidents may be imposed. In addition, some of our regulators
and certifying agents contractually require notification of data security breaches. Security compromises experienced by us or by
our competitors may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our
industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security
measures, negatively impact our ability to attract new clients, cause existing clients to switch to a competing betting software
provider, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely
affect our business and operating results.
There can be no assurance that any limitations
of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities
or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage
and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts
to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion
of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance
policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material
adverse effect on our business and results of operations.
Privacy concerns and domestic or foreign
privacy laws or regulations may result in significant costs and compliance challenges, reduce demand for our solutions, and adversely
affect our business.
Our clients can use our Platform to collect,
use and store certain personal data regarding their agents, employees, players/customers and suppliers. National and local governments,
agencies, and authorities in the countries in which we and our clients operate have adopted or may adopt laws and regulations regarding
the collection, use, storage, processing and disclosure of personal data obtained from consumers and individuals, which could impact
our ability to offer our solutions in certain jurisdictions or our customers’ ability to deploy our solutions globally. Privacy-related
laws are particularly stringent in Europe. If we or our third-party subprocessors fail to adequately comply with privacy-related
laws, regulations and standards, it may limit the use and adoption of our solutions, reduce overall demand for our solutions, lead
to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of
which could harm our business. Moreover, if we or our third-party subprocessors fail to adhere to adequate data protection practices
around the usage of our clients’ personal data, it may damage our reputation and brand.
The European Union, or the EU, and the United
States agreed to a framework for data transferred from the EU to the United States called the Privacy Shield in 2016, but this
framework has been challenged by private parties and may face additional challenges by national regulators or additional private
parties.
Additionally, in 2016 the EU adopted a new
regulation governing data privacy called the General Data Protection Regulation, or the GDPR, which became effective on May 25,
2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for non-compliance
of up to four percent of worldwide annual handle or 20 million euro, whichever is higher. Customers, particularly in the EU, are
seeking assurances from their suppliers, including us, that their processing of personal data of EU nationals is in accordance
with the GDPR, and if we are unable to provide adequate assurances to such customers, demand for our solutions could be adversely
affected. In addition, we must continue to seek assurances from our third-party subprocessors that they are handling personal data
in accordance with GDPR requirements in order to meet our own obligations under the GDPR. Compliance with privacy laws and regulations,
particularly the GDPR, that are applicable to our business and the businesses of our clients is costly and time-consuming. Such
laws and regulations may adversely affect our clients’ ability and willingness to process, handle, store, use and transmit
personal data of their employees, players/customers and suppliers, which in turn could limit the use, effectiveness and adoption
of our solutions and reduce overall demand. Even the perception of privacy concerns, whether or not valid, may inhibit the adoption,
effectiveness or use of our betting Platform. Future laws, regulations, standards and other obligations, and changes in the interpretation
of existing laws, including challenges to onward transfer mechanisms such as Privacy Shield and model contractual clauses, regulations,
standards and other obligations could result in increased regulation, increased costs of compliance and penalties for non-compliance,
as well as limitations on data collection, use, disclosure and transfer for us and our clients.
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In addition, the other bases on which we and
our clients rely for the transfer of data, such as certain contractual clauses, continue to be subjected to regulatory and judicial
scrutiny. If we or our clients are unable to transfer data between and among countries and regions in which we operate, it could
decrease demand for our betting software solutions, require us to restrict our business operations, and impair our ability to maintain
and grow our client base, expand geographically and increase our revenues.
If we fail or are unable to protect our
intellectual property effectively, we may be unable to prevent third parties from using our technologies, which would impair our
competitive advantage, proprietary technology and our brand.
Our success is dependent, in part, upon protecting
our proprietary technology which supports our betting Platform and other operations. We rely on a combination of proprietary programming
and source codes, copyright, trademarks, service marks, trade secret laws and contractual provisions in an effort to establish
and protect our proprietary rights. However, the steps we take to protect our intellectual property may be inadequate. We will
not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use
of our intellectual property. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated
through administrative process or litigation. We do not have any patent applications pending anywhere we operate and may not be
able to obtain patent protection for the technology covered in any future patent applications should we enter such applications.
In addition, any patents, if any, that are issued in the future may not provide us with competitive advantages or may be successfully
challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual
property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our solutions
and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions
protecting against unauthorized use, copying, transfer and disclosure of our technology may be unenforceable under the laws of
jurisdictions outside the United States. In addition, the laws of some countries do not protect proprietary rights to the same
extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying
and use of our solutions and proprietary information may increase.
Although we enter into confidentiality agreements
with the parties with whom we have strategic relationships and business alliances, we do not currently enter into confidentiality
and invention assignment agreements with our employees and consultants. No assurance can be given that the agreements we enter
into will be effective in controlling access to and distribution of our solutions and proprietary information. Further, these agreements
do not prevent our competitors or partners from independently developing technologies that are substantially equivalent or superior
to our solutions.
In order to protect our intellectual property
rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the
future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce
our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment
or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met
with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our
inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion
of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the
functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies
into our solutions, or injure our reputation. In addition, we may be required to license additional technology from third parties
to develop and market new solutions, and we cannot assure you that we would be able to license that technology on commercially
reasonable terms or at all from them. Any inability to license third party technology in the future would have a material adverse
effect on our business or operating results and would adversely affect our ability to compete.
We have experienced rapid growth and
organizational change in recent periods and if we fail to manage our growth effectively, we may be unable to execute our business
plan.
We increased our number of employees from 15
as of August 15, 2014 to 45 as of December 31, 2018 as we have expanded our operations, completed additional business acquisitions
and experienced growth in the number of customers and operators. Our growth has placed, and may continue to place, a significant
strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our headcount
and operations both domestically and internationally, with no assurance that our business or revenue will continue to grow. Continuing
to create a global organization and managing a geographically dispersed workforce will require substantial management effort, the
allocation of valuable management resources and significant additional investment in our infrastructure. We will be required to
continually improve our operational, financial and management controls and our reporting procedures and we may not be able to do
so effectively, which could negatively affect our results of operations and overall business. In addition, we may be unable to
manage our expenses effectively in the future, which may negatively impact our gross margins or operating expenses in any particular
quarter. Moreover, if we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate
culture, the quality of our software solutions may suffer, which could negatively affect our brand and reputation and harm our
ability to retain and attract customers.
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We may not be able to successfully scale
our technology and manage the growth of our business if we are unable to improve our internal systems, processes and controls
We need to continue to improve our internal
systems, processes and controls to effectively manage our operations and growth. We may not be able to successfully implement and
scale improvements to our systems and processes in a timely or efficient manner or in a manner that does not negatively affect
our operating results. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. We have
licensed technology from third parties to help us improve our internal systems, processes and controls. The support services available
for such third-party technology may be negatively affected by mergers and consolidation in the software industry, and support services
for such technology may not be available to us in the future. We may experience difficulties in managing improvements to our systems,
processes and controls or in connection with third-party software, which could impair our ability to provide our solutions or professional
services to our customers in a timely manner, causing us to lose customers, limit us to smaller deployments of our solutions or
increase our technical support costs.
The estimates of market opportunity and
forecasts of market growth included in this annual report may prove to be inaccurate, and even if the market in which we compete
achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts
included in this Annual Report on form 10-K, including those we have generated ourselves, are subject to significant uncertainty
and are based on assumptions and estimates that may not prove to be accurate. Not all geographic or regional metrics covered by
our market opportunity estimates will necessarily implement regulated or online gaming at all, and in some cases many potential
customers and operators may choose to continue using their existing betting platform provider, or choose a solution offered by
our competitors. It is impossible to build every product feature that every customer wants, and our competitors may develop and
offer features that our solutions do not offer. The variables that go into the calculation of our market opportunity are subject
to change over time, and there is no guarantee that any particular number or percentage of customers covered by our market opportunity
estimates will purchase our solutions at all or generate any particular level of revenues for us. Even if the market in which we
compete meets the size estimates and growth forecasted in this annual report, our business could fail to grow for a variety of
reasons outside of our control, including competition in our industry. Furthermore, we have historically focused our selling and
marketing efforts in regulated markets in Europe, specifically Italy. In order for us to successfully address the broader market
opportunity, we will need to successfully market and sell our betting Platform to larger enterprise customers and also further
expand our international presence. If any of these risks materialize, it could adversely affect our results of operations.
Our research and development efforts
are costly and subject to international risks and may not contribute significantly to revenues for several years, if at all.
In order to remain competitive, we must continue
to invest in research and development. During the year ended December 31, 2018, we spent approximately $800k for research and development.
We have made and expect to continue to make significant investments in development and related opportunities, such as our acquisition
of VG, and these investments could adversely affect our operating results if not offset by increases in revenues. However, we may
not receive significant revenue from these investments for several years, if at all.
Further, our competitors may expend a greater
amount of funds on their research and development programs, and those that do not may be acquired by larger companies that would
allocate greater resources to our competitors’ research and development programs. Our failure to maintain adequate research
and development resources or to compete effectively with the research and development programs of our competitors could materially
and adversely affect our business and results of operations.
In addition, our release schedule for new features,
enhancements and solutions may be delayed while we hire software developers or find alternative contract development resources
and may require additional certifications from regulators. Additionally, while we take precautions to ensure that our software
components and source code is protected, misconduct by any third-party, acts of espionage, malware attacks, theft of confidential
information or other malicious cyber incidents attributed to any third-party contractor may compromise our system infrastructure,
expose us to litigation and lead to reputational harm that could adversely affect our business and results of operations.
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If we fail to manage our technical operations
infrastructure, our existing customers may experience service outages and our new customers may experience delays in the deployment
of our solutions.
We derive significant revenue from the use
of our websites and Platform. In the past, we have experienced significant growth in the number of users, transactions and data
that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to
meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer
deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations
infrastructure in order to support version control, changes in hardware and software parameters and the evolution of our Platform.
As we transition to larger infrastructure and geographic expansion, we may experience interruptions, delays and outages in service
and availability, and we expect our gross gaming margin to decline modestly in the near term reflecting the costs of this transition.
We have experienced, and may in the future
experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors,
including infrastructure changes, vendor issues, human or software errors, viruses, security attacks, fraud, general Internet availability
issues, spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes
of these performance problems within an acceptable period of time. If we do not accurately predict our infrastructure requirements,
our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and customer
losses. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to
obtain additional capacity, which could adversely affect our reputation, business and results of operations.
We may not have exclusive control over
the distribution of cash from our acquired operators and may be unable to cause all or a portion of the cash of such operators
to be distributed to us.
We anticipate having a complete or a majority
ownership in the operators we acquire. We expect the agreements we execute with such operators will provide for the distribution
of available cash to us. However, it is possible that these agreements may impose limits on the ability of our acquired operators
to make distributions of cash to us. If we are unable to cause sufficient cash to be distributed from one or more of our acquired
operators, our ability to pay our obligations as they become due may be harmed.
If we acquire an operator that has made
submission and reporting errors prior to our ownership, we may be liable for such errors that which may have a material adverse
effect on our business.
Historical submissions and reporting errors
in gaming accounts made by an operator prior to our acquisition, may require us to provide refunds to customers and may also subject
us to civil penalties, which involve monetary damages. In the case that acquired operators overpaid their obligation, it is very
unlikely that we would be able to collect funds that were owed to the operator prior to our acquisition. There can be no assurance
that a compliance audit will disclose any future liabilities for underpayments or overpayments that any of our operators may have
incurred.
If any executive officers or key personnel
of operators we acquire are unable to assist with the transition of operations and customers, our business may be adversely affected.
In connection with the acquisition of operators,
we believe that it is necessary and desirable to retain the services of executive officers and key personnel of such operators
to assist with the transition and integration of operations and customers into our existing operations; however, no assurances
can be given that such executive officers and key personnel will be willing and able to assist us with such transition and integration.
In the event that such executive officers and key personnel are unable to assist us after the consummation of the acquisition of
the operator, we may need to hire additional personnel to assist with the transaction, which new personnel may not be readily available
to us or on acceptable terms
Any violation of the Foreign Corrupt
Practices Act or any other similar anti-corruption laws could have a negative impact on us.
Our revenue is derived from operations outside
the United States, which exposes us to complex foreign and U.S. regulations inherent in doing cross-border business and in each
of the countries in which we transact business. We are subject to compliance with the United States Foreign Corrupt Practices Act
(“FCPA”) and other similar anti-corruption laws, which generally prohibit companies and their intermediaries from making
improper payments to foreign government officials for the purpose of obtaining or retaining business. While our employees and agents
are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from
violations of these laws, despite our commitment to legal compliance and corporate ethics. Violations of these laws may result
in severe criminal and civil sanctions as well as other penalties, and the Securities and Exchange Commission (the “SEC”)
and U.S. Department of Justice have increased their enforcement activities with respect to the FCPA. The occurrence or allegation
of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
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Risks Related to Our Industry
Economic conditions, particularly in
Italy and Europe, that have an adverse effect on the gaming industry may have an adverse effect on our results of operations.
Our business operations are currently concentrated
in a single industry and geographic area (Italy) that is affected by international, national and local economic conditions. A downturn
in the overall economy or economy in a specific region such as Italy or a reduction in demand for gaming in such area, may have
an adverse effect on our financial condition or results of operations. We cannot predict the effect or duration of an economic
slowdown in Italy or in the gaming industry, or the impact such slowdown may have on the demand for our leisure gaming. If consumers
have less disposable income to spend on wagers or if we are unable to devote resources to persuade consumers to use our products,
our business may be adversely affected.
Intense competition in the leisure gaming
industry may adversely affect our revenue and profitability.
We operate in a highly competitive environment
and we compete for operators, customers and advertisers with numerous well-established leisure gaming operators, as well as numerous
smaller and newer gaming website operators. Many of our principal competitors have substantially longer operating histories, greater
financial, technical, marketing or other resources, stronger brand and customer recognition, larger intellectual property portfolios
and broader global distribution and presence than we have. Our competitors may be able to offer products or functionality similar
to ours at a more attractive price than we can by integrating or bundling such products with their other product offerings or may
develop new technologies or services that are more attractive to other operators or our customers. Acquisitions and consolidation
in our industry may provide our competitors with even more resources or may increase the likelihood of our competitors offering
bundled or integrated products with which we cannot effectively compete. New innovative start-ups and existing large companies
that are making significant investments in research and development could also launch new products and services that are competitive
with ours and that could gain market acceptance quickly. In addition, we face potential competition from participants in adjacent
markets that may enter our markets by leveraging related technologies and partnering with or acquiring other companies or providing
alternative approaches to provide similar results.
With the introduction of new technologies,
the evolution of our Platform and new market entrants, we expect competition to intensify in the future. Increased competition
generally could result in reduced sales, reduced margins, losses or the failure of our Platform to achieve or maintain more widespread
market acceptance, any of which could harm our business.
We expect that competition from internet
gaming will continue to grow and intensify in the United States.
We intend to expand the use of our Platform
in the United States; however, that will be dependent upon changes in legislation and we expect that we will face increased competition
from internet gaming as the potential for legalized internet gaming continues to grow. Several states in the United States are
currently considering legislation that would legalize internet gaming at the state level. As a result of the Justice Department’s
(“DOJ”) December 2011 opinion concerning the applicability of the Wire Act to internet gaming, certain states including
Nevada, Delaware and New Jersey have enacted legislation to authorize various forms of intrastate internet gaming. More so, the
recently revised DOJ opinion on UIGEA and competition from internet lotteries and other internet wagering gaming services, which
allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home, could divert
customers from our products and thus adversely affect our business. Such internet wagering services are likely to expand in future
years and become more accessible to domestic customers as a result of initiatives in some states to consider legislation to legalize
intrastate internet wagering. There have also been proposals that would specifically legalize internet gaming under federal law.
If we are unable to initiate our U.S. strategy, anticipate, react to or penetrate the U.S. market in a timely manner, our competitive
position would weaken, which would adversely affect our business and results of operations.
If we fail to comply with applicable
laws and regulations, we could suffer penalties or be required to make significant changes to our operations. In addition, changes
in laws and regulations with respect to the gaming industry, and the application or interpretation of existing laws and regulations
applicable to our operations may have a material adverse effect on our business, financial condition and results of operations.
Our business is highly regulated, and we are
subject to many laws and regulations at the federal, provincial and local government levels in the jurisdictions in which we operate.
These laws and regulations require that our operators and our operations meet various licensing, certification and other requirements,
including those relating to:
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ownership of our operators;
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our and our operators’ relationships with sponsors and other
referral sources;
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approvals and other regulations affecting the acquisition of operators,
capital expenditures or the addition of services;
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qualifications of management and support personnel;
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maintenance and protection of records;
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billing for services by gaming product providers, including appropriate
treatment of overpayments and credit balances;
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privacy and security of individually identifiable personal information;
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online gaming and gaming in general;
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commercial advertising;
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subscription rates; and
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Furthermore, the rules and regulations governing
the gaming industry are still evolving and subject to interpretation in the territories in which we operate and the territories
in which we may operate in the future. Promulgation of new laws, changes in current laws, and changes in interpretations by courts
and other government agencies of existing laws, may require us to modify or cease our operations. Compliance with changes in such
laws and regulations may increase our operating expenses. In addition, our failure to comply with current or future laws and regulations
may expose us to significant liabilities. Our inability or failure to comply with laws and regulations that govern the gaming industry
in the territories in which we operate may result in our loss of our licenses which would have a material adverse effect on our
business, financial conditions and results of operations.
Regulators at the federal and provincial
level in Italy are monitoring and restricting the issuance and renewal of gaming licenses which could have an adverse effect on
our growth.
Federal regulators in Italy are enforcing new
restrictions to reduce the number of independent operators in the gaming industry, and a moratorium on new licenses for gaming
operators in Italy has been implemented. The success of our business depends upon our ability to acquire operators in new regional
locations throughout Italy. The restrictions on the licensing of new operators may make it more difficult for us to locate operators
that we may be able to acquire. Our inability to acquire operators and expand our operations into new regional locations throughout
Italy may have a material adverse effect on our business and financial condition.
Our records and submissions to regulatory
agencies may contain inaccurate or unsupportable submissions which may result in an under or overstatement of our revenues and
subject us to various penalties.
A major component of the regulatory environment
is the interpretation of winnings and tax calculation procedures established by the ADM. Inaccurate or unsupportable submissions,
inaccurate records for gaming coin-in or handle (turnover), client data and erroneous winning claims could result in inaccurate
revenues being reported. Such errors are subject to correction or retroactive adjustment in later periods and may be reflected
in financial statements for periods subsequent to the period in which the revenue was recorded. We may also be required to refund
a portion of the revenue that we received which, depending on its magnitude, may damage our reputation and relationship with regulatory
agencies and may have a material adverse effect on our results of operations or cash flows.
The ADM in Italy conducts weekly account audits
and sweeps for taxes in addition to random onsite inspections for online connection to the ADM network as well as nefarious programming
or routers which can alter the reporting requirements of the ADM. It is possible that our acquired operators will receive letters
from ADM auditors requesting payment of alleged violations and errors and as such will incur expenses associated with responding
to, and appealing such requests, as well as the costs of paying any shortfalls in addition to possible fines and penalties. Demands
for payments can occur even if an operator is acquired by means of an asset transfer. Our inability to dispute demands or pay requests
for underpayments may have a material adverse effect on our financial condition and results of operations.
Operators in the gaming industry have
been the subject of Italian federal and provincial investigations, and we may become subject to investigations in the future.
Both Italian federal and provincial government
agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of gaming
companies, as well as their executives and managers. These investigations relate to, among other things diversion practices if
an agent or store owner were to disconnect (i.e., remove ethernet plug from internet) our betting terminal or PC from the ADM network.
In addition, we may employ executives and managers,
some of which may have worked at other gaming companies that are or may become the subject of ADM investigations and private litigation.
Such executives and managers may be included in governmental investigations or named as defendants in private litigation. A governmental
investigation of us, our executives or our managers could divert our management’s attention and result in significant expenses,
as well as negative publicity.
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If regulations or regulatory interpretations
change, we may be obligated to buy interests of principals who retain equity interests in operators in which we have a majority
interest.
Although we expect that we will purchase 100%
ownership of any operators that we acquire in some instances the selling principal or principals may retain a minority interest.
If certain regulations or regulatory interpretations change, we may be obligated to purchase some or all of the non-controlling
interests of the principals of the operators that we acquire. The regulatory changes that may trigger such obligations include
changes that:
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make the referral of client lists and other customers to our operators
by principals affiliated with us illegal;
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create the substantial likelihood that cash distributions from limited
liability companies to affiliated principals will be illegal; or
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cause the ownership by principals of interests in limited liability
companies to be illegal.
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The cost of purchasing such non-controlling
interests may be substantial if a triggering event were to result in simultaneous purchase obligations of a substantial number
of, or all of the non-controlling interests of principals of our operators. There can be no assurance that our existing or future
capital resources will be sufficient for us to purchase the non-controlling interests held by the principals of our operators.
The triggering of these obligations could have a material adverse effect on our financial condition and results of operations.
Our current operations are international
in scope and we are planning further geographic expansion, creating a variety of potential operational challenges
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We currently have an office location in Canada
and business operations and offices in Europe and intend to open offices in the United States and possibility other countries.
If we expand in the future, our offices, personnel and operations may be further dispersed around the world. In connection with
such expansion, we may face a number of challenges, including costs associated with developing software and providing support in
additional languages, varying seasonality patterns, potential adverse movement of currency exchange rates, longer payment cycles
and difficulties in collecting accounts receivable in some countries, tariffs and trade barriers, a variety of regulatory or contractual
limitations on our ability to operate, adverse tax events, reduced protection of intellectual property rights in some countries
and a geographically and culturally diverse workforce and customer base. Failure to overcome any of these difficulties could negatively
affect our business and results of operations.
We face exposure to foreign currency
exchange rate fluctuations that could harm our results of operations.
We conduct transactions, including intercompany
transactions, in currencies other than the U.S. dollar. As we grow our international operations, we expect the amount of our revenues
that are denominated in foreign currencies to increase in the future. Accordingly, changes in the value of foreign currencies relative
to the U.S. dollar could affect our revenues and operating results due to transactional and translational remeasurements that are
reflected in our results of operations. As a result of such foreign currency exchange rate fluctuations, it could be more difficult
to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency
exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading
price of our common stock could be adversely affected.
We do not currently maintain a program to hedge
transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency
forward and option contracts, to hedge exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities
may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over
the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable
to structure effective hedges with such instruments.
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Risks Related to Ownership of Our Securities
We do not know whether an active, liquid
and orderly trading market will develop for our securities or what the market price of our securities will be and as a result it
may be difficult for you to sell our securities.
Currently our shares of common stock are quoted
in the over-the-counter market on the OTCQB Venture Market. Although we have applied to list our securities on the NASDAQ Capital
Market, no assurance can be given that our listing application will be approved. Even if our listing application is approved, there
can be no assurance that an active trading market for our securities may develop or be sustained. You may not be able to sell your
securities quickly or at the market, price if trading in our securities is not active. Further, an inactive market our may also
impair our ability to raise capital by selling our securities and may impair our ability to enter into strategic partnerships or
acquire companies or products by using our securities as consideration.
The price of our securities may fluctuate
significantly.
An investment in our securities is risky and
should be made only if an investor can withstand a significant loss and wide fluctuations in the market value of your investment.
Some factors that may cause the market price of our securities to fluctuate, in addition to the other risks mentioned in this “Risk
Factors” section and elsewhere in this Annual Report on Form 10-K, are:
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sale of our common stock by our stockholders, executives, and directors;
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volatility and limitations in trading volumes of our securities;
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our ability to obtain financings to implement our business plans,
including the acquisitions of operators;
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the timing and success of introductions of new products by us or
our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors;
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our ability to attract new customers;
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changes in our capital structure or dividend policy, future issuances
of securities and sales of large blocks of securities by our stockholders;
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announcements and events surrounding financing efforts, including
debt and equity securities;
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our inability to enter into new markets or develop new products;
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our inability to successfully manage our business or achieve profitability;
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announcements of acquisitions, partnerships, collaborations, joint
ventures, new products, capital commitments, or other events by us or our competitors;
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changes in general economic, political and market conditions in or
any of the regions in which we conduct our business;
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changes in industry conditions or perceptions;
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analyst research reports, recommendation and changes in recommendations,
price targets, and withdrawals of coverage;
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departures and additions of key personnel;
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disputes and litigations related to intellectual properties, proprietary
rights, and contractual obligations;
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changes in applicable laws, rules, regulations, or accounting practices
and other dynamics;
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market conditions or trends in the gaming industry; and
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other events or factors, many of which may be out of our control.
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In addition, if the market for stocks in our
industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could
decline for reasons unrelated to our business, financial condition and results of operations. Any of these factors may make it
more difficult or impossible for investors to sell our common stock or obtain a return on their investment. In the past, shareholders
have instituted securities class action litigation against some companies following periods of market volatility. If we become
involved in such securities litigation, we could, among other things, incur substantial costs and the attention of our management
could be diverted from our business.
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Future sales of shares of our common
stock or the perception in the public markets that these sales may occur, may depress our stock price.
The market price of our common stock could
decline significantly as a result of sales of a large number of shares of our common stock in the market. In addition, if our significant
stockholders sell a large number of shares, or if we issue a large number of shares, the market price of our stock could decline.
Any issuance of additional common stock, or common stock equivalent by us would result in dilution to our existing shareholders.
Such issuances could be made at a price that reflects a discount to the then-current trading price of our common stock. Moreover,
the perception in the public market that stockholders may sell shares of our stock or that we may issue additional shares of common
stock could depress the market for our shares. and make it more difficult for us to sell equity securities in the future at any
time if at all.
We may issue additional shares of common
stock and preferred stock without stockholder approval, which would dilute the current holders of our common stock. In addition,
the exercise or conversion of currently outstanding securities would further dilute holders of our common stock
Our Board of Directors has authority, without action or vote of
our shareholders, to issue shares of common and preferred stock. We may issue shares of our common stock or preferred stock to
complete a business combination or to raise capital. Such stock issuances could be made at a price that reflects a discount from
the then-current trading price of our common stock. These issuances would dilute our stockholder’s ownership interest, which
among other things would have the effect of reducing their influence on matters on which our stockholders vote. In addition, our
stockholders and prospective investors may incur additional dilution if holders of stock options and warrants, whether currently
outstanding or subsequently granted, exercise their options or warrants to purchase shares of our common stock or if our convertible
debt holders convert their debt.
If all of the holders of our outstanding convertible
notes and warrants converted or exercised their securities, we would be obligated to issue 31,253,617 common shares.
The rights of the holders of our common
stock may be impaired by the potential issuance of preferred stock.
Our certificate of incorporation gives our
Board the right to create one or more new series of preferred stock. As a result, the Board may, without stockholder approval,
issue preferred stock with voting, dividend, conversion, liquidation or other rights that could adversely affect the voting power
and equity interests of the holders of our common stock. Preferred stock, which could be issued with the right to more than one
vote per share, which would dilute the rights of our common stockholders and could be used to discourage, delay or prevent a change
of control of our company, which could materially adversely affect the price of our common stock.
If we fail to comply with the rules under
Sarbanes-Oxley related to accounting controls and procedures in the future, or, if we discover material weaknesses and other deficiencies
in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more
difficult.
Section 404 of Sarbanes-Oxley requires annual
management assessments of the effectiveness of our internal control over financial reporting. Our management assessed the effectiveness
of our disclosure controls and procedures as of December 31, 2018 and concluded that we had a material weakness in our internal
controls and that due to our limited resources our disclosure controls and procedures are not effective in providing material information
required to be included in our periodic SEC filings on a timely basis and to ensure that information required to be disclosed in
our periodic SEC filings is accumulated and communicated to our management to allow timely decisions regarding required disclosure
about our internal control over financial reporting. In addition, as of December 31, 2017, our management concluded that we had
a material weakness in internal control over financial reporting. If we fail to comply with the rules under Sarbanes-Oxley related
to disclosure controls and procedures in the future, or, if we continue to have material weaknesses and other deficiencies in our
internal control and accounting procedures and disclosure controls and procedures, our stock price could decline significantly
and raising capital could be more difficult. If material weaknesses or significant deficiencies are discovered or if we otherwise
fail to achieve and maintain the adequacy of our internal control and disclosure controls and procedures, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance
with Section 404 of Sarbanes-Oxley. Moreover, effective internal controls are necessary for us to produce reliable financial reports
and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business
and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price
of our common stock could drop significantly.
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If securities or industry analysts do
not publish research or reports, or publish unfavorable research or reports about our business, our stock price and trading volume
may decline.
The trading market for our common stock will
rely in part on the research and reports that industry or financial analysts publish about us, our business, our markets and our
competitors. We currently do not have any analyst coverage. If securities analysts do not cover our common stock, the lack of research
coverage may adversely affect the market price of our common stock. Furthermore, if we should have analyst coverage and one or
more of the analysts who do cover us downgrade our stock or if those analysts issue other unfavorable commentary about us or our
business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fails to regularly publish
reports on us, we could lose visibility in the market and interest in our stock could decrease, which in turn could cause our stock
price or trading volume to decline and may also impair our ability to expand our business with existing customers and attract new
customers.
Our common stock may be subject to the
“penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in the
stock cumbersome and may reduce the value of an investment in the stock.
Rule 15g-9 under the Exchange Act establishes
the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions
in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be purchased.
In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives
of the person; and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in
highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that
the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be
less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure also has to be made about the risks
of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker
or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in penny stocks.
Because certain of our stockholders control
a significant number of shares of our common stock, they may have effective control over actions requiring stockholder approval.
The spouse of our Chief Executive Officer is
the beneficial owner of 34,884,240 shares of our common stock and beneficially owns approximately 45.18% of our outstanding shares
of common stock on a fully diluted basis as of the date of the filing of this Annual Report on Form 10-K. As a result, this stockholder,
has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors
and any merger, consolidation or sale of all or substantially all of our assets the ability to control the management and affairs
of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business combination
involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us.
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Delaware law and our corporate charter
and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation
and bylaws may have the effect of delaying or preventing a change of control of our company or changes in our management. For example,
our Board has the authority to issue up to 20,000,000 shares of preferred stock in one or more series and to fix the powers, preferences
and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control of our company, or otherwise could materially adversely affect
the market price of our common stock.
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Furthermore, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware. This provision
may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging
or combining with us, which could discourage potential takeover attempts, reduce the price that investors may be willing to pay
for shares of our common stock in the future and result in our market price being lower than it would without these provisions.
We received approval from our stockholders to effect a reverse
stock split of our outstanding common stock at a ratio within the range of 1-for-2 to 1-for 20. However, the reverse stock split
may not increase our stock price sufficiently.
We expect that the reverse stock split of our
outstanding common stock will increase the market price of our common stock so that we will be able to meet the minimum market
price requirement of the listing rules of the NASDAQ Capital Market. However, the effect of a reverse stock split upon the market
price of our common stock cannot be predicted with certainty, and the results of reverse stock splits by companies in similar circumstances
have been varied. It is possible that the market price of our common stock following the reverse stock split will not increase
sufficiently for us to be in compliance with the minimum market price requirement of the NASDAQ Capital Market, or if it does,
that such price will be sustained. Although we believe that a higher market price of our common stock may help generate greater
or broader investor interest, there can be no assurance that the reverse stock split will result in a share price that will attract
new investors, including institutional investors
The reverse stock split may decrease
the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock
may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the
reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split.
In addition, the reverse stock split may increase the number of shareholders who own odd lots (less than 100 shares) of our common
stock, creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty
effecting such sales.
Holders of our warrants will have no
rights as a common stockholder until they acquire our common stock.
The holders of our outstanding warrants until
they acquire shares of our common stock upon exercise of your warrants, will have no rights with respect to shares of our common
stock issuable upon exercise of the warrants.
We do not intend to pay cash dividends
on our shares of common stock so any returns will be limited to the value of our shares.
We currently anticipate that we will retain
future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash
dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share
price.