Notes to Consolidated Financial Statements
1. Basis of Presentation and Nature of Business
Basis of Consolidation
The consolidated financial statements include
the financial statements of the Company and its subsidiaries, all of which are wholly owned. All significant inter-company transactions
are eliminated upon consolidation.
Certain amounts of prior periods were reclassified
to conform with current period presentation.
Nature of Business
Newgioco Group, Inc. (“Newgioco Group”
or the “Company”) was incorporated in the state of Delaware on August 26, 1998 as Pender International Inc. On September
30, 2005, the Company changed its name to Empire Global Corp., and on July 20, 2016 changed its name to Newgioco Group, Inc. The
Company maintains its principal executive offices headquartered in Toronto, Canada with wholly-owned subsidiaries in Canada, Italy,
Malta and Austria.
The Company’s subsidiaries include: Multigioco
Srl (“Multigioco”), acquired on August 15, 2014, Rifa Srl (“Rifa”), acquired on January 1, 2015, and Ulisse
GmbH (“Ulisse”) and Odissea Betriebsinformatik Beratung GmbH (“Odissea”) which were both acquired on July
1, 2016 and a non-operating subsidiary Newgioco Group, Inc. based in Canada.
Newgioco Group is a commercial stage and vertically
integrated company which owns and operates an innovative, certified Betting Platform Software (“BPS”), offering a complete
suite of online and offline leisure gaming services including sports betting, lottery and casino gaming on a business-to-business
basis. Newgioco Group also operates a retail distribution network through regulated websites and licensed betting locations situated
throughout Italy.
2. Summary of Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include
the financial statements of the Company and its subsidiaries, all of which are wholly-owned. All significant inter-company transactions
are eliminated upon consolidation.
Certain items in prior periods were reclassified
to conform to the current period presentation.
Use of estimates
The preparation of the financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue
and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include
valuing equity securities issued in share-based payment arrangements, determining the fair value of assets acquired, allocation
of purchase price, impairment of long-lived assets, the collectability of receivables and the value of deferred taxes and related
valuation allowances. Certain estimates, including evaluating the collectability of receivables and advances, could be affected
by external conditions, including those unique to our industry and general economic conditions. It is possible that these external
factors could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The
Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
F-6
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Goodwill
Goodwill is recognized for the excess of the
purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Goodwill is not being
amortized but is reviewed at least annually for impairment. In the Company’s evaluation of goodwill impairment, it performs
a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If the qualitative assessment is not conclusive, the Company proceeds to a two-step process to test goodwill for impairment
including comparing the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value for
the Company’s reporting units is determined using an income or market approach incorporating market participant considerations
and management's assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair
value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, the Company
performs its annual impairment testing in the fourth quarter. The Company performs the allocation based on its knowledge of the
market in which we operate, and our overall knowledge of the leisure betting and gaming industry.
There was no goodwill impairment recorded as
a result of the last quantitative assessment in the fourth quarter of 2018.
Loss Contingencies
The Company may be subject to claims, suits,
government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, indirect
taxes, labor and employment, commercial disputes, content generated by its users, goods and services offered by advertisers or
publishers using our website platforms, and other matters. Certain of these matters include speculative claims for substantial
or indeterminate amounts of damages. The Company records a liability when it believes that it is both probable that a loss has
been incurred, and the amount can be reasonably estimated. If the Company determines that a loss is possible, and a range of the
loss can be reasonably estimated, it discloses the range of the possible loss in the notes to the consolidated financial statements.
The Company evaluates, on a monthly basis,
developments in its legal matters that could affect the amount of liability that has been previously accrued, and the matters and
related ranges of possible losses disclosed and make adjustments and changes to its disclosures as appropriate. Significant judgment
is required to determine both the likelihood of there being and the estimated amount of a loss related to such matters. Until the
final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be
material. Should any of the Company’s estimates and assumptions change or prove to have been incorrect, it could have a material
impact on our business, consolidated financial position, results of operations, or cash flows.
To date, none of these types of litigation
matters, most of which are typically covered by insurance, has had a material impact on the Company’s operations or financial
condition. The Company has insured and continues to insure against most of these types of claims.
Business Combinations
The Company allocates the fair value of purchase
consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The
excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded
as goodwill.
Such valuations require management to make
significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible
assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from
a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates.
F-7
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Long-Lived Assets
The Company evaluates the carrying value of
its long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value
of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the
expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the
estimated fair value will be charged to earnings.
Fair value is based upon discounted cash flows
of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate,
current estimated net sales proceeds from pending offers.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including
convertible debentures and stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income.
For option-based simple derivative financial
instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period.
As a result of the adoption of ASU 2017-11
in the third quarter of 2018, the Company has no derivative financials instruments classified as a liability at December 31, 2018.
Earnings Per Share
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 260, “Earnings Per Share” provides for calculation of “basic”
and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income
(loss) available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution of securities that could share in the earnings of an entity and include warrants granted and
convertible debt. When the Company incurs a net loss, the effect of the Company’s outstanding stock warrants and convertible
debt are not included in the calculation of diluted earnings (loss) per share as the effect would be anti-dilutive. Accordingly,
basic and diluted net loss per share are identical for the year ended December 31, 2018.
On December 20, 2017, the Company completed
a two-for-one forward stock split in the form of a stock dividend. All references made to share or per share amounts in the accompanying
consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect such forward stock split.
The following is a reconciliation of weighted
average shares and a calculation of earnings per share:
|
|
For the years ending December 31,
|
|
|
2018
|
|
2017
|
Net (Loss) Income
|
|
$
|
(3,046,308
|
)
|
|
$
|
1,365,886
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares
|
|
|
75,887,946
|
|
|
|
74,032,631
|
|
Effect of Dilutive Securities
|
|
|
—
|
|
|
|
1,312,317
|
|
Weighted Average Diluted Shares
|
|
|
75,887,946
|
|
|
|
75,344,948
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
F-8
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Currency translation
The Company's subsidiaries operate in Europe
with a functional currency of Euro and in Canada with a functional currency of Canadian dollars. In the consolidated financial
statements, revenue and expense accounts are translated at the average rates during the period, assets and liabilities are translated
at period-end rates and equity accounts are translated at historical rate. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of stockholders' equity. Gains and losses from foreign currency
transactions are recognized in current operations.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires revenue to
be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is
expected to be received for those goods or services. ASU 2014-09 (“ASC Topic 606”) supersedes the existing revenue
recognition guidance and is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted
ASC Topic 606 on January 1, 2018 and has determined that the new standard does not have a material impact on the nature and timing
of revenues recognized.
Revenues from sports-betting, casino, cash
and skill games, slots, bingo and horse race wagers represent the gross pay-ins (also referred to as “handle” or “turnover”)
from customers less gaming taxes and payouts to customers. Revenues are recorded when the game is closed which is representative
of the point in time at which the Company has satisfied its performance obligation. In addition, the Company receives commissions
from the sale of scratch off tickets and other lottery games. Commissions are recorded when the ticket for scratch off tickets
and lottery tickets are sold.
Revenues from the BPS include license fees,
training, installation, and product support services. Revenue is recognized when transfer of control to the customer has been made
and the Company’s performance obligation has been fulfilled. License fees are calculated as a percentage of each licensee’s
level of activity and are contingent upon the licensee’s usage. The license fees were recognized on an accrual basis as earned.
Cash and cash equivalents
The Company considers all highly liquid debt
instruments with maturities of three months or less at the time acquired to be cash equivalents. Cash equivalents represent short-term
investments consisting of investment-grade corporate and government obligations, carried at cost, which approximates market value.
The Company had no cash equivalents as of December 31, 2018 and 2017.
The Company primarily places its cash with
high-credit quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation
up to a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit
of CDN$100,000 per institution, in Italy which is insured by the Italian deposit guarantee fund Fondo Interbancario di Tutela dei
Depositi (FITD) up to a limit of €100,000 per institution, and in Germany which is a member of the Deposit Protection Fund
of the Association of German Banks (Einlagensicherungsfonds des Bundesverbandes deutscher Banken) up to a limit of €100,000
per institution.
Gaming accounts receivable
Gaming accounts receivable represent gaming
deposits made by customers to their online gaming accounts either directly by credit card, bank wire, e-wallet or other accepted
method through one of the Company’s websites or indirectly by cash collected at the cashier of a betting shop but not yet
credited to our bank accounts and subject to normal trade collection terms without discounts. The Company periodically evaluates
the collectability of its gaming accounts receivable and considers the need to record or adjust an allowance for doubtful accounts
based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates.
The Company does not require collateral to support customer receivables. The Company recorded bad debt expense of approximately
$6,000 and $136,000 for the years ended December 31, 2018 and 2017, respectively. All balances previously recorded as allowance
for doubtful accounts were written off as uncollectible.
F-9
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Gaming account balances
Gaming account balances represent customer
balances, including winnings and deposits, that are held as credits in online gaming accounts and have not as of yet been used
or withdrawn by the customers. Customers can request payment from the Company at any time and the payment to customers can be made
through bank wire, credit card, or cash disbursement from one of our locations. Online gaming account credit balances are non-interest
bearing.
Fair Value Measurements
ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable
inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices
(unadjusted) in active market for identical assets or liabilities.
Level 2: Inputs other than quoted prices that
are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little
or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market
participant would use.
The carrying value of the Company's short-term
investments, prepaid expenses, accounts receivables, other current assets, accounts payable and accrued liabilities, gaming account
balance, and advances from shareholder approximate fair value because of the short-term maturity of these financial instruments.
The following table provides a summary of the
changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on
a recurring basis using significant unobservable inputs for the year ended December 31, 2018 and the year ended December 31, 2017.
Refer to this Note for accounting of early adoption of ASU 2017-11.
Balance at December 31, 2016
|
$
|
211,262
|
|
Issued during the year ended December 31, 2017
|
|
268,884
|
|
Exercised during the year ended December 31, 2017
|
|
—
|
|
Change in fair value recognized in operations
|
|
(257,231
|
)
|
Balance at December 31, 2017
|
$
|
222,915
|
|
Issued during the year ended December 31, 2018
|
|
31,010,535
|
|
Canceled during the year ended December 31, 2018
|
|
(470,070
|
)
|
Change in fair value recognized in operations
|
|
(18,268,653
|
)
|
Adjustment due to ASU 2017-11
|
|
(12,494,727
|
)
|
Balance at December 31, 2018
|
$
|
—
|
|
Property, plant and equipment
Property, plant and equipment are stated at
acquisition cost less accumulated depreciation and adjustments for impairment losses. Expenditures are capitalized only when they
increase the future economic benefits embodied in an item of property, plant and equipment. All other expenditures are recognized
as expenses in the statement of income as incurred.
Depreciation is charged on a straight-line
basis over the estimated remaining useful lives of the individual assets. Amortization commences from the time an asset is put
into operation. The range of the estimated useful lives is as follows:
Trademarks / names
|
14 years
|
|
Office equipment
|
5 years
|
|
Office furniture
|
8 1/3 years
|
|
Signs and displays
|
5 years
|
|
F-10
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Leases
Leases are reviewed and classified as capital
or operating at their inception in accordance with ASC Topic 840, Accounting for Leases. For leases that contain rent escalations,
the Company records rent expense on the straight-line method. The difference between rent expense recorded and the amount paid
is credited or charged to deferred rent account and is included in accrued expenses and other current liabilities.
All lease agreements of the Company as lessees
are accounted for as operating leases as of December 31, 2018 and 2017.
Income Taxes
The Company uses the asset and liability method of accounting
for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized
for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity's financial statements or tax returns. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred
tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion
or all of the deferred tax assets will not be realized.
ASC Topic 740-10-30 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Company has no material uncertain tax positions for any of the reporting periods presented.
The recently passed comprehensive tax reform
bill could adversely affect the Company’s business and financial condition.
The Company has elected to include interest
and penalties related to uncertain tax positions, if determined, as a component of income tax expense.
In Italy, tax years beginning 2012 forward,
are open and subject to examination, while in Austria companies are open and subject to inspection for five years and ten years
for inspection of serious infractions. In the United States and Canada, tax years beginning 2014 forward, are subject to examination.
The Company is not currently under examination and it has not been notified of a pending examination.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the
change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources,
including foreign currency translation adjustments and unrealized gains and losses on marketable securities.
The Company adopted FASB ASC 220-10-45, “Reporting
Comprehensive Income”. ASC 220-10-45 establishes standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains (losses) on
available for sale marketable securities; foreign currency translation adjustments and changes in market value of future contracts
that qualify as a hedge; and negative equity adjustments.
F-11
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Investment in Non-Consolidated Entities
Investments in non-consolidated entities are
accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company's ability to exercise
significant influence over the operating and financial policies of the investee, except where investments have a readily determinable
fair value. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the
Company's proportionate share of the investees' net income or losses after the date of investment. When net losses from an investment
are accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional
losses are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently
reports net income and the Company's share of that net income exceeds the share of net losses not recognized during the period
the equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is
other than temporary has occurred.
The Company’s investment in Banca Veneto SPA was accounted
for at cost. The Company monitors its investment for impairment annually and makes appropriate reductions in the carrying value
if it determines that an impairment charge is required based on qualitative and quantitative information.
Equity investments with readily determinable
fair value, are measured at fair value with changes in fair value recognized in earnings. The Company’s investment in Zoompass
Holdings Inc was accounted for at fair value. These securities have readily determinable fair values and subsequent to the adoption
of ASU 2016-01 on January 1, 2018, changes in fair value are recorded to earnings. Net unrealized losses recorded to earnings related
to these securities were $75,000 and $0 for the years ended December 31, 2018 and 2017 respectively.
Recent Accounting Pronouncements
On January 1, 2018, the Company adopted ASU
2016-01, Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.
The ASU provides guidance related to the recognition and measurement of financial assets and financial liabilities with changes
primarily affecting equity investments and disclosure of financial instruments. Under the new guidance, equity investments with
readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value
with changes in fair value recognized in earnings. Prior period amounts have not been adjusted and continue to be reported in accordance
with the previous accounting guidance. The adoption of this standard on did not have a material impact on the Company’s consolidated
financial statements.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02 (ASU 2016-02) which amends the FASB ASC and created Topic 842, “Leases.” Under Topic 842,
lessees are required to recognize assets and liabilities on the balance sheet for most leases and provides for enhanced disclosures.
Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual reporting periods, and
interim periods within those years beginning after December 15, 2018. Entities are required to use a modified retrospective approach
for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full
retrospective application is prohibited and early adoption by public entities is permitted. The adoption of this guidance did not
have a material impact on the Company’s financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock
Compensation (Topic 718), Scope of Modification Accounting. The amendments in this update provide guidance about which changes
to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The
amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. This Company adopted ASU 2017-09 on January 1, 2018 and has determined that the new standard does not
have a material impact the Company’s consolidated financial statements.
F-12
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(continued)
Recent Accounting Pronouncements (continued)
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments
in Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down
round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced
on the basis of the pricing of future equity transactions. Current accounting guidance creates cost and complexity for entities
that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value
measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic
480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards
Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable
financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments
in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018 with early adoption permitted. The Company early adopted the ASU 2017-11 in the
third quarter of 2018.
Adoption of ASU 2017-11
The Company changed its method of accounting
for all of our outstanding Debentures and Warrants through the early adoption of ASU 2017-11 during the three months ended September
30, 2018 on a modified retrospective basis. Accordingly, the Company reclassified the warrant and conversion option derivative
liabilities to additional paid in capital on its January 1, 2018 consolidated balance sheets totaling approximately $222,915 and
recorded the cumulative effect of the adoption to the beginning balance of accumulated deficit of approximately $64,966. This resulted
to an increase in additional paid-in capital by $287,881. In addition, because of the modified retrospective adoption, the Company
recalculated the derivative liabilities for debt issued in 2018 and reduced the loss on debt issuance and change in fair value
of derivative liabilities on its consolidated statements of operations by approximately $5,000,000 and reduced amortization of
debt discount by approximately $650,000 for the year ended December 31, 2018. The following table provides a reconciliation of
the warrant derivative liability, convertible debt, conversion, additional paid-in capital and accumulated deficit on the consolidated
balance sheet as of January 1, 2018:
|
|
Convertible Debt
|
|
Derivative Liability
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
Balance, January 1, 2018 (Prior to adoption of ASU 2017-11
|
|
$
|
1,148,107
|
|
|
$
|
222,915
|
|
|
$
|
14,254,582
|
|
|
$
|
(9,897,620
|
)
|
Reclassified derivative liabilities and cumulative effect of adoption
|
|
|
—
|
|
|
|
(222,915
|
)
|
|
|
287,881
|
|
|
|
(64,966
|
)
|
Balance, January 1, 2018 (After adoption of ASU 2017-11)
|
|
$
|
1,148,107
|
|
|
$
|
—
|
|
|
$
|
14,542,463
|
|
|
$
|
(9,962,586
|
)
|
There are no other recently issued accounting
standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
F-13
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
3. Acquisition of betting software technology;
offline and land-based gaming assets
Odissea Betriebsinformatik Beratung GmbH
(“Odissea”) Acquisition
On June 30, 2016, the Company entered into
a Share Exchange Agreement (“Odissea SPA”), which closed on July 1, 2016, with the former shareholders of Odissea organized
under the laws of Austria. Odissea operates a proprietary betting operating system. Pursuant to the agreement, the Company issued
8,772,200 shares of common stock in consideration for 100% of the issued and outstanding shares of Odissea. As a result of this
acquisition, the former shareholders of Odissea now hold approximately 15.57% of the issued and outstanding shares of common stock
of the Company.
Pursuant to the Odissea SPA, upon completion
of certification of the betting operating system by Italy’s online gaming and betting regulator, Agenzia delle Dogane e dei
Monopoli (“ADM”) which was obtained on June 30, 2017, the former shareholders of Odissea have an option to resell to
the Company 50% of the shares of common stock issued in consideration for the purchase price (or 4,386,100 shares) at a fixed price
of $0.50 per share (the “Odissea Put Option”). As of the date of this prospectus, the Odissea Put Option has been extended
indefinitely by mutual consent.
The purchase price was allocated to the fair
market value of tangible and intangible assets acquired and liabilities assumed. Intangible assets will be amortized over their
remaining useful life as follows:
|
|
|
|
Remaining Useful Life
|
Current assets
|
|
$
|
210,505
|
|
|
|
Property, Plant and Equipment
|
|
|
30,638
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
Betting Operating System
|
|
|
1,685,371
|
|
|
15 years
|
Less: liabilities assumed
|
|
|
(215,935
|
)
|
|
|
Total identifiable assets less liabilities assumed
|
|
|
1,710,579
|
|
|
|
Total purchase price
|
|
|
1,710,579
|
|
|
|
Excess purchase price
|
|
$
|
—
|
|
|
|
Ulisse GmbH (“Ulisse”) Acquisition
On June 30, 2016, the Company entered into
a Share Exchange Agreement (“Ulisse SPA”), which closed on July 1, 2016, with the former shareholders of Ulisse organized
under the laws of Austria. Ulisse operates a network of approximately 172 land-based agency locations. Pursuant to the agreement,
the Company issued 3,331,200 shares of common stock in consideration for 100% of the issued and outstanding shares of Ulisse.
Pursuant to the Ulisse SPA, the purchase price
was subject to an adjustment equal to two times earnings before income taxes calculated on a pro rata basis from the closing date
upon completion of the ADM license tender auction. The former shareholders of Ulisse were also permitted to exercise an option
to resell to the Company 50% of the shares of common stock (or 1,665,600 shares) issued in consideration for the purchase price
at a fixed price of $0.50 per share (the “Ulisse Put Option”).
On May 31, 2018, the Company and Ulisse mutually
agreed to exercise the Ulisse Put Option in lieu of completion of the ADM license tender auction. The Company repurchased and retired
the shares issued in June 2016 with a purchase price adjustment to €10 million (approximately $11.7 million). The purchase
price adjustment was paid half in cash of €5 million (approximately $5.85 million) and the Company issued 4,735,600 shares
to the sellers on May 31, 2018 to settle the balance of the purchase price adjustment in shares of common stock at the closing
price of $1.18 per share on May 31, 2018.
Multigioco Acquisition
On May 31, 2018, the Company and Multigioco
mutually agreed to exercise the option to repurchase the shares issued to the former shareholders of Multigioco at the closing
of the acquisition of Multigioco on August 15, 2014 (“Multigioco Put Option”). On June 22, 2018, the Company repurchased
and retired the balance of 2,040,000 shares issued to the Multigioco former shareholders in consideration for the purchase price
at a fixed price of $0.50 per share in exchange for €510,000 (approximately $595,000).
F-14
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
4. Intangible Assets
Intangible assets consist of the following:
|
|
December 31,
2018
|
|
December 31,
2017
|
|
Life (years)
|
Betting Platform Software
|
|
$
|
1,685,371
|
|
|
$
|
1,685,371
|
|
|
15
|
Ulisse Bookmaker License
|
|
|
9,724,244
|
|
|
|
—
|
|
|
—
|
Land-based licenses
|
|
|
970,422
|
|
|
|
967,328
|
|
|
1.5 - 7
|
Location contracts
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
5 - 7
|
Customer relationships
|
|
|
870,927
|
|
|
|
870,927
|
|
|
10 - 15
|
Trademarks/names
|
|
|
110,000
|
|
|
|
110,000
|
|
|
14
|
Websites
|
|
|
40,000
|
|
|
|
40,000
|
|
|
5
|
|
|
|
14,400,964
|
|
|
|
4,673,626
|
|
|
|
Accumulated amortization
|
|
|
(1,817,507
|
)
|
|
|
(1,427,878
|
)
|
|
|
Balance
|
|
$
|
12,583,457
|
|
|
$
|
3,245,748
|
|
|
|
The Company evaluates intangible assets for
impairment on an annual basis during the last month of each year and at an interim date if indications of impairment exist. Intangible
asset impairment is determined by comparing the fair value of the asset to its carrying amount with an impairment being recognized
only when the fair value is less than carrying value. The Company recorded approximately $450,000 and $445,000 in amortization
expense for finite-lived assets for the years ended December 31, 2018 and 2017, respectively.
Licenses obtained by the Company in the acquisitions
of Multigioco and Rifa include a Gioco a Distanza (“GAD”) online license as well as a Bersani and Monti land-based
licenses issued by the Italian gaming regulator to Multigioco and Rifa, respectively, as well as an Austrian Bookmaker License
through the acquisition of Ulisse.
The Company believes that the carrying amounts
of its intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that
the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could
be impaired.
5. Restricted Cash
Restricted cash is cash held in a segregated
bank account at Intesa Sanpaolo Bank S.p.A. (“Intesa Sanpaolo Bank”) as collateral against our operating line of credit
with Intesa Sanpaolo Bank as well as Wirecard Bank as a security deposit for Ulisse betting operations. In addition, the Company
maintains a $1 million deposit at Metropolitan Commercial bank held as security against a $1 million line of credit. See Note 7.
6. Other long-term liabilities
Other long-term liabilities represent the Italian
“Trattamento di Fine Rapporto” which is a severance amount set up by Italian companies to be paid to employees on termination
or retirement as well as shop deposits that are held by Ulisse.
Balances of other long-term liabilities were
as follows:
|
|
December 31,
2018
|
|
December 31,
2017
|
Severance liability
|
|
$
|
168,706
|
|
|
$
|
131,904
|
|
Customer deposit balance
|
|
|
440,021
|
|
|
|
400,775
|
|
Total other long term liabilities
|
|
$
|
608,727
|
|
|
$
|
532,680
|
|
F-15
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
7. Line of Credit – Bank
The Company maintains a $1 million secured
revolving line of credit from Metropolitan Commercial Bank in New York, which bears a fixed rate of interest of 3.00% 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.
See Note 5. At December 31, 2018, the Line of Credit had an outstanding balance of $750,000.
8. Liability in connection with acquisition
Liability in connection with acquisition represent
non-interest-bearing amount due by the Company’s subsidiaries toward the purchase price as per a purchase agreement between
Newgioco Srl and the Company’s subsidiaries. An officer of the Company owns 50% of Newgioco Srl. In connection with the Multigioco
Acquisition, on June 22, 2018 the Company paid the amount due to Newgioco Srl in full.
9. Related party transactions and balances
Related Party Loans
Advances from stockholders represent non-interest-bearing
loans that are due on demand. Balances of Advances from stockholders are as follows:
|
|
December 31,
2018
|
|
December 31,
2017
|
Gold Street Capital Corp.
|
|
$
|
39,237
|
|
|
$
|
41,143
|
|
Doriana Gianfelici
|
|
|
—
|
|
|
|
58,792
|
|
Luca Pasquini
|
|
|
—
|
|
|
|
(119,939
|
)
|
Other stockholders
|
|
|
—
|
|
|
|
567,813
|
|
Total advances from stockholders
|
|
$
|
39,237
|
|
|
$
|
547,809
|
|
Amounts due to Gold Street Capital Corp., the
major stockholder of the Company are for reimbursement of expenses. During the year ended December 31, 2018 and 2017, the Company
paid management fees of $72,000 and $144,000, respectively, to Gold Street Capital Corp.
In January 2018, the Company advanced €100,000
(approximately $116,000) to an officer to cover fees related to an application for a gaming license in Malta, under the name Ulisse
Services, Ltd. The advance has been repaid and the gaming license in Malta is still pending.
In February 2018 the Company provided a loan of approximately €39,000
(approximately $45,000) to Engage IT Services Srl to finance hardware purchased by third-party betting shops. In June 2018, the
Company increased the loan by approximately €46,000 (approximately $53,000). The loan bears interest at 4.47% and is due
in February 2019. Total repayments in 2018 were approximately €43,000 and approximately €43,000 (approximately $45,000
and $45,000, respectively), including interest, remains outstanding at December 31, 2018. An officer of the Company holds a 34%
stake in Engage IT Services Srl.
During the year ended December 31, 2018, the
Company paid management fees of approximately €480,000 (approximately $549,000) to Ulisse Services, Ltd. to cover office
and set-up expenses.
The amounts due to the stockholders at December
31, 2018 are non-interest bearing and due on demand.
Related Party Debt
Promissory notes payable to related parties
with a principal of approximately $318,000 represents amounts due to Braydon Capital Corp., a company owned by Claudio Ciavarella,
the brother of our CEO. These notes bear interest at a rate of 1% per month and have no fixed maturity date. Accounts payable and
accrued liabilities include approximately $104,000 in accrued interest on these notes.
F-16
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
10. Investment in Non-Consolidated Entities
Investments in non-consolidated entities consists
of the following:
|
|
December 31,
2018
|
|
December 31,
2017
|
2336414 Ontario Inc
|
|
$
|
—
|
|
|
$
|
875,459
|
|
Banca Veneto
|
|
|
—
|
|
|
|
1
|
|
Zoompass Holdings Inc.
|
|
|
275,000
|
|
|
|
—
|
|
|
|
|
275,000
|
|
|
|
875,459
|
|
|
|
|
|
|
|
|
|
|
Less impairment
|
|
|
—
|
|
|
|
(875,459
|
)
|
Total investment in non-consolidated entities
|
|
$
|
275,000
|
|
|
$
|
1
|
|
In December 2014, the Company invested CDN$1,000,000
(approximately $778,000) in a private placement of common shares of 2336414 Ontario Inc. (“2336414”) representing 666,664
common shares, or 2.3% of 2336414. 2336414 is an Ontario corporation and was the parent company of Paymobile Inc. (“Paymobile”)
a carrier-class, Payment Card Industry (“PCI”) compliant transaction platform, delivering Visa prepaid card programs
for social disbursements, corporate payroll and check replacement. The Company also had warrants to purchase additional shares
in 2336414 that were not exercised and have since expired.
On December 31, 2014 the Company set up a 100%
impairment on the investment in 2336414 because Paymobile did not produce any meaningful income and the Company determined that
it may not be able to realize its investment in 2336414.
In August 2016, 2336414 transferred its interest
in Paymobile to Zoompass Holdings, Inc a Nevada corporation (“Zoompass”). On March 31, 2018, the Company entered into
a settlement agreement (the “Settlement Agreement”) with 2336414, Paymobile and a director of 2336414. Pursuant to
the terms and conditions of the Settlement Agreement, the Company received 2,500,000 shares of common stock of Zoompass and Paymobile
agreed to discharge debt and interest of approximately CDN$210,000 due under the promissory note. The investment in Zoompass has
been recorded as an investment in non-consolidated entities and is revalued every quarter with fluctuations in value recorded to
earnings. In connection with the settlement, the Company recorded a gain on litigation settlement of $516,120 in the first quarter
of 2018. See also Note 13.
On December 31, 2017, the Company recorded
an impairment of $1 for the shares of Banca Veneto held.
For the year ended December 31, 2018, the Company
recorded a loss of $75,000 related to the investment in Zoompass.
11. Stockholders’ Equity
On November 28, 2017, the Board of Directors
approved a 2-for-1 forward split of our common stock. The common stock dividend payment date was December 20, 2017 to stockholders
of record as at December 18, 2017.
In May 2018, the Company repurchased and retired
3,331,200 shares issued in June 2016 to the Ulisse former shareholders. In addition, 4,735,600 new shares were issued to the Ulisse
former shareholders based on the purchase price adjustment of Ulisse per the Ulisse SPA.
In May 2018, the Company repurchased and retired
2,040,000 shares issued to the Multigioco former shareholders in exchange for €510,000 (approximately $595,000) based on
the stock purchase agreement between the Company and Multigioco dated August 15, 2014.
On May 18, 2018, a warrant holder exercised
warrants on a cashless basis and was issued 201,088 shares of the Company’s common stock.
In connection to the debenture units issued
in the second quarter of 2018, the Company issued an aggregate of 1,720,064 shares of common stock at 100% of the market price
to the debenture holders. See also Note 12.
F-17
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
11. Stockholders’ Equity (continued)
In connection to the debenture units issued
in the first quarter of 2018, the Company issued an aggregate of 111,000 shares of common stock at 100% of the market price to
the debenture holders. See also Note 12.
On July 5, 2018, the Company filed a certificate
of amendment to amend Article 4 of its Certificate of Incorporation with the State of Delaware, increasing the number of authorized
shares of the Company from 100,000,000 shares to 180,000,000 shares of which 160,000,000 shares are designated common stock, par
value $0.0001 per share, and 20,000,000 shares are designated preferred stock, par value $0.0001 per share.
12. Debentures and Convertible Notes
The conversion price of the convertible notes
issued in February 2016 and April 2016 per share of common stock has been retroactively restated to reflect the 2-for-1 forward
stock split effected on December 20, 2017.
February 2016 and April 2016 Convertible
Notes
In February 2016, the Company consummated the
transactions contemplated pursuant to a securities purchase agreement with an unaffiliated private investor, to raise up to $750,000.
The Company received gross proceeds from the initial private placement of $600,000. On April 4, 2016, the Company received the
balance of gross proceeds, or $150,000, less legal expenses of $15,000. In addition, the Company paid $75,000 in commission. Pursuant
to the securities purchase agreement, the Company also issued a warrant to purchase up to 326,088 shares of Company’s common
stock at an exercise price of $0.575 per share. The notes issued pursuant to the offering bear an interest rate of 12% per annum
and were due in one year. The Company continued to accrue interest at 22% past the due date. The notes were guaranteed by Confidi
Union Impresa, an unrelated party.
During the year ended December 31, 2018, the
Company paid approximately $1 million to the private investor to pay the entire amount due under the notes in full, including penalty
and interest towards the consent judgement related to the settlement agreement with the investor dated May 15, 2017. Accounts payable
and accrued liabilities included an accrued interest on the notes of $139,041 at December 31, 2017.
On May 18, 2018 the investor exercised the
warrant to purchase up to 326,088 shares of the Company and received 201,088 shares on a cashless basis. See Notes 11 and 15.
First Quarter Debentures
On February 26, 2018, the Company issued debentures
units to certain accredited investors (the “February 2018 Private Placement”). Each debenture unit was comprised of
(i) a note in the principal amount of CDN$1,000 bearing interest at a rate of 10% per annum, with a maturity date of two years
from the date of issuance, (ii) warrants to purchase up to 250 shares of the Company’s common stock at an exercise price
equal to the lessor of $0.625 or 125% of the proposed initial Canadian public offering price per warrant, expiring on February
25, 2020, and (iii) 160 shares of restricted common stock. The investors in the February 2018 Private Placement purchased an aggregate
principal amount of CDN$670,000 (approximately $521,900) debentures and received warrants to purchase up to 167,500 shares of the
Company’s common stock and 111,000 shares of common stock. As a result of the lower debenture conversion price and the warrant
exercise price of the May 31, 2018 Private Placement described below, the whole or any part of the principal amount of the February
2018 Private Placement debentures plus any accrued and unpaid interest may be converted into shares of the Company’s common
stock at a price equal to $0.40 per share and the warrants can be exercised at a price equal to $0.50 per share. In addition, the
Company paid finders fees equal to 5% of the gross proceeds in cash plus 5% in broker warrants with like terms as the Warrants
issued to investors in the February 2018 Private Placement.
F-18
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
12. Debentures and Convertible Notes (continued)
Second Quarter Debentures
In April 2018, the Company issued debentures
units to certain investors (the “April 2018 Private Placement”). Each debenture unit was comprised of (i) a note in
the principal amount of CDN$1,000 bearing interest at a rate of 10% per annum, with a maturity date of two years from the date
of issuance, (ii) warrants to purchase up to 250 shares of the Company’s common stock at an exercise price equal to the lessor
of $0.625 or 125% of the proposed initial Canadian public offering price per warrant, expiring in April 2020, and (iii) 160 shares
of restricted common stock. The investors in the April 2018 Private Placement purchased an aggregate principal amount of CDN$135,000
(approximately $105,200) debentures and received warrants to purchase up to 33,750 shares of the Company’s common stock and
21,600 shares of restricted common stock. As a result of the lower debenture conversion price and the warrant exercise price of
the May 31, 2018 Private Placement described below, the whole or any part of the principal amount of the April 2018 Private Placement
debentures plus any accrued and unpaid interest may be converted into shares of the Company’s common stock at a price equal
to $0.40 per share and the warrants can be exercised at a price equal to $0.50 per share. In addition, we paid finders fees equal
to 5% of the gross proceeds in cash plus 5% in broker warrants with like terms as the warrants issued to investors in the April
2018 Private Placement.
On April 23, 2018, the Company re-issued debenture
units that were first issued to certain investors between January 24, 2017 and January 31, 2018 in order to simplify the various
debentures into a single series with the same terms as new convertible debenture units issued on February 26, 2018 (the “April
19, 2018 Debentures”). Each debenture unit was comprised of (i) a note in the principal amount of CDN$1,000 bearing interest
at a rate of 10% per annum, with a maturity date of two years from the date of issuance, (ii) warrants to purchase up to 250 shares
of the Company’s common stock at an exercise price equal to the lessor of $0.625 or 125% of the proposed initial Canadian
public offering price per warrant, expiring on April 19, 2020, and (iii) 160 shares of restricted common stock. The investors in
the April 19, 2018 Debentures received an aggregate principal amount of CDN$1,436,000 (approximately $1,118,600) debentures, warrants
to purchase up to 359,000 shares of the Company’s common stock and 229,760 restricted shares of common stock. As a result
of the lower debenture conversion price and the warrant exercise price of the May 31, 2018 Private Placement described below, the
whole or any part of the principal amount of the April 19, 2018 Debentures plus any accrued and unpaid interest may be converted
into shares of the Company’s common stock at a price equal to $0.40 per share and the warrants can be exercised at a price
equal to $0.50 per share.
On May 11, 2018, the Company issued debentures
units to certain investors (the “May 11, 2018 Private Placement”). Each debenture unit was comprised of (i) a note
in the principal amount of CDN$1,000 bearing interest at a rate of 10% per annum, with a maturity date of two years from the date
of issuance, (ii) warrants to purchase up to 250 shares of the Company’s common stock at an exercise price equal to the lessor
of $0.625 or 125% of the proposed initial Canadian public offering price per warrant, expiring on May 11, 2020, and (iii) 160 shares
of restricted common stock. The investors in the May 11, 2018 Private Placement purchased an aggregate principal amount of CDN$131,000
(approximately $102,000) debentures and received warrants to purchase up to 32,750 shares of the Company’s common stock and
20,960 restricted shares of common stock. As a result of the lower debenture conversion price and the warrant exercise price of
the May 31, 2018 Private Placement described below, the whole or any part of the principal amount of the May 11, 2018 Private Placement
plus any accrued and unpaid interest may be converted into shares of the Company’s common stock at a price equal to $0.40
per share and the warrants can be exercised at a price equal to $0.50 per share. In addition, we paid finders fees equal to 5%
of the gross proceeds in cash plus 5% in broker warrants with like terms as the warrants issued to investors in the May 11, 2018
Private Placement.
On May 31, 2018, the Company closed a private
placement offering of up to 7,500 units and entered into Subscription Agreements (the “Agreements”) with certain accredited
investors (the “May 31, 2018 Private Placement”). The units were offered in both U.S. and Canadian dollar denominations.
Each unit sold to U.S. investors was sold at a per unit price of $1,000 and was comprised of (i) a 10% convertible debenture in
the principal amount of $1,000 (the “U.S. Debentures”), (ii) 208 shares of our common stock and (ii) warrants to purchase
up to 1082.25 warrants shares of our common stock (the “U.S. Warrants”). Each unit sold to Canadian investors was sold
at a per unit price of CDN$1,000 and was comprised of (i) a 10% convertible debenture in the principal amount of CDN$1,000 (the
“Canadian Debentures” and together with the U.S. Debentures, the “May Debentures”), (ii) 160 shares of
our common stock and (ii) warrants to purchase up to 832.50 shares of our common stock (the “Canadian Warrants” and
together with the U.S. Warrants, the “May Warrants”).
The May Warrants are exercisable at an exercise
price of $0.50 per share and expire two years after the issuance date.
The U.S. investors in the May 31, 2018 Private Placement purchased
a total 3,268 units and the Company issued U.S. Debentures in the principal amount of $3,268,000 and Canadian investors purchased
4,800 units and we issued Canadian Debentures in the principal amount of CDN$4,800,000 (approximately $3,739,200). In addition,
investors received May Warrants to purchase up to 6,438,062 shares of the Company’s common stock and 1,447,744 restricted
shares of common stock.
F-19
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
12. Debentures and Convertible Notes (continued)
Second Quarter Debentures (continued)
In connection with the May 31, 2018 Private
Placement, the Company paid finders fees equal to 5% of the gross proceeds in cash plus broker warrants to purchase 5% of the number
of May Warrants sold to investors. The broker warrants had like terms as the May Warrants issued to Investors in the May 31, 2018
Private Placement.
One of the investors, Mr. Harold Wolkin, through
his company, Princeville Capital, purchased 200 Canadian units on May 31, 2018. Mr. Wolkin received 32,000 shares of common stock
and Canadian Warrants to purchase up to 166,500 of the Company’s common stock at an exercise price of $0.50 per share which
May Warrants expire on May 31, 2020. Mr. Wolkin served as a director of the Company and as Chairman of the Board and Chair of the
Audit Committee.
In addition, on June 18, 2018, the Company
received proceeds from the second closing of the May 31, 2018 Private Placement and issued U.S. Debenture in the principal amount
of $950,000 and Canadian Debentures in the principal amount of CDN$9,500 (approximately $7,455) net of commissions with identical
terms of the May Debentures. In addition, the Company also issued two-year May Warrants to purchase up to 1,094,738 shares of the
Company’s common stock at an exercise price of $0.50 per share.
Warrants issued in relation to the debentures
and notes are discussed in Note 15.
13. Promissory Notes Payable – Other
In December 2014, the Company received a promissory
note in the principal amount of CDN$500,000 (approximately $390,000) from Paymobile a subsidiary of 2336414 of which the Company
owned 666,664 common shares, that bears interest at a rate of 1% per month on the outstanding balance.
On March 31, 2018, the Company entered into
the Settlement Agreement with 2336414, Paymobile and Zoompass. Pursuant to the terms and conditions of the Settlement Agreement,
CDN$210,000 (approximately $160,000), in principal and accrued interest was forgiven and written off. See Note 10.
14. Bank Loan Payable
In September 2016, the Company obtained a loan
of €500,000 (approximately $580,000) from Intesa Sanpaolo Bank in Italy, which loan is secured by the Company's assets. The
loan has an underlying interest rate of 4.5 points above Euro Inter Bank Offered Rate, subject to quarterly review and is amortized
over 57 months ending September 30, 2021. Monthly repayments of €9,760 (approximately $11,000) began in January 2017.
The Company made payments of approximately
$117,000) during the years ended December 31, 2018 which included principal of approximately $101,000 and interest of approximately
$16,000 for the year ended December 31, 2018.
15. Warrants
The exercise price of the warrants and the
number of warrant shares exercisable have been retroactively restated to reflect the 2-for-1 forward stock split effected on December
20, 2017.
In February 2016, pursuant to a securities
purchase agreement, the Company issued warrants to purchase up to 260,870 shares of the Company’s common stock at an exercise
price of $0.575 per share in connection with the February 2016 convertible promissory note which may be exercised by the warrant
holders between August 28, 2016 and February 28, 2019. In April 2016, the Company issued warrants to the same holders to purchase
up to 65,218 shares of the Company’s common stock at an exercise price of $0.575 per share in connection with the April 4,
2016 convertible promissory note which may be exercised by the warrant holder until April 4, 2019 (See Note 12).
On May 18, 2018, the warrant holder exercised
warrants to purchase 201,088 shares of the Company’s common stock on a cashless basis.
On April 4, 2016, the Company issued warrants
to purchase up to 124,440 shares of the Company’s common stock at an exercise price of $0.575 per share which may be exercised
by the warrant holders until April 4, 2019. The warrants were issued to placement agents in relation to securing the February 29,
2016 and April 4, 2016 convertible promissory notes (See Note 12).
F-20
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
15. Warrants (continued)
In connection with the private placement agreements
entered into with accredited investors between February 26, 2018 and May 31, 2018, for each $1,000 debenture unit the Company issued
two-year warrants to purchase up to 1082.25 shares of the Company’s common stock and for each CDN$1,000 debenture unit the
Company issued two-year warrants to purchase up to 832.50 shares of the Company’s common stock at an exercise price of $0.50
per share. (See Note 12)
The fair value of the warrants was calculated
using the Black-Scholes model on the date of issuance and was recorded as debt discount, which has been amortized as interest expense
over the life of the debt.
The following assumptions were used to calculate
the fair value at issuance for the warrants outstanding at December 31, 2018:
Exercise Price/share at Issuance
|
|
$0.50 - $0.575
|
Common Stock Price/share
|
|
$0.26
|
Volatility
|
|
459%
|
Term (Years)
|
|
1.37 years
|
Dividend Yield
|
|
0%
|
Interest Rate
|
|
0.91%
|
Forfeiture Risk
|
|
0%
|
A summary of warrant transactions during the
year ended December 31, 2018 is as follows:
|
|
Warrant Shares
|
|
Weighted Average Exercise Price Per Common Share
|
|
Weighted Average Life
|
Outstanding at December 31, 2016
|
|
|
467,928
|
|
|
$
|
0.58
|
|
|
|
2.13
|
|
Issued
|
|
|
162,000
|
|
|
$
|
0.50
|
|
|
|
2.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
(17,400
|
)
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
612,528
|
|
|
$
|
0.54
|
|
|
|
1.37
|
|
Exercisable at December 31, 2017
|
|
|
561,528
|
|
|
$
|
0.56
|
|
|
|
1.21
|
|
Issued
|
|
|
8,767,064
|
|
|
$
|
0.50
|
|
|
|
2.00
|
|
Canceled
|
|
|
(216,000
|
)
|
|
$
|
0.63
|
|
|
|
|
|
Exercised
|
|
|
(326,088
|
)
|
|
$
|
0.58
|
|
|
|
|
|
Expired
|
|
|
(124,440
|
)
|
|
$
|
0.58
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
8,713,064
|
|
|
$
|
0.50
|
|
|
|
1.41
|
|
Exercisable at December 31, 2018
|
|
|
8,713,064
|
|
|
$
|
0.50
|
|
|
|
1.41
|
|
16. Revenues
The following table represents disaggregated
revenues from our gaming operations for the years ended December 31, 2018 and 2017. handle (turnover) represents the total bets
processed for the period.
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
Handle (Turnover)
|
|
|
|
|
Handle web-based
|
|
$
|
235,891,170
|
|
|
$
|
106,785,302
|
|
Handle land-based
|
|
|
177,334,592
|
|
|
|
111,734,469
|
|
Total Handle (Turnover)
|
|
$
|
413,225,762
|
|
|
$
|
218,519,771
|
|
|
|
|
|
|
|
|
|
|
Winnings/Payouts
|
|
|
|
|
|
|
|
|
Winnings web-based
|
|
|
223,064,978
|
|
|
|
100,860,085
|
|
Winnings land-based
|
|
|
152,446,130
|
|
|
|
94,201,786
|
|
Total Winnings/Payouts
|
|
|
375,511,108
|
|
|
|
195,061,871
|
|
|
|
|
|
|
|
|
|
|
Gross Gaming Revenues
|
|
$
|
37,714,654
|
|
|
$
|
23,457,900
|
|
|
|
|
|
|
|
|
|
|
Less: ADM Gaming Taxes
|
|
|
3,417,150
|
|
|
|
1,761,935
|
|
|
|
|
|
|
|
|
|
|
Net Gaming Revenues
|
|
$
|
34,297,504
|
|
|
$
|
21,695,965
|
|
Add: Commission Revenues
|
|
|
135,957
|
|
|
|
281,285
|
|
Add: Service Revenues
|
|
|
141,636
|
|
|
|
887,896
|
|
Revenues
|
|
$
|
34,575,097
|
|
|
$
|
22,865,146
|
|
F-21
17. Income Taxes
The Company is incorporated in the United States
of America and is subject to United States federal taxation. No provisions for income taxes have been made as the Company had no
U.S. taxable income for the year ended December 31, 2018 and December 31, 2017.
The Company's Italian subsidiaries are governed
by the income tax laws of Italy. The corporate tax rate in Italy is 28.82% (IRES at 24% plus IRAP ordinary at 4.82%) on income
reported in the statutory financial statements after appropriate tax adjustments.
The Company's Austrian subsidiaries are governed
by the income tax laws of Austria. The corporate tax rate in Austria is 25% on income reported in the statutory financial statements
after appropriate tax adjustments.
The Company's Canadian subsidiary is governed
by the income tax laws of Canada and the Province of Ontario. The combined Federal and Provincial corporate tax rate in Canada
is 26.5% on income reported in the statutory financial statements after appropriate tax adjustments.
On December 22, 2017, the President of the
United States signed into law Public Law No. 115-97, commonly referred to as the Tax Reform Act, following its passage by the United
States Congress. The Tax Act made significant changes to U.S. federal income tax laws, including reduction of the corporate tax
rate from 35.0% to 21.0%, limitation of the deduction for net operating losses to 80.0% of current year taxable income and elimination
of net operating loss carrybacks, one-time taxation of offshore earning at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions.
On December 22, 2017, Staff Accounting Bulletin
No. 118, or SAB 118, was issued to address the application of GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain
income tax effects of the Tax Act. Additional work is necessary for a more detailed analysis of the deferred tax assets and liabilities
and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will
be recorded to current tax expense within the measurement period.
The Company continues to evaluate the accounting
for uncertainty in tax positions at the end of each reporting period. The guidance requires companies to recognize in their financial
statements the impact of a tax position if the position is more likely than not of being sustained if the position were to be challenged
by a taxing authority. The position ascertained inherently requires judgment and estimates by management.
The reconciliation of income tax expense at
the U.S. statutory rate of 21% and 35% during 2018 and 2017, respectfully, to the Company’s effective tax rate is as follows:
|
|
December 31,
2018
|
|
December 31,
2017
|
U.S. Statutory rate
|
|
$
|
(408,157
|
)
|
|
$
|
818,584
|
|
Tax rate difference between Italy, Austria, Canada and U.S.
|
|
|
(394,401
|
)
|
|
|
(428,353
|
)
|
Change in Valuation Allowance
|
|
|
1,287,619
|
|
|
|
558,187
|
|
Permanent difference
|
|
|
617,640
|
|
|
|
24,506
|
|
Income tax expense
|
|
$
|
1,102,701
|
|
|
$
|
972,924
|
|
The Company has accumulated a net operating
loss carry forward (“NOL”) of approximately $17.0 million as of December 31, 2018 in the U.S. This NOL may be offset
against future taxable income through the year 2038. The use of these losses to reduce future income taxes will depend on the generation
of sufficient taxable income prior to the expiration of the NOL. The Company periodically evaluates whether it is more likely than
not that it will generate sufficient taxable income to realize the deferred income tax asset. At the present time, management cannot
presently determine when the Company will be able to generate sufficient taxable income to realize the deferred tax asset; accordingly,
a 100% valuation allowance has been established to offset the asset.
F-22
NEWGIOCO GROUP, INC.
Notes to Consolidated Financial Statements
17. Income Taxes (continued)
Utilization of NOLs are subject to limitation
due to any ownership change (as defined under Section 382 of the Internal Revenue Code of 1986) which resulted in a change in business
direction. Unused limitations may be carried over to future years until the NOLs expire. Utilization of NOLs may also be limited
in any one year by alternative minimum tax rules.
Under Italian tax law, the operating loss carryforwards
available for offset against future profits can be used indefinitely. Operating loss carryforwards are only available for offset
against national income tax, up to the limit of 80% of taxable annual income. This restriction does not apply to the operating
loss incurred in the first three years of the Company's activity, which are therefore available for 100% offsetting.
Under Austrian tax law, the operating loss
carryforwards available for offset against future profits can be used indefinitely. Operating loss carryforwards are only available
for offset against national income tax, up to the limit of 75% of taxable annual income.
Under Canadian tax law, the operating loss
carryforwards available for offset against future profits can be used indefinitely.
The provisions for income taxes consist of
currently payable income tax in Italy and Austria. The provisions for income taxes are summarized as follows:
|
|
December 31, 2018
|
|
December 31, 2017
|
Current
|
|
$
|
1,102,701
|
|
|
$
|
972,924
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,102,701
|
|
|
$
|
972,924
|
|
The tax effects of temporary differences that
give rise to the Company’s net deferred tax asset are as follows:
|
|
December 31,
2018
|
|
December 31,
2017
|
Net loss carryforward - Foreign
|
|
$
|
124,407
|
|
|
$
|
2,732
|
|
Net loss carryforward - US
|
|
|
3,861,629
|
|
|
|
4,540,465
|
|
|
|
|
3,986,036
|
|
|
|
4,543,197
|
|
Less valuation allowance
|
|
|
(3,986,036
|
)
|
|
|
(4,543,197
|
)
|
Deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
18. Subsequent Events
On January 30, 2019 Newgioco Group, Inc, 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 include Mr. Luca Pasquini, the Company’s
Vice President of Technology and a member of the Company’s board of directors, and Mr. Gabriele Peroni, the Company’s
Vice President of Business Development, each of whom owns 800 ordinary shares of Naos (20% of the issued and outstanding shares
of Naos).
F-23
Pursuant to the Purchase Agreement, on the closing date, the Company
paid the sellers Four Million Euro (€4,000,000) (approximately $4,580,000) in consideration for all the ordinary shares of
VG and Naos, which was paid as follows:
|
(i)
|
a cash payment of One Hundred and Eight Thousand Euro (€108,000) (approximately $124,000);
|
|
(ii)
|
the issuance of shares of our common stock valued at Eighty-Nine Thousand Euro (€89,000) (approximately $102,000); and
|
|
(iii)
|
the delivery of a non-interest bearing promissory note providing for the payment of (a) an aggregate of €2,392,000 (approximately $2,737,000) in cash in 23 equal and consecutive monthly installments of €104,000 (approximately $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 $1,615,000) in shares of our common stock in seventeen (17) equal and consecutive monthly installments of €83,000 (approximately $95,000) as determined by the average of the closing prices of such shares on the last 10 trading days immediately preceding the determination date of each monthly issuance, commencing on March 1, 2019.
|
In addition, pursuant to the terms of the Purchase
Agreement, the Company agreed to pay the sellers as an earn-out payment 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 $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.
F-24
NEWGIOCO GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
Financial Statements for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)
|
|
Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018
|
F-25
|
Consolidated Statements
of Operations and Comprehensive (Income) Loss for the Three and Six Months Ended June 30, 2019 and 2018
|
F-26
|
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018
|
F-27
|
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018
|
F-29
|
Notes to Consolidated Financial Statements
|
F-30
|
NEWGIOCO GROUP, INC.
Consolidated Balance Sheets
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
(Unaudited)
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,228,797
|
|
|
$
|
6,289,903
|
|
Accounts receivable
|
|
|
116,398
|
|
|
|
10,082
|
|
Gaming accounts receivable
|
|
|
654,016
|
|
|
|
1,021,052
|
|
Prepaid expenses
|
|
|
140,107
|
|
|
|
124,712
|
|
Related party receivable
|
|
|
851
|
|
|
|
49,914
|
|
Other current assets
|
|
|
145,348
|
|
|
|
55,700
|
|
Total Current Assets
|
|
|
6,285,517
|
|
|
|
7,551,363
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
1,439,782
|
|
|
|
1,560,539
|
|
Property, plant and equipment
|
|
|
347,824
|
|
|
|
354,799
|
|
Intangible assets
|
|
|
16,353,775
|
|
|
|
12,583,457
|
|
Goodwill
|
|
|
267,076
|
|
|
|
262,552
|
|
Investment in non-consolidated entities
|
|
|
250,000
|
|
|
|
275,000
|
|
Total Noncurrent Assets
|
|
|
18,658,457
|
|
|
|
15,036,347
|
|
Total Assets
|
|
$
|
24,943,974
|
|
|
$
|
22,587,710
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Line of credit - bank
|
|
$
|
1,000,000
|
|
|
$
|
750,000
|
|
Accounts payable and accrued liabilities
|
|
|
3,982,319
|
|
|
|
4,603,608
|
|
Gaming accounts payable
|
|
|
2,217,089
|
|
|
|
1,489,444
|
|
Taxes payable
|
|
|
995,004
|
|
|
|
1,056,430
|
|
Advances from stockholders
|
|
|
48,508
|
|
|
|
39,237
|
|
Convertible Debenture, net of discount of $2,578,995 and $4,587,228, respectively
|
|
|
6,083,982
|
|
|
|
3,942,523
|
|
Notes payable, net of discount of $132,970
|
|
|
1,421,045
|
|
|
|
—
|
|
Notes payable – related party
|
|
|
1,405,804
|
|
|
|
318,078
|
|
Bank loan payable – current portion
|
|
|
122,829
|
|
|
|
120,920
|
|
Total Current Liabilities
|
|
|
17,276,580
|
|
|
|
12,320,240
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of discount of $54,216
|
|
|
498,874
|
|
|
|
—
|
|
Notes payable – related party
|
|
|
332,582
|
|
|
|
—
|
|
Bank loan payable
|
|
|
161,504
|
|
|
|
225,131
|
|
Other long-term liabilities
|
|
|
193,021
|
|
|
|
168,707
|
|
Total Liabilities
|
|
|
18,462,561
|
|
|
|
12,714,078
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 20,000,000 shares authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
Common Stock, $0.0001 par value, 160,000,000 shares authorized; 79,348,133 and 75,540,298 shares issued and outstanding as of June 30, 2019 and December 31, 2018
|
|
|
7,935
|
|
|
|
7,555
|
|
Additional paid-in capital
|
|
|
25,455,983
|
|
|
|
23,956,309
|
|
Accumulated other comprehensive income
|
|
|
(1,170,151
|
)
|
|
|
(1,081,338
|
)
|
Accumulated deficit
|
|
|
(17,812,354
|
)
|
|
|
(13,008,894
|
)
|
Total Stockholders' Equity
|
|
|
6,481,413
|
|
|
|
9,873,632
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
24,943,974
|
|
|
$
|
22,587,710
|
|
|
|
|
|
|
|
|
|
|
See notes to the unaudited consolidated financial
statements
F-25
NEWGIOCO GROUP, INC.
Unaudited Consolidated Statements of Operations
and Comprehensive Income (Loss)
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
|
$
|
9,105,353
|
|
|
$
|
8,822,659
|
|
|
$
|
18,371,648
|
|
|
$
|
17,416,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
7,038,797
|
|
|
|
5,826,243
|
|
|
|
14,446,503
|
|
|
|
11,903,600
|
|
General and administrative expenses
|
|
|
2,487,299
|
|
|
|
2,056,275
|
|
|
|
5,660,766
|
|
|
|
4,115,728
|
|
Total Costs and Expenses
|
|
|
9,526,096
|
|
|
|
7,882,518
|
|
|
|
20,107,269
|
|
|
|
16,019,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Operations
|
|
|
(420,743
|
)
|
|
|
940,141
|
|
|
|
(1,735,621
|
)
|
|
|
1,397,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expenses) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
7,725
|
|
|
|
—
|
|
|
|
7,725
|
|
|
|
—
|
|
Interest expense, net of interest income
|
|
|
(1,016,866
|
)
|
|
|
(1,050,270
|
)
|
|
|
(2,520,656
|
)
|
|
|
(1,262,509
|
)
|
Imputed interest on related party advances
|
|
|
—
|
|
|
|
753
|
|
|
|
—
|
|
|
|
(761
|
)
|
Gain on litigation settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
516,120
|
|
Loss on debt modification
|
|
|
—
|
|
|
|
212,270
|
|
|
|
—
|
|
|
|
(212,270
|
)
|
Loss on conversion of debt
|
|
|
(35,943
|
)
|
|
|
—
|
|
|
|
(35,943
|
)
|
|
|
—
|
|
Loss on marketable securities
|
|
|
—
|
|
|
|
(155,000
|
)
|
|
|
(25,000
|
)
|
|
|
(155,000
|
)
|
Total Other (Expenses) Income
|
|
|
(1,045,084
|
)
|
|
|
(1,416,787
|
)
|
|
|
(2,573,874
|
)
|
|
|
(1,114,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes
|
|
|
(1,465,827
|
)
|
|
|
(476,646
|
)
|
|
|
(4,309,495
|
)
|
|
|
282,778
|
|
Income tax provision
|
|
|
(232,417
|
)
|
|
|
(512,406
|
)
|
|
|
(493,964
|
)
|
|
|
(757,442
|
)
|
Net Loss
|
|
|
(1,698,244
|
)
|
|
|
(989,052
|
)
|
|
|
(4,803,459
|
)
|
|
|
(474,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(32,633
|
)
|
|
|
(98,355
|
)
|
|
|
(88,813
|
)
|
|
|
(162,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
$
|
(1,730,877
|
)
|
|
$
|
(1,087,407
|
)
|
|
$
|
(4,892,272
|
)
|
|
$
|
(637,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
78,962,852
|
|
|
|
74,754,258
|
|
|
|
78,115,599
|
|
|
|
74,468,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the unaudited consolidated financial
statements
F-26
NEWGIOCO GROUP, INC.
Unaudited Consolidated Statements of Changes
in Stockholders' Equity
Three months and Six months ended June 30,
2019 and June 30, 2018
|
|
Common Stock
|
|
Additional
|
|
Accumulated
Other
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Comprehensive Income
|
|
Accumulated Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
75,540,298
|
|
|
$
|
7,555
|
|
|
$
|
23,956,309
|
|
|
$
|
(1,081,338
|
)
|
|
$
|
(13,008,894
|
)
|
|
$
|
9,873,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on conversion of convertible debentures
|
|
|
2,300,487
|
|
|
|
230
|
|
|
|
919,594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
919,824
|
|
Common stock issued for the purchase of subsidiaries
|
|
|
522,380
|
|
|
|
52
|
|
|
|
196,731
|
|
|
|
—
|
|
|
|
—
|
|
|
|
196,783
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(56,180)
|
|
|
|
—
|
|
|
|
(56,180)
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,105,216)
|
|
|
|
(3,105,216
|
)
|
Balance at March 31, 2019
|
|
|
78,363,165
|
|
|
|
7,837
|
|
|
|
25,072,634
|
|
|
|
(1,137,518)
|
|
|
|
(16,114,110)
|
|
|
|
7,828,843
|
|
Common stock issued on conversion of convertible debentures
|
|
|
262,278
|
|
|
|
26
|
|
|
|
104,885
|
|
|
|
—
|
|
|
|
—
|
|
|
|
104,911
|
|
Common stock issued for the purchase of subsidiaries
|
|
|
722,690
|
|
|
|
72
|
|
|
|
278,464
|
|
|
|
—
|
|
|
|
—
|
|
|
|
278,536
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(32,633
|
)
|
|
|
—
|
|
|
|
(32,633
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,698,244
|
)
|
|
|
(1,698,244
|
)
|
Balance at June 30, 2019
|
|
|
79,348,133
|
|
|
|
7,935
|
|
|
|
25,455,983
|
|
|
|
(1,170,151
|
)
|
|
|
(17,812,354
|
)
|
|
|
6,481,413
|
|
See notes to the unaudited consolidated financial
statements
F-27
NEWGIOCO GROUP, INC.
Unaudited Consolidated Statements of Changes
in Stockholders' Equity
Three months and Six months ended June 30,
2019 and June 30, 2018
|
|
Common Stock
|
|
Additional
|
|
Accumulated
Other
|
|
|
|
Total
|
|
|
Number of Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Comprehensive Income/(Loss)
|
|
Accumulated Deficit
|
|
Stockholders’ Equity
|
Balance at December 31, 2017
|
|
|
74,143,590
|
|
|
$
|
7,415
|
|
|
$
|
14,254,582
|
|
|
$
|
(250,327
|
)
|
|
$
|
(9,897,620
|
)
|
|
$
|
4,114,050
|
|
Cumulative effect of early adoption of ASU 2017-11
|
|
|
—
|
|
|
|
—
|
|
|
|
287,881
|
|
|
|
—
|
|
|
|
(64,966
|
)
|
|
|
222,915
|
|
Restated balance at December 31, 2017
|
|
|
74,143,590
|
|
|
|
7,415
|
|
|
|
14,542,463
|
|
|
|
(250,327
|
)
|
|
|
(9,962,586
|
)
|
|
|
4,336,965
|
|
Imputed interest on stockholder advances
|
|
|
—
|
|
|
|
—
|
|
|
|
1,251
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,251
|
|
Common stock issued with debentures
|
|
|
111,000
|
|
|
|
11
|
|
|
|
55,489
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,500
|
|
Beneficial conversion feature of convertible debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
91,017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91,017
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(64,518
|
)
|
|
|
—
|
|
|
|
(64,518
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
768,677
|
|
|
|
768,677
|
|
Balance at March 31, 2018, as previously reported
|
|
|
74,254,590
|
|
|
|
7,426
|
|
|
|
14,402,339
|
|
|
|
(314,845
|
)
|
|
|
(9,128,943
|
)
|
|
|
4,965,977
|
|
Opening balance cumulative effect of early adoption of ASU2017-11
|
|
|
—
|
|
|
|
—
|
|
|
|
287,881
|
|
|
|
—
|
|
|
|
(64,966
|
)
|
|
|
222,915
|
|
ASU 2017-11 adjustments to common stock issued debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,853
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,853
|
)
|
ASU 2017-11 elimination of derivative liability movement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(254,289
|
)
|
|
|
(254,289
|
)
|
ASU 2017-11 adjustments to the beneficial conversion feature of debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,780
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Balance at March 31, 2018
|
|
|
74,254,590
|
|
|
$
|
7,426
|
|
|
$
|
14,672,587
|
|
|
$
|
(314,845
|
)
|
|
$
|
(9,448,198
|
)
|
|
$
|
4,916,970
|
|
Common stock issued with debentures
|
|
|
1,720,220
|
|
|
|
172
|
|
|
|
1,770,025
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,770,197
|
|
Common stock retired on acquisition of Multigioco
|
|
|
(2,040,000
|
)
|
|
|
(204
|
)
|
|
|
(2,260,770
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,260,974
|
)
|
Common stock issued net of stock retired on acquisition of Ulisse
|
|
|
1,404,400
|
|
|
|
140
|
|
|
|
5,587,534
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,587,674
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(98,355
|
)
|
|
|
—
|
|
|
|
(98,355
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,487,928
|
)
|
|
|
(6,487,928
|
)
|
Balance at June 30, 2018, as previously reported
|
|
|
75,339,210
|
|
|
|
7,534
|
|
|
|
19,499,128
|
|
|
|
(413,200
|
)
|
|
|
(15,616,871
|
)
|
|
|
3,476,591
|
|
Opening balance cumulative effect of early adoption of ASU2017-11
|
|
|
—
|
|
|
|
—
|
|
|
|
287,881
|
|
|
|
—
|
|
|
|
(64,966
|
)
|
|
|
222,915
|
|
ASU 2017-11 adjustments to common stock issued with debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,243,211
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,243,211
|
)
|
ASU 2017-11 elimination of derivative liability movement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,244,587
|
|
|
|
5,244,587
|
|
ASU 2017-11 adjustments to the beneficial conversion feature of convertible debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
2,494,552
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,494,552
|
|
Fair value of warrants issued
|
|
|
—
|
|
|
|
—
|
|
|
|
2,951,429
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,951,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
|
75,339,210
|
|
|
$
|
7,534
|
|
|
$
|
23,989,779
|
|
|
$
|
(413,200
|
)
|
|
$
|
(10,437,250
|
)
|
|
$
|
13,146,863
|
|
See notes to the unaudited condensed consolidated
financial statements
F-28
NEWGIOCO GROUP, INC.
Unaudited Consolidated Statements of Cash
Flows
|
|
For the Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,803,459
|
)
|
|
$
|
(474,664
|
)
|
Adjustments to reconcile net loss to net cash (Used in) Provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
291,332
|
|
|
|
226,436
|
|
Amortization of deferred costs
|
|
|
2,096,080
|
|
|
|
58,188
|
|
Non-cash interest
|
|
|
409,114
|
|
|
|
1,012,225
|
|
Loss on debt modification
|
|
|
—
|
|
|
|
212,270
|
|
Loss on debt conversion
|
|
|
35,943
|
|
|
|
—
|
|
Imputed interest on advances from stockholders
|
|
|
—
|
|
|
|
1,514
|
|
Unrealized loss on trading securities
|
|
|
25,000
|
|
|
|
155,000
|
|
Recovery of assets
|
|
|
—
|
|
|
|
(516,120
|
)
|
Bad debt expense
|
|
|
—
|
|
|
|
6,354
|
|
Foreign transaction gain
|
|
|
173,400
|
|
|
|
—
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(7,732
|
)
|
|
|
5,225
|
|
Accounts payable and accrued liabilities
|
|
|
(26,789
|
)
|
|
|
756,656
|
|
Accounts receivable
|
|
|
(57,679
|
)
|
|
|
98,833
|
|
Gaming accounts receivable
|
|
|
357,886
|
|
|
|
31,409
|
|
Gaming accounts liabilities
|
|
|
727,433
|
|
|
|
(583,899
|
)
|
Taxes payable
|
|
|
(53,941
|
)
|
|
|
439,731
|
|
Other current assets
|
|
|
(57,163
|
)
|
|
|
(270,259
|
)
|
Long term liability
|
|
|
30,995
|
|
|
|
78,346
|
|
Net Cash (Used in) Provided by Operating Activities
|
|
|
(859,580
|
)
|
|
|
1,237,245
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Acquisition of property, plant, and equipment, and intangible assets
|
|
|
(59,253
|
)
|
|
|
(4,442,508
|
)
|
Decrease in restricted cash
|
|
|
100,140
|
|
|
|
15,657
|
|
Cash received on acquisition of Virtual Generation
|
|
|
46,668
|
|
|
|
—
|
|
Net Cash Provided by (Used in) Investing Activities
|
|
|
87,555
|
|
|
|
(4,426,851
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from bank credit line
|
|
|
250,000
|
|
|
|
(177,060
|
)
|
Repayment of bank loan
|
|
|
(59,007
|
)
|
|
|
(71,143
|
)
|
Proceeds from convertible debentures and promissory notes, net of repayment
|
|
|
—
|
|
|
|
6,883,905
|
|
Repayment of promissory notes, related party
|
|
|
(213,353
|
)
|
|
|
—
|
|
Repayment of promissory notes
|
|
|
(331,913
|
)
|
|
|
—
|
|
Loan to related party
|
|
|
(11,992
|
)
|
|
|
(215,745
|
)
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(2,261,307
|
)
|
Advances from stockholders, net of repayment
|
|
|
6,605
|
|
|
|
(485,036
|
)
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(359,660
|
)
|
|
|
3,673,614
|
|
Effect of change in exchange rate
|
|
|
70,579
|
|
|
|
(168,600
|
)
|
Net (decrease) increase in cash
|
|
|
(1,061,106
|
)
|
|
|
315,408
|
|
Cash – beginning of the period
|
|
|
6,289,903
|
|
|
|
6,469,858
|
|
Cash – end of the period
|
|
$
|
5,228,797
|
|
|
$
|
6,785,266
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
13,955
|
|
|
$
|
140,815
|
|
Income tax
|
|
$
|
473,679
|
|
|
$
|
341, 830
|
|
Supplemental cash flow disclosure for non-cash activities
|
|
|
|
|
|
|
|
|
Common shares issued for the acquisition of subsidiaries
|
|
$
|
—
|
|
|
$
|
5,588,088
|
|
Common shares issues to related parties for repayment of debt
|
|
$
|
—
|
|
|
$
|
54,402
|
|
Retirement of treasury stock
|
|
$
|
—
|
|
|
$
|
2,260,770
|
|
Common shares issued for cashless exercise of warrants
|
|
$
|
—
|
|
|
$
|
201,088
|
|
Common shares issued with conversion of debentures
|
|
$
|
104,911
|
|
|
$
|
—
|
|
Common shares issued with purchase of Virtual Generation
|
|
$
|
272,307
|
|
|
$
|
—
|
|
See notes to the unaudited condensed consolidated
financial statements
F-29
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
Nature of Business
Established in the state of Delaware in 1998,
Newgioco Group, Inc. (“Newgioco Group” or the “Company”) is an international, vertically integrated commercial-stage
company engaged in various aspects of the leisure gaming industry. We own and operate an innovative state-of-the-art betting platform
(“Platform”) and are a licensed leisure lottery and gaming operator offering online and offline leisure gaming services,
including a variety of lottery, casino gaming and sports betting products through a distribution network of retail betting locations
situated throughout Italy and internationally through various agents in eleven other countries located in Africa and South America.
The Company’s subsidiaries include: Multigioco
Srl (“Multigioco”), acquired on August 15, 2014, Rifa Srl (“Rifa”), acquired on January 1, 2015, and Ulisse
GmbH (“Ulisse”) and Odissea Betriebsinformatik Beratung GmbH (“Odissea”) which were both acquired on July
1, 2016, Virtual Generation Limited (“VG”) and Naos Holding Limited, acquired on January 30, 2019 and a non-operating
subsidiary Newgioco Group, Inc. based in Canada.
The Company operates in one line of business
that provides certified betting Platform software (“Platform”) services to and the operating of leisure betting establishments
situated throughout Italy and in 11 other countries and is comprised of 3 geographically organized groups: an Operational Group;
Technology Group; and a Corporate Group, organized as follows:
|
a)
|
the Operational Group is based in Europe and maintains administrative and customer service offices headquartered in Rome, Italy with sub offices for operations administration, and risk management and trading in Naples and Teramo, Italy and Valetta, Malta;
|
|
b)
|
the Technology Group is based in Innsbruck, Austria and manages software development, training and administration; and
|
|
c)
|
the Corporate Group is based in North America which includes a head office situated in Toronto, Canada with a sub office in Boca Raton, Florida through which our CEO and CFO carry-out our corporate duties, handle day-to-day reporting and other operations such as U.S. development and planning, and through which various independent contractors and vendors are engaged.
|
|
2.
|
Accounting Policies and Estimates
|
Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2019. The balance sheet at December 31, 2018 has been derived from the Company’s audited
consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the
U.S. Securities and Exchange Commission (“SEC”).
All amounts referred to in the Notes to the
unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.
F-30
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Basis of Consolidation
The unaudited condensed consolidated financial
statements include the financial statements of the Company and its subsidiaries in which it has at least a majority voting interest.
All significant inter-company accounts and transactions have been eliminated in the unaudited condensed consolidated financial
statements. The entities included in these unaudited condensed consolidated financial statements are as follows:
Company
|
Country of Incorporation
|
Percentage owned
%
|
|
|
|
Newgioco Group, Inc.
|
United States – Delaware
|
Parent
|
Newgioco Group, Inc (Canada)
|
Canada
|
100
|
Ulisse GmbH
|
Austria
|
100
|
Odissea Betriebsinformatik Beratung GMBH
|
Austria
|
100
|
Multigioco Srl.
|
Italy
|
100
|
Rifa Srl.
|
Italy
|
100
|
Virtual Generation Limited
|
Malta
|
100
|
Naos Holding Limited
|
Malta
|
100
|
Currency Translation
The Company's subsidiaries operate in Europe
with a functional currency of Euro and in Canada with a functional currency of Canadian dollars. In the consolidated financial
statements, revenue and expense accounts are translated at the average rates during the period, assets and liabilities are translated
at period-end rates and equity accounts are translated at historical rates. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of stockholders' equity. Gains and losses from foreign currency
transactions are recognized in current operations.
Use of Estimates
The preparation of the unaudited financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions
include valuing equity securities issued in share-based payment arrangements, determining the fair value of assets acquired, allocation
of purchase price, impairment of long-lived assets, the collectability of receivables and the value of deferred taxes and related
valuation allowances. Certain estimates, including evaluating the collectability of receivables and advances, could be affected
by external conditions, including those unique to our industry and general economic conditions. It is possible that these external
factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all
of our accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Loss Contingencies
The Company may be subject to claims, suits,
government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, indirect
taxes, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or
publishers using our website platforms, and other matters. Certain of these matters include speculative claims for substantial
or indeterminate amounts of damages. The Company records a liability when we believe that it is both probable that a loss has been
incurred, and the amount can be reasonably estimated. If we determine that a loss is possible, and a range of the loss can be reasonably
estimated, we disclose the range of the possible loss in the Notes to the Consolidated Financial Statements.
F-31
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Loss Contingencies (continued)
The Company evaluates, on a monthly basis,
developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and
related ranges of possible losses disclosed and make adjustments and changes to our disclosures as appropriate. Significant judgment
is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Until the final
resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be material.
Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our business,
consolidated financial position, results of operations, or cash flows.
To date, none of these types of litigation
matters, most of which are typically covered by insurance, has had a material impact on our operations or financial condition.
The Company has insured and continue to insure against most of these types of claims.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including
convertible debentures and stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income.
For option-based simple derivative financial
instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period.
As a result of the adoption of ASU 2017-11
in the third quarter of 2018, the Company has no derivative financials instruments classified as a liability at June 30, 2019 and
December 31, 2018.
Business Combinations
The Company allocates the fair value of purchase
consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The
excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded
as goodwill.
Such valuations require management to make
significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible
assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from
a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates.
F-32
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Fair Value Measurements
ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable
inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in
active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either
directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical
or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists,
therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
The carrying value of the Company's short-term
investments, prepaid expenses, accounts receivables, other current assets, accounts payable and accrued liabilities, gaming account
balance, and advances from shareholder approximate fair value because of the short-term maturity of these financial instruments.
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments with maturities of three months or less at the time acquired to be cash equivalents. The Company had no cash equivalents
as of June 30, 2019 and December 31, 2018.
The Company primarily places cash with high-credit
quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation up to
a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit of
CDN$100,000 per institution, in Italy which is insured by the Italian deposit guarantee fund Fondo Interbancario di Tutela dei
Depositi (FITD) up to a limit of €100,000 per institution, and in Germany which is a member of the Deposit Protection Fund
of the Association of German Banks (Einlagensicherungsfonds des Bundesverbandes deutscher Banken) up to a limit of €100,000
per institution.
Gaming Accounts Receivable
Gaming accounts receivable represent gaming
deposits made by customers to their online gaming accounts either directly by credit card, bank wire, e-wallet or other accepted
method through one of our websites or indirectly by cash collected at the cashier of a betting shop but not yet credited to the
Company’s bank accounts and subject to normal trade collection terms without discounts. The Company periodically evaluates
the collectability of its gaming accounts receivable and considers the need to record or adjust an allowance for doubtful accounts
based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates.
The Company does not require collateral to support customer receivables. The company recorded bad debt expense $0 and $0 for the
three months ended June 30, 2019 and 2018, respectively, and $0 and $6,354 bad debt expense for the six months ended June 30, 2019
and 2018, respectively. All balances previously recorded as allowance for doubtful accounts were written off as uncollectible.
Gaming Accounts Payable
Gaming accounts payable represent customer
balances, including winnings and deposits, that are held as credits in online gaming accounts and have not as of yet been used
or withdrawn by the customers. Customers can request payment from the Company at any time and the payment to customers can be made
through bank wire, credit card, or cash disbursement from one of our locations. Online gaming account credit balances are non-interest
bearing.
F-33
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Long-Lived Assets
The Company evaluates the carrying value of
our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value
of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the
expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the
estimated fair value will be charged to earnings.
Fair value is based upon discounted cash flows
of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate,
current estimated net sales proceeds from pending offers.
Property, Plant and Equipment
Property, plant and equipment are stated at
acquisition cost less accumulated depreciation and adjustments for impairment losses. Expenditures are capitalized only when they
increase the future economic benefits embodied in an item of property, plant and equipment. All other expenditures are recognized
as expenses in the statement of income as incurred.
Depreciation is charged on a straight-line
basis over the estimated remaining useful lives of the individual assets. Amortization commences from the time an asset is put
into operation. The range of the estimated useful lives is as follows:
Description
|
Useful Life (in years)
|
|
|
Office equipment
|
5
|
Office furniture
|
8 1/3
|
Signs and displays
|
5
|
Intangible Assets
Intangible assets are stated at acquisition
cost less accumulated amortization, if applicable, less any adjustments for impairment losses.
Amortization is charged on a straight-line
basis over the estimated remaining useful lives of the individual intangibles. Where intangibles are deemed to be impaired the
Company recognizes an impairment loss measured as the difference between the estimated fair value of the intangible and its book
value.
The range of the estimated useful lives is
as follows:
Description
|
Useful Life (in years)
|
|
|
Betting Platform Software
|
15
|
Ulisse Bookmaker License
|
—
|
Multigioco and Rifa ADM Licenses
|
1.5 - 7
|
VG Licenses
|
—
|
Location contracts
|
5 - 7
|
Customer relationships
|
10 - 15
|
Trademarks/names
|
14
|
Websites
|
5
|
|
|
The Ulisse Bookmaker License and the VG Licenses
have no expiration date and are therefore not amortized.
F-34
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Goodwill
The Company allocates the fair value of purchase
consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The
excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded
as goodwill.
Such valuations require management to make
significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible
assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from
a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates.
The Company annually assesses whether the carrying value of its intangible assets exceeds their fair value and, if necessary, records
an impairment loss equal to any such excess. Each interim reporting period, the Company assesses whether events or circumstances
have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of
the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess. No
asset impairment charges were incurred during the three and six months ended June 30, 2019 or June 30, 2018. $4,593 of goodwill
was recorded as part of an acquisition during the six months ended June 30, 2019.
Income Taxes
The Company uses the asset and liability method
of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense
is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary
differences resulting from matters that have been recognized in an entity's financial statements or tax returns. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to
reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely
than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740-10-30 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
The Company has elected to include interest
and penalties related to uncertain tax positions, if determined, as a component of income tax expense.
In Italy, tax years beginning 2015 forward,
are open and subject to examination, while in Austria companies are open and subject to inspection for five years and ten years
for inspection of serious infractions. In the United States and Canada, tax years beginning 2015 forward, are subject to examination.
The Company is not currently under examination and it has not been notified of a pending examination.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires revenue to
be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is
expected to be received for those goods or services. The Company adopted ASC Topic 606 on January 1, 2018 and has determined that
the new standard does not have a material impact on the nature and timing of revenues recognized.
F-35
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Revenue Recognition (continued)
The Company recognizes revenue when control
of its products and services is transferred to its customers in an amount that reflects the consideration the Company expects to
receive from its customers in exchange for those products and services. Revenues from sports-betting, casino, cash and skill games,
slots, bingo and horse race wagers represent the gross pay-ins (also referred to as turnover) from customers less gaming taxes
and payouts to customers. Revenues are recorded when the game is closed which is representative of the point in time at which the
Company has satisfied its performance obligation. In addition, the Company receives commissions from the sale of scratch tickets
and other lottery games. Commissions are recorded when the ticket for scratch off tickets and lottery tickets are sold.
Revenues from the Platform include license
fees, training, installation, and product support services. Revenue is recognized when transfer of control to the customer has
been made and the Company’s performance obligation has been fulfilled. License fees are calculated as a percentage of each
licensee’s level of activity and are contingent upon the licensee’s usage. The license fees are recognized on an accrual
basis as earned.
Stock-Based Compensation
The Company records its compensation expense
associated with stock options and other forms of equity compensation based on their fair value at the date of grant using the Black-Scholes
option pricing model. Stock-based compensation includes amortization related to stock option awards based on the estimated grant
date fair value. Stock-based compensation expense related to stock options is recognized ratably over the vesting period of the
option. In addition, the Company records expense related to Restricted Stock Units (“RSU’s”) granted based on
the fair value of those awards on the grant date. The fair value related to the RSUs is amortized to expense over the vesting term
of those awards. Forfeitures of stock options and RSUs are recognized as they occur.
Stock-based compensation expense for a stock-based
award with a performance condition is recognized when the achievement of such performance condition is determined to be probable.
If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized
and any previously recognized compensation expense is reversed.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the
change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources,
including foreign currency translation adjustments and unrealized gains and losses on marketable securities.
The Company adopted FASB ASC 220-10-45, “Reporting
Comprehensive Income”. ASC 220-10-45 establishes standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains (losses) on
available for sale marketable securities and foreign currency translation adjustments.
Earnings Per Share
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 260, “Earnings Per Share” provides for calculation of “basic”
and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income
(loss) available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the earnings of an entity and include warrants granted
and convertible debentures.
F-36
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Related Parties
Parties are considered to be related to the
Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common
control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions
are recorded at fair value of the goods or services exchanged.
Recent Accounting Pronouncements Not
Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The
purpose of this updated guidance is to improve the effectiveness and disclosures in the Notes to the financial statements. The
ASU removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;
removes the policy for timing of transfers between levels; and removes the disclosure related to the valuation process for Level
3 fair value measurements. The ASU also modifies existing disclosure requirements which relate to the disclosure for investments
in certain entities which calculate net asset value and clarifies the disclosure about uncertainty in the measurements as of the
reporting date. For all entities, the effective date for this guidance is fiscal years beginning after December 15, 2019, including
interim periods within the reporting period, with early adoption permitted. Entities are also allowed to elect early adoption of
the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective
date. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The main objective of this guidance is
to simplify the accounting for goodwill impairment by requiring that impairment charges be based upon the first step in the current
two-step impairment test under ASC 350. Currently, if the fair value of a reporting unit is lower than its carrying amount (Step
1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2).
The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit
from the reporting unit’s fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate
the fair value of any unrecognized intangible assets and any corporate-level assets or liabilities that were included in the determination
of the carrying amount and fair value of the reporting unit in Step 1. Under this guidance, if a reporting unit’s carrying
amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will
be limited to the amount of goodwill allocated to that reporting unit. This guidance eliminates the requirement to calculate a
goodwill impairment charge using Step 2. This guidance does not change the guidance on completing Step 1 of the goodwill impairment
test. Under this guidance, an entity will still be able to perform the current optional qualitative goodwill impairment assessment
before determining whether to proceed to Step 1. The guidance in the ASU will be applied prospectively and is effective for the
Company for annual and interim impairment tests performed in periods beginning after December 15, 2019. The Company does not expect
the adoption of this ASU to have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A
lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right
of use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less,
a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease
liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period
presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for
all public business entities and all nonpublic business entities upon issuance. The Company is currently not in compliance with
ASU 2016-02 as it is continuing its evaluation of the impact of its pending adoption of ASU 2016-02 on our consolidated financial
statements. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements
and related disclosures.
F-37
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
2.
|
Accounting Policies and Estimates (continued)
|
Recent Accounting Pronouncements Not
Yet Adopted (continued)
The Company has reviewed all recently issued,
but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations,
financial position, and cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
Comparatives
Certain items in prior periods were reclassified
to conform to the current period presentation. These reclassifications had no impact on net loss or comprehensive loss.
|
3.
|
Reclassification of prior period results
|
The company adopted ASU 2017-11(“ASU
2017-11”) – Accounting for certain convertible debentures and warrants with down round features, in the prior year.
When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock.
The Company determined that ASU 2017-11 is
applicable to the Company and the down round feature of the convertible debentures and warrants issued during the period February
2018 to June 2018, no longer qualified as derivative liabilities.
The amendments in this update were effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, however early adoption was
permitted for all entities, including adoption in an interim period. The company early adopted ASU 2017-11 in its September 30,
2018 quarterly report.
The adjustments were reflected as of January
1, 2018, the beginning of the fiscal year.
The adjustments made by the Company to its
opening balance sheet as of January 1, 2018 were as follows:
|
|
Convertible Debentures
|
|
Derivative Liability
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
Balance as of January 1, 2018
|
|
$
|
1,148,107
|
|
|
$
|
222,915
|
|
|
$
|
14,254,582
|
|
|
$
|
(9,897,620
|
)
|
Reclassified derivative liabilities and cumulative effect of adoption
|
|
|
—
|
|
|
|
(222,915
|
)
|
|
|
287,881
|
|
|
|
(64,966
|
)
|
Balance as of January 1, 2018, restated
|
|
$
|
1,148,107
|
|
|
$
|
—
|
|
|
$
|
14,542,463
|
|
|
$
|
(9,962,586
|
)
|
During the three and six months ended June
30, 2018, the Company issued Convertible debenture units to investors amounting to $3,268,000 and CDN$7,162,000 (approximately
$6,502,000). Each unit consisting of a convertible debenture, common shares of stock and a warrant, refer to Note 9 below.
Due to the modified retrospective adoption
allowed under ASU 2017-11, the Company eliminated the derivative liability at the date of the issuance of the convertible debentures
and warrants and credited additional paid in capital and debited convertible debentures discount with $5,536,301 on the grant date
of the convertible debentures and warrants. The $5,536,301 was calculated using a Black-Scholes valuation model to measure and
allocate the following components of the convertible debenture units; (a) the beneficial conversion feature of the convertible
debentures; (b) the value of the warrants issued with the units; and the brokers warrants related to the issuance of the convertible
debenture units, after applying the relative fair value method to the derived Black-Scholes valuations. The common shares of stock
issued as part of the convertible debenture units were valued at the grant date at closing market prices at $582,486.
F-38
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
3.
|
Reclassification of prior period results (continued)
|
The Company eliminated the derivative liability
of $12,494,727 reflected on the consolidated balance sheet as of June 30, 2018 and the net derivative liability movements through
the consolidated statements of comprehensive loss of $5,498,876 and $5,244,587 for the three and six months ended June 30, 2018
and the net derivative liability movement of $5,244,587 from the statement of cash flows for the six months ended June 30, 2018.
The Company had originally calculated the mark-to-market
derivative liability on the grant date of the warrants and brokers warrants and the convertible debentures as an additional charge
of $23,513,240 and reflected this loss together with the loss realized on the modification of certain convertible debentures and
warrants of $212,270 as a loss on debt issuance. The $23,513,240 related to the mark-to-market derivative liability movement at
the grant date was reclassified as a mark-to-market movement in derivative liabilities for the three months and six months ended
June 30, 2018, with a net loss on debt modification of $212,270.
The reconciliation of the unaudited consolidated
statement of comprehensive loss for the three months ended June 30, 2018 is as follows:
|
|
As Previously reported
|
|
Reclass of
disclosure
|
|
As Reclassed
|
|
Effect of adoption of ASU 2017-11
|
|
As Reclassified
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,822,659
|
|
|
$
|
—
|
|
|
$
|
8,822,659
|
|
|
$
|
—
|
|
|
$
|
8,822,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
5,826,243
|
|
|
|
—
|
|
|
|
5,826,243
|
|
|
|
—
|
|
|
|
5,826,243
|
|
General and administrative expenses
|
|
|
2,056,275
|
|
|
|
—
|
|
|
|
2,056,275
|
|
|
|
—
|
|
|
|
2,056,275
|
|
Total Costs and Expenses
|
|
|
7,882,518
|
|
|
|
—
|
|
|
|
7,882,518
|
|
|
|
—
|
|
|
|
7,882,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
940,141
|
|
|
|
—
|
|
|
|
940,141
|
|
|
|
—
|
|
|
|
940,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expenses) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
|
(1,050,270
|
)
|
|
|
—
|
|
|
|
(1,050,270
|
)
|
|
|
—
|
|
|
|
(1,050,270
|
)
|
Changes in fair value of derivative liabilities
|
|
|
18,014,364
|
|
|
|
(23,513,240
|
)
|
|
|
(5,498,876
|
)
|
|
|
(5,498,876
|
)
|
|
|
—
|
|
Imputed interest on related party advances
|
|
|
753
|
|
|
|
—
|
|
|
|
753
|
|
|
|
—
|
|
|
|
753
|
|
Gain on litigation settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss on issuance of debt
|
|
|
(23,725,510
|
)
|
|
|
23,725,510
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss on debt modification
|
|
|
—
|
|
|
|
(212,270
|
)
|
|
|
(212,270
|
)
|
|
|
—
|
|
|
|
(212,270
|
)
|
Loss on Marketable Securities
|
|
|
(155,000
|
)
|
|
|
—
|
|
|
|
(155,000
|
)
|
|
|
—
|
|
|
|
(155,000
|
)
|
Total Other (Expenses) Income
|
|
|
(6,915,663
|
)
|
|
|
—
|
|
|
|
(6,915,663
|
)
|
|
|
5,498,876
|
|
|
|
(1,416,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(5,975,522
|
)
|
|
|
—
|
|
|
|
(5,975,522
|
)
|
|
|
5,498,876
|
|
|
|
(476,646
|
)
|
Income tax provision
|
|
|
(512,406
|
)
|
|
|
—
|
|
|
|
(512,406
|
)
|
|
|
—
|
|
|
|
(512,406
|
)
|
Net Loss
|
|
|
(6,487,928
|
)
|
|
|
—
|
|
|
|
(6,487,928
|
)
|
|
|
5,498,876
|
|
|
|
(989,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(98,355
|
)
|
|
|
—
|
|
|
|
(98,355
|
)
|
|
|
—
|
|
|
|
(98,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
$
|
(6,586,283
|
)
|
|
$
|
—
|
|
|
$
|
(6,586,283
|
)
|
|
$
|
5,498,876
|
|
|
$
|
(1,087,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
—
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
74,754,258
|
|
|
|
74,754,258
|
|
|
|
74,754,258
|
|
|
|
74,754,258
|
|
|
|
74,754,258
|
|
F-39
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
3.
|
Reclassification of prior period results (continued)
|
The reconciliation of the unaudited consolidated
statement of comprehensive loss for the six months ended June 30, 2018 is as follows:
|
|
As Previously reported
|
|
Reclass of
disclosure
|
|
As Reclassed
|
|
Effect of adoption of ASU 2017-11
|
|
As Reclassified
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,416,526
|
|
|
$
|
—
|
|
|
$
|
17,416,526
|
|
|
$
|
—
|
|
|
$
|
17,416,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
11,903,600
|
|
|
|
—
|
|
|
|
11,903,600
|
|
|
|
—
|
|
|
|
11,903,600
|
|
General and administrative expenses
|
|
|
4,115,728
|
|
|
|
—
|
|
|
|
4,115,728
|
|
|
|
—
|
|
|
|
4,115,728
|
|
Total Costs and Expenses
|
|
|
16,019,328
|
|
|
|
—
|
|
|
|
16,019,328
|
|
|
|
—
|
|
|
|
16,019,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
1,397,198
|
|
|
|
—
|
|
|
|
1,397,198
|
|
|
|
—
|
|
|
|
1,397,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expenses) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
|
(1,262,509
|
)
|
|
|
—
|
|
|
|
(1262,509
|
)
|
|
|
—
|
|
|
|
(1,262,509
|
)
|
Changes in fair value of derivative liabilities
|
|
|
18,268,653
|
|
|
|
(23,513,240
|
)
|
|
|
(5,244,587
|
)
|
|
|
5,244,587
|
|
|
|
—
|
|
Imputed interest on related party advances
|
|
|
(761
|
)
|
|
|
—
|
|
|
|
(761
|
)
|
|
|
—
|
|
|
|
(761
|
)
|
Gain on litigation settlement
|
|
|
516,120
|
|
|
|
—
|
|
|
|
516,120
|
|
|
|
—
|
|
|
|
516,120
|
|
Loss on issuance of debt
|
|
|
(23,725,510
|
)
|
|
|
23,725,510
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss on debt modification
|
|
|
—
|
|
|
|
(212,270
|
)
|
|
|
(212,270
|
)
|
|
|
—
|
|
|
|
(212,270
|
)
|
Loss on Marketable Securities
|
|
|
(155,000
|
)
|
|
|
—
|
|
|
|
(155,000
|
)
|
|
|
—
|
|
|
|
(155,000
|
)
|
Total Other (Expenses) Income
|
|
|
(6,359,007
|
)
|
|
|
—
|
|
|
|
(6,359,007
|
)
|
|
|
5,244,587
|
|
|
|
(1,114,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(4,961,809
|
)
|
|
|
—
|
|
|
|
(4,961,809
|
)
|
|
|
5,244,587
|
|
|
|
282,778
|
|
Income tax provision
|
|
|
(757,442
|
)
|
|
|
—
|
|
|
|
(757,442
|
)
|
|
|
—
|
|
|
|
(757,442
|
)
|
Net Loss
|
|
|
(5,719,251
|
)
|
|
|
—
|
|
|
|
(5,719,251
|
)
|
|
|
5,244,587
|
|
|
|
(474,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(162,873
|
)
|
|
|
—
|
|
|
|
(162,873
|
)
|
|
|
—
|
|
|
|
(162,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
$
|
(5,882,124
|
)
|
|
$
|
—
|
|
|
$
|
(5,882,124
|
)
|
|
$
|
5,244,587
|
|
|
$
|
(637,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
—
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
74,468,088
|
|
|
|
74,468,088
|
|
|
|
74,468,088
|
|
|
|
74,468,088
|
|
|
|
74,468,088
|
|
F-40
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
3.
|
Reclassification of prior period results (continued)
|
The reconciliation of the unaudited consolidated
statement of cash flows for the six months ended June 30, 2018 is as follows:
|
|
As Previously reported
|
|
Reclass of
disclosure
|
|
As Reclassed
|
|
Effect of adoption of ASU 2017-11
|
|
As Reclassified
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,719,251
|
)
|
|
$
|
—
|
|
|
$
|
(5,719,251
|
)
|
|
$
|
5,244,587
|
|
|
$
|
(474,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash Provided by operating activities
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Depreciation and amortization
|
|
|
226,436
|
|
|
|
—
|
|
|
|
226,436
|
|
|
|
—
|
|
|
|
226,436
|
|
Amortization of deferred costs
|
|
|
58,188
|
|
|
|
—
|
|
|
|
58,188
|
|
|
|
—
|
|
|
|
58,188
|
|
Non-cash interest
|
|
|
1,012,225
|
|
|
|
—
|
|
|
|
1,012,225
|
|
|
|
—
|
|
|
|
1,012,225
|
|
Loss on issuance of debt
|
|
|
23,725,510
|
|
|
|
(23,725,510
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss on debt modification
|
|
|
—
|
|
|
|
212,270
|
|
|
|
212,270
|
|
|
|
—
|
|
|
|
212,270
|
|
Imputed interest on advances from stockholders
|
|
|
1,514
|
|
|
|
—
|
|
|
|
1,514
|
|
|
|
—
|
|
|
|
1,514
|
|
Changes in fair value of derivative liabilities
|
|
|
(18,268,653
|
)
|
|
|
23,513,240
|
|
|
|
5,244,587
|
|
|
|
(5,244,587
|
)
|
|
|
—
|
|
Unrealized loss on trading securities
|
|
|
155,000
|
|
|
|
—
|
|
|
|
155,000
|
|
|
|
—
|
|
|
|
155,000
|
|
Recovery of assets
|
|
|
(516,120
|
)
|
|
|
—
|
|
|
|
(516,120
|
)
|
|
|
—
|
|
|
|
(516,120
|
)
|
Bad debt expense
|
|
|
6,354
|
|
|
|
—
|
|
|
|
6,354
|
|
|
|
—
|
|
|
|
6,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
5,225
|
|
|
|
—
|
|
|
|
5,225
|
|
|
|
—
|
|
|
|
5,225
|
|
Accounts payable and accrued liabilities
|
|
|
756,656
|
|
|
|
—
|
|
|
|
756,656
|
|
|
|
—
|
|
|
|
756,656
|
|
Accounts receivable
|
|
|
98,833
|
|
|
|
—
|
|
|
|
98,833
|
|
|
|
—
|
|
|
|
98,833
|
|
Gaming accounts receivable
|
|
|
31,409
|
|
|
|
—
|
|
|
|
31,409
|
|
|
|
—
|
|
|
|
31,409
|
|
Gaming accounts liabilities
|
|
|
(583,899
|
)
|
|
|
—
|
|
|
|
(583,899
|
)
|
|
|
—
|
|
|
|
(583,899
|
)
|
Taxes payable
|
|
|
439,731
|
|
|
|
—
|
|
|
|
439,731
|
|
|
|
—
|
|
|
|
439,731
|
|
Other current assets
|
|
|
(270,259
|
)
|
|
|
—
|
|
|
|
(270,259
|
)
|
|
|
—
|
|
|
|
(270,259
|
)
|
Long term liability
|
|
|
78,346
|
|
|
|
—
|
|
|
|
78,346
|
|
|
|
—
|
|
|
|
78,346
|
|
Net Cash Provided by Operating Activities
|
|
|
1,237,245
|
|
|
|
—
|
|
|
|
1,237,245
|
|
|
|
—
|
|
|
|
1,237,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant, and equipment, and intangible assets
|
|
|
(4,442,508
|
)
|
|
|
—
|
|
|
|
(4,442,508
|
)
|
|
|
—
|
|
|
|
(4,442,508
|
)
|
Decrease in restricted cash
|
|
|
15,657
|
|
|
|
—
|
|
|
|
15,657
|
|
|
|
—
|
|
|
|
15,657
|
|
Net Cash Used in Investing Activities
|
|
|
(4,426,851
|
)
|
|
|
—
|
|
|
|
(4,426,851
|
)
|
|
|
—
|
|
|
|
(4,426,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank credit line
|
|
|
(177,060
|
)
|
|
|
—
|
|
|
|
(177,060
|
)
|
|
|
—
|
|
|
|
(177,060
|
)
|
Repayment of bank loan
|
|
|
(71,143
|
)
|
|
|
—
|
|
|
|
(71,143
|
)
|
|
|
—
|
|
|
|
(71,143
|
)
|
Proceeds from convertible debentures and promissory notes, net of repayment
|
|
|
6,883,905
|
|
|
|
—
|
|
|
|
6,883,905
|
|
|
|
—
|
|
|
|
6,883,905
|
|
Loan to related party
|
|
|
(215,745
|
)
|
|
|
—
|
|
|
|
(215,745
|
)
|
|
|
—
|
|
|
|
(215,745
|
)
|
Purchase of treasury stock
|
|
|
(2,261,307
|
)
|
|
|
—
|
|
|
|
(2,261,307
|
)
|
|
|
—
|
|
|
|
(2,261,307
|
)
|
Advances from stockholders, net of repayment
|
|
|
(485,036
|
)
|
|
|
—
|
|
|
|
(485,036
|
)
|
|
|
—
|
|
|
|
(485,036
|
)
|
Net Cash Provided by Financing Activities
|
|
|
3,673,614
|
|
|
|
—
|
|
|
|
3,673,614
|
|
|
|
—
|
|
|
|
3,673,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of change in exchange rate
|
|
|
(168,600
|
)
|
|
|
—
|
|
|
|
(168,600
|
)
|
|
|
—
|
|
|
|
(168,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
315,408
|
|
|
|
—
|
|
|
|
315,408
|
|
|
|
—
|
|
|
|
315,408
|
|
Cash – beginning of the period
|
|
|
6,469,858
|
|
|
|
—
|
|
|
|
6,469,858
|
|
|
|
—
|
|
|
|
6,469,858
|
|
Cash – end of the period
|
|
$
|
6,785,266
|
|
|
$
|
—
|
|
|
$
|
6,785,266
|
|
|
$
|
—
|
|
|
$
|
6,785,266
|
|
F-41
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
4.
|
Acquisition of betting software technology; offline and land-based gaming assets
|
Ulisse GmbH (“Ulisse”) Acquisition
On June 30, 2016, the Company entered into
a Share Exchange Agreement (“Ulisse SPA”), which closed on July 1, 2016, with the shareholders of Ulisse organized
under the laws of Austria. Ulisse operates a network of approximately 170 land-based agency locations. Pursuant to the agreement,
the Company issued 3,331,200 shares of common stock in consideration for 100% of the issued and outstanding shares of Ulisse.
Pursuant to the Ulisse SPA, the purchase price
was subject to an adjustment equal to two times earnings before income taxes calculated on a pro rata basis from the closing date
upon completion of the license tender auction held by the Italian gaming regulator, Agenzia delle Dogane e dei Monopoli (“ADM”).
The sellers were also permitted to exercise the option to resell to the Company 50% of the shares of common stock (or 1,665,600
shares) issued in consideration for the purchase price at a fixed price of $0.50 per share (the “Ulisse Put Option”).
On May 31, 2018, the Company and Ulisse mutually
agreed to exercise the Ulisse Put Option in lieu of completion of the ADM license tender auction. The Company repurchased and retired
the shares issued in June 2016 with a purchase price adjustment to 10 million Euros (approximately $11.7 million). The purchase
price adjustment was paid half in cash of €5 million (approximately $5.85 million) and the Company issued 4,735,600 shares
to the sellers on May 31, 2018 to settle the balance of the purchase price adjustment in shares of common stock at the closing
price of $1.18 per share on May 31, 2018
Multigioco Acquisition
On May 31, 2018, the Company and Multigioco
mutually agreed to exercise the option to repurchase the shares issued to the shareholders of Multigioco at the closing of the
acquisition of Multigioco on August 15, 2014 (“Multigioco Put Option”). The Company repurchased and retired the balance
of 2,040,000 shares issued to the Multigioco sellers in exchange for €510,000 (approximately $595,000).
Virtual Generation Limited (“VG”)
Acquisition
On January 30, 2019, the Company entered into
a Share Exchange Agreement (“VG SPA”), with the shareholders of Virtual Generation (“VG”) organized under
the laws of Republic of Malta (the “Sellers”) and acquired all of the issued and outstanding ordinary shares of VG.,
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. VG owns and has developed a virtual gaming software
platform. Pursuant to the agreement, the Company issued 522,380 shares of common stock in consideration for 100% of the issued
and outstanding shares of VG.
Pursuant to the Purchase Agreement, on the
Closing Date, the Company agreed to pay the Sellers the previously agreed to consideration of €4,000,000 ($4,576,352) in
consideration for all the ordinary shares of VG and Naos, on the Closing Date as follows:
|
(i)
|
a cash payment of €108,000;
|
|
(ii)
|
the issuance of shares of the Company’s common stock valued at €89,000; and
|
|
(iii)
|
the delivery of a non-interest bearing promissory
note of €3,803,000, providing for the payment of:
(a) an aggregate of €2,392,000 in cash
in 23 equal and consecutive monthly instalments of €104,000 with the first such payment due and payable on the date that
is one month after the Closing Date; and
(b) an aggregate of €1,411,000 in shares
of the Company’s common stock in 17 equal and consecutive monthly instalments of €83,000 as determined by the average
of the closing prices of such shares on the last 10 trading days immediately preceding the determination date of each monthly issuance,
commencing on March 1, 2019.
|
|
|
F-42
|
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
4.
|
Acquisition of betting software technology; offline and land-based gaming assets
|
Virtual Generation Limited (“VG”)
Acquisition (continued)
In terms of the agreement, the purchase price
was allocated to the fair market value of tangible and intangible assets acquired and liabilities assumed, as follows:
|
|
Amount
|
|
|
|
Purchase consideration, net of discount of $382,778
|
|
$
|
4,193,374
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
|
|
Cash
|
|
|
47,268
|
|
Current assets
|
|
|
221,287
|
|
Property, Plant and Equipment
|
|
|
41,473
|
|
Intangible assets
|
|
|
4,000,000
|
|
|
|
|
4,310,028
|
|
Less: liabilities assumed
|
|
|
(121,247
|
)
|
Total identifiable assets less liabilities assumed
|
|
|
4,188,781
|
|
Excess purchase price allocated to goodwill
|
|
$
|
4,593
|
|
|
|
|
|
|
Intangible assets will be amortized over their
remaining useful life over a period of 1 to 3 years.
The €3,803,000 promissory note was recorded
as a liability owing to related parties of €1,521,000 (Note 13) and to third parties of €2,281,800 (Note 9).
Restricted cash is cash held in a segregated
bank account at Intesa Sanpaolo Bank S.p.A. (“Intesa Sanpaolo Bank”) as collateral against our operating line of credit
with Intesa Sanpaolo Bank as well as Wirecard Bank as a security deposit for Ulisse betting operations. In addition, the Company
maintains a $1,000,000 deposit at Metropolitan Commercial bank held as security against a $1,000,000 line of credit. See Note 8.
Intangible assets consist of the following:
Description
|
|
June 30,
2019
|
|
December 31, 2018
|
|
|
|
|
|
Betting Platform Software
|
|
$
|
1,685,371
|
|
|
$
|
1,685,371
|
|
Ulisse Bookmaker License
|
|
|
9,724,244
|
|
|
|
9,724,244
|
|
Multigioco and Rifa ADM Licenses
|
|
|
970,422
|
|
|
|
970,422
|
|
Virtual Generation Licenses
|
|
|
4,000,000
|
|
|
|
—
|
|
Location contracts
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Customer relationships
|
|
|
870,927
|
|
|
|
870,927
|
|
Trademarks/names
|
|
|
110,000
|
|
|
|
110,000
|
|
Websites
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
18,400,964
|
|
|
|
14,400,964
|
|
Accumulated amortization
|
|
|
(2,047,189
|
)
|
|
|
(1,817,507
|
)
|
|
|
$
|
16,353,775
|
|
|
$
|
12,583,457
|
|
The Company evaluates intangible assets for
impairment on an annual basis during the last month of each year and at an interim date if indications of impairment exist. Intangible
asset impairment is determined by comparing the fair value of the asset to its carrying amount with an impairment being recognized
only when the fair value is less than carrying value.
F-43
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
The Company recorded $131,320 and $111,664
in amortization expense for the three months ended June 30, 2019 and 2018, respectively, and $261,124 and $224,752 for the six
months ended June 30, 2019 and 2018, respectively.
Licenses obtained by the Company in the acquisitions
of Multigioco and Rifa include a Gioco a Distanza (“GAD”) online license as well as a Bersani and Monti land-based
licenses issued by the Italian gaming regulator (ADM) to Multigioco and Rifa, respectively, as well as an Austrian Bookmaker License
through the acquisition of Ulisse.
The Company believes that the carrying amounts
of its intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that
the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could
be impaired.
|
7.
|
Investment in Non-consolidated Entities
|
Investments in non-consolidated entities consists
of 2,500,000 shares of Zoompass Holdings (“Zoompass”) and is accounted for at fair value, with changes recognized into
earnings in accordance with ASU 2016-1, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities.”
On June 30, 2019, the shares of Zoompass were
last quoted at $0.10 per share on the OTC market, resulting in an unrealized loss recorded to earnings related to these securities
of $25,000 for the three and six months ended June 30, 2019.
The Company currently maintains an operating
line of credit for a maximum amount of €300,000 (approximately $340,000) for Multigioco and €50,000 (approximately
$57,000) for Rifa from Intesa Sanpaolo Bank in Italy. The line of credit is secured by restricted cash on deposit at Intesa Sanpaolo
Bank and guaranteed by certain shareholders of the Company and bears a fixed rate of interest at 5% per annum on the outstanding
balance with no minimum payment, maturity or due date.
In addition, the Company maintains a $1,000,000
secured revolving line of credit from Metropolitan Commercial Bank in New York, which bears a fixed rate of interest of 3.00% on
the outstanding balance with an interest only monthly minimum payment, no maturity or due date and is secured by a $1,000,000 security
deposit, see Note 5.
|
9.
|
Convertible Debentures
|
On February 26, 2018, the Company issued debenture
units to certain accredited investors (the “February 2018 Private Placement”). Each debenture unit was comprised of
(i) a debenture in the principal amount of CAD 1,000 bearing interest at a rate of 10% per annum, with a maturity date of two years
from the date of issuance, (ii) warrants to purchase up to 250 shares of the Company’s common stock at an exercise price
equal to the lessor of $0.625 or 125% of the proposed initial Canadian public offering price per warrant, expiring on February
25, 2020, and (iii) 160 shares of restricted common stock. The investors in the February 2018 Private Placement purchased an aggregate
principal amount of CAD 670,000 (approximately $521,900) debentures and received warrants to purchase up to 167,500 shares of the
Company’s common stock and 111,000 shares of common stock. As a result of the lower debenture conversion price and the warrant
exercise price of the May 31, 2018 Private Placement described below, the whole or any part of the principal amount of the February
2018 Private Placement debentures plus any accrued and unpaid interest may be converted into shares of the Company’s common
stock at a price equal to $0.40 per share and the warrants can be exercised at a price equal to $0.50 per share.
In April 2018, the Company issued
debenture units to certain investors (the “April 2018 Private Placement”). Each debenture unit was comprised of
(i) a debenture in the principal amount of CAD 1,000 bearing interest at a rate of 10% per annum, with a maturity date of two
years from the date of issuance, (ii) warrants to purchase up to 250 shares of the Company’s common stock at an
exercise price equal to the lessor of $0.625 or 125% of the proposed initial Canadian public offering price per warrant,
expiring in April 2020, and (iii) 160 shares of restricted common stock. The investors in the April 2018 Private Placement
purchased an aggregate principal amount of CAD 135,000 (approximately $105,200) debentures and received warrants to purchase
up to 33,750 shares of the Company’s common stock and 21,600 shares of restricted common stock. As a result of the
lower debenture conversion price and the warrant exercise price of the May 31, 2018 Private Placement described below, the
whole or any part of the principal amount of the April 2018 Private Placement debentures plus any accrued and unpaid interest
may be converted into shares of the Company’s common stock at a price equal to $0.40 per share and the warrants can be
exercised at a price equal to $0.50 per share
F-44
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
9.
|
Convertible Debentures (continued)
|
On April 23, 2018, the Company re-issued debenture
units that were first issued to certain investors between January 24, 2017 and January 31, 2018 in order to simplify the various
debentures into a single series with the same terms as new convertible debenture units issued on February 26, 2018 (the “April
19, 2018 Debentures”). Each debenture unit was comprised of (i) a debenture in the principal amount of CAD 1,000 bearing
interest at a rate of 10% per annum, with a maturity date of two years from the date of issuance, (ii) warrants to purchase up
to 250 shares of the Company’s common stock at an exercise price equal to the lessor of $0.625 or 125% of the proposed initial
Canadian public offering price per warrant, expiring on April 19, 2020, and (iii) 160 shares of restricted common stock. The investors
in the April 19, 2018 Private Placement received an aggregate principal amount of CAD 1,436,000 (approximately $1,118,600) debentures,
warrants to purchase up to 359,000 shares of the Company’s common stock and 229,760 restricted shares of common stock. As
a result of the lower debenture conversion price and the warrant exercise price of the May 31, 2018 Private Placement described
below, the whole or any part of the principal amount of the April 19, 2018 Debentures plus any accrued and unpaid interest may
be converted into shares of the Company’s common stock at a price equal to $0.40 per share and the warrants can be exercised
at a price equal to $0.50 per share.
On May 11, 2018, the Company issued debenture
units to certain investors (the “May 11, 2018 Private Placement”). Each debenture unit was comprised of (i) a debenture
in the principal amount of CAD 1,000 bearing interest at a rate of 10% per annum, with a maturity date of two years from the date
of issuance, (ii) warrants to purchase up to 250 shares of the Company’s common stock at an exercise price equal to the lessor
of $0.625 or 125% of the proposed initial Canadian public offering price per warrant, expiring on May 11, 2020, and (iii) 160 shares
of restricted common stock. The investors in the May 11, 2018 Private Placement purchased an aggregate principal amount of CAD
131,000 (approximately $102,000) debentures and received warrants to purchase up to 32,750 shares of the Company’s common
stock and 20,960 restricted shares of common stock. As a result of the lower debenture conversion price and the warrant exercise
price of the May 31, 2018 Private Placement described below, the whole or any part of the principal amount of the May 11, 2018
Private Placement plus any accrued and unpaid interest may be converted into shares of the Company’s common stock at a price
equal to $0.40 per share and the warrants can be exercised at a price equal to $0.50 per share.
On May 31, 2018, the Company closed a private
placement offering of up to 7,500 units and entered into Subscription Agreements (the “Agreements”) with certain accredited
investors (the “May 31, 2018 Private Placement”). The units were offered in both U.S. and Canadian dollar denominations.
Each unit sold to U.S. investors was sold at a per unit price of $1,000 and was comprised of (i) a 10% convertible debenture in
the principal amount of $1,000 (the “U.S. Debentures”), (ii) 208 shares of our common stock and (ii) warrants to purchase
up to 1082.25 warrants shares of our common stock (the “U.S. Warrants”). Each unit sold to Canadian investors was sold
at a per unit price of CND $1,000 and was comprised of (i) a 10% convertible debenture in the principal amount of CND $1,000 (the
“Canadian Debentures” and together with the U.S. Debentures, the “May Debentures”), (ii) 160 shares of
our common stock and (ii) warrants to purchase up to 832.50 shares of our common stock (the “Canadian Warrants” and
together with the U.S. Warrants, the “May Warrants”).
The May Warrants are exercisable at an exercise
price of $0.50 per share and expire on May 31, 2020.
The warrants issued in terms of the convertible
debenture agreements were valued using a Black Scholes valuation model and recorded as a discount to the convertible debentures
amortized over the expected life of the convertible debentures.
As of June 30, 2019 and December 31, 2018,
the Company has outstanding, US Dollar convertible debentures of $3,053,000 and $3,268,000, respectively and Canadian Dollar denominated
Convertible debentures of CDN$6,211,165 and CDN$6,801,165, respectively.
During the six months ended June 30, 2019,
investors in Canadian Dollar convertible debentures converted the aggregate principal amount of CDN$590,000, including interest
thereon of CDN$66,991 and investors in US Dollar convertible debentures converted the aggregate principal amount of $215,000, including
interest thereon of $13,184, into 1,862,765 shares of common stock.
F-45
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
9.
|
Convertible Debentures (continued)
|
The Aggregate convertible debentures outstanding
consists of the following:
Description
|
|
June 30, 2019
|
|
|
|
Principal Outstanding
|
|
|
Opening balance
|
|
$
|
8,529,021
|
|
Conversion to equity
|
|
|
(925,963
|
)
|
Foreign exchange movements
|
|
|
195,999
|
|
|
|
|
7,799,057
|
|
Accrued Interest
|
|
|
|
|
Opening balance
|
|
|
528,141
|
|
Interest expense
|
|
|
390,186
|
|
Conversion to equity
|
|
|
(63,206
|
)
|
Foreign exchange movements
|
|
|
10,307
|
|
|
|
|
865,428
|
|
Debenture Discount
|
|
|
|
|
Opening balance
|
|
|
(4,588,215
|
)
|
Amortization
|
|
|
2,007,712
|
|
|
|
|
(2,580,503
|
)
|
Convertible Debentures, net
|
|
$
|
6,083,982
|
|
Terms of the acquisition of Virtual Generation
Limited on January 30, 2019, disclosed in Note 4 above, the Company issued a non-interest bearing promissory note of €3,803,000
owing to both related parties and non-related parties. The value of the promissory note payable related parties was €1,521,200
and to non-related parties was €2,281,800.
The promissory note payable to non-related
parties is to be settled as follows:
|
(a)
|
an aggregate of €1,435,200 in cash in 23 equal and consecutive monthly instalments of €104,000 with the first such payment due and payable on the date that is one month after the Closing Date; and
|
|
(b)
|
an aggregate of €846,600 in shares of the Company’s common stock in 17 equal and consecutive monthly instalments of €83,000 as determined by the average of the closing prices of such shares on the last 10 trading days immediately preceding the determination date of each monthly issuance, commencing on March 1, 2019.
|
The future payments on the promissory note
was discounted to present value using the Company’s average cost of funding of 10%. The discount is being amortized over
the repayment period of the promissory note using the effective interest rate method.
F-46
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
10.
|
Notes Payable (continued)
|
The movement on notes payable consists of the
following:
Description
|
|
June 30, 2019
|
|
|
|
Principal Outstanding
|
|
|
Promissory note due to non-related parties
|
|
$
|
2,745,811
|
|
Settled by the issuance of common shares
|
|
|
(285,192
|
)
|
Repayment in cash
|
|
|
(331,913
|
)
|
Foreign exchange movements
|
|
|
(21,601
|
)
|
|
|
|
2,107,105
|
|
Present value discount on future payments
|
|
|
|
|
Present value discount
|
|
|
(242,089
|
)
|
Amortization
|
|
|
53,020
|
|
Foreign exchange movements
|
|
|
1,883
|
|
|
|
|
(187,186
|
)
|
Notes payable, net
|
|
$
|
1,919,919
|
|
|
|
|
|
|
Disclosed as follows:
|
|
|
|
|
Current liability
|
|
$
|
1,421,045
|
|
Long term liability
|
|
|
498,874
|
|
Notes payable, net
|
|
$
|
1,919,919
|
|
In September 2016, the Company obtained a loan
of €500,000 (approximately $580,000) from Intesa Sanpaolo Bank in Italy, which loan is secured by the Company's assets. The
loan has an underlying interest rate of 4.5 points above the Euro Inter Bank Offered Rate, subject to quarterly review and is amortized
over 57 months ending March 31, 2021. Monthly repayments of €9,760 began in January 2017.
The Company made payments of €58,560
(approximately $66,146) for the six months ended June 30, 2019 which included principal of approximately €52,239 (approximately
$59,007) and interest of €6,321 (approximately $7,140) for the six months ended June 30, 2019.
|
12.
|
Other Long-term Liabilities
|
Other long term liabilities represents the
Italian “Trattamento di Fine Rapporto” which is a severance amount set up by Italian companies to be paid to employees
on termination or retirement.
Notes Payable – Related Party
The Company has three promissory notes entered
into in 2015 and 2016 with a related party with an aggregate principal amount outstanding of $318,078. The promissory notes bear
interest at 12% per annum and are due on demand.
In terms of the acquisition of Virtual Generation
Limited on January 30, 2019, disclosed in Note 4 above, the Company issued a non-interest bearing promissory note in the principal
amount of €3,803,000 owing to both related parties and non-related parties. The value of the promissory note payable to non-related
parties was €2,281,800 and to related parties was €1,521,200.
The promissory note is to be settled as follows:
|
(a)
|
an aggregate of €956,800 in cash in 23 equal and consecutive monthly instalments of €104,000 with the first such payment due and payable on the date that is one month after the Closing Date; and
|
|
(b)
|
an aggregate of €564,400 in shares of the Company’s common stock in 17 equal and consecutive monthly instalments of €83,000 as determined by the average of the closing prices of such shares on the last 10 trading days immediately preceding the determination date of each monthly issuance, commencing on March 1, 2019.
|
F-47
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
|
13.
|
Related Parties (continued)
|
Notes Payable – Related Party (continued)
The future payments on the promissory note
was discounted to present value using the Company’s average cost of funding of 10%. The discount is being amortized over
the repayment period of the promissory note using the effective interest rate method.
The movement on notes payable consists of the
following:
Description
|
|
June 30, 2019
|
|
|
|
Principal Outstanding
|
|
|
Opening balance
|
|
$
|
318,078
|
|
Promissory note due to non-related parties
|
|
|
1,830,541
|
|
Settled by the issuance of common shares
|
|
|
(190,128
|
)
|
Repayment in cash
|
|
|
(213,353
|
)
|
Foreign exchange movements
|
|
|
(14,442
|
)
|
|
|
|
1,730,696
|
|
Accrued Interest
|
|
|
|
|
Opening balance
|
|
|
113,553
|
|
Interest expense
|
|
|
18,928
|
|
|
|
|
132,481
|
|
Present value discount on future payments
|
|
|
|
|
Present value discount
|
|
|
(161,393
|
)
|
Amortization
|
|
|
35,347
|
|
Foreign exchange movements
|
|
|
1,255
|
|
|
|
|
(124,791
|
)
|
Notes payable – Related Party, net
|
|
$
|
1,738,386
|
|
|
|
|
|
|
Disclosed as follows:
|
|
|
|
|
Current liability
|
|
$
|
1,405,804
|
|
Long term liability
|
|
|
332,582
|
|
Notes payable – Related Party, net
|
|
$
|
1,738,386
|
|
Advances from Stockholders
Advances from stockholders represent non-interest-bearing
loans that are due on demand.
Advances from stockholders are as follows:
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Gold Street Capital Corp.
|
|
$
|
48,508
|
|
|
$
|
39,237
|
|
Amounts due to Gold Street Capital Corp., the
major stockholder of Newgioco Group, are for reimbursement of expenses. During the three and six months ended June 30, 2018, the
Company paid management fees of $36,000 and $72,000 to Gold Street Capital Corp and no management fees during the three and six
months ended June 30, 2019, respectively.
During the six months ended June 30, 2018,
the Company paid management fees of approximately $6,000 to Luca Pasquini.
F-48
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
The Company issued the following shares of
common stock to promissory note holders in terms of the agreement entered into for the acquisition of Virtual Generation Limited,
as disclosed in Note 4 above.
|
☐
|
On January 30, 2019, 259,600 shares of common stock valued at $101,763;
|
|
☐
|
On March 1, 2019, 262,780 shares of common stock valued at $101,249;
|
|
☐
|
On April 1, 2019, 239,800 shares of common stock valued at $86,328;
|
|
☐
|
On May 1, 2019, 264,840 shares of common stock valued at $93,018;
|
|
☐
|
On June 1, 2019, 218,050 shares of common stock valued at $92,961.
|
For the six months ended June 30, 2019, the
Company issued a total of 694,801 shares of common stock, valued at $989,169, upon the conversion of convertible debentures into
equity (Note 9).
On April 22, 2019, the Company issued 89,857
shares of common stock, valued at $35,943, to certain convertible debenture holders as an incentive for them to transfer their
convertible debentures to another investor.
In connection with the private placement agreements
entered into with accredited investors in the first and second quarter of 2018, for each $1,000 debenture unit the Company issued
two-year warrants to purchase up to 1082.25 shares of the Company’s common stock and for each CAD 1,000 debenture unit the
Company issued two-year warrants to purchase up to 832.50 shares of the Company’s common stock at an exercise price of $0.50
per share.
A summary of all of the Company’s warrant activity during
the period January 1, 2018 to June 30, 2019 is as follows:
|
|
Number of shares
|
|
Exercise price per share
|
|
Weighted average exercise price
|
|
|
|
|
|
|
|
Outstanding January 1, 2018
|
|
|
612,528
|
|
|
$
|
0.54
|
|
|
$
|
0.54
|
|
Granted
|
|
|
8,767,064
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Forfeited/cancelled
|
|
|
(216,000
|
)
|
|
|
0.63
|
|
|
|
(0.63
|
)
|
Exercised
|
|
|
(326,088
|
)
|
|
|
0.58
|
|
|
|
0.58
|
|
Expired
|
|
|
(124,440
|
)
|
|
|
0.58
|
|
|
|
0.58
|
|
Outstanding December 31, 2018
|
|
|
8,713,064
|
|
|
$
|
0.50
|
|
|
|
0.50
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding June 30, 2019
|
|
|
8,713,064
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
The following tables summarize information about warrants outstanding
as of June 30, 2019:
|
|
Warrants outstanding
|
|
Warrants exercisable
|
|
Exercise price
|
|
|
|
Number of shares
|
|
|
|
Weighted
average
remaining years
|
|
|
|
Weighted
average
exercise price
|
|
|
|
Number of shares
|
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
8,713,064
|
|
|
|
0.90
|
|
|
$
|
0.50
|
|
|
|
8,713,064
|
|
|
$
|
0.50
|
|
F-49
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
The following table represents disaggregated
revenues from our gaming operations for the three and six months ended June 30, 2019 and 2018. Net Gaming Revenues represents turnover
(also referred to as “handle”), the total bets processed for the period, less customer winnings paid out, commissions
paid to agents, and taxes due to government authorities, while Commission Revenues represents commissions on lotto ticket sales
and Service Revenues is revenue invoiced for our ELYS software service and royalties invoiced for the sale of virtual products.
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Turnover
|
|
|
|
|
|
|
|
|
Turnover web-based
|
|
$
|
88,647,748
|
|
|
$
|
55,025,859
|
|
|
$
|
175,223,649
|
|
|
$
|
101,091,758
|
|
Turnover land-based
|
|
|
10,617,656
|
|
|
|
45,013,592
|
|
|
|
61,017,220
|
|
|
|
89,507,552
|
|
Total Turnover
|
|
|
99,265,404
|
|
|
|
100,039,451
|
|
|
|
236,240,869
|
|
|
|
190,599,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winnings/Payouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winnings web-based
|
|
|
81,857,558
|
|
|
|
54,687,682
|
|
|
|
164,120,495
|
|
|
|
97,305,678
|
|
Winnings land-based
|
|
|
7,199,276
|
|
|
|
35,765,405
|
|
|
|
51,555,578
|
|
|
|
74,511,647
|
|
Total Winnings/payouts
|
|
|
89,056,834
|
|
|
|
90,453,087
|
|
|
|
215,676,073
|
|
|
|
171,817,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Gaming Revenues
|
|
|
10,208,570
|
|
|
|
9,586,364
|
|
|
|
20,564,796
|
|
|
|
18,781,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: ADM Gaming Taxes
|
|
|
1,172,993
|
|
|
|
799,016
|
|
|
|
2,366,739
|
|
|
|
1,565,849
|
|
Net Gaming Revenues
|
|
|
9,035,577
|
|
|
|
8,787,348
|
|
|
|
18,198,057
|
|
|
|
17,216,136
|
|
Add: Commission Revenues
|
|
|
33,360
|
|
|
|
18,152
|
|
|
|
62,433
|
|
|
|
117,152
|
|
Add: Service Revenues
|
|
|
36,416
|
|
|
|
17,159
|
|
|
|
111,158
|
|
|
|
83,238
|
|
Total Revenues
|
|
$
|
9,105,353
|
|
|
$
|
8,822,659
|
|
|
$
|
18,371,648
|
|
|
$
|
17,416,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Net Loss per Common Share
|
Basic loss per share is based on the weighted-average
number of common shares outstanding during each period. Diluted loss per share is based on basic shares as determined above, plus
the incremental shares that would be issued upon the assumed exercise of “in-the-money” warrants using the treasury
stock method and the inclusion of all convertible securities, including convertible debentures, assuming these securities were
converted at the beginning of the period or at the time of issuance, if later. The computation of diluted net loss per share does
not assume the issuance of common shares that have an anti-dilutive effect on net loss per share.
For the three months and six months ended June
30, 2019 and 2018, the following warrants and convertible debentures were excluded from the computation of diluted loss per share
as the result of the computation was anti-dilutive:
Description
|
|
Three and Six Months ended June 30, 2019
|
|
Three and Six Months ended June 30, 2018
|
|
|
|
|
|
Warrants
|
|
|
8,713,064
|
|
|
|
8,713,064
|
|
Convertible debentures
|
|
|
21,661,212
|
|
|
|
21,661,212
|
|
|
|
|
30,374,276
|
|
|
|
30,374,276
|
|
F-50
NEWGIOCO GROUP, INC.
Notes to Unaudited Consolidated Financial
Statements
Subsequent to the period covered by this report,
the principal amount of $550,000 and CAD 20,000 (approximately $16,400) of outstanding convertible debentures plus accrued interest
was presented to the Company for conversion into 1,562,377 shares of common stock.
Other than disclosed above, the Company has
evaluated subsequent events through the date the financial statements were issued and did not identify any other subsequent events
that would have required adjustment or disclosure in the financial statements.
F-51
Registration number C 66059
Virtual Generation Limited
Director's Report
and
Financial Statements
2018
F-51
VIRTUAL GENERATION LIMITED
DIRECTOR'S REPORT AND FINANCIAL STATEMENTS
2018
Contents
|
|
Page
|
|
|
|
|
Report of the Director
|
2
|
|
|
|
|
Statement of Director's Responsibilities
|
3
|
|
|
|
|
Report of the Independent Auditor
|
4 - 5
|
|
|
|
|
Statement of Comprehensive Income
|
6
|
|
|
|
|
Statement of Financial Position
|
7
|
|
|
|
|
Statement of Changes in Equity
|
8
|
|
|
|
|
Statement of Cash Flows
|
9
|
|
|
|
|
Notes to the Financial Statements
|
10 - 18
|
VIRTUAL GENERATION LIMITED
REPORT OF THE DIRECTOR
FOR THE YEAR ENDED 31 DECEMBER 2018
Director
|
:
|
Stefano Volo
|
|
|
|
Registered Office
|
:
|
Level 2, Farrugia Building, 9
|
|
|
St. Michael Street
|
|
|
San Gwann SGN2301
|
|
|
Malta
|
The director presents the annual report together
with the audited financial statements of the Company for the year ended 31 December 2018. The Company qualifies as a small company
for the purposes of the reporting requirements of the Companies Act, Cap. 386 of the Laws of Malta.
1 Principal
Activities
The Company is engaged in developing and managing
virtual gaming software and ancillary services.
2 Review
of Business Development and State of Affairs
During the year under review, the Company was
engaged in maintaining and strengthening its customer base. The profit for the year amounted to €37,897.
3 Likely
Future Business Developments
The Company expects to maintain its business
line at profitable levels over the forthcoming financial year.
4 Dividends
and Reserves
During the year under review, interim dividends
amounting to €100,000 (2017: €165,000) were distributed to shareholders. After adding up the profit and the dividend
for the current year to retained profits brought forward, total retained profits amounting to €107,665 are being carried
forward to the next financial year.
Approved by the Director on 31 January, 2019:
/s/ Stefano Volo
Stefano Volo
Director
2
VIRTUAL GENERATION LIMITED
STATEMENT OF DIRECTOR'S RESPONSIBILITIES
This statement is made to enable shareholders
to distinguish between the duties of the director, as listed below, and the duties of the auditor as indicated in the report of
the independent auditor to the members on page 4.
The Companies Act, Cap. 386 of the Laws of
Malta requires the director to prepare financial statements for each financial period, which give a true and fair view of the Company's
state of affairs as at the end of, and its profit or loss for, that period.
In preparing these financial statements, the
director is required to:
-
adopt the going concern basis unless it is inappropriate to presume
that the Company will continue in business;
-
select suitable accounting policies and apply them consistently;
-
make judgements and estimates that are reasonable and prudent;
-
account for income and charges relating to the accounting period on
the accrual basis;
-
value separately the components of asset and liability items; and
-
report comparative figures corresponding to those of the preceding
accounting period.
The director is responsible for keeping proper
accounting records. Such records should disclose with reasonable accuracy at any time, the financial position of the Company such
as to enable him to ensure that the financial statements have been properly prepared in accordance with the Companies Act. He is
also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
3