UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

_________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

 

Commission File Number 000-50045

_________________

 

NEWGIOCO GROUP, INC.

(Exact name of registrant as specified in its charter)

_________________

Delaware   33-0823179
(State or Other Jurisdiction   (I.R.S. Employer
of Incorporation or Organization)   Identification No.)

 

130 Adelaide Street, West, Suite 701

Toronto, Ontario, Canada M5H 2K4

(Address of Principal Executive Offices) (Zip Code)

 

+39-391-306-4134

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   NWGI   OTCQB Venture Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of August 14, 2019, the registrant had 79,949,040 shares of common stock, $0.0001 par value per share, outstanding.

 

 
 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION PAGE
     
  Cautionary Statement Regarding Forward-Looking Statements 3
     
Item 1 Financial Statements  
  Consolidated Balance Sheets (unaudited) 4
  Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) 5
  Consolidated Statements of Changes in Stockholders' Equity 6
  Consolidated Statements of Cash Flows (unaudited) 8
  Notes to Consolidated Financial Statements (unaudited) 9
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation 31
Item 3 Quantitative and Qualitative Disclosures About Market Risk 38
Item 4 Controls and Procedures 38
     
PART II - OTHER INFORMATION 39
     
Item 1 Legal Proceedings  
Item 1A Risk Factors 39
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3 Defaults Upon Senior Securities 40
Item 4 Mine Safety Disclosures 40
Item 5 Other Information 40
Item 6 Exhibits 40
     
SIGNATURES 41

 

 
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as “may,” “might,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “pro forma” or the negative of these words or other words or expressions of and similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing.

 

These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and the other documents referred to in this Quarterly Report on Form 10-Q and relate to a variety of matters, including, but not limited to, other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of management, are not guarantees of performance and are subject to significant risks and uncertainty. These forward-looking statements should not be relied upon as predictions of future events and Newgioco Group, Inc. cannot assure you that the events or circumstances discussed or reflected in these statements will be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by Newgioco Group, Inc. or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth below, under Part II, “Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and those identified under Part I, Item 1A in our Annual Report on Form 10-K of the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 8, 2019.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.

 

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Newgioco Group” “our Company,” “the Company,” “we,” “our,” and “us” refer to Newgioco Group, Inc. a Delaware corporation, and its wholly-owned subsidiaries.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 
 

 PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 

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

4

 

 
 

 

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

 

5

 

 
 

 

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, 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

 

6

 

 

 
 

 

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 312, 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

 

 

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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

 

 
 

NEWGIOCO GROUP, INC.

Notes to Unaudited Consolidated Financial Statements

 

1.Nature of Business

 

Nature of Business

 

Established in the state of Delaware in 1998, Newgioco Group, Inc. (“Newgioco Group” or the “Company”) is an international commercial-stage, vertically integrated 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 and casino gaming products, as well as sports betting products through a distribution network of retail betting locations situated throughout Italy and internationally through various agents in 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.

 

9

 

 

 
 

 

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.

 

10

 

 

 
 

 

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.

 

11

 

 

 
 

 

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.

 

12

 

 

 
 

 

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.

 

13

 

 

 
 

 

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.

14

 

 

 
 

 

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.

15

 

 

 
 

 

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.

 

16

 

 
 

 

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.

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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 

 

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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 

 

 

 

 

 

 

 

19

 

 

 
 

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 

 

20

 

 
 

 

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.

     
       

 

 

 

 

 

 

 

 

 

 

21

 

 
 

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).

 

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 $1,000,000 deposit at Metropolitan Commercial bank held as security against a $1,000,000 line of credit. See Note 8. 

 

6.Intangible Assets

 

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.

 

 

22

 

 
 

NEWGIOCO GROUP, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

6.Intangible Assets

 

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.

 

8.Line of Credit - Bank

 

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 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 ($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 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 ($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

 

23

 

 

 
 

NEWGIOCO GROUP, INC.

Notes to Unaudited Consolidated Financial Statements

 

9.Convertible Debentures (continued)

 

On April 19, 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 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 Private Placement received an aggregate principal amount of CDN $1,436,000 ($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 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 ($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.

 

 

 

24

 

 

 
 

 

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 

 

10.Notes Payable

 

In Terms of the acquisition of Virtual Generation Limited on January 31, 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.

 

 

 

 

 

 

 

 

 

25

 

 

 
 

 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 

 

11.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 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.

 

13.Related Parties

 

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 31, 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. 

 

26

 

 
 

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.

 

 

 

 

 

 

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NEWGIOCO GROUP, INC.

Notes to Unaudited Consolidated Financial Statements

 

14.Stockholders’ Equity

 

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 31, 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.

 

15.Warrants

 

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 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.

 

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 

 

 

 

 

 

 

 

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NEWGIOCO GROUP, INC.

Notes to Unaudited Consolidated Financial Statements

 

16.Revenues

 

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 

 

 

 

 

 

 

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NEWGIOCO GROUP, INC.

Notes to Unaudited Consolidated Financial Statements

 

18.Subsequent Events

 

Subsequent to the period covered by this report, the principal amount of $550,000 and CDN $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.

 


 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as “may,” “might,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “pro forma” or the negative of these words or other words or expressions of and similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. Factors that might cause such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 8, 2019 under the heading “Risk Factors” and the Risk Factors as described in Item 1A of this report on Form 10-Q for the six months ended June 30, 2019.

 

Overview

 

Except as expressly stated, the financial condition and results of operations discussed throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations are those of Newgioco Group, Inc. and its consolidated subsidiaries.

 

General Plan of Operation

 

We are a licensed gaming operator (known as an “Operator”) in the regulated Italian leisure betting market holding an “online”, “retail” and “CED retail” Austria Bookmaker license through our Multigioco, Rifa and Ulisse subsidiaries, respectively. As an Operator, we are authorized to collect gaming wagers and sports bets through two distribution channels: (i) online through websites on internet browsers, mobile applications and physical venues known as “web-shops” (internet cafes; kiosks, coffee-shops, convenience stores, restaurants and bars, etc.) where patrons can play on online through PC’s situated at each venue, and (ii) through physical land-based retail venues (off-track betting shops, SSBT (“self-serve betting terminal”) kiosks, coffee-shops, convenience stores, restaurants, taverns and bars, etc.).

 

Additionally, we are a global gaming technology company (known as a “Provider”), which owns and operates a unique “distributed” architecture betting software colloquially named Elys Game Board (the “Platform”) through our Odissea subsidiary. The Platform is a fully integrated “omni-channel” framework that combines centralized technology updating, servicing and operation with multi-channel functionality to accept all forms of customer payment through the two distribution channels described above. The omni-channel design is fully integrated with a built in player gaming account management, built-in sports book with what we believe is an industry-leading dynamic risk-management algorithm software and a virtual sports platform through our VG subsidiary. The Platform also provides seamless application programming interface integration of third-party supplied products such as online casino, poker, lottery and horse racing and has the capability to incorporate e-sports and daily fantasy sports providers.

 

Our corporate group is based in North America which includes a head office situated in Toronto, Canada with sub-offices in Fort Lauderdale and Boca Raton, Florida through which our CEO and CFO handle day-to-day reporting duties, U.S. development planning and through which various independent contractors and vendors are engaged.

 

Although we operate in one business segment, the leisure gaming industry, our revenue is derived from two sources:

 

  1. Transaction revenue through our offering of leisure betting products to retail customers directly through our online distribution on websites or a betting shop or through third party agents that operate white-label websites and/or land-based retail venues; and
  2. SaaS based service revenue through providing our Platform and virtual sports products to betting operators.

 

Currently, transaction revenue generated through our subsidiaries Multigioco, Rifa and Ulisse, consist of wagering and gaming transaction income broken down to: (i) spread on sports bet wagers, and (ii) fixed rate commissions on casino, poker, lotto and horse racing wagers from online based betting web shops and websites as well as land-based retail betting shops located throughout Italy; while our service revenue generated by our Platform is primarily derived from bet and wager processing through our Multigioco, Rifa and Ulisse operations in Italy.

 

We believe that our Platform is considered one of the newest betting software in the world and our plan is to expand our Platform offering to new jurisdictions around the world on a B2B basis, including expansion through Europe, South America, South Africa and the developing market in the United States. During the first and second quarter of 2019, we also generated service revenue from royalties through authorized agents by providing our virtual sports products through our VG subsidiary in 12 countries including: Italy, Peru, Nigeria, Paraguay, Albania, Honduras, Colombia, Mexico, Dominican Republic, Uganda, Nicaragua, and Turkey. We intend to leverage our partnerships in these 12 countries to cross-sell our Platform services to expand the global distribution of our betting solutions.

 

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This Management’s Discussion and Analysis includes a discussion of our operations for the quarter ended June 30, 2019, which reflects the operations of VG and Naos for the three months of the quarter ended June 2019 and for five months of the six month period ended June 30, 2019. The operations of VG and Naos are not included in the discussion for the three months and six months ended June 30, 2018 due to the fact that the acquisition was consummated in January 2019. Accordingly, the results of operations reported for the three months and six months ended June 30, 2019 and 2018, in this Management’s Discussion and Analysis are not comparable.

 

Highlights and Recent Developments

 

Acquisition of VG

 

As part of our multi-year business growth strategy, we expanded our operations in Europe by our acquisition of all of the issued and outstanding ordinary shares of VG and Naos. The sellers included Mr. Luca Pasquini, our Vice President of Technology and a member of our Board of Directors, and Mr. Gabriele Peroni, our Vice President of Business Development, each of whom owned 800 ordinary shares of Naos (20% of the issued and outstanding shares of Naos).

 

VG is a Gaming Laboratories International (GLI) certified virtual sports and gaming software developer with a portfolio of products including greyhound and horse racing; league play football (i.e., soccer), keno; and American Roulette. In addition, VG’s platform allows for customization for country-specific  virtual sports products including applications in Latin American and African markets as well as unique U.S. tribal games tailored for the U.S. tribal gaming market.

 

VG’s operations have grown rapidly in the highly competitive virtual sports market from approximately 67,000 tickets in 2014 to over 20 million bet tickets traded in 2018. VG now operates in 12 countries including: Italy, Peru, Nigeria, Paraguay, Albania, Honduras, Colombia, Mexico, Dominican Republic, Uganda, Nicaragua, and Turkey.

 

Pursuant to the VG purchase agreement, on the closing date, in consideration for all the ordinary shares of VG and Naos we paid the sellers €4,000,000 (approximately $4,580,000 at a Euro – exchange rate of 1.143) as follows:

 

  (i) a cash payment of €108,000 (approximately $124,000);

 

  (ii) the issuance of shares of our common stock valued at €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 VG purchase agreement, we agreed to pay the sellers as an earn-out payment in shares of our common stock within one month from the end of the 2019 fiscal year 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.

 

As of June 30, 2019, we made cash payments to the VG former shareholders under the promissory note that we issued to them equal to €482,400 (approximately $545,000) and we have issued 1,245,070 shares (or €421,000 (approximately $475,320) of common stock to the former shareholders of VG pursuant to the promissory note, and the remaining amounts due to the vendors in cash was €2,017,600 (approximately $2,293,000) and €1,079,000 (approximately $1,226,500) in common shares of the company.

 

 

 

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Expansion and New Markets

 

United States Operations Development

 

In May 2018, the U.S. Supreme Court (“SCOTUS”) ruled that the Professional and Amateur Sports Protection Act (the “PASPA”) was unconstitutional as it violates the Tenth Amendment prohibition against forcing states to implement federal laws. Enacted in 1992, PASPA generally prohibited states from authorizing, licensing or sponsoring betting on competitive games in which amateur or professional athletes participate. PASPA did not make sports betting a federal crime; rather, it allowed the attorney general for the Department of Justice, as well as professional and amateur sports organizations, to bring civil actions to enjoin violations of the act. The SCOTUS decision opens the door for all states to legalize and regulate sports gambling within their borders. States such as Nevada, New Jersey, Delaware, West Virginia, Rhode Island, Pennsylvania, Arkansas, Montana, Illinois, Indiana, Iowa, Tennessee and Mississippi have passed laws that were ready to be enacted once the federal ban on sports betting was lifted. Additional states including Maine, New Hampshire, California, Connecticut, Louisiana, South Carolina, Oklahoma, Kansas, Missouri, Kentucky, Michigan, Ohio and Maryland are considering active bills.

 

As part of our multi-year business growth strategy, we made significant investments in the second half of 2018 and first half of 2019 to enter and then build a foundation aimed at accelerating our recently announced U.S. expansion plans. To support these principal objectives, we initiated an ambitious investment strategy that is fundamental to the successful execution of our long-term business plan. These fundamental investments have resulted in short-term, non-recurring expenses related to key elements including the expansion of CEO responsibilities into regulatory and policy development functions, as well as establishing a centralized US-based headquarters. In the third quarter of 2018, we also established a plan to relocate our CEO to the U.S., commenced the recruitment and evaluation of key officers, as well as allocating a software development team at Odissea for coding and submission of our Platform for GLI-33 certification to Gaming Laboratories International (“GLI”) for the U.S. market.

  

Inflation

 

We do not believe that general price inflation will have a material effect on our business in the near future.

 

Foreign Exchange

 

We operate in several foreign countries, including Austria, Italy, Malta and Canada and we incur operating expenses and have foreign currency denominated assets and liabilities associated with these operations. Transactions involving our corporate expenditures are generally denominated in U.S. dollars and Canadian dollars while the functional currency of our subsidiaries is in Euro. Convertible debentures have also been issued in both U.S. dollars and Canadian dollars. Changes and fluctuations in the foreign exchange rate between the Euro and the U.S. dollar and the Canadian dollar and the U.S. dollar will have an effect on our results of operations.

 

Critical Accounting Policies and Estimates

 

Preparation of our unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Significant accounting policies are fundamental to understanding our financial condition and results as they require the use of estimates and assumptions which affect the financial statements and accompanying Notes.

 

 

 

 

 

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Results of Operations

 

Comparison of the three and six months ended June 30, 2019 and 2018.

 

Revenues

 

 

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 
                     

 

The Company generated total revenues of $9,105,353 and $18,371,648 for the three and six months ended June 30, 2019, compared to revenues of $8,822,659 and $17,416,526  for the three and six months ended June 30, 2018, respectively.

 

The increase in revenues for the three months ended June 30, 2019 over the same period ended June 30, 2018 is attributed to the substantial increase in web-based turnover for the three and six months periods, as the Company pursues the global trend of web-based gaming, offset by the substantial decline in land based turnover due to the soccer world cup sporting event in 2018, the event occurs every four years.

 

Selling expenses

 

The Company incurred selling expenses of $7,038,797 and $14,446,503 for the three and six months ended June 30, 2019, compared to $5,826,243 and $11,903,600 for the three and six months ended June 30, 2018. Selling expenses are commissions paid to agents based on a percentage of Handle (Turnover), During the three and six months ended June 2019 our percentage of selling expenses to gross gaming revenues was approximately 70% compared to approximately 62% for the three and six months ended June 2018.

 

General and Administrative Expenses

 

The Company incurred $2,487,299 and $5,660,766 in general and administrative expenses during the three and six months ended June 30, 2019, compared to $2,056,275 and $4,115,728 in the three and six months ended June 30, 2018. The increase in general and administrative expenses was mostly as a result of an increase in payroll expenses, professional fees and gaming related conferences. These expenses have been curtailed with effect from May 2019.

 

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(Loss) Income from Operations

 

The loss from operations of $(420,743) and $(1,735,621) for the three and six months ended June 30, 2019, respectively, compares to income from operations of $940,141 and $1,397,198. The loss from operations during the current fiscal year is directly attributable to higher commissions paid on turnover and the increase in general and administrative expenses discussed above.

 

Interest Expense, Net of Interest Income

 

Interest expense of $1,016,866 and $2,520,656 for the three and six months ended June 30, 2019, respectively compares to interest expense of $1,050,270 and $1,262,509 for the three and six months ended June 30, 2018. The increase in interest expense for the six month period is attributable to the convertible debenture funding which took place from February 2018 to June 2018, resulting in a significant increase in interest and debenture discount amortization during the three months ended June 30, 2018. The convertible debenture interest and amortization expense was incurred for the full six months during the current fiscal year.

 

Gain on Litigation Settlement.

 

The gain on litigation settlement for the six months ended June 30, 2018, related to the settlement of the Paymobile litigation matter. In connection with the settlement, the Company received 2,500,000 shares of Zoompass Holdings, Inc. and recorded a gain on litigation settlement of $516,120 in the first quarter of 2018.

 

Loss on Marketable Securities

 

The loss on marketable securities of $0 and $25,000 for the three and six months ended June 30, 2019, respectively, compares to the loss on marketable securities of $155,000 and $155,000 for the three and six months ended June 30, 2018. The loss on marketable securities is directly related to the stock price of our investment in Zoompass which is marked-to-market each quarter. The shares in Zoompass were acquired by the Company as settlement of a litigation matter.

 

(Loss) Income Before Income Taxes

 

The loss before income taxes of $(1,465,827) and $(4,309,495) for the three and six months ended June 30, 2019, respectively, compares to the loss before income taxes of $(476,646) and the income before income taxes of $282,778 for the three and six months ended June 30, 2019. The increase in loss before income taxes is attributable to the increased selling expenses and increased general and administrative expenses discussed above.

 

Income Tax Provision

 

The income tax provision of $232,417 and $493,964 for the three and six months ended June 30, 2019, respectively, compares to the income tax provision of $512,406 and $757,442 for the three and six months ended June 30, 2018. The decrease in the income tax provision is attributable to lower income earned in one of our subsidiaries in the three and six months ended June 30, 2019 compared to June 30, 2018, impacting on both the overall group profitability and the provision for income tax.

 

Net Loss

 

Net loss of $1,698,244 and $4,803,459 for the three and six months ended June 30, 2019, respectively, compares to the net loss of $989,052 and $474,664 for the three and six months ended June 30, 2018. The increase in net loss is discussed above.

 

Comprehensive Loss

 

Our reporting currency is the U.S. dollar while the functional currency of our subsidies is the Euro, the local currency in Italy and Austria and the functional currency of our Canadian subsidiary is the Canadian dollar. The financial statements of our subsidiaries are translated into United States dollars in accordance with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining other comprehensive income.

 

We recorded a foreign currency translation adjustment loss of $32,633 and $88,813 for the three and six months ended June 30, 2019, respectively, compared to a foreign currency translation adjustment loss of $98,355 and $162,873 for the three and six months ended June 30, 2018, respectively.

 

 

 

 

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Liquidity and Capital Resources

 

Assets

 

At June 30, 2019, we had a total of $24,943,974 in assets compared to $22,587,710 in assets at December 31, 2018. The increase is primarily related to the increase in intangible assets related to the acquisition of the Virtual Generation licenses acquired on January 31, 2019 in terms of the Securities Purchase agreement entered into as disclosed in Note 4 to the financial statements, offset by a reduction in cash balances and gaming accounts receivable.

 

Liabilities

 

At June 30, 2019, we had $18,462,561 in total liabilities and compared to total liabilities of $12,714,078 at December 31, 2018. The increase is attributable to the promissory note payable to related and non-related parties incurred on the acquisition of Virtual Generation Limited during January 2019 as discussed in Note 4 to the financial statements.

 

Working Capital

 

We had $5,228,797 in cash and cash equivalents at June 30, 2019 compared to $6,289,903 on December 31, 2018.

 

We had a working capital deficit of $10,991,063 at June 30, 2019, compared to a working capital deficit of $4,768,877 at December 31, 2018. The increase in the working capital deficit is due to the acquisition of Virtual Generation as disclosed in Note 4 to the financial statements resulting in the acquisition of primarily long term assets in the form of licenses funded by primarily a short-term promissory note.

 

We currently maintain 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 of our shareholders 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, we maintain 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% 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.

 

We currently believe that our existing cash resources together with the revenue from operations that we expect to generate will be sufficient to meet our anticipated needs over the next twelve months from the date hereof. Historically, we have financed our operations through revenue generated from providing online and offline gaming products, services, and Platform services in Italy and the sales of our securities and we expect to continue to seek to obtain required capital in a similar manner. Recently, we have spent, and expect to continue to spend, a substantial amount of funds in connection with our expansion strategy.

 

Accumulated Deficit

 

As of June 30, 2019, we had accumulated deficit of $17,812,354 compared to accumulated deficit of $13,008,894 at December 31, 2018.

 

Cash Flows from Operating Activities

 

Cash flows from operating activities resulted in net cash used in operating activities of $859,580 for the six months ended June 30, 2019, compared to cash provided by operating activities of $1,237,245 for the six months ended June 30, 2018. The increase in cash used in operating activities of $2,096,835 is primarily related to the increase in loss from operations of $4,328,795 offset by the movement in non-cash amortization of deferred costs of $2,037,892.

 

Cash Flows from Investing Activities

 

The net cash provided by investing activities for the six months ended June 30, 2019 was $87,555 compared to net cash used in investing activities of $4,426,851 for the six months ended June 30, 2018 that was attributed directly to the asset purchases of Ulisse and Multigioco on May 31, 2018 pursuant to the Ulisse Put Option and the Multigioco Put Option.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities for the six months ended June 30, 2019 was $359,660 compared to $3,673,614 of net cash provided by financing activities for the six months ended June 30, 2018. We raised funding through the issue of debentures in the prior year of $6,883,905 and repurchased common shares totaling $2,261,307 in the prior year. The common share repurchase was attributed to the asset purchases of Ulisse and Multigioco on May 31, 2018 pursuant to the Ulisse Put Option and the Multigioco Put Option. 

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Contractual Obligations

 

Current accounting standards require disclosure of material obligations and commitments to make future payments under contracts, such as debt, lease agreements, and purchase obligations. Contractual obligations consist of the following:

 

·Promissory notes payable to Braydon Capital Corp., a company owned by Claudio Ciavarella, the brother of our CEO, a related party with principal and interest of approximately $450,559 that is due on demand.

 

·a Promissory note to acquire VG for €3,803,000 that is payable in monthly instalments until January 2022. The amount due under this promissory note as of June 30, 2019 was approximately $3,519,722 (approximately €3,100,000 ), before debt discount of $311,977.

 

·Convertible Debentures denominated in both US$ and CDN$ issued in the first and second quarter of 2018 that mature two years from the issue date. At June 30, 2019, we have outstanding a principal amount of $7,799,057 plus accrued interest of $865,428.

 

Off-Balance-Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that we expect to be material to investors. We do not have any non-consolidated, special-purpose entities.

 

Related Party Transactions

 

Promissory Notes

 

The Company has three promissory notes entered into in 2015 and 2016 with Braydon Capital Corp., 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. The amount outstanding under the promissory notes was $450,559 as of June 30, 2019.

 

In connection with the acquisition of VG on January 31, 2019, disclosed in Note 4 to the financial statements, the Company issued a non-interest bearing promissory note of €3,803,000 owing to both related parties and non-related parties, the balance to be settled as follows:

 

  (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.

 

The amount due under the VG promissory note is $3,519,723, before debt discount of $311,977 as at June 30, 2019.

 

Advances from Stockholders

 

Advances from stockholders represent non-interest-bearing loans that are due on demand.

 

The amount payable to stockholders as of June 30, 2019 was $48,508.

 

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.

 

 

 

 

 

 

 

 

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Newgioco Group is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

 

Item 4. Controls and Procedures.

 

Management's Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is collected, recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

As required by SEC Rule 13a-15(b), our management, under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based on the foregoing evaluation, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), concluded that due to our limited resources our disclosure controls and procedures were not effective. Specifically, our internal control over financial reporting was not effective due to material weaknesses related to a limited segregation of duties due to our limited resources and the small number of employees. Management has determined that this control deficiency constitutes a material weakness which can result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual financial statements that would not be prevented or detected. In addition, due to limited staffing, we are not always able to detect minor errors or omissions in reporting.

 

Going forward, management anticipates that additional staff will be necessary to mitigate these weaknesses, as well as to implement other planned improvements. Additional staff should enable us to document and apply transactional and periodic controls procedures, permit a better review and approval process and improve quality of financial reporting. However, the potential addition of new staff is contingent on obtaining additional financing, and there is no assurance that we will be able to do so.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2018. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Risks Related to Our Financial Position

 

We have incurred substantial losses in the past and it may be difficult to achieve profitability.

 

We have a history of losses and are anticipated to incur additional losses in the development of our business. For the year ended December 31, 2018, we had a net loss of $3.0 million and for the six month period ended June 30, 2019 we had a net loss of $4.8 million. As of December 31, 2018, and June 30, 2019 we had accumulated deficits of $13.0 million, and $17.8 million, respectively. Since we are currently in the early stages of our development and strategy, we intend to continue to invest in sales and marketing, product and solution development and operations, including by hiring additional personnel, upgrading our technology and infrastructure and expanding into new geographical markets. To the extent we are successful in increasing our customer base, we expect to also incur increased losses in the short term despite the fact that our Platform is easily scalable and because costs associated with entering new markets, acquiring clients, customers and operators are generally incurred up front, while service and transactional revenues are generally recognized at future dates if at all. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this section, and unforeseen expenses, difficulties, complications and delays and other unknown events. Although we cannot assure that we will be able to maintain a profitable level of betting operations to meet normal business operating obligations, in recent years we have relied on issuance of debt and equity securities to grow our business such that we have generated sufficient revenue to maintain our existing level of operations and to continue moderate organic growth in the regulated Italian leisure betting market. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease.

 

We expect to continue relying on our discretionary available cash and bank credit to fund our additional acquisitions or enter into new business opportunities that may not be available at reasonable terms, if at all.

 

We have recently initiated an ambitious investment strategy including taking steps to enter the U.S. market which has led to an increase in some recurring and a number of non-recurring expenses. Our ability to execute our growth plan is dependent upon our ability to generate profits from operations in the future, bank credit facilities and/or our ability to obtain the additional necessary bank financing required and to fund our ambitious investment strategy if such financing is available on reasonable terms, if at all.

 

The exercise or conversion of currently outstanding securities would dilute current holders of our common stock.

 

If all of the holders of our outstanding convertible debentures and warrants converted or exercised their securities, we would be obligated to issue 30,374,276 common shares.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the six months ended June 30, 2019, we issued 1,967,760 shares of common stock to the vendors of Virtual Generation limited pursuant to the terms of a Securities Purchase Agreement as disclosed in Note 4 to the financial statements. We issued the securities in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act. We relied on this exemption from registration for private placements based in part on the representations made by the investors with respect to their status as accredited investors, as such term is defined in Rule 501(a) of the Securities Act.

 

During the six months ended June 30, 2019, we issued an aggregate of 1,772,908 shares of common stock upon the conversion of convertible debentures into equity. The issuance was exempt from the registration requirements of the Securities Act by virtue of Section 3(a)(9) thereunder as a transaction not involving a public offering as the issuance was made to existing holders, there was no additional consideration paid for the common stock and no commission or remuneration was paid.

 

On April 22, 2019, we issued an aggregate of 89,857 shares of common stock to certain convertible debenture holders as an incentive for them to transfer the convertible debentures to another investor. We issued the securities in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act. We relied on this exemption from registration for private placements based in part on the representations made by the investors with respect to their status as accredited investors, as such term is defined in Rule 501(a) of the Securities Act.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits

 

Exhibit Number   Description

10.1

 

10.2

 

31.1

 

Independent Contractor Agreement with Mark Korb dated July 1, 2019 (incorporated by reference to the Company’s Current Report on Form 8-K dated July 3, 2019 (File number 000-50045))

Amendment to Employment Agreement dated July 5, 2015 with Michele Ciavarella (incorporated by reference to the Company’s Current Report on Form 8-K dated July 9, 2019 (File umber 000-50045))

Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2   Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date: August 16, 2019 Newgioco Group, Inc.
 

 

 

 

 

By: /s/ Michele Ciavarella

 

Michele Ciavarella

Chief Executive Officer (Principal Executive Officer)

 

 

 

By: /s/ Mark J. Korb

 

Mark J. Korb

Chief Financial Officer (Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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