UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q/A

 

Amendment No. 1

_________________

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)

 

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. YesNo

 

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). YesNo

 

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). YesNo

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   NWGI   The Nasdaq Capital Market

 

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

 

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 4
     
Item 1 Financial Statements  
  Consolidated Balance Sheets (unaudited) 5
  Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) 6
  Consolidated Statements of Changes in Stockholders' Equity (Deficiency) 7
  Consolidated Statements of Cash Flows (unaudited) 8
  Notes to the Consolidated Financial Statements (unaudited) 9
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation 42
Item 3 Quantitative and Qualitative Disclosures About Market Risk 49
Item 4 Controls and Procedures 49
     
PART II - OTHER INFORMATION 50
     
Item 1 Legal Proceedings  
Item 1A Risk Factors 50
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3 Defaults Upon Senior Securities 51
Item 4 Mine Safety Disclosures 51
Item 5 Other Information 51
Item 6 Exhibits 51
     
SIGNATURES 52

 

 

2


 
 

 

EXPLANATORY NOTE

 

Unless the context requires otherwise, references to “we,” “us,” “our,” and “Newgioco,” and the “Company” refer to Newgioco Group, Inc. and its subsidiaries.

 

The Company has prepared this Amendment No. 1 (this “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which was originally filed with the Securities and Exchange Commission on August 16, 2019 (the “Original 10-Q”) to reflect the restatement of certain of the Company’s previously issued Consolidated Balance Sheets at June 30, 2019, Consolidated Statements of Operations and Comprehensive Income (Loss), Consolidated Statements of Changes in Stockholder’ Equity (Deficiency) and Consolidated Statements of Cash Flows for the quarters ended June 30, 2019 and 2018 and the notes related thereto and certain other related matters.

 

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A.

 

The Company intends to file as soon as practicable the restated financial statements for the quarter ended September 30, 2019.

 

In addition, all share and earnings per share information have been retroactively adjusted to reflect an 1 for 8 reverse stock split effective December 12, 2019.

 

Background

 

On May 5, 2020, the Company filed a Current Report on Form 8-K under Item 4.02 with the Securities and Exchange Commission relating to previously issued financial statements as described below. As indicated in the Current Report on Form 8-K under Item 4.02, the Company determined that a restatement was necessary due to the effect of certain errors in its Consolidated Balance Sheets at December 31, 2018 and 2017, Consolidated Statements of Operations and Comprehensive Income (Loss), Consolidated Statements of Changes in Stockholder’ Equity and Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 (collectively the “Financial Statements”) and the notes related thereto.

 

These errors consisted primarily of the following: (i) the understatement of non-cash consolidated depreciation and amortization by $788,666; (ii) the understatement of unrealized foreign exchange losses of $178,976. In addition, the Company identified other miscellaneous immaterial adjustments amounting to $9,506. As a result, net loss for the year ended December 31, 2018 increased by $582,449 and the net income for the year ended December 31, 2017 increased by $85,198 and the cumulative adjustment to periods prior to January 1, 2017 decreased by $460,885.

 

The Company also analyzed the impact of the aforementioned adjustments and other accumulated misstatements on the financial statements for the interim and annual periods prior to the fiscal year ended December 31, 2018, and concluded that a cumulative opening retained earnings adjustment is appropriate as the correction of the errors in each prior period would not be material individually or in the aggregate to any such prior interim or annual period. However, the Company concluded that correcting the cumulative impact of the errors would be material to its results of operations for the year ended December 31, 2018 and the three subsequent quarters.

 

In addition, the Company adjusted the opening Consolidated Balance Sheets to reflect the changes describe above and made amendments to its Consolidated Balance Sheet at June 30, 2019, Consolidated Statement of Operations and Comprehensive Income (Loss), Consolidated Statements of Changes in Stockholders Equity and Consolidated Statements of Cash Flows for the three and six months ended June 30, 2019 and the related notes thereto (collectively “the Interim financial Statements”) to take into account the following:

 

Accounting for leases in terms of ASC 842 – leases, which requires the Company to

 

-recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard was effective for interim periods beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019 using the prospective transition method, and accordingly restated its Interim Financial Statements. In terms of the adjustment, the Company recorded an initial Right-of-use asset of $646,138 under non-current assets and a corresponding Operating Lease liability of $617,352 on January 1, 2019 and adjusted for subsequent addition to the right of use asset and Operating liability of $217,352 and the disposal of right-of-use assets of $27,517 and a reduction in the corresponding liability of $32,499 during the six months ended June 30, 2019. The subsequent amortization of the Right-of-use asset and Operating lease liability resulted in a net adjustment to the Right-of-use asset of $736,625 and to the operating lease liability of $703,167 and other accrued liabilities of $33,620, after taking into account foreign currency translation differences of $162.

 

3


 
 

 

-The accounting for finance leases in terms of ASC 842- Leases, was also modified to correct certain immaterial differences in accounting for these leases. The net adjustment resulted in the recording of an asset of $43,961 and a finance lease liability of $44,590 and the subsequent adjustment to net loss from operation of a net $163.

 

-Accounting for Imputed Deferred Taxation in terms of ASC 740, on the acquisition of Virtual Generation which was effective January 31, 2019. ASC 740 require the recognition of imputed deferred tax on the identifiable intangible assets acquired. This resulted in an adjustment to goodwill on acquisition of $1,401,608 and the initial recognition of a deferred tax liability of $1,401,608. The deferred tax liability was subsequently decreased by $38,934, the deferred tax liability is related to the amortization of the intangible asset acquired of $111,239.

 

-Other adjustments, with a net impact of $28,233 to the Statement of Operations and Comprehensive Loss were made to correct errors that perpetuated from the December 31, 2018 balance sheet adjustments in the Interim Financial Statements for the six months ended June 30, 2019. Included in other adjustments is a reclassification of selling expenses of $770,025 to general and administrative expenses to conform to current disclosure.

 

To assist in your review of this filing, this 10-Q/A sets forth the Original 10-Q in its entirety, as amended to reflect the changes described above. The Company believes that presenting all of the amended and restated information in this 10-Q/A allows investors to review all pertinent data in a single presentation. This 10-Q/A amends and restates the Financial Statements to reflect the restated numbers to correct the errors. In addition, in this 10-Q/A, corresponding changes were also made to the Part I, Item 2, under “Management’s Discussion and Analysis of Results of Operations and Financial Condition” to reflect the restated numbers; Part II, Item 1A to reflect the restated numbers in the applicable risk factor; Part II, Item 2 to correct the number of shares issuable upon exercise of debentures in the applicable risk factor and Part II, Item 2 Sale of Unregistered Securities to correct the number of unregistered shares of common stock that were issued during the quarter.

 

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 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.

 

4


 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

NEWGIOCO GROUP, INC.

Consolidated Balance Sheets

(Unaudited)

 

   June 30, 2019  December 31, 2018
   (As Restated)   
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 
           
Non-current Assets          
Restricted cash   1,439,782    1,560,539 
Property, plant and equipment   519,213    476,047 
Right-of-use assets   736,625    —   
Intangible assets   16,197,962    12,527,980 
Goodwill   1,663,591    262,552 
Investment in non-consolidated entities   250,000    275,000 
Total Noncurrent Assets   20,807,173    15,102,118 
Total Assets  $27,092,690   $22,653,481 
           
Current Liabilities          
Line of credit - bank  $1,000,000   $750,000 
Accounts payable and accrued liabilities   3,594,997    4,603,608 
Gaming accounts balances   2,217,089    1,049,423 
Taxes payable   995,004    1,056,430 
Advances from stockholders   48,508    39,237 
Convertible Debt, 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, net of discount of $88,647   1,405,804    318,078 
Bank loan payable – current portion   122,829    120,920 
Operating lease liability   91,449      
Financial lease liability   6,194      
Total Current Liabilities   16,986,901    11,880,219 
           
Non-current liabilities          
Deferred tax liability   1,362,674    —   
Notes payable, net of discount of $54,216   498,874    —   
Notes payable – related party, net of discount of $36,144   332,582    —   
Bank loan payable   161,504    225,131 
Operating lease liability   611,718    —   
Financial lease liability   38,396    —   
Other long-term liabilities   613,963    608,728 
Total Non-current liabilities   3,619,711    833,859 
Total Liabilities   20,606,612    12,714,078 
           
Stockholders' Equity          
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued   —      —   
Common Stock, $0.0001 par value, 80,000,000 shares authorized; 9,918,517 and 9,442,537 shares issued and outstanding as of June 30, 2019 and December 31, 2018*   992    944 
Additional paid-in capital*   25,462,926    23,962,920 
Accumulated other comprehensive income   (118,638)   (57,431)
Accumulated deficit   (18,859,202)   (13,967,030)
Total Stockholders' Equity   6,486,078    9,939,403 
Total Liabilities and Stockholders’ Equity  $27,092,690   $22,653,481 

 

* Adjusted for a 1 for 8 reverse stock split effective December 12, 2019.

 

See notes to the unaudited consolidated financial statements

5


 
 

 

NEWGIOCO GROUP, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

 

   

For the Three Months Ended

June 30,

 

For the Six Months Ended

June 30,

    2019   2018   2019   2018
    (As Restated)   (As Restated)   (As Restated)   (As Restated)
Revenue   $ 9,105,353     $ 8,822,659     $ 18,371,648     $ 17,416,526  
                                 
Costs and Expenses                                
Selling expenses     6,268,772       5,826,243       13,676,478       11,903,600  
General and administrative expenses     3,360,284       2,201,805       6,557,739       4,407,119  
Total Costs and Expenses     9,629,056       8,028,048       20,234,217       16,310,719  
                                 
(Loss) Income from Operations     (523,703 )     794,611       (1,862,569 )     1,105,807  
                                 
Other (Expenses) Income                                
Other income     7,725       -       7,725       -  
Interest expense, net of interest income     (1,017,243 )     (1,050,270 )     (2,521,355 )     (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     (1,045,461 )     (1,416,787 )     (2,574,573 )     (1,114,420 )
                                 
Loss Before Income Taxes     (1,569,164 )     (622,176 )     (4,437,142 )     (8,613 )
Income tax provision     (209,056 )     (512,406 )     (455,030 )     (757,442 )
Net Loss     (1,778,220 )     (1,134,582 )     (4,892,172 )     (766,055 )
                                 
Other Comprehensive Income (Loss)                                
Foreign currency translation adjustment     69,023       63,305       (61,207 )     160,778  
                                 
Comprehensive Loss   $ (1,709,197 )   $ (1,071,277 )   $ (4,953,379 )   $ (605,277 )
                                 
Loss per common share – basic and diluted*   $ (0.17 )   $ (0.13 )   $ (0.50 )   $ (0.08 )
Weighted average number of common shares outstanding – basic and diluted*     9,870,357       9,344,282       9,870,357       9,308,511  
                                 

 

* Adjusted for a 1 for 8 reverse stock split effective December 12, 2019.

 

See notes to the unaudited consolidated financial statements

6


 
 

 

NEWGIOCO GROUP, INC.

Consolidated Statements of Changes in Stockholders' Equity

Three and six months ended June 30, 2019 and June 30, 2018

(Unaudited)

 

   Common Stock*  Additional  Accumulated Other      
   Shares  Amount  Paid-In Capital*  Comprehensive loss  Accumulated Deficit  Total
                   
Balance at December 31, 2018   9,442,537   $944   $23,962,920   $(57,431)  $(13,967,030)  $9,939,403 
                               
Common stock issued on conversion of debentures   287,561    29    919,795              919,824 
Common stock issued for the purchase of subsidiaries   65,298    7    196,776              196,783 
Foreign currency translation adjustment                  (130,230)        (130,230)
Net income (loss)                       (3,113,952)   (3,113,952)
                               
Balance at March 31, 2019   9,795,396   $980   $25,079,491   $(187,661)  $(17,080,982)  $7,811,828 
Common stock issued on conversion of debentures   32,785    3    104,908    —      —      104,911 
Common stock issued for the purchase of subsidiaries   90,336    9    278,527    —      —      278,536 
Foreign currency translation adjustment   —      —      —      69,023         69,023 
Net loss   —      —           —      (1,778,220)   (1,778,220)
Balance at June 30, 2019   9,918,517    992    25,462,926    (118,638)   (18,859,202)   6,486,078 

 

 

   Common Stock*  Additional  Accumulated
Other
     Total
   Shares  Amount  Paid-In Capital*  Comprehensive Income  Accumulated Deficit  Stockholders’ Equity
Balance at December 31, 2017   9,267,948   $927   $14,548,951   $126,612   $(10,338,273)  $4,338,217 
Imputed interest on stockholder advances   —      —      1,251    —      —      1,251 
Common stock issued with debentures   13,875    1    55,499    —      —      55,500 
Beneficial conversion feature of convertible debentures   —      —      91,017    —      —      91,017 
ASU 2017-11 adjustment to common stock issued debentures   —      —      (10,853)   —      —      (10,853)
ASU2017-11 adjustment to beneficial conversion feature of debentures   —      —      (6,780)   —      —      (6,780)
ASU 2017-11 Elimination of derivative liability movement   —      —      —      —      (254,289)   (254,289)
Foreign currency translation adjustment   —      —      —      97,473    —      97,473 
Net income   —      —      —      —      622,816    622,816 
                               
Balance at March 31, 2018   9,281,823   $928   $14,679,085   $224,085   $(9,969,746)  $4,934,352 
Common stock issued with debentures   215,028    22    1,770,175    —      —      1,770,197 
Common stock retired on acquisition of Multigioco   (255,000)   (26)   (2,260,948)   —      —      (2,260,974)
Common stock issued net of stock retired on acquisition of Ulisse   175,550    18    5,587,656    —      —      5,587,674 
ASU 2017-11 adjustments to common stock issued with debentures   —      —      (1,232,358)   —      —      (1,232,358)
ASU 2017-11 adjustments to the beneficial conversion feature of convertible debentures   —      —      2,501,332    —      —      2,501,332 
Fair value of warrants issued   —      —      2,951,429    —      —      2,951,429 
Foreign currency translation adjustment   —      —      —      63,305    —      63,305 
Net loss   —      —      —      —      (1,134,582)   (1,134,582)
                               
Balance at June 30, 2018   9,417,401   $942   $23,996,371   $287,390   $(11,104,328)  $13,180,375 

 

* Adjusted for a 1 for 8 reverse stock split effective December 12, 2019.

 

See notes to the unaudited consolidated financial statements

7


 
 

NEWGIOCO GROUP, INC.

Consolidated Statements of Cash Flows

(Unaudited)

  

For the six months Ended

June 30,

   2019  2018
   (As Restated)  (As Restated)
Cash Flows from Operating Activities      
Net loss  $(4,892,172)  $(766,055)
           
Adjustments to reconcile net loss to net cash (used in) provided by operating activities          
Depreciation and amortization   445,990    330,832 
Amortization of deferred costs   2,096,080    1,012,225 
Non-cash interest   409,114    58.188 
Loss on debt conversions   35,943    212,270 
Unrealized loss on trading securities   25,000    155,000 
Imputed interest on advances from stockholders   —      1,514 
Movement in deferred taxation   (38,934)   —   
Recovery of assets        (516,120)
Bad debt expense        6,354 
Changes in Operating Assets and Liabilities          
Prepaid expenses   (7,732)   5,225 
Accounts payable and accrued liabilities   (444,743)   756,987 
Accounts receivable   (57,679)   98,833 
Gaming accounts receivable   357,886    31,409 
Gaming accounts liabilities   1,167,454    (583,899)
Taxes payable   (53,941)   439,731 
Other current assets   (57,163)   (270,259)
Long term liability   9,296    78,346 
Net Cash (Used in) Provided by Operating Activities   (1,005,601)   1,050,581 
           
Cash Flows from Investing Activities          
Acquisition of property, plant, and equipment, and intangible assets   (54,283)   (4,577,886)
Acquisition of Virtual Generation, net of cash of $47,268   (216,150)   —   
Net Cash Used in Investing Activities   (270,433)   (4,577,886)
           
Cash Flows from Financing Activities          
Proceeds from bank credit line   250,000    —   
Repayment of bank credit line   —      (177,060)
Repayment of bank loan   (59,007)   71,143)
Proceeds from debentures and convertible notes, net of repayment   —      6,883,905 
Repayment of deferred purchase consideration – non related parties   (173,862)   —   
Repayment of deferred purchase consideration – related parties   (107,986)   —   
Repayment of financial leases   (5,449)   (215,745)
Loan to related party   (11,992)   —   
Purchase of treasury stock   —      (2,261,307)
Loans advanced to stockholders   —      (485,036)
Repayment of loans advanced to stockholders   6,605    —   
Net Cash (Used in) Provided by Financing Activities   (101,691)   3,673,614 
           
Effect of change in exchange rate   195,864    153,442 
           
Net (decrease) increase in cash   (1,181,861)   299,751 
Cash, cash equivalents and restricted cash – beginning of the period   7,850,442    7,057,763 
Cash, cash equivalents and restricted cash – end of the period  $6,668,581   $7,357,514 
           
Reconciliation of cash, cash equivalents and restricted cash within the Balance Sheets to the Statement of Cash Flows          
Cash and cash equivalents  $5,228,797   $6,785,266 
Restricted cash included in non-current assets   1,439,784    572,248 
   $6,668,581   $7,357,514 

 

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  $272,307   $5,588,088 
Common shares issued on conversion of debentures  $104,911   $—   
Common shares issued 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 

 

See notes to the unaudited consolidated financial statements

8


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

1. 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 satellite 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 satellite 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 the 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 the 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 the 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 the 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 the 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. The Company recorded 1,401,608 of goodwill arising from 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 the 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 reflect the potential dilution of securities that could share in the earnings of an entity and include warrants granted and convertible debt.

 

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.

 

 

15


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

2. Accounting Policies and Estimates (continued)

 

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.

 

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.

 

 

16


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results

 

The company identified the following errors in the financial results for the periods ended June 30, 2019 and 2018.

 

Three and six months ended June 30, 2019

 

The company restated its financial statements for the year ended December 31, 2018, to correct the recording of non-cash amortization of intangible assets and the depreciation of revalued plant and equipment which was incorrectly classified as other comprehensive income, the unrealized foreign currency loss on convertible debentures denominated in Canadian Dollars and other immaterial adjustments, resulting in a restatement of opening balances of plant and equipment of $121,243, intangible assets of $(55,475), other comprehensive income of $(1,023,907) and opening retained earnings of $(958,138).

 

The Company had not accounted for ASC 842 – leases, which was effective for periods beginning January 1, 2019, in its interim financial statements for the periods ended June 30, 2019, June 30, 2019 and September 30, 2019.

 

The Company recorded a right-of-use asset of $646,138 and an operating lease liability of $617,352 and an accrued liability of $28,786 as of January 1, 2019. An additional $217,352 of operating leases were entered into and a further $27,517 of operating leases were terminated before maturity during the six months ended June 30, 2019. The amortization of the right-of-use asset during the six months ended June 30, 2019 amounted to $95,622, the amortization of the operating lease liability of $90,086 and the increase in the accrued liability of $4,834.

 

The Company adjusted its accounting for financial leases by recording an office equipment asset of $34,638 and a finance lease liability of $34,524 as of January 1, 2019. During the six months ended June 30, 2019, an additional $15,118 of additional office equipment under financial leases was recorded. The Company recorded a depreciation charge of $5,623 related to these assets, an interest charge of $699 and amortization of financial leases of $5,336.

 

The Company modified its accounting for the acquisition of Virtual Generation by accounting for the imputed deferred tax liability on the value of the Platform acquired, resulting in an adjustment of $1,401,608 to deferred tax liability and recording of a goodwill asset on acquisition of $1,401,608. The Virtual Generation platform valued at $4,004,954 was amortized for the six months ended June 30, 2019, resulting in an amortization expense of $111,239 and a reduction in the deferred tax liability of $38,934.

 

Other immaterial adjustments relating to the recording of intercompany movements and certain expenses were incorrectly reflected in other comprehensive income, the net adjustment amounted to $16,233 and an adjustment of comprehensive loss of $28,223. Included in other adjustments is a reclassification of selling expenses of $770,025 to general and administrative expenses to conform to current disclosure.

 

Due to a 1 for 8 reverse stock split which took place on December 12, 2019, the outstanding shares and additional paid in capital was adjusted to take into account the effects of the reverse stock split.

 

Three and six months ended June 30, 2018

 

The error corrected in the financial statements for the year ended December 31, 2018, resulted in an adjustment to depreciation and amortization expense of $235,296, an adjustment to foreign exchange movements of $55,764 and an immaterial $331 adjustment to general and administrative expenses.

 

 

 

 

 

 

17


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results (continued)

 

The restatement recorded by the Company for the six months ended June 30, 2019 was as follows:

   Prior year adjustment  Lease adjustments  Acquisition of Virtual Generation adjustments  Other adjustments  Total Restated
                
Opening retained earnings  $958,136   $—     $—     $—     $958,136 
 Selling Expenses   —      —      —      (770,025)   (770,025)
General and administrative expenses   —      (6,148)   —      

798,248

    

792,100

 
Depreciation and amortization   —      5,623    111,239    (11,990)   104,872 
Interest expense   —      699    —      —      699 
Deferred taxation   —      —      (38,934)   —      (38,934)
Net increase in accumulated deficit   958,136    174    72,305    16,233    1,046,848 
                          
Net decrease in other Comprehensive loss   (1,023,907)   617    —      (28,223)   (1,051,513)
                          
Net increase in plant and equipment and intangibles   65,771    780,586    1,290,369    11,990    2,148,716 
                          
Total increase in current liabilities   —      (131,263)   —      —      (131,263)
                          
Net increase in non-current liabilities  $—     $(650,114)  $(1,362,674)  $—     $(2,012,788)

  

 

The restatement recorded by the Company for the six months ended June 30, 2018 was as follows:

 

   Plant and equipment and intangibles adjustments  Foreign currency adjustments  Other adjustments  Total Restated
             
General and administrative expenses  $—     $55,764   $331   $56,095 
Depreciation and amortization   235,296    —      —      235,296 
Net increase in accumulated deficit  $235,296   $55,764   $331   $291,391 

 

18


 
 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results (continued)

 

The reconciliation of the consolidated balance sheet as of June 30, 2019 is as follows:

 

   As Previously Reported  Prior year adjustment  Lease adjustments  Acquisition of Virtual Generation  Other Adjustments  As Restated
Current Assets                  
Cash and cash equivalents  $5,228,797   $—     $—     $—     $—     $5,228,797 
Accounts receivable   116,398    —      —      —      —      116,398 
Gaming accounts receivable   654,016    —      —      —      —      654,016 
Prepaid expenses   140,107    —      —      —      —      140,107 
Related party receivable   851    —      —      —      —      851 
Other current assets   145,348    —      —      —      —      145,348 
Total Current Assets   6,285,517    —      —      —      —      6,285,517 
                               
Non-Current Assets                              
Restricted cash   1,439,782    —      —      —      —      1,439,782 
Property, plant and equipment   347,824    121,248    43,961    —      6,180    519,213 
Right-of-use assets   —      —      736,625    —      —      736,625 
Intangible assets   16,353,775    (55,477)   —      (111,239)   10,903    16,197,962 
Goodwill   267,076    —      —      1,401,608    (5,093)   1,663,591 
Investment in non-consolidated entities   250,000    —      —      —      —      250,000 
Total Non-Current Assets   10,658,457    65,771    780,586    1,290,369    11,990    20,807,173 
Total Assets  $24,943,974   $65,771   $780,586   $1,290,369   $11,990   $27,092,690 
                               
Current Liabilities                              
Line of credit - bank  $1,000,000   $—     $—     $—     $—     $1,000,000 
Accounts payable and accrued liabilities   3,982,319    —      33,620    —      (420,942)   3,594,997 
Gaming accounts balances   2,217,089    —      —      —      —      2,217,089 
Taxes payable   995,004    —      —      —      —      995,004 
Advances from stockholders   48,508    —      —      —      —      48,508 
Convertible Debt, net of discount of $2,578,995 and $4,587,228, respectively   6,083,982    —      —      —      —      6,083,982 
Notes payable, net of discount of $132,970   1,421,045    —      —      —      —      1,421,045 
Notes payable – related party, net of discount of $88,647   1,405,804    —      —      —      —      1,405,804 
Bank loan payable – current portion   122,829    —      —      —      —      122,829 
Operating lease liability   —      —      91,449    —           91,449 
Financial lease liability   —      —      6,194    —           6,194 
Total Current Liabilities   17,276,580    —      131,263    —      —      16,986,901 
                               
Non-current liabilities                              
Deferred tax liability        —      —      1,362,674    —      1,362,674 
Notes payable, net of discount of $54,216   498,874                        498,874 
Notes payable – related party, net of discount of $36,144   332,582                        332,582 
Bank loan payable   161,504    —      —      —      —      161,504 
Operating lease liability        —      611,718    —      —      611,718 
Financial lease liability        —      38,396    —      —      38,396 
Other long-term liabilities   193,021    —      —      —      420,942    613,963 
Total Non-Current Liabilities  1,185,981    —      650,114    1,362,674    —      3,619,711 
Total Liabilities   18,462,561    —      781,377    1,362,674    —      20,606,612 
                               
Stockholders' Equity                              
Preferred stock, $0.0001 par value; 20,000,000 shares authorized, none issued  —      —      —      —      —      —   
Common Stock, $0.0001 par value, 80,000,000 shares authorized; 9,795,396 shares issued and outstanding as of June 30, 2019*   7,935    —      —      —      (6,943)   992 
Additional paid-in capital*   25,455,983    —      —      —      6,943    25,462,926 
Accumulated other comprehensive income   (1,170,151)   1,023,907    (617)   —      28,223    (118,638)
Accumulated deficit   (17,812,354)   (958,136)   (174)   (72,305)   (16,233)   (18,859,202)
Total Stockholders' Equity   6,481,413    65,771    (791)   (72,305)   11,990    6,486,078 
Total Liabilities and Stockholders’ Equity  $24,943,974   $65,771   $780,586   $1,290,369   $11,990   $27,092,690 

 

* Adjusted for a 1 for 8 reverse stock split effective December 12, 2019.

19


 
 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results (continued)

 

The reconciliation of the consolidated statement of operations and comprehensive loss for the three months ended June 30, 2019 is as follows:

 

   As Previously Reported 

Lease

adjustments

  Acquisition of Virtual Generation  Other Adjustments  As Restated
                
Revenue  $9,105,353   $—     $—     $—     $9,105,353 
                          
Costs and Expenses                         
Selling expenses   7,038,797    —      —      (770,025   6,268,772 
General and administrative expenses   2,487,299    (214)   66,744    806,553    3,360,284 
Total Costs and Expenses   9,526,096    (214)   66,744    36,430    9,629,056 
                          
Loss from Operations   (420,743)   214    (66,744)   (36,430)   (523,703)
                          
Other (Expenses) Income                         
Other income   7,725    —      —      —      7,725 
Interest expense, net of interest income   (1,016,866)   (377)   —      —      (1,017,243)
Loss on conversion of debt   (35,943)   —      —      —      (35,943)
Total Other (Expenses) Income   (1,045,084)   (377)   —      —      (1,045,461)
                          
Loss Before Income Taxes   (1,465,827)   (163)   (66,744)   (36,430)   (1,569,164)
                          
Income tax provision   (232,417)   —      23,361    —      (209,056)
                          
Net Loss  $(1,698,244)  $(163)  $(43,383)  $(36,430)  $(1,778,220)
                          
Other Comprehensive Loss                         
Foreign currency translation adjustment   (32,633)   (55)   —      101,711    69,023 
                          
Comprehensive Loss  $(1,730,877)  $(218)  $(43,383)  $65,281   $(1,709,197)
                          
Loss per common share – basic and diluted*  $(0.18)                 $(0.17)
Weighted average number of common shares outstanding – basic and diluted*   9,870,357                   9,870,357 

  

 

20


 
 

 

The reconciliation of the consolidated statement of operations and comprehensive loss for the six months ended June 30, 2019 is as follows:

   As Previously Reported 

Lease

adjustments

  Acquisition of Virtual Generation  Other Adjustments  As Restated
                
Revenue  $18,371,648   $—     $—     $—     $18,371,648 
                          
Costs and Expenses                         
Selling expenses   14,446,503    —      —      (770,025   13,676,478 
General and administrative expenses   5,660,767    (525)   111,239    786,258    

6,557,739

 
Total Costs and Expenses   20,107,270    (525)   111,239    16,233    20,234,217 
                          
Loss from Operations   (1,735,622)   525    (111,239)   (16,233)   (1,862,569)
                          
Other (Expenses) Income                         
Other income   7,725    —                7,725 
Interest expense, net of interest income   (2,520,656)   (699)   —      —      (2,521,355)
Loss on conversion of debt   (35,943)   —      —      —      (35,943)
    (25,000)   —      —      —      (25,000)
Total Other (Expenses) Income   (2,573,874)   (699)   —      —      (2,574,573)
                          
Loss Before Income Taxes   (4,309,496)   (174)   (111,239)   (16,233)   (4,437,142)
                          
Income tax provision   (493,964)   —      38,934    —      (455,030)
                          
Net Loss  $(4,803,460)  $(174)  $(72,305)  $(16,233)  $(4,892,172)
                          
Other Comprehensive Loss                         
Foreign currency translation adjustment   (88,813)   (617)   —      28,223    (61,207)
                          
Comprehensive Loss  $(4,892,273)  $(791)  $(72,305)  $11,990   $(4,953,379)
                          
Loss per common share – basic and diluted*  $(0.50)                 $(0.50)
Weighted average number of common shares outstanding – basic and diluted*   9,764,450                   9,870,357 

  

* Adjusted for a 1 for 8 reverse stock split effective December 12, 2019.

 

 

21


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results (continued)

 

The reconciliation of the consolidated statement of operations and comprehensive loss for the three months ended June 30, 2018 is as follows:

 

   As Previously Reported  Depreciation and amortization adjustments  Foreign Exchange adjustments  Other Adjustments  As Restated
                
Revenue  $8,822,659   $—     $—     $—     $8,822,659 
                          
Costs and Expenses                         
Selling expenses   5,826,243    —      —      —      5,826,243 
General and administrative expenses   2,056,275    117,648    27,882    —      2,201,805 
Total Costs and Expenses   7,882,518    117,648    27,882    —      8,028,048 
                          
Income from Operations   940,141    (117,648    (27,882)   —      794,611 
                          
Other (Expenses) Income                         
Interest expense, net of interest income   (1,050,270)   —      —      —      (1,050,270)
Imputed interest on related party advances   753    —      —      —      753 
Loss on debt modification   (212,270)   —      —      —      (212,270)
Loss on marketable securities   (155,000)   —      —      —      (155,000)
Total Other (Expenses) Income   (1,416,787)   —      —      —      (1,416,787)
                          
Loss Before Income Taxes   (476,646)   (117,648)   (27,882)   —      (622,176)
                          
Income tax provision   (512,406)   —      —      —      (512,406)
                          
Net Loss  $(989,052)  $(117,648)  $(27,882)  $—     $(1,134,582)
                          
Other Comprehensive Loss                         
Foreign currency translation adjustment   (98,355)   —      —      —      (98,355)
                          
Comprehensive Loss  $(1,087,407)  $(117,648)  $(27,882)  $—     $(1,232,937)
                          
Loss per common share – basic and diluted*  $(0.12)                 $(0.13)
Weighted average number of common shares outstanding – basic and diluted*   9,344,282                   9,344,282 

 

22


 
 

The reconciliation of the consolidated statement of operations and comprehensive loss for the six months ended June 30, 2018 is as follows:

 

   As Previously Reported  Depreciation and amortization adjustments  Foreign Exchange adjustments  Other Adjustments  As Restated
                
Revenue  $17,416,526   $—     $—     $—     $17,416,526 
                          
Costs and Expenses                         
Selling expenses   11,903,600    —      —      —      11,903,600 
General and administrative expenses   4,115,728    235,296    55,764    331    4,407,119 
Total Costs and Expenses   16,019,328    235,296    55,764    331    16,310,719 
                          
Income from Operations   1,397,198    (235,296)   (55,764)   (331)   1,105,807 
                          
Interest expense, net of interest income   (1,262,509)   —      —      —      (1,262,509)
Imputed interest on related party advances   (761)   —      —      —      (761)
Gain on litigation settlement   516,120    —      —      —      516,120 
Loss on debt modification   (212,270)                  (212,270)
Loss on marketable securities   (155,000)                  (155,000)
Total Other Expenses (Income)   (1,114,420)   —      —      —      (1,114,420)
                          
Income (Loss) Before Income Taxes   282,778    (235,296)   (55,764)   (331)   (8,613)
                          
Income tax provision   (757,442)   —      —      —      (757,442)
                          
Net Loss  $(474,664)  $(235,296)  $(55,764)  $(331)  $(766,055)
                          
Other Comprehensive Income (Loss)                         
Foreign currency translation adjustment   (162,873)   267,556    55,764    331    160,778 
                          
Comprehensive Loss  $(637,537)  $32,260   $—     $—     $(605,277)
                          
Loss per common share – basic and diluted*  $(0.05)                 $(0.08)
Weighted average number of common shares outstanding – basic and diluted*   9,308,511                   9,308,511 

 

* Adjusted for a 1 for 8 reverse stock split effective December 12, 2019.

23


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results (continued)

 

The reconciliation of the consolidated statement of cash flows for the ix months ended June 30, 2019 is as follows:

 

   As Previously Reported 

Lease

adjustments

  Acquisition of Virtual Generation  Other Adjustments and reclassifications  As Restated
Cash Flows from Operating Activities                         
Net loss  $(4,803,460)  $(174)  $(72,305)  $(16,233)  $(4,892,172)
                          
Adjustments to reconcile net loss to net cash generated by operating activities                         
Depreciation and amortization   291,332    5,623    111,239    37,796    445,990 
Amortization of deferred costs   2,096,080    —      —      —      2,096,080 
Non-cash interest   409,114    —      —      —      409,114 
Loss on debt conversions   35,943              —      35,943 
Unrealized loss on trading securities   25,000    —      —      —      25,000 
Deferred taxation movements   —      —      (38,934)   —      (38,934)
Foreign translation loss   173,400    —           (173,400)   —   
Changes in Operating Assets and Liabilities                         
Prepaid expenses   (7,732)   —      —      —      (7,732)
Accounts payable and accrued liabilities   (26,789)   —      —      (417,954)   (444,743)
Accounts receivable   (57,679)   —      —      —      (57,679)
Gaming accounts receivable   357,886    —      —      —      357,886 
Gaming accounts liabilities   727,433    —      —      440,021    1,167,454 
Taxes payable   (53,941)   —      —      —      (53,941)
Other current assets   (57,163)   —      —      —      (57,163)
Long term liability   30,995    —      —      (21,699)   9,296 
Net Cash used in operating Activities   (859,581)   5,449    —      (151,469)   (1,005,601)
                          
Cash Flows from Investing Activities                         
Acquisition of property, plant, and equipment, and intangible assets   (59,253)   —      4,954    16    (54,283)
Decrease in restricted cash   100,140    —      —      (100,140)   —   
Acquisition of Virtual Generation, net of cash of $47,268   46,668    —      (262,818)   —      (216,150)
Net Cash Used in Investing Activities   87,555    —      (257,864)   (100,124)   (270,433)
                          
Cash Flows from Financing Activities                         
Proceeds from bank credit line, net   250,000    —      —      —      250,000 
Repayment of bank loan   (59,007)   —      —      —      (59,007)
Repayment of deferred purchase consideration – non-related parties   (331,913)   —      158,051    —      (173,862)
Repayment of deferred purchase consideration – related parties   (213,353)        105,367         (107,986)
Movement in financial leases   —      (5,449)   —      —      (5,449)
Advance to related party   (11,992)   —      —      —      (11,992)
Repayment of loans advanced to stockholders   6,605    —      —      —      6,605 
Net Cash Used in Financing Activities   (359,660)   (5,449)   263,418    —      (101,691)
                          
Effect of change in exchange rate   70,580    —      (5,554)   130,838    195,864 
                          
Net decrease in cash   (1,061,106)   —      —      (120,755)   (1,181,861)
Cash, cash equivalents and restricted cash  – beginning of the period   6,289,903    —      —      1,560,539    7,850,442 
Cash, cash equivalents and restricted cash – end of the period  $5,228,797   $—     $—     $1,439,784   $6,668,581 
                          
Reconciliation of cash, cash equivalents and restricted cash within the balance sheet to the statement of cash flows                         
                          
Cash and cash equivalents  $5,228,797   $—     $—     $—     $5,228,797 
Restricted cash   —                1,439,784    1,439,784 
   $5,228,797             $1,439,784   $6,668,581 

 

24


 
 

 NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

3. Restatement of prior period results (continued)

 

The reconciliation of the consolidated statement of cash flows for the six months ended June 30, 2018 is as follows:

 

   As Previously Reported 

Depreciation
and

amortization

adjustments

 

Foreign

Exchange adjustments

  Other Adjustments and reclassifications  As Restated
Cash Flows from Operating Activities               
Net Loss  $(474,664)  $(235,296)  $(55,764)  $(331)  $(766,055)
                          
Adjustments to reconcile net loss to net cash provided by operating activities                        
Depreciation and amortization   226,436    104,396    —      —      330,832 
Amortization of deferred costs   1,012,225    —      —      —      1,012,225 
Non-cash interest   58,188    —      —      —      58,188 
Loss on debt modification   212,270                   212,270 
Imputed interest on advances from stockholders   1,514    —      —      —      1,514 
Unrealized loss on trading securities   155,000    —      —      —      155,000 
Recovery of assets   (516,120)   —      —      —      (516,120)
Bad debt expense   6,354    —      —      —      6,354 
Changes in Operating Assets and Liabilities                         
Prepaid expenses   5,225    —      —      —      5,225 
Accounts payable and accrued liabilities  756,656    —      —      331    756,987 
Accounts receivable   98,833    —      —      —      98,833 
Gaming accounts receivable   31,409    —      —      —      31,409 
Gaming accounts liabilities   (583,899)   —      —      —      (583,899)
Taxes payable   439,731    —      —      —      439,731 
Other current assets   (270,259)   —      —      —      (270,259)
Long term liability   78,346    —      —      —      78,346 
Net Cash Provided by operating Activities   1,237,245    (130,900)   (55,764)   —      1,050,581 
                          
Cash Flows from Investing Activities                         
Acquisition of property, plant, and equipment, and intangible assets   (4,442,508)   (135,378)   —      —      (4,577,886)
Decrease in restricted cash   15,657    —      —      (15,657)   —   
Net Cash Used in Investing Activities   (4,426,851)   (135,378)   —      (15,657)   (4,577,886)
                          
Cash Flows from Financing Activities                         
Repayment of bank credit line, net   (177,060)   —      —      —      (177,060)
Repayment of bank loan   (71,143)   —      —      —      (71,143)
Proceeds from debentures and convertible notes, net of repayment   6,883,905    —      —      —      6,883,905 
Loan to related party   (215,745)                  (215,745)
Purchase of treasury stock   (2,261,307)                  (2,261,307)
Repayment to stockholders, net of advances   (485,036)   —      —      —      (485,036)
Net Cash Provided by Financing Activities  3,673,614    —      —      —      3,673,614 
                          
Effect of change in exchange rate   (168,600)   266,278    55,764    —      153,442 
                          
Net increase in cash   315,408    —      —      (15,657)   299,751 
Cash, cash equivalents and restricted cash – beginning of the period   6,469,858    —      —      587,905    7,057,763 
Cash, cash equivalents and restricted cash – end of the period  $6,785,266   $—     $—     $572,248   $7,357,514 
                          
Reconciliation of cash, cash equivalents and restricted cash within the balance sheet to the statement of cash flows                        
                          
Cash and cash equivalents  $6,785,266   $—     $—     $—     $6,785,266 
Restricted cash   —      —      —      572,248    572,248 
   $6,785,266   $—     $—     $572,248   $7,357,514 

 

25


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

4. 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 13 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.

 

 

26


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

4. 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   $ (0.71 )   $     $ (0.71 )   $ 0.59     $ (0.12 )
Weighted average number of common shares outstanding – basic and diluted     9,344,282       9,344,282       9,344,282       9,344,282       9,344,282  

 

 

 

27


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

4. 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   $ (0.63 )   $     $ (0.63 )   $ 0.56     $ (0.07 )
Weighted average number of common shares outstanding – basic and diluted     9,308,511       9,308,511       9,308,511       9,308,511       9,308,511  

 

 

 

 

 

 

28


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

4. 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  

 

29


 
 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

5. 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 416,400 shares of common stock in consideration for 100% of the issued and outstanding shares of Ulisse.

 

Pursuant to the Ulisse SPA, the purchase price was subject to an adjustment equal to two times earnings before income taxes calculated on a pro rata basis from the closing date upon completion of the ADM license tender auction. The sellers were also permitted to exercise the option to resell to the Company 50% of the shares of common stock (or 208,200 shares) issued in consideration for the purchase price at a fixed price of USD $4.00 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 USD $11.7 million). The purchase price adjustment was paid half in cash of 5 million Euros (approximately USD $5.85 million) and the Company issued 591,950 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 $9.44 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 255,000 shares issued to the Multigioco sellers in exchange for EUR 510,000 (approximately USD $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. VG owns and has developed a virtual gaming software platform, 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. Pursuant to the agreement, the Company issued 65,298 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 Four Million Euro (€4,000,000) in consideration for all the ordinary shares of VG and Naos, on the Closing Date as follows:

 

i.a cash payment of One Hundred and Eight Thousand Euro (€108,000);
ii.the issuance of shares of the Company’s common stock valued at Eighty-Nine Thousand Euro (€89,000); and
iii.the delivery of a non-interest bearing promissory note (the “Promissory Note”) 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 (1) month after the Closing Date; and (b) an aggregate of €1,411,000 in shares of the Company’s common stock in seventeen (17) equal and consecutive monthly instalments of €83,000 as determined by the average of the closing prices of such shares on the last ten (10) trading days immediately preceding the determination date of each monthly issuance, commencing on March 1, 2019.

 

The value of the EUR 4,000,000 promissory note net of discount was EUR 3,665,255 ($4,193,374 U.S.). The note was allocated as 40% as related party and 60% non-related party. In the six months ending June 30, 2019, cash payments were $240,015 net of interest of $2,354. Shares were issued at an equivalent of $195,220 net of interest of $1,563. Transaction gain during the quarter was $150. As of June 30, 2019, the promissory note net of discount related to the purchase of VG had a balance of $3,758,289 ($1,502,832 related party; $2,255,457 non-related party).

 

 

 

 

30


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

5. Acquisition of betting software technology; offline and land-based gaming assets (continued)

 

The purchase price was allocated to the fair market value of tangible and intangible assets acquired and liabilities assumed. Intangible assets will be amortized over their remaining useful life as follows:

 

Cash $ 47,268  
Current assets   178.181  
Property, Plant and Equipment   41,473  
Betting Platform   4,004,594  
    4,271,516  
Less: liabilities assumed   (78,141 )
Less: Imputed Deferred taxation on identifiable intangible assets acquired   (1,401,608 )
Total identifiable assets less liabilities assumed   2,791,767  
Goodwill arising on acquisition   1,401,608  
Total purchase price $ 4,193,375  

 

Intangible assets will be amortized over their remaining useful life over a period of 15 years.

 

The €3,803,000 promissory note was recorded as a liability owing to related parties of €1,521,000 (Note 11) and to third parties of €2,281,800 (Note 14).

 

 

 

 

 

 

 

 

31


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

6. Leases

 

Adoption of ASC Topic 842, “Leases”

 

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 840. The Company’s portfolio of leases contains both finance and operating leases that relate to real estate agreements, vehicles and office equipment agreements.

 

Practical Expedients and Elections

 

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, the Company’s assessment on whether a contract is or contains a lease, and its initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease components on the office equipment leases and elected the short-term lease recognition exemption for all leases that qualify.

 

Discount Rate

 

To determine the present value of minimum future lease payments for leases at January 1, 2019, the Company was required to use the rate implicit in the lease unless the rate is not determinable then a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the “incremental borrowing rate” or “IBR”).

 

Operating leases

 

Property and vehicle leases

 

The Company determined the rate implicit in the lease or an IBR where that rate was not determinable. The Company used country specific rates based on the country the assets are located in.

 

Property leases

 

The Company determined that rates ranging from 2.12% to 4.5% were appropriate discount rates to apply to its real-estate operating leases.

 

The Company entered into new real estate operating leases during the current period and determined an appropriate discount rate to apply to its operating leases was 2.12%.

 

Vehicle leases

 

The Company determined that appropriate discount rates to apply to its vehicle operating leases ranged from 5.1% to 6.7%.

 

Finance leases

 

Computer and office equipment leases

 

The Company has financed several items of computer and office equipment through vendor financing. The discount rates for finance leases ranged from 2.5% to 4.2%.

 

 

32


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

6. Leases (continued)

 

Right of use assets

 

Upon adoption of ASC 842, effective January 1, 2019, the Company recorded a right of use asset for operating leases of $646,138.

 

Right of use assets are included in the consolidated balance sheet are as follows:

 

    June 30, 2019
     
Non-Current assets        
Right-of-use assets - operating leases, net of amortization   $ 736,625  
Right-of-use assets – finance leases, net of amortization (included in plant and equipment)   $ 43,961  

 

Lease costs consists of the following:

 

   

Six months ended

June 30, 2019

     
Finance lease cost:   $ 15,817  
Amortization of right-of-use assets     15,118  
Interest expense on lease liabilities     699  
         
Operating lease cost     95,371  
         
Total lease cost   $ 111,191  

 

Other lease information:

 

 

Six months ended

June 30, 2019

   
Cash paid for amounts included in the measurement of lease liabilities      
Operating cash flows from finance leases $ (699 )
Operating cash flows from operating leases   (95,371 )
Financing cash flows from finance leases   (5,449 )
       
Right-of-use assets obtained in exchange for new finance leases   15,118  
Right-of-use assets disposed of under operating leases prior to lease maturity   (27,517 )
Right-of -use assets obtained in exchange for new operating leases $ 95,622  
       
Weighted average remaining lease term – finance leases   3.88 years  
Weighted average remaining lease term – operating leases   3.83 years  
       
Weighted average discount rate – finance leases   3.48 %
Weighted average discount rate – operating leases   3.66 %
       

 

 

33


 
 

 

NEWGIOCO GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

 

6. Leases (continued)

 

Maturity of Leases

 

Finance lease liability

 

The amount of future minimum lease payments under finance leases are as follows:

 

  Amount
  2019   $ 6,890  
  2020     13,780  
  2021     10,543  
  2022     8,536  
  2023     6,788  
  2024     817  
  Total undiscounted minimum future lease payments