Quarterly report pursuant to Section 13 or 15(d)

4. Acquisition and rescission of subsidiaries

v3.23.3
4. Acquisition and rescission of subsidiaries
9 Months Ended
Sep. 30, 2023
Business Combination and Asset Acquisition [Abstract]  
4. Acquisition and rescission of subsidiaries

4. Acquisition and rescission of subsidiaries

 

Acquisition agreement

On January 29, 2023 (the “Closing Date”), the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) to acquire 100% of Engage IT Services, Srl, a company organized under the laws of Italy (“Engage IT”), from its founding shareholders (the “Sellers”). The Purchase Agreement provided that, upon the terms and subject to the conditions set forth therein, the Company would acquire all of the shares of Engage IT and Engage IT became a wholly owned subsidiary of Elys.

 

Founded in 2016 by the Company’s current Head of Global Technology, Luca Pasquini, along with Alessandro Alpi and Michael Denney, Engage IT employs 27 specialist technicians, developers and software engineers that specialize in the design, implementation and management of SQL databases, agile project management, and solutions based on the Microsoft cloud platform (Azure) and in the development of .NET applications. Since 2016, Engage has also provided contract services to the Company, playing a key role in the development of the Company’s Elys Gameboard sportsbook technology and Player Account Management Platform (PAM).

 

Pursuant to the terms of the Purchase Agreement, on the Closing Date, the Company paid the “Dollar Equivalent” of €1,080,000 for all of the shares of Engage IT on a debt free basis, which amount may be increased or decreased based on the working capital surplus or deficit, and any indebtedness due to or from Engage IT by or from any one or more of the Sellers to be determined 10 days prior to June 30, 2023, the calculation of the working capital surplus or deficit was not performed prior to June 30, 2023 and will be performed at a later date, if applicable, based on ongoing discussions with the management of Engage IT. The Company satisfied the payment by the issuance 3,018,461 shares of common stock (the “Exchange Shares”), valued at $1,735,615, equal to the “Dollar Equivalent” of the Purchase Price, calculated at the exchange rate at the time of closing, at a price equal to the volume weighted average price per share (calculated to the nearest one-hundredth of one cent) of the Company’s common stock for the twenty consecutive trading days beginning on the twenty-third trading day immediately preceding the Closing Date and concluding at the close of trading on the third trading day immediately preceding the Closing Date or US $0.39 per share, which may be adjusted for any stock split, reverse stock split, stock dividend, recapitalization, combination, exchange or similar event; or any subsequent equity sale or rights offering of Elys, and is subject to shareholder approval if required. Additionally, the Company may repurchase the Exchange Shares in cash in whole or in part at any time on or prior to June 30, 2023. The Company did not exercise its right to acquire the Exchange Shares.

 

The Purchase Agreement contains customary representations, warranties and covenants of Elys and the Sellers. Subject to certain customary limitations, the Sellers have agreed to indemnify Elys and its officers and directors against certain losses related to, among other things, breaches of the Sellers’ representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the Purchase Agreement.

 

The preliminary purchase price allocation was as follows:

 

    Amount
Consideration        
3,018,461 shares of common stock at fair market value   1,735,615  
Total purchase consideration   $ 1,735,615  
         
Recognized amounts of identifiable assets acquired and liabilities assumed        
Cash   $ 94,450  
Accounts receivable – Related party     555,634  
Other Current assets     22,377  
Property and equipment     36,135  
Right-of-use assets     47,335  
    $ 755,931  
Less: liabilities assumed        
Current liabilities assumed   $ (425,882 )
Related party payables     (130,278 )
Operating lease liabilities     (47,335 )
Non-current liabilities assumed     (171,051 )
    $ (774,546 )
Net identifiable assets acquired and liabilities assumed     (18,615 )
Goodwill     1,754,230  
    $ 1,735,615  

 

 

Rescission agreement

On July 15, 2023, the Company and the Sellers, after further due diligence into the operations of Engage, agreed to rescind the Acquisition agreement, as discussed above, with effect from July 17, 2023. In exchange for the return of the shares in Engage to the Sellers, the shares of common stock issued to the Sellers on January 29, 2023 were returned into the custody of the Company and will be cancelled in due course. With effect from July 17, 2023, the company no longer has control over the operations and has ceased all development and support work with Engage, other than projects that required minimal effort to complete. The 3,018,461 common shares returned to the Company had a fair market value of $0.6422 per share on July 17, 2023.

 

As a result of the rescission the Company recorded the following loss from discontinued operations:

 

    Amount
Assets and liabilities transferred        
Cash   $ 15,667  
Accounts receivable     1,166,990  
Prepaid expenses     2,995  
Other Current assets     18,024  
Property and equipment     36,220  
Right-of-use assets     35,094  
Goodwill     1,754,230  
      3,029,220  
Less: liabilities assumed        
Current liabilities assumed     (570,691 )
Related party payables     (173,652 )
Operating lease liabilities     (35,094 )
Income tax payable     (75,941 )
Non-current liabilities assumed     (193,185 )
      (1,048,563 )
         
Net assets transferred   $ 1,980,657  
         
Fair value of 3,018,461 common shares returned to the custody of the Company     1,938,456  
         
Loss on rescission   $ 42,201  

 

The loss from discontinued operations is as follows: 

   

Three months ended September 30,

2023

 

Nine months ended September 30,

2023

Revenue   $ 41,248     $ 622,704  
                 
Costs and Expenses                
General and administrative expenses     86,030       904,152  
Depreciation and amortization     2       2,228  
Total Costs and Expenses     86,032       906,380  
                 
Loss from Operations     (44,784 )     (283,676 )
                 
Other (Expenses) Income                
Other income     23       443  
Other expense     (21 )     (188 )
Total Other (Expenses) Income     2       255  
                 
Loss Before Income Taxes     (44,782 )     (283,421 )
Income tax provision     10,093       85,086  
Net Loss from discontinued operations     (34,689 )     (198,335 )
                 
Loss on recission     (42,201 )     (42,201 )
Loss from discontinued operations   (76,891 )   (240,536 )

 

 

  

The amount of revenue and earnings included in the Company’s consolidated statement of operations and comprehensive income (loss) for the period ended July 17, 2023, the effective date of the rescission, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2022, is presented as follows: 

    Revenue   Earnings
                 
Actual for the period from acquisition to July 15, 2023   $        $ (198,335 )
                 
2023 supplemental pro forma from January 1, 2023 to July 15, 2023   $ 32,233,378     $ (9,023,632 )
                 
2022 supplemental pro forma from January 1, 2022 to September 30, 2022   $ 32,181,552     $ (10,452,167 )

 

The 2023 supplemental pro forma information was adjusted to exclude $73,811 of intercompany profit that would not have been capitalized to platform costs, the associated adjustment to amortization expense of platform costs amounting to $109,132 and the associated deferred taxation calculated on the elimination of the intercompany profit and adjustment to amortization expense amounting to $19,671. The 2022 supplemental pro forma information was adjusted to exclude  $454,950 of intercompany profit that would not have been capitalized to platform costs and an estimated once-off legal expense of $15,000, that would not have been incurred had this transaction taken place on January 1, 2022. There was no associated adjustment to amortization expense as the platform cost associated with the intercompany profit was not being depreciated during the nine months ended September 30, 2022.