(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as "may," "might," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "pro forma" or the negative of these words or other words or expressions of and similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. Factors that might cause such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed with the Securities and Exchange Commission on April 13, 2021 under the heading "Risk Factors" and the Risk Factors as described in Item 1A of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.
Except as expressly stated, the financial condition and results of operations discussed throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations are those of Elys Game Technology, Corp. and its consolidated subsidiaries.
We currently provide our gaming services in Italy through our subsidiary, Multigioco Srl ("Multigioco"), which operations are carried out via both land-based or online retail gaming licenses regulated by the Agenzia delle Dogane e dei Monopoli ("ADM") that permits us to distribute leisure betting products such as sports betting, and virtual sports betting products through both physical, land-based retail locations as well as online through our licensed website www.newgioco.it or commercial webskins linked to our licensed website and through mobile devices. Our Austria Bookmaker license that is regulated by the Austrian Federal Finance Ministry ("BMF") permits us to operate online sports betting in certain European jurisdictions outside of Italy through our subsidiary Ulisse GmbH ("Ulisse") under the free-trade principles incorporated within bilateral Intra-EU trade agreements that refers to all trade, including e-commerce transactions in most goods, services and products between member states of the European Union ("EU").
We also provide Gaming services in the US market via our recently acquired subsidiary Bookmakers Company US, LLC in certain licensed states where we offer bookmaking and platform services to our customers. Our intention is to focus our attention on expanding the US market. We recently began operation is Washington DC through a Class B Managed Service Provider and Class B Operator license to operate a sportsbook within the Grand Central Bar and Grill located in the Adams Morgan area of Washington, D.C., and in October 2021 we entered into an agreement with Ocean Resort Casino in Atlantic City to commence operations in the state of New Jersey in March 2022.
Additionally, we are a global gaming technology company which owns and operates a betting software designed with a unique "distributed model" architecture colloquially named Elys Game Board (the "Platform") through our Odissea subsidiary. The Platform is a fully integrated "omni-channel" framework that combines centralized technology for updating, servicing and operations with multi-channel functionality to accept all forms of customer payment through the two distribution channels described above. The omni-channel software design is fully integrated with a built in player gaming account management system, built-in sports book and a virtual sports platform through our VG subsidiary. The Platform also provides seamless application programming interface integration of third-party supplied products such as online casino, poker, lottery and horse racing and has the capability to incorporate e-sports and daily fantasy sports providers.
Our corporate group is based in North America, which includes an executive suite situated in San Francisco, California and a Canadian office in Toronto, Ontario through which we carry-out corporate activities, handle day-to-day reporting and U.S. development planning, and through which various employees, independent contractors and vendors are engaged.
For the period ended September 30, 2021, transaction revenue generated through our subsidiaries Multigioco and Ulisse consisted of wagering and gaming transaction income broken down to: (i) spread on sports bet wagers, and (ii) fixed rate commissions on casino, poker, lotto and horse racing wagers from online based betting web-shops and websites as well as land-based retail betting shops located throughout Italy; while our service revenue generated by our Platform is primarily derived from bet and wager processing through Multigioco and Ulisse. Since the majority of Ulisse Data Transmission Centers (CTD) locations were not expected to re-open after the COVID-19 related lockdowns in Italy subside, management decided to simplify our Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence in Italy during Q2-2021 and focusing Ulisse operations to online operations in Austria and other potential European regions.
We believe that our Platform is considered one of the newest betting software platforms in the world and our plan is to expand our Platform offering to new jurisdictions around the world on a B2B basis, including expansion through Europe, South America, South Africa and the developing market in the United States. During the year ended December 31, 2020 and the nine months ended September 30, 2021, we also generated service revenue from royalties through authorized agents by providing our virtual sports products through our VG subsidiary and generated service revenues through the provision of bookmaking and platform services through our recently acquired subsidiary, Bookmakers Company US, LLC. We intend to leverage our partnerships in these countries to cross-sell our Platform services to expand the global distribution of our betting solutions.
Impact of COVID-19
As a result of the global outbreak of the COVID-19 virus, on March 8, 2020 the Italian government issued a decree which imposed certain restrictions on public gatherings and travel, and closures of physical venues that included betting shops, arcades and bingo halls across Italy. Accordingly, we had temporarily closed all betting shop locations throughout Italy as a result of the decree until May 4, 2020. Subsequently, on March 10, 2020 the Italian government imposed further restrictions on travel throughout Italy as well as transborder crossings and had either postponed or cancelled most professional sports events which had an effect on the Company's overall sports betting handle and revenues and negatively impacted the Company's operating results.
On June 19, 2020 all land-based betting shops, including corner locations such as coffee shops throughout Italy temporarily reopened until November 2020 when the Italian government imposed new lockdowns that were lifted on June 14, 2021. The closing of physical betting shop locations did not affect our online and mobile business operations which has mitigated some of the impact. Due to the high percentage of vaccinations administered in Italy, we do not anticipate further severely restrictive lockdowns.
We anticipate that COVID-19 will continue to negatively impact our operating results in future periods, and we expect that a significant number of locations will not re-open after the COVID-19 related lockdowns in Italy subside. Since the duration and scope of the COVID-19 outbreak worldwide, including the impact to the local economies and retail business is not precisely determinable at this time, management decided to close our Ulisse operations in Italy during Q2 2021, while focusing investments on growing our more familiar Multigioco brand, the result of which management believes has reduced the complexity and improve the efficiency of our gaming operations in Italy.
Expansion and New Markets
United States Operations Development
On July 15, 2021, we completed the acquisition of Bookmakers Company US LLC dba US Bookmaking ("USB") in accordance with the terms of the Membership Purchase Agreement that we entered into on July 5, 2021 with the members of USB (the "Sellers"), making USB a wholly owned subsidiary of the Company. USB's management team includes a long time sports book operator Victor Salerno, with over 40 years of experience in the Nevada sports book business managing risk for over 100 properties and who was inducted into the American Gaming Association's Gaming Hall of Fame in 2015 and SBC's Hall of Fame in 2020; Bob Kocienski, CEO, with over 40 years of experience in the gaming industry including oversight on the sports books at several high profile casinos; Robert Walker, Director of Bookmaking, with over 30 years of experience in managing sports books at several casinos including the Stardust, Mirage, and the MGM; and John Salerno, Director of Operations and Compliance with over 20 years of experience. USB currently operates in 4 states (New Mexico, Colorado, North Dakota and Michigan) providing services to 6 clients (Sky Ute Casino Resort, Santa Ana Star Casino, Isleta Resort & Casino, Santa Claran Hotel & Casino, Odawa Casino, and 4 Bears Casino) with pending operations in 2 additional states (Washington, DC and Iowa).
Pursuant to the terms of the Purchase Agreement, the consideration paid for all of the equity of USB was $6 million in cash plus the issuance of 1,265,823 shares of our common stock having a value of $6,000,000 based upon a price of $4.74 per share which was the volume weighted average closing price of the stock for the 90 trading days preceding the closing date. The Sellers will have an opportunity to receive up to an additional $38 million plus a potential premium of 10% (or $3.8 million) based upon achievement of stated adjusted cumulative EBITDA milestones during the next four years, payable 50% in cash and 50% in Elys stock at a price equal to volume weighted average price of our common stock for the 90 consecutive trading days preceding January 1 of each subsequent fiscal year for the duration of the earnout period ending December 31, 2025, subject to obtaining shareholder approval, if the aggregate number of shares to be issued pursuant to the Purchase Agreement exceed 4,401,020 and with a cap of 5,065,000 on the aggregate number of shares to be issued. Any excess not approved by shareholders or exceeding the cap will be paid in cash.
The Purchase Agreement contains customary representations, warranties and covenants of us and the Sellers. Subject to certain customary limitations, the Sellers have agreed to indemnify us and ours 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 commencement of betting transactions in the United States are subject to obtaining the required certification, licensing and approvals from the respective state gambling control agency, in addition to any other state or federal regulatory approval required by law, On September 1, 2021, we issued a press release announcing the approval of our first license in Washington DC, a Class B Managed Service Provider and Class B Operator licenses to operate a sportsbook within the Grand Central Bar and Grill located in the Adams Morgan area of Washington, D.C. which commenced sports betting in October 2021, and in October 2021 we entered into an agreement with Ocean Resort Casino in Atlantic City to commence operations in the state of New Jersey in March 2022.
We do not believe that general price inflation will have a material effect on our business in the near future.
We operate in several foreign countries, including Austria, Italy, Malta and Canada and we incur operating expenses and have foreign currency denominated assets and liabilities associated with these operations. Transactions involving our corporate expenditures are generally denominated in U.S. dollars and Canadian dollars while the functional currency of our subsidiaries is in Euro. Changes and fluctuations in the foreign exchange rate between the US Dollar and the Euro, Canadian dollar and Colombian Peso will have an effect on our results of operations.
Critical Accounting Policies and Estimates
Preparation of our unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Significant accounting policies are fundamental to understanding our financial condition and results as they require the use of estimates and assumptions which affect the financial statements and accompanying Notes.
Recently Issued Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding recently issued accounting standards.
Results of Operations
Results of Operations for the three months ended September 30, 2021 and the three months ended September 30, 2020
The following table represents disaggregated revenues from our gaming operations for the three months ended September 30, 2021 and 2020. Net Gaming Revenues represents Turnover (also referred to as "Handle"), the total bets processed for the period, less customer winnings paid out, and taxes due to government authorities, Service Revenues is revenue invoiced for our Elys software service and royalties invoiced for the sale of virtual products.
Three Months Ended Increase September 30, 2021 September 30, 2020 (decrease) Percentage change Turnover Turnover web-based $ 162,471,799 $ 117,879,687 $ 44,592,112 37.8 % Turnover land-based 1,193,779 25,823,099 (24,629,320 ) (95.4 )% Total Turnover 163,665,578 143,702,786 19,962,792 13.9 % Winnings/Payouts Winnings web-based 152,328,199 110,841,093 41,487,106 37.4 % Winnings land-based 1,031,217 21,495,660 (20,464,443 ) (95.2 )% Total Winnings/payouts 153,359,416 132,336,753 21,022,663 15.9 % Gross Gaming Revenues 10,306,162 11,366,033 (1,059,871 ) (9.3 )% Less: ADM Gaming Taxes 2,515,570 1,698,192 817,378 48.1 % Net Gaming Revenues 7,790,592 9,667,841 (1,877,249 ) (19.4 )% Add: Service Revenues 239,490 33,955 205,535 605.3 % Total Revenues $ 8,030,082 $ 9,701,796 $ (1,671,714 ) (17.2 )%
The Company generated total revenues of $8,030,082 and $9,701,796 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $1,671,714 or 17.2%.
The change in turnover (handle) is primarily due to the following:
Web-based turnover increased by $44,592,112 or 37.8%. The increase was due to the significant number of new online players while the physical betting shops were closed for a significant portion of the prior year and up until June 14, 2021 due to the pandemic. The reopening of physical land-based locations during June 2021 resulted in a lower percentage growth in our web-based turnover for the current quarter, however it still remains significant and reinforces our belief that web based turnover will continue its growth trajectory. In addition, due to the closure of our Ulisse operations in Italy, we generated no revenue from this entity. We expect the business mix to continue to trend towards online channels, and we still expect quarterly growth for the foreseeable future as we gain market share. The percentage of payouts on web-based turnover improved to 93.8% from 94.0% for the three months ended September 30, 2021 and 2020, respectively.
Land-based turnover decreased by $24,629,320 or 95.4%. The decrease over the prior period was impacted by the closure of the Ulisse Italian operations during June 2021, with no revenue generated from this entity during the current period. The impact of the closure of our Ulisse operations was offset by increased online gaming in Multigioco. We expect the business mix to continue trending towards online channels. The percentage of payouts on land-based turnover increased to 86.4% from 83.2% for the three months ended September 30, 2021 and 2020, respectively.
The turnover mix impacts our Gross Gaming Revenue. In the prior year three-month period ended September 30, 2020 sports betting represented 31.4% of turnover and casino style games represented 67.8% and other was 0.8%, in the current year three-month period ended September 30, 2021 sports betting represented 19.2% of turnover and casino style games represented 80.1% of turnover and other was 0.7%. Although the shift towards sports betting had a positive impact on our gross gaming revenue, the closure of all Ulisse Italian based locations in the second quarter, had a negative impact on the overall sports betting turnover resulting in our blended Hold (sports betting combined with i-gaming and online poker) decreasing to 6.3% compared to 7.9% for the three months ended September 30, 2021 and 2020, respectively. Casino style games generally have a lower Hold compared to our sports betting business.
Disaggregated sportsbook hold, before gaming taxes, decreased to 14.8% from 17.0% of handle for the three months ended September 30, 2021 and 2020, respectively, a decrease of 2.2 percentage points in sportsbook hold. The closure of the Ulisse operations had a negative impact on overall sports betting during the current three month period compared to the same prior year period and the lower sports betting hold had a negative impact on our overall gross gaming revenue, or our blended hold (sports betting combined with i-gaming and online poker). Although the Casino style games hold improved to 4.2% from 3.6% for the three months ended September 30, 2021 and 2020, respectively, the shift of overall revenue towards on-line casino style games with a lower hold and lower margin poker rake, resulted in an overall blended conversion of turnover to revenue hold of 6.3% compared to 7.9% for the three months ended September 30, 2021 and 2020, respectively, a year-over-year decrease of 1.6 percentage points in blended hold.
Gaming taxes increased by $817,378 or 48.1% over the prior period. The relative rate of our gaming taxes, which is based on Gross Gaming Revenues was 24.4% and 14.9% for the three months ended September 30, 2021 and 2020, respectively. The increase is attributable to all of our Italian based gaming business shifting to Multigioco. In the prior period Ulisse had a significantly lower tax rate due to its incorporation being situated outside of Italy.
The majority of Ulisse CTD locations were not expected to re-open after the COVID-19 related lockdowns in Italy, management simplified its Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence in Italy at the end of the second quarter of 2021, re-focusing our Ulisse online operations in Austria and other potential European regions.
Service revenues increased by $205,535 or 605.3%. This is primarily due to; (i) revenues generated by our Colombian operations of $99,524, which started trading in the last quarter of the prior year and revenues generated of $121,552 from our recent acquisition of USB. This revenue remains insignificant to total revenues during the periods presented.
We incurred selling expenses of $6,054,757 and $7,154,623 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $1,099,866 or 15.4%. Selling expenses are commissions that are paid to our sales agents as a percentage of turnover (handle) and are not affected by the winnings that are paid out. Therefore, increases in turnover (handle), will typically result in increases in selling expenses but may not result in increases in overall revenue if winnings/payouts, that are subject to the unknown outcome of sports events that we have no control over, are very high. The percentage of selling expenses to turnover improved to 3.7% compared to 5.0% for the three months ended September 30, 2021 and 2020, respectively. The improvement is due to the wind down of Ulisse during the second quarter, which had a commission percentage of 9.8% in the prior year.
General and Administrative Expenses
General and administrative expenses were $5,075,300 and $3,156,505 for the three months ended September 30, 2021 and 2020, respectively, an increase of $1,918,795 or 60.8%. The increase over the prior year is attributable to the following: (i) an increase in personnel costs of $1,074,838 in our European operations as well as in our US operations as we gear up for our expansion into the US markets, this includes both administrative personnel and engineering personnel to develop the platform for the US market; (ii) an increase in stock based compensation expense of $626,376 primarily due to the periodic amortization expense of options granted to senior management during the second half of the prior year and the third quarter of the current year; (iii) an increase in platform and IT related services to support the services offered by the group of $54,322, and (iv) an increase in depreciation and amortization expense of $185,557 offset by (v) a foreign exchange gain realized predominantly in our corporate operations of $423,452 due to the improvement in the US Dollar exchange rate against the Euro. The balance of the increase of $401,154 consists of numerous individually insignificant expenses that have increased due to the increased activity as we gear up for our expansion into the US market.
Loss from Operations
The loss from operations was $3,099,975 and $609,332 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,490,643 or 408.8%. The increase in operating loss is directly attributable to the decrease in revenues of $1,671,714 and the increase in general and administrative expenses of $1,918,795, offset by a reduction in selling expenses of $1,099,866, as discussed above.
Other income was $74,327 and $37,237 for the three months ended September 30, 2021 and 2020, respectively, an increase of $37,090 or 99.6%. Other income includes a gain realized on reconciling our accounting records to the platform records.
Other expense was $384 and $109,623 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $109,239 or 99.6%. The prior year expense consists primarily of a contribution made to an Italian sporting Association to relaunch sporting operations post the COVID-19 shut down.
Interest Expense, Net of Interest Income
Interest expense was $4,705 and $56,093 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $51,388 or 91.6%. The decrease is primarily related to the repayment and the conversion into equity of convertible debentures during the prior year resulting in lower interest-bearing debt. The last convertible debenture was repaid during the first quarter of 2021.
Change in fair value of contingent purchase consideration
Change in fair value of contingent purchase consideration was $569,076 and $0 for the three months ended September 30, 2021 and 2020, respectively, an increase of $569,076. The change in fair value of contingent purchase consideration is the accretion expense associated with the present value of contingent purchase consideration due on the acquisition of USB.
Amortization of present value discount
Amortization of present value discount was $0 and $43,604 for the three months ended September 30, 2021 and 2020, respectively, an increase of $514,892. The amortization of present value discount in the prior period, related to deferred purchase consideration on the acquisition of Virtual Generation which was fully amortized in the first quarter of the current period.
(Loss) gain on Marketable Securities
The loss on marketable securities was $200,000 and $250,000 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $50,000 or 20.0%. The losses and gains on marketable securities is directly related to the stock price of our investment in Zoompass which is marked-to-market each quarter. The shares in Zoompass were acquired by the Company as settlement of a litigation matter, we have no influence over the performance of Zoompass.
Loss Before Income Taxes
Loss before income taxes was $3,799,813 and $1,031,379 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,768,434 or 268.4%. The increase is primarily attributable to the increase in loss from operations and the change in fair value of contingent purchase consideration, as discussed above.
Income Tax Provision
The income tax provision was a credit of $284,636 and a charge of $(181,902) for the three months ended September 30, 2021 and 2020, respectively, a decrease of $466,538 or 256.5%. The current period credit is due to the reversal of a tax provision raised in the previous quarter due to the current period reduction in profitability in our Multigioco and Odissea operations and an adjustment to a prior period income tax charge in Ulisse related to incentive bonuses reversed during the current period of $119,660.
Net loss was $3,515,177 and $1,213,281 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,301,896 or 189.7% due to the increase in loss before income taxes and the reduction in income tax provision, discussed above.
Our reporting currency is the U.S. dollar while the functional currency of our Italian, Maltese and Austrian subsidiaries is the Euro, the functional currency of our Canadian subsidiary is the Canadian Dollar and the functional currency of our Colombian operation is the Colombian Peso. The financial statements of our subsidiaries are translated into United States dollars in accordance with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining other comprehensive income.
We recorded a foreign currency translation loss of $(154,572) and a foreign currency translation gain of $218,193 for the three months ended September 30, 2021 and 2020, respectively, primarily due to the strengthening of the US Dollar against the Euro during the current period and the weakening against the Euro in the prior period.
Results of Operations for the nine months ended September 30, 2021 and the nine months ended September 30, 2020
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Nov 15, 2021
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