ELYS BMG GROUP, INC. You should read the following discussion and analysis of our financial condition and plan of operations together with our financial statements and the related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Annual Report. All amounts in this Annual Report are inU.S. dollars, unless otherwise noted. Overview Except as expressly stated, the financial condition and results of operations discussed throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations are those ofElys Game Technology, Corp. and its consolidated subsidiaries. 44 We currently provide our gaming services inItaly 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. Management decided to focus its attention on developing the U.S. market for future growth and allowed the Austria Bookmaker license that is regulated by theAustrian Federal Finance Ministry ("BMF") to be revoked by not renewing required monetary deposits. We also provide Gaming services in the U.S. market via our recently acquired subsidiary US Bookmaking in certain regulated states where we offer bookmaking and platform services to our customers. Our intention is to focus our attention on expanding the U.S. market. We recently began operation isWashington, D.C. through a Class B Managed Service Provider and ClassB Operator license to operate a sportsbook within theGrand Central Bar and Grill located in the AdamsMorgan area ofWashington, D.C. , and inOctober 2021 we entered into an agreement withOcean Casino Resort inAtlantic City and commenced operations in the state ofNew Jersey inMarch 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 Virtual Generation 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 inNorth America , which includes an executive suite situated inLas Vegas, Nevada and a Canadian office inToronto, Ontario through which we carry-out corporate activities, handle day-to-day reporting andU.S. development planning, and through which various employees, independent contractors and vendors are engaged. For the period endedDecember 31, 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 throughoutItaly ; while our service revenue generated by our Platform is primarily derived from bet and wager processing inItaly through Multigioco and Ulisse, and in theU.S. , through US Bookmaking and Gameboard. Since the majority of CTD locations were not expected to re-open after the COVID-19 related lockdowns inItaly subsided, management simplified our Italian footprint by focusing our investment towards the Multigioco operations and discontinued Ulisse presence inItaly during the second quarter of 2021. 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 throughEurope ,South America ,South Africa and the developing market inthe United States . During the year endedDecember 31, 2021 and 2020, we also generated service revenue from royalties through authorized agents by providing our virtual sports products through our Virtual Generation subsidiary and generated service revenues through the provision of bookmaking and platform services through our recently acquired subsidiary, US Bookmaking. We intend to leverage our partnerships in these countries to cross-sell our Platform services to expand the global distribution of our betting solutions.
We operate two business segments in the leisure gaming industry and our revenue is derived as follows:
1. Betting establishments Transaction revenue through our offering of leisure betting products to retail customers directly through our online distribution on websites or a betting shop establishment or through third party agents that operate white-label websites and/or land-based retail venues; and 2. Betting platform software and services
SaaS based service revenue through providing our Platform and virtual sports products to betting operators.
This Management's Discussion and Analysis includes a discussion of our operations for the year endedDecember 31, 2021 and 2020, which reflects the operations of US Bookmaking for the five and a half months of the year endedDecember 31, 2021 . 45 Recent Developments
OnNovember 19, 2021 , we entered into an Open Market Sale AgreementSM (the "Sale Agreement") withJefferies LLC (the "Sales Agent") pursuant to which we may offer and sell our shares of common stock (the "Common Stock"), from time to time, through the Sales Agent (the "Offering"). The Common Stock is being offered and sold pursuant to the Company's Registration Statement on Form S-3 (File No. 333-256815), which was declared effective onJune 14, 2021 (the "Registration Statement"). We will pay the Sales Agent a commission for its services in acting as agent in the sale of shares of Common Stock. The Sales Agent will be entitled to compensation in an amount equal to three percent of the gross sales price of all of the shares of Common Stock sold through it under the Sale Agreement. In addition, we will reimburse the Sales Agent for certain expenses, including the fees and disbursements of the Sales Agent's legal counsel, in an amount not to exceed$200,000 in addition to certain ongoing disbursements of its legal counsel, unless the Company and the Sales Agent otherwise agree. The Sale Agreement will terminate upon the earlier of (1) the sale of all the shares of Common Stock subject to the Sale Agreement or (2) termination of the Sale Agreement by the Sales Agent or us, as permitted therein. We intend to use the net proceeds from the Offering, if any, for general corporate purposes, which may include, among other things, working capital. OnMarch 28, 2022 , we activated the Open Market Sale Agreement we entered into withJeffries LLC onNovember 19, 2021 and sold a total of 147,710 shares of common stock for net proceeds of$331,520 after commission of$10,253 . Results of Operations
Results of operations for the years ended
The comparisons below include a discussion of our operations for the years ended
Revenues The following table represents disaggregated revenues from our gaming operations for the years endedDecember 31, 2021 and 2020. Net Gaming Revenues represents turnover (also referred to as "handle"), the total bets processed for the period, less customer winnings paid out, commissions paid to agents, and taxes due to government authorities. Commission and service revenues represent commissions on lotto ticket sales and revenue invoiced for our Platform service and royalties invoiced for the sale of virtual products. 46 Years Ended Increase/ December 31, 2021 December 31, 2020 (decrease) Percentage change Turnover Web-based$ 826,789,619 $ 505,369,803 $ 321,419,816 63.6 % Land-based 15,071,218 68,888,592 (53,817,374 ) (78.1 )% Total Turnover 841,860,837 574,258,395 267,602,442 46.6 % Winnings/Payouts Winnings web-based 771,852,252 473,794,175 298,058,077 62.9 % Winnings land-based 12,842,577 56,467,865 (43,625,288 ) (77.3 )% Total Winnings/payouts 784,694,829 530,262,040 254,432,789 48.0 % Gross Gaming Revenues 57,166,008 43,996,355 13,169,653 29.9 % Less: Gaming Taxes 12,657,930 6,874,752 5,783,178 84.1 % Net Gaming Revenues 44,508,078 37,121,603 7,386,475 19.9 % Betting platform software and services 1,038,713 144,764 893,949 617.5 % Total Revenues$ 45,546,791 $ 37,266,367 $ 8,280,424 22.2 %
The Company generated total revenues of
The change in total revenues is primarily due to the following:
Web-based turnover increased by$321,419,816 or 63.6%. 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 current year, only re-opening onJune 14, 2021 due to the pandemic. The increase over the prior year was impacted by the temporary shutdown of betting shops inItaly onMarch 8, 2020 due to COVID-19. This trend has continued with more people relying on using web based platforms to place wagers. The ratio of payouts on online turnover improved from 93.8% in the prior year to 93.4% in the current year. The payout ratio varies based on the skill and luck of our customers and the outcome of sporting events which are inherently unpredictable and can fluctuate significantly from period to period. 47 Land-based turnover decreased by$53,817,374 or 78.1%. The decrease over the prior period was impacted by the shutdown of betting shops inItaly that started onMarch 8, 2020 due to COVID-19 and the majority of which were effectively terminated onJune 14, 2021 . The impact was significant for both our Ulisse operation, which ceased operations inItaly inJune 2021 and our Multigioco land-based operation, which impact was offset by increased online based gaming in both Multigioco and Ulisse during the period January toJune 2021 . The ratio of payouts on land-based turnover deteriorated to 85.2% in the current year from 82.0% in the prior year. The payout ratio varies based on the skill and luck of our customers and the outcome of sporting events which are inherently unpredictable and can fluctuate significantly from period to period. Disaggregated sportsbook hold decreased to 15.7% from 18.9% of handle for the years endedDecember 31, 2021 and 2020, respectively, a decrease of 3.2 percentage points in sportsbook hold while our casino style game hold increased to 4.2% from 3.8% for the years endedDecember 31, 2021 and 2020, respectively, an increase of 0.4 percentage points. The blended hold decreased to 6.8% from 7.7% for the years endedDecember 31, 2021 and 2020, respectively, a decrease of 0.9 percentage points. The decrease in sports betting hold had an overall negative impact on our overall gross gaming revenue. The shift towards growing our online channel, with higher pay-out casino games and lower margin poker rake, resulted in an overall decrease in blended conversion of turnover to revenue. Gaming taxes increased by$5,783,178 or 84.1% over the prior year. The relative rate of our gaming taxes, which is based on Gross Gaming Revenues, of 22.2% for the year endedDecember 31, 2021 is significantly higher than the 15.6% for the year endedDecember 31, 2020 , respectively, and is primarily due to the mix of our Gross Gaming revenues shifting to Multigioco which has an average gaming tax of approximately 24.4% compared to Ulisse with a significantly lower tax rate due to its incorporation being situated outside ofItaly . The increase in taxes is due to the shift of Ulisse business to Multigioco with effect fromJune 2021 . Service revenues increased by$893,949 or 617.5%. This is predominantly due to revenues generated by our Colombian operations and our newly acquired US Bookmaking operations. Our Platform services customer base is currently limited primarily to services provided to external US and international retail customers and internal group operations of Multigioco, Ulisse and Virtual Generation. This revenue remains insignificant to total revenues during the periods presented. Selling expenses We incurred selling expenses of$36,274,752 and$26,109,221 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$10,165,531 or 38.9%. Selling expenses are commissions that are paid to our sales agents and are directly tied to handle (turnover) as they are based on a percentage of handle (turnover) and are not affected by the winnings that are paid. Therefore, increases in 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 over which we have no control, are very high. Due to a concerted effort to manage the rates at which we agree to pay commissions to selling agents, based on a 46.6% increase in turnover during the year endedDecember 31, 2021 , our percentage of selling expenses to turnover was approximately 4.3%, compared to 4.5% for the year endedDecember 31, 2020 .
General and Administrative Expenses
General and administrative expenses were$18,817,959 and$13,789,391 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$5,028,568 or 36.5%. The increase in general and administrative is due to the following:
i) Personnel costs were
31, 2021 and 2020, respectively, an increase of
included the addition of personnel costs in US Bookmaking of
increase in salary expenses of approximately
(i) the increase in personnel at corporate level associated with our
expansion into the U.S. market, including the head of special projects,
head of corporate affairs and salary increases to our CEO in line with
market related salaries; and (ii) an increase in the headcount of our
development personnel in our European operations.
ii) Stock based compensation expense was
ended
or 255.8%. The increase is primarily due to the issuance of 1,193,500
options during the current year and the amortization expense associated
with these options and the 648,000 options issued to our head of special
projects during the last quarter of 2020.
(iii) Platform related fees were
this is primarily due to the increase in turnover of 46.6%, a portion of
our platform fees is linked to turnover.
(iv) Professional fees were $2,496,045 and $1,316,272 for the years ended
December 31, 2021 and 2020, respectively, an increase of $1,179,773 or
89.6%. the increase is primarily due to legal fees associated with
absorbing the Ulisse business into Multigioco and fees associated with
licensing the Elys platform in the first
year, as well as licensing and administrative consultants associated with
the launch into the US market.
(v) The remaining decrease of $248,238 consists of several individually
immaterial expense items.
48
Impairment of indefinite lived assets and goodwill
Impairment of indefinite lived assets and goodwill was$17,350,628 and$4,900,000 for the years endedDecember 31, 2021 and 2020, respectively. We evaluated our long-lived assets for impairment in terms of ASC 350 and determined that an impairment charge of the remaining value of our Ulisse bookmakers license was appropriate of$4,827,914 as we have decided to concentrate a significant amount of our efforts on developing the U.S. market. In addition, we considered the fair value of purchased goodwill on the acquisition of US Bookmaking in terms of ASC 360, and determined that, based on management's revised future projections that an impairment charge of$12,522,714 was appropriate. In the prior year we impaired the Ulisse bookmakers license by$4,900,000 in terms of an ASC 350 evaluation. As discussed below under contingent purchase consideration, management recently reviewed the future revenue and profit projections of US Bookmaking based on the forecasts provided by the vendors at the time of performing the business valuation, factoring in the ability to source new customers. The customer acquisition process has proven to take longer than expected with a resultant downward revision of new customers acquired over the forecast period and the resultant downward impact on forecasted revenue streams. We reviewed the forecasts and made appropriate adjustments based on our current understanding of the addressable market, the growth rates forecast by third party market analysts, our expected share of revenue and the expectation of how many new clients we would realistically be able to add over the forecast period. Management is currently forecasting expected discounted cash flows over the forecast period to be approximately 40% lower than originally estimated. This has a significant impact on our current valuation of US Bookmaking, resulting in a goodwill impairment charge of approximately$12,522,714 . Loss from Operations
The loss from operations was$26,896,548 and$7,532,245 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$19,364,303 or 257.1%. The increase in loss from operations is primarily due to the following: (i) the impairment of the Ulisse license of$4,827,914 and the impairment of theGoodwill on the acquisition of US Bookmaking of$12,522,714 ; (ii) an increase of$10,165,531 in selling expenses, which are based on turnover that had increased by 46.6% and (iii) an increase inU.S. corporate related expenses as we increased the size of our operation and personnel to enter into the U.S. market.
Interest Expense, Net of Interest Income
Interest expense was$20,985 and$328,663 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$307,678 or 93.6%. The decrease is primarily related to the conversion of convertible debentures into equity, primarily in the prior year period. Interest during the current year represents minor interest on the remaining debenture and other bank loans and related
party payables.
Amortization of debt discount
Amortization of debt discount was$12,833 and$818,182 for the years endedDecember 31 , 20210 and 2020, respectively, a decrease of$805,349 or 98.4%. The decrease is primarily due to the conversion of convertible debentures into equity, primarily in the prior period, resulting in accelerated amortization and the maturity of the convertible notes inMay 2020 .
Change in fair value of contingent purchase consideration
Change in fair value of contingent purchase consideration was$11,857,558 and$0 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$11,857,558 . The change in fair value of contingent purchase consideration includes the reevaluation of the fair value of contingent purchase consideration on the acquisition of US Bookmaking. 49 Contingent purchase consideration on the acquisition of US bookmaking is due to the vendors for the years endedDecember 31, 2022 toDecember 31, 2025 . The basis for determining contingent purchase consideration at each reporting period is based on cumulative EBITDA for the periodJuly 15, 2021 toDecember 31, 2025 , with the first measurement period beingDecember 31, 2022 . The forecasts provided by the vendors at the time of performing the business valuation was based on achieving a certain number of new customers on an annual basis. The customer acquisition process has proven to take longer than expected with a resultant impact on forecasted revenue streams over the contingent earnout period. Management revised its estimated revenues duringJanuary 2022 . These forecasts were reviewed and adjusted to ensure they appeared reasonable based on our current understanding of addressable market, the growth rates forecast by third party market analysts, our expected share of revenue and the expectation of how many new clients we would realistically be able to add in a fiscal period. The most significant impact on the contingent purchase consideration is expected to be in the 2022 fiscal year, where we currently forecast that no contingent purchase consideration will be payable. This has a knock-on effect on the future 2023 to 2024 fiscal periods as the calculation of contingent purchase consideration is based on cumulative EBITDA. Other income
Other income was
Other expense Other expense was$49,967 and$86,933 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$36,966 or 42.5%. Other expense represents several individually insignificant amounts such as minor fines and penalties and non-operational commitments not related to operations, expensed during the year.
Loss on extinguishment of convertible debt
The loss on extinguishment of convertible debt was$0 and$719,390 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$719,390 or 100%. InMay 2020 , we issued additional warrants to certain debenture holders who agreed to extend the maturity date of their debentures by between 90 and 120 days to allow us to complete a fund raising exercise resulting in a non-cash charge of$719,390 . These warrants were valued using a Black-Scholes valuation model that were recorded as a discount against the gross value of the convertible debentures with the following assumptions: no dividend yield, expected volatility of between 139.5% and 183.5%, risk free interest rate between 0.16% and 0.19% and warrant life of approximately 2 - 3 years.
(Loss) gain on
The loss on marketable securities was$460,000 and the gain on marketable securities was$290,000 for the years endedDecember 31, 2021 , and 2020, respectively, a decrease of$750,000 or 258.6%. The gain and loss on marketable securities is directly related to the stock price of our investment in Zoompass which is marked-to-market each period. The shares in Zoompass were acquired by the Company as settlement of the litigation matter. Loss Before Income Taxes
Loss before income taxes was$15,354,987 and$9,030,038 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$6,324,949 or 70.0%. The increase is primarily attributable to the increase in the loss from operations, including the impairment of indefinite lived assets and goodwill, and the loss on marketable securities, as discussed above, offset by the change in the fair value of contingent purchase consideration, a decrease in interest expense and a decrease in the amortization of debt discount, as discussed above. Income Tax Provision
The income tax provision was a credit of$290,476 and a charge of$906,644 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$1,197,120 or 132.0%. The decrease is attributable to deferred tax movements on imputed goodwill charges and the reversal of a tax charge from prior years related to commissions not recognized as an expense in the prior year. Net Loss Net loss was$15,064,511 and$9,936,682 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$5,127,829 or 51.6%, due to the reasons discussed above. 50 Comprehensive Loss
Our reporting currency is theU.S. dollar while the functional currency of our subsidies is the Euro, the local currency inItaly andAustria , the functional currency of our Canadian subsidiary is the Canadian dollar and the functional currency of our Colombian operations is the Colombian Peso. The financial statements of our subsidiaries are translated intoUnited 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 intoU.S. dollars are included in determining other comprehensive income.
We recorded a foreign currency translation loss of
Liquidity and Capital Resources
The closing of physical betting shop locations that occurred as a result of orders imposed due to the COVID-19 outbreak did not affect our online and mobile business operations, which mitigated some of the impact of the closure of the physical locations. OnMarch 8, 2020 the Italian government imposed further restrictions on travel throughoutItaly as well as transborder crossings and had either postponed or cancelled most professional sports events. Although most major sporting events and leagues have recently recommenced, the suspension of professional sports competitions throughout the world negatively impacted our ability to offer sports gaming products and COVID-19 could have a continued material adverse impact on economic and market conditions and trigger a period of continued global economic slowdown, especially in light of potential subsequent waves or new strains of the virus. Assets
OnDecember 31, 2021 , we had total assets of$44,578,841 compared to total assets of$35,857,979 onDecember 31, 2020 . The increase of$8,720,862 is primarily related to the increase inGoodwill of$14,501,217 after impairment charges of$12,522,714 on the acquisition of US Bookmaking, the impairment charge was due to a revision on the timing of management's expected profitability over the earnout period. An increase in intangible assets of$5,299,979 due to the acquisition of US Bookmaking and included non-compete agreements, tradenames and customer relationships. A reduction in cash balances and restricted cash balances of$12,338,412 primarily due to the cash paid in the acquisition of US Bookmaking of$5,973,839 , the cash used in operation of$7,553,511 , predominantly fromU.S. operations, which included the funding of expenses related to the setup ofU.S. operations, including consultants and legal expenses related to licensing activities and the absorption of cash in Ulisse as it wound down its operations and settled its outstanding liabilities, including accounts payable, gaming payables and tax liabilities, offset by net proceeds from financing activities of$2,857,084 , which included proceeds from warrants exercised of$3,962,482 and the repayment of the bank line of credit of$500,000 and deferred purchase consideration of$410,383 . Liabilities OnDecember 31, 2021 , we had total liabilities of$26,837,324 compared to$15,701,626 onDecember 31, 2020 . The increase of$11,135,698 is primarily due to the Contingent Purchase Consideration of$12,859,399 which was fair valued during the current period based on management's revised estimate of the profitability of US Bookmaking, an increase in the deferred tax liability of$2,069,465 , a decrease in accounts payable and accrued liabilities of$1,140,867 and a decrease of$474,463 in Gaming Payables, primarily due to the winding down of Ulisse operations and the repayment of longer outstanding liabilities at corporate level, a reduction in tax liabilities of$899,071 due to the lower profitability of our European operations this year, in particular, the winding down of Ulisse operations, and the repayment of the$500,000 bank line of credit. Working Capital
We had
We had a working capital surplus of
51
We continue to embark on an aggressive roll out of our operation in the U.S.
market over the next twenty-four months and anticipate that we will need cash of
approximately $10 million to $15 million to execute this successfully and to
fund our increasing working capital requirements. We believe that we will need
to raise additional cash resources either from equity markets or from debt
funding during the near term as our existing cash resources together with the
revenue from operations will not be sufficient to fund existing operations over
the next twelve months from the date hereof. Historically, we have primarily
financed our operations through revenue generated from providing online and
land-based gaming products, services, and Platform services in Italy and the
sales of our securities and we expect to continue to seek to obtain required
capital in a similar manner. Recently, we have spent, and expect to continue to
spend, a substantial amount of funds in connection with our expansion strategy.
Accumulated Deficit
As of
Cash Flows from Operating Activities
Cash flows from operating activities resulted in net cash used in operating activities of$7,553,511 and$165,493 for the years endedDecember 31, 2021 and 2020, respectively. The$(7,388,018) increase in cash used in operating activities is primarily related to; (i) the increase in net loss of$(5,127,829) offset by (ii) a net movement in non-cash items of$1,148,714 , including a movement in impairment costs of long-lived assets and goodwill of$12,450,628 , an increase in the movement of stock option compensation expense of$1,326,513 , an increase in the movement in loss on marketable securities of$750,000 , offset by a change in the fair value of contingent purchase consideration of$11,857,558 , the decrease in the movement in the loss on extinguishment of debt of$(719,390) and a decrease in the movement on the amortization of debt discount of$805,349 ; and (iii) an increase in working capital movement of$(3,408,903) , primarily due to the decrease in movement of gaming accounts payable of$(1,552,573) and the movement in taxes payable of$(1,445,398) , primarily related to the winding down of Ulisse operations, an increase in the movement of the gaming accounts receivable balances of$880,226 due to the increase in business activity at our Multigioco operation, an increase in the movement of prepaid expenses of$534,099 , predominantly due to prepaid licensed software for US operations, offset by an increase in accounts payable of$1,585,327 , primarily related to an increase in payables balances at our Multigioco operation and an increase in corporate payables due to the expansion activities into the U.S. market taking place at the corporate level.
Cash Flows from Investing Activities
The net cash used in investing activities for the year endedDecember 31, 2021 was$6,690,919 and$291,501 for the year endedDecember 31, 2020 , the increase over the prior year is primarily due to the acquisition of US Bookmaking amounting to$5,973,839 , net of cash balances acquired and the acquisition of property and equipment and intangibles of$717,080 , primarily to support theU.S. expansion efforts.
Cash Flows from Financing Activities
Net cash provided by financing activities for the for the year endedDecember 31, 2021 was$2,857,084 and net cash provided by financing activities for the year endedDecember 31, 2020 was$12,711,416 . The cash generated by financing activities during the current year included warrant exercises of$3,962,482 , offset by the repayment of the bank line of credit of$500,000 and deferred purchase price payments of$410,383 . In the prior year, we raised net proceeds of$8,966,122 in a public offering and further proceeds of$8,541,896 on warrants exercised, a portion of the proceeds were used to repay debentures of$2,778,349 and the bank line of credit of$500,000 as well as deferred purchase price payments of$1,577,010 . Contractual Obligations
Contractual obligations consist of the following:
A cash and equity obligation to meet potential contingent purchase
consideration obligations upon the achievement of financial targets by our
recently acquired subsidiary, US Bookmaking.
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that we expect to be material to investors. We do not have any non-consolidated, special-purpose entities. Inflation
We do not believe that general price inflation will have a material effect on the Company's business in the near future.
52
Foreign Exchange
We operate in several foreign countries, including Austria , Italy , Malta ,
Colombia 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 and Colombian Pesos. Changes and fluctuations in the
foreign exchange rate between the Euro and the U.S. dollar, the Canadian dollar
and the U.S. dollar and the Colombian Peso and the US Dollar, will have an
effect on our results of operations.
Critical Accounting Policies and Estimates
Preparation of our consolidated financial statements in accordance withU.S. generally accepted accounting principles ("GAAP") 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. See Note 2 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form
10- K for further information.
The critical accounting policies that involved significant estimation included the following:
Impairment of indefinite lived assets and goodwill
We carried intangible assets in the amount of$15.6 million and goodwill in the amount of$16.2 million as more fully described in Notes 7 and 8 to the consolidated financial statements. The intangible assets and goodwill are allocated between reporting units. The Company tests its goodwill and intangible assets with an indefinite useful life annually for impairment or more frequently if indicators for impairment exist. Impairment for goodwill is determined by comparing the fair value of the respective reporting unit to their carrying amount. For impairment testing of indefinite-lived intangibles (Ulisse Bookmaker License) the Company fully impaired the indefinite-lived intangibles due to the Company's decision not to renew the cash deposits required to retain the license. The Company determines the fair value of the reporting units using an income-based approach which estimates the fair value using a discounted cash flow model. Key assumptions in estimating fair values include projected revenue growth and the weighted average cost of capital. In addition, management recently reviewed the future revenue and profit projections of US Bookmaking based on the forecasts provided by the vendors at the time of performing the business valuation, which factored in the ability to source new customers. The customer acquisition process has proven to take longer than expected with a resultant downward revision of new customers acquired over the forecast period and the resultant downward impact on forecasted revenue streams. We reviewed the forecasts and made appropriate adjustments based on our current understanding of the addressable market, the growth rates forecast by third party market analysts, our expected share of revenue and the expectation of how many new clients we would realistically be able to add over the forecast period. Management is currently forecasting expected discounted cash flows over the forecast period to be approximately 40% lower than originally estimated. This has a significant impact on our current valuation of US Bookmaking, resulting in a goodwill impairment charge of approximately$12,522,714 .
Fair Value of Contingent Consideration
As ofDecember 31, 2021 , the Company carried contingent purchase consideration in the amount of$12.9 million as more fully described in Note 14 to the consolidated financial statements. The contingent consideration relates to the business combination of US Bookmaking onJuly 15, 2021 . The contingent consideration is based upon achievement of certain EBITDA milestones during the next 4 years, payable 50% in cash and 50% in stock, the contingent consideration is up to$41.8 million . At each reporting period, the Company estimates changes in the fair value of the contingent consideration and any change in fair value is recognized in the consolidated statements of operations and comprehensive (loss) income. 53 The basis for determining contingent purchase consideration at each reporting period is based on cumulative EBITDA for the periodJuly 15, 2021 toDecember 31, 2025 , with the first measurement period beingDecember 31, 2022 . The forecasts provided by the vendors at the time of performing the business valuation was based on achieving a certain number of new customers on an annual basis. The customer acquisition process has proven to take longer than expected with a resultant impact on forecasted revenue streams over the contingent earnout period. Management revised its estimated revenues as ofDecember 31, 2021 . These forecasts were reviewed and adjusted to ensure they appeared reasonable based on our current understanding of addressable market, the growth rates forecast by third party market analysts, our expected share of revenue and the expectation of how many new clients we would realistically be able to add in a fiscal period. The most significant impact on the contingent purchase consideration is expected to be in the 2022 fiscal year, where we currently forecast that no contingent purchase consideration will be payable. This has a knock-on effect on the future 2023 to 2024 fiscal periods as the calculation of contingent purchase consideration is based on cumulative EBITDA. Business Combination
As ofJuly 15, 2021 , we acquired 100% of US Bookmaking for a consideration of$6 million in cash, the issuance of 1,265,823 shares of our common stock plus an opportunity to the seller to receive up to an additional$41.8 million based upon achievement of certain EBITDA milestones during the upcoming four years as more fully described in Note 3 to the consolidated financial statements. We determined the fair values of the tangible and intangible assets acquired and the liabilities assumed using valuation techniques, and goodwill using an income-based approach which estimates the fair value using a discounted cash flow model. Key assumptions in estimating fair values include projected revenue growth and the weighted average cost of capital (WACC). We retained the services of a specialist valuation company to assist in assessing the reasonableness of the assumptions used in valuing the business as well as to perform a purchase price allocation. These assumptions were deemed reasonable at the time of performing the valuation.
Recently Issued Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for information regarding recently issued accounting standards.
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