Gaming Technologies, Inc. - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
| ☐ | 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: 333-249998
Gaming Technologies, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 35-2675083 | |
|
State or Other Jurisdiction of Incorporation or Organization |
I.R.S. Employer Identification No. | |
|
Two Summerlin Las Vegas, NV, USA |
89135 | |
| Address of Principal Executive Offices | Zip Code |
Registrant’s telephone number, including area code: + 1 (833) 388-GMGT (-4648)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐Yes ☒ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐Yes ☒ No
As of August 22, 2022, shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
TABLE OF CONTENTS
| Item Number and Caption | Page | ||
| Cautionary Note Regarding Forward-Looking Statements | ii | ||
| PART I FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 35 | |
| Item 4. | Controls and Procedures | 35 | |
| PART II OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 36 | |
| Item 1A. | Risk Factors | 36 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 | |
| Item 3 | Defaults Upon Senior Securities | 36 | |
| Item 4 | Mine Safety Disclosures | 36 | |
| Item 5. | Other Information | 36 | |
| Item 6. | Exhibits | 37 | |
| SIGNATURES | 38 | ||
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions 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”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions, future performance, anticipated expenses, or projected financial results. These forward-looking statements are subject to certain risks and uncertainties, including the risks outlined under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) and in this Form 10-Q, that could cause actual results to differ materially from our historical experience and our present expectations or projections. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, or joint ventures we may make or collaborations or strategic partnerships we may enter into.
You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q, as well as the Form 10-K and the other reports, schedules and documents we have filed with the SEC, completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Unless the context requires otherwise, references in this report to “Gaming Technologies,” the “Company,” “we,” “us,” and “our” refer to Gaming Technologies, Inc., a Delaware corporation, and its subsidiaries. All brand names or trademarks appearing in this report are the property of their respective holders.
| ii |
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 1 |
GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 | December 31, 2021 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | – | $ | 406,526 | ||||
| Tax refund | 281,600 | – | ||||||
| Deposits and other current assets | 37,299 | 109,791 | ||||||
| Total current assets | 318,899 | 516,317 | ||||||
| Property and equipment, net | 15,128 | 7,393 | ||||||
| Intellectual property, net | 175,133 | 179,709 | ||||||
| Total assets | $ | 509,160 | $ | 703,419 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 2,484,066 | $ | 1,575,394 | ||||
| Due to related parties | 17,495 | 13,252 | ||||||
| Notes payable, net | 359,800 | – | ||||||
| Secured convertible note payable, net | 1,737,976 | 1,028,586 | ||||||
| Current portion of note payable, bank | 12,850 | 12,850 | ||||||
| Total current liabilities | 4,612,187 | 2,630,082 | ||||||
| Note payable, bank | 34,569 | 46,059 | ||||||
| Total liabilities | 4,646,756 | 2,676,141 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock, $ par value; authorized - shares; issued - | – | – | ||||||
| Common stock, $ par value; authorized - shares; issued and outstanding - shares at June 30, 2022 and December 31, 2021, respectively | 31,353 | 31,353 | ||||||
| Additional paid-in capital | 19,039,227 | 18,914,227 | ||||||
| Accumulated other comprehensive income | (50,762 | ) | (56,004 | ) | ||||
| Accumulated deficit | (23,157,414 | ) | (20,862,298 | ) | ||||
| Total stockholders' deficit | (4,137,596 | ) | (1,972,722 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 509,160 | $ | 703,419 | ||||
See accompanying notes to condensed consolidated financial statements.
| 2 |
GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | 23,411 | $ | 23,321 | $ | 67,427 | $ | 25,410 | ||||||||
| Costs and Expenses: | ||||||||||||||||
| Cost of revenues | 92,447 | 91,318 | 142,437 | 273,581 | ||||||||||||
| Software development, including amortization of intellectual property of $0 and $15,150 in the three months ended June 30, 2022 and 2021, respectively and $3,614 and $35,071 in the six months ended June 30, 2022 and 2021, respectively | (281,600 | ) | 114,460 | (267,127 | ) | 132,863 | ||||||||||
| General and administrative: | ||||||||||||||||
| Officers, directors, affiliates, and other related parties | 141,007 | 155,727 | 305,770 | 447,582 | ||||||||||||
| Advertising and marketing | – | 3,317,162 | – | 3,524,643 | ||||||||||||
| Other (including stock compensation costs of $ and $ in 2022 and 2021, respectively) | 480,383 | 571,443 | 1,291,067 | 2,254,353 | ||||||||||||
| Total Costs and expenses | 432,237 | 4,250,110 | 1,472,147 | 6,633,022 | ||||||||||||
| Loss from operations | (408,826 | ) | (4,226,789 | ) | (1,404,720 | ) | (6,607,612 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (446,910 | ) | – | (889,506 | ) | – | ||||||||||
| Foreign currency loss | (247 | ) | – | (890 | ) | – | ||||||||||
| Total other expense, net | (447,157 | ) | – | (890,396 | ) | – | ||||||||||
| Net loss | (855,983 | ) | (4,226,789 | ) | (2,295,116 | ) | (6,607,612 | ) | ||||||||
| Foreign currency translation adjustment | (6,418 | ) | (8,491 | ) | – | (21,664 | ) | |||||||||
| Comprehensive loss | $ | (862,401 | ) | $ | (4,235,280 | ) | $ | (2,295,116 | ) | $ | (6,629,276 | ) | ||||
| Net loss per common share - basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding - basic and diluted | 31,351,953 | 30,521,059 | 31,351,953 | 30,033,705 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
Three and Six Months Ended June 30, 2022 and 2021
For the three and six months ended June 30, 2022:
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Stockholders' | ||||||||||||||||||||
| Shares | Par Value | Capital | Income | Deficit | Deficiency | |||||||||||||||||||
| Balance, March 31, 2022 | 31,351,953 | $ | 31,353 | $ | 18,976,727 | $ | (49,586 | ) | $ | (22,301,431 | ) | $ | (3,342,937 | ) | ||||||||||
| Common stock issued as compensation | – | 62,500 | 62,500 | |||||||||||||||||||||
| Foreign currency translation adjustment | – | (1,176 | ) | (1,176 | ) | |||||||||||||||||||
| Net loss | – | (855,983 | ) | (855,983 | ) | |||||||||||||||||||
| Balance, June 30, 2022 | 31,351,953 | $ | 31,353 | $ | 19,039,227 | $ | (50,762 | ) | $ | (23,157,414 | ) | $ | (4,137,596 | ) | ||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Stockholders' | ||||||||||||||||||||
| Shares | Par Value | Capital | Income | Deficit | Deficiency | |||||||||||||||||||
| Balance, December 31, 2021 | 31,351,953 | $ | 31,353 | $ | 18,914,227 | $ | (56,004 | ) | $ | (20,862,298 | ) | $ | (1,972,722 | ) | ||||||||||
| Common stock issued as compensation | – | 125,000 | 125,000 | |||||||||||||||||||||
| Foreign currency translation adjustment | – | 5,242 | 5,242 | |||||||||||||||||||||
| Net loss | – | (2,295,116 | ) | (2,295,116 | ) | |||||||||||||||||||
| Balance, June 30, 2022 | 31,351,953 | $ | 31,353 | $ | 19,039,227 | $ | (50,762 | ) | $ | (23,157,414 | ) | $ | (4,137,596 | ) | ||||||||||
Three and six months ended June 30, 2021:
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Stockholders' Equity | ||||||||||||||||||||
| Shares | Par Value | Capital | Income | Deficit | (Deficiency) | |||||||||||||||||||
| Balance, March 31, 2021 | 30,521,059 | $ | 30,521 | $ | 14,677,355 | $ | (31,919 | ) | $ | (10,347,016 | ) | $ | 4,328,941 | |||||||||||
| Common stock issued in connection with private placement, net | – | |||||||||||||||||||||||
| Common stock issued as compensation | – | 20,833 | 20,833 | |||||||||||||||||||||
| Foreign currency translation adjustment | – | (8,491 | ) | (8,491 | ) | |||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | – | (4,226,789 | ) | (4,226,789 | ) | |||||||||||||||||||
| Balance, June 30, 2021 | 30,521,059 | $ | 30,521 | $ | 14,698,188 | $ | (40,410 | ) | $ | (14,573,805 | ) | $ | 114,494 | |||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Stockholders' Equity | ||||||||||||||||||||
| Shares | Par Value | Capital | Income | Deficit | (Deficiency) | |||||||||||||||||||
| Balance, December 31, 2020 | 28,367,525 | $ | 28,367 | $ | 9,551,507 | $ | (18,746 | ) | $ | (7,966,193 | ) | $ | 1,594,935 | |||||||||||
| Common stock issued in connection with private placement, net | 1,616,600 | 1,617 | 3,679,883 | 3,681,500 | ||||||||||||||||||||
| Common stock issued as compensation | 536,934 | 537 | 1,466,798 | 1,467,335 | ||||||||||||||||||||
| Foreign currency translation adjustment | – | (21,664 | ) | (21,664 | ) | |||||||||||||||||||
| Net loss for the six months ended June 30, 2021 | – | (6,607,612 | ) | (6,607,612 | ) | |||||||||||||||||||
| Balance, June 30, 2021 | 30,521,059 | $ | 30,521 | $ | 14,698,188 | $ | (40,410 | ) | $ | (14,573,805 | ) | $ | 114,494 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,295,116 | ) | $ | (6,607,612 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 1,056 | 5,146 | ||||||
| Amortization of intellectual property | 4,576 | 35,342 | ||||||
| Amortization of discount and accrued interest | 460,032 | – | ||||||
| Amortization of operating lease right of use asset | – | 11,968 | ||||||
| Accretion of premium on convertible note payable | 259,158 | – | ||||||
| Stock compensation | 125,000 | 1,467,335 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in - | ||||||||
| Deposits and other current assets | (209,108 | ) | (124,922 | ) | ||||
| Increase (decrease) in - | ||||||||
| Accounts payable and accrued expenses | 908,672 | 107,272 | ||||||
| Due to related parties | 4,243 | (2,330 | ) | |||||
| Operating lease liability | – | (11,968 | ) | |||||
| Net cash used in operating activities | (741,487 | ) | (5,119,769 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of intellectual property | – | (174,616 | ) | |||||
| Purchase of property and equipment | (10,657 | ) | (4,964 | ) | ||||
| Net cash used in investing activities | (10,657 | ) | (179,580 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from notes payable, net | 350,000 | – | ||||||
| Proceeds from private placement of common stock | – | 3,681,500 | ||||||
| Repayment of note payable – bank | (6,148 | ) | – | |||||
| Net cash provided by financing activities | 343,852 | 3,681,500 | ||||||
| Effect of exchange rate on cash | 1,766 | (21,664 | ) | |||||
| Cash: | ||||||||
| Net decrease | (406,526 | ) | (1,639,513 | ) | ||||
| Balance at beginning of year | 406,526 | 1,946,232 | ||||||
| Balance at end of year | $ | – | $ | 306,719 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for - | ||||||||
| Interest | $ | 522 | $ | – | ||||
| Income taxes | $ | – | $ | – | ||||
See accompanying notes to condensed consolidated financial statements.
| 5 |
GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Six Months Ended June 30, 2022 and 2021
1. Organization and Basis of Presentation
Organization and Combination
Gaming Technologies, Inc. (formerly Dito, Inc.,) (“Gaming US”) was incorporated in the State of Delaware on July 23, 2019. Effective as of March 18, 2020, Gaming US completed a Share Exchange Agreement (the “Exchange Agreement”) to acquire all of the outstanding ordinary shares of Gaming Technologies Limited, formerly Gaming UK Limited, (“Gaming UK”) that provided for each outstanding ordinary share of Gaming UK to be effectively converted into 25 shares of common stock of Gaming US. As a result, Gaming UK became a wholly-owned subsidiary of Gaming US in a recapitalization transaction (collectively, the “Company”). On December 21, 2020, the Company changed its name from Dito, Inc. to Gaming Technologies Inc.
Gaming UK was originally formed as Smart Tower Limited on November 3, 2017 in the United Kingdom for the purpose of software development. On June 29, 2018, Smart Tower Limited changed its name to NENX Gaming Limited and then to Gaming UK Limited on July 29, 2019 and to Gaming Technologies Limited on January 7, 2021.
On March 18, 2021, the Company incorporated Vale Gaming, Inc. in the State of Delaware, a wholly owned subsidiary, that has had no operations.
Gaming US maintains its principal executive offices in Las Vegas, Nevada, United States. Gaming UK maintains its principal executive offices in London, England.
The Company's activities are subject to significant risks and uncertainties, including the need for additional capital, as described below. The Company does not have positive cash flows from operations, and is dependent on periodic infusions of debt and equity capital to fund its operating requirements.
Business Operations
The Company is a mobile games developer and publisher with offices in London and New York. The Company intends to license its software platform to mobile gaming operators and developers to enable rapid development of new games. In addition, the Company operates an online gaming operation in Mexico through its web site vale.mx.
On November 13, 2020, we entered into an Agreement for the Provision of Online Gaming Management and Consulting Services (as subsequently amended) with Comercial de Juegos de la Frontera, S.A. de C.V., a Mexican company doing business as Big Bola, pursuant to which we provide to Big Bola consulting and management services related to their interactive online betting and gaming business in Mexico via the web site www.vale.mx, a regulated online casino and sports betting site. vale.mx operates under Big Bola’s existing license issued by the General Directorate of Games and Raffles of the Ministry of Interior (SEGOB). Big Bola is one of only 14 operators legally authorized to offer legal betting and online casino services in Mexico. vale.mx has more than 500 online premium casino games available, which can be enjoyed both on mobile or via desktop. Players can receive promotions and play live roulette and blackjack, or high-definition slots from leading software providers such as NetEnt, Microgaming, Pragmatic Play, Evolution and Matrix Studios. We are responsible for player acquisition, promotion and retention for vale.mx. We manage players’ accounts and are required to ensure that the balance in players’ accounts at all times satisfies the requirements under applicable law, and we pay out winnings to players from Big Bola’s account. While Big Bola bears liability to the players as provided by the permit, as between us and Big Bola we bear the costs of this obligation. Each party indemnifies the other against certain liabilities and claims. Under the terms of the agreement, we share 60% of gross gaming revenue generated from the platform, subject to certain minimum guaranteed monthly amounts of Big Bola’s participation in the remaining gross gaming revenues. This venture began operations in February 2021.
| 6 |
In June 2022, the Company and Big Bola entered into a Side Letter Agreement (“SLA”) whereby Big Bola agreed to convert $134,669 in fees owed to it by the Company into shares of the Company’s common stock. The Company recorded the fees as incurred and they are included in accounts payable at June 30, 2022. The Company was required to issue the shares by July 10, 2022. As of the date of this filing the shares have not been issued. In addition, the Company agreed to make payments on $120,000 in guaranteed participation fees due to Big Bola as follows: $40,000 no later than July 14, 2022; $40,000 on later than August 14, 2022; and $40,000 no later than September 14, 2022. The guaranteed participation fees have been recorded by the Company as they were incurred and are included in accounts payable at June 30, 2022. The July and August payments have not been made as of the date of this filing. In addition, Big Bola agreed that it will not collect from the Company the guaranteed participation fee of $40,000 per month for the months of June, July and August of 2022 and that the guaranteed participation fee for the months of September, October and November of 2022 will be reduced to $20,000 per month. Effective December 1, 2022, the parties will revert to the terms of the original agreement, as amended.
On May 19, 2021, we entered into a non-exclusive license agreement with Playboy Enterprises International, Inc. (“Playboy”) to use certain trademarks (including the rabbit head logo) and other intellectual property of Playboy on and in connection with the design, creation, promotion, marketing, advertisement, sales, operation, maintenance and distribution in India of real-money game mobile apps, such as rummy, poker, fantasy sports and other games of skill approved by Playboy. We will pay Playboy as a royalty a percentage of net gaming revenue. The term of the agreement is through the end of 2025, subject to early termination upon certain events of default, which include our failure to launch a Playboy-branded game in India by November 1, 2021, or to meet certain annual minimum net gaming revenue targets. The Playboy-branded game, https://www.playboyrummy.com/, was launched on November 1, 2021. On August 1, 2022, the non-exclusive license was terminated. The Company does not owe any royalties to Playboy as of June 30, 2022 or on the date of termination.
Going Concern
The Company's condensed consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company has had limited operating revenues to date, and has experienced recurring net losses from operations and negative operating cash flows. During the six months ended June 30, 2022, the Company incurred a net loss of $2,295,116, utilized cash in operating activities of $741,487, and had a stockholders’ deficit of $4,137,596 as of June 30, 2022. The Company has financed its working capital requirements since inception through the sale of its equity securities and from borrowings. In addition, the Company is delinquent in certain interest payments to its note holders and in payments to Big Bola.
At June 30, 2022, the Company had cash of $0. The Company estimates that it must raise additional capital in the form of debt or equity in order to continue operations. As reflected in Note 7, Loan Agreements, the Company obtained loans for net proceeds of $350,000 during the six months ended June 30, 2022. The Company estimates that a significant amount of capital will be necessary over a sustained period of time to advance the development of the Company's business to the point at which it can become commercially viable and self-sustaining. However, there can be no assurances that the Company will be successful in this regard.
As a result, management has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year of the date that the accompanying condensed consolidated financial statements are issued. In addition, the Company's independent registered public accounting firm, in their report on the Company's consolidated financial statements for the year ended December 31, 2021, expressed substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company's ability to raise additional funds and implement its business plan, and to ultimately achieve sustainable operating revenues and profitability. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The development and expansion of the Company's business in 2022 and thereafter will be dependent on many factors, including the capital resources available to the Company. No assurances can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company or adequate to fund the development and expansion of the Company's business to a level that is commercially viable and self-sustaining. There is also significant uncertainty as to the effect that the coronavirus pandemic may have on the availability, amount and type of financing in the future.
| 7 |
If cash resources are insufficient to satisfy the Company's ongoing cash requirements, the Company would be required to scale back or discontinue its operations, obtain funds, if available, although there can be no certainty, through strategic alliances that may require the Company to relinquish rights to its technology, or to discontinue its operations entirely.
2. Summary of Significant Accounting Policies
Principles of Combination
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and include the financial statements of Gaming US, its wholly-owned subsidiary, Vale Gaming, Inc., and its wholly-owned foreign subsidiary, Gaming UK. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates are expected to include those related to assumptions used in calculating accruals for potential liabilities, valuing equity instruments issued for services, and the realization of deferred tax assets.
Cash
The Company maintains its cash balances with financial institutions with high credit ratings. The Company has not experienced any losses to date resulting from this practice.
As of June 30, 2022 and December 31, 2021, the Company's cash balances by currency consisted of the following:
June 30, 2022 |
December 31, 2021 |
|||||||
| GBP | £ | – | £ | 90,467 | ||||
| USD | $ | – | $ | 284,410 | ||||
Cash balances in British Pounds are maintained in the United Kingdom and cash balances in United States Dollars are maintained in the United States.
Concentration of Risk
The Company may periodically contract with consultants and vendors to provide services related to the Company's business development activities. Agreements for these services may be for a specific time period or for a specific project or task. The Company did not have any such agreements at June 30, 2022 or December 31, 2021.
| 8 |
Tax Credits and Receivables
The Company is registered for provincial goods and services taxes in the United Kingdom. As such, the Company is obligated to collect from third parties, and is entitled to claim sales taxes paid on its expenses and capital expenditures incurred in the United Kingdom. In addition, the Company may be entitled to a receivable in the form of tax credit or incentive on certain research and development activities. The Company records tax credits as a reduction of expense and receivable when the Company can reasonably estimate the amounts and it is more likely than not, they will be received. During the period ended June 30, 2022, the Company recorded a receivable of $281,600 as a credit for research and development activities incurred in the United Kingdom, which has been offset against research and development costs during the period. The tax credit was received by the Company in July 2022.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers. ASC Topic 606 requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Revenue is recognized based on the following five step model:
| · | Identification of the contract with a customer |
| · | Identification of the performance obligations in the contract |
| · | Determination of the transaction price |
| · | Allocation of the transaction price to the performance obligations in the contract |
| · | Recognition of revenue when, or as, the Company satisfies a performance obligation |
The Company operates an online betting platform allowing users to place wagers on casino games. Each wager placed by users create a single performance obligation for the Company to administer each event wagered. Net gaming revenue is the aggregate of gaming wins and losses based on results of each event that customers wager bets on. Gross gaming revenue is split with our partners, whose share of gross gaming revenue is recorded as a reduction to net gaming revenue.
Cost of Revenue
Cost of revenue consists primarily of variable costs related to our contract with Big Bola. These include mainly (i) payment processing fees and chargebacks, (ii) product taxes, (iii) technology costs, (iv) revenue share / market access arrangements, and (v) feed / provider services. The Company incurs payment processing fees on user deposits, withdrawals and deposit reversals from payment processors (“chargebacks”). Chargebacks have not been material to date. Cost of revenue also includes expenses related to the distribution of our services, amortization of intangible assets and compensation of revenue associated personnel.
The Company issues common stock and intends to issue stock options to officers, directors and consultants for services rendered. Options will vest and expire according to terms established at the issuance date of each grant. Stock grants, which are generally time vested, will be measured at the grant date fair value and charged to operations ratably over the vesting period.
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The fair value of stock options granted as stock-based compensation will be determined utilizing the Black-Scholes option-pricing model, and can be affected by several variables, the most significant of which are the life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common stock. Estimated volatility will be based on the historical volatility of the Company's common stock over an appropriate calculation period, or, if not available, by reference to the volatility of a representative sample of comparable public companies. The risk-free interest rate will be based on the U.S. Treasury yield curve in effect at the time of grant. The fair market value of the common stock will be determined by reference to the quoted market price of the Company's common stock on the grant date, or, if not available, by reference to an appropriate alternative valuation methodology.
The Company will recognize the fair value of stock-based compensation awards in general and administrative costs or in software development costs, as appropriate, in the Company's condensed consolidated statements of operations. The Company will issue new shares of common stock to satisfy stock option exercises.
As of June 30, 2022 and December 31, 2021, the Company did t have any outstanding stock options.
Comprehensive Income (Loss)
Comprehensive income or loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Components of comprehensive income or loss, including net income or loss, unrealized gains or losses on available-for-sale securities, unrealized gains or losses on other financial investments, unrealized gains or losses on pension and retirement benefit plans, and foreign currency translation adjustments, are reported in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss) are reported net of any related tax effect to arrive at comprehensive income (loss). The Company's comprehensive income (loss) for the three months ended June 30, 2021 and 2020 consists of foreign currency translation adjustments.
The Company's computation of earnings (loss) per share ("EPS") includes basic and diluted EPS. Basic EPS is measured as the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible notes payable, convertible preferred stock, warrants and stock options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. At June 30, 2022 and December 31, 2021, the Company excluded warrants to acquire shares of common stock from its calculation of loss per share as their effect would be antidilutive. Basic and diluted loss per common share is the same for all periods presented because the aforementioned warrants were antidilutive.
The Company has adopted ASU 2017-11, Earnings per share (Topic 260), provided that when determining whether certain financial instruments should be classified as liability 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.
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Fair Value of Financial Instruments
The authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level 1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.
Level 2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level 3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds and are measured using present value pricing models.
The Company will determine the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company will perform an analysis of the assets and liabilities at each reporting period end.
The carrying value of financial instruments (consisting of cash and accounts payable and accrued expenses) is considered to be representative of their respective fair values due to the short-term nature of those instruments.
Foreign Currency
The accompanying condensed consolidated financial statements are presented in United States dollars ("USD"). The functional currency of Gaming UK, the Company's foreign subsidiary, is the British Pound (“GBP”), the local currency in the United Kingdom. Accordingly, assets and liabilities of the foreign subsidiary are translated at the current exchange rate at the end of the period, and revenues and expenses are translated at average exchange rates during the six months ended June 30, 2022 and the year ended December 31, 2021. The resulting translation adjustments of the balance sheet amounts are recorded as a component of shareholders' equity (deficiency). Gains and losses from translation of revenues and expenses from foreign currency transactions are included in net income (loss).
Translation of amounts from the local currencies of the foreign subsidiary, Gaming UK, into USD has been made at the following exchange rates for the respective periods:
Translation of amounts from the local currencies of the foreign subsidiary, Gaming UK, into USD has been made at the following exchange rates for the respective periods:
| As of and for the | ||||||||
| Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||
| Period-end GBP to USD1.00 exchange rate | 1.2162 | 1.3801 | ||||||
| Period-average GBP to USD1.00 exchange rate | 1.2556 | 1.3885 | ||||||
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Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 significantly changes how entities measure credit losses for most financial assets, including accounts and notes receivables. ASU 2016-13 will replace the current "incurred loss" approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the provisions of ASU 2016-13 as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which ASU 2016-13 is effective. As small business filer, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. Management is currently in the process of assessing the impact of adopting ASU-2016-13 on the Company's financial statements and related disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future condensed consolidated financial statements and related disclosures.
3. Property and Equipment
Property and equipment as of June 30, 2022 and December 31, 2021 is summarized as follows:
June 30, 2022 | December 31, 2021 | |||||||
| Computer and office equipment | $ | 43,269 | $ | 36,194 | ||||
| Less accumulated depreciation | (28,141 | ) | (28,801 | ) | ||||
| Computer and office equipment, net | $ | 15,128 | $ | 7,393 | ||||
All of the Company's property and equipment is located in the United Kingdom. Depreciation expense for the six months ended June 30, 2022 and 2021 was $1,056 and $5,146, respectively. Depreciation expense is included in general and administrative costs in the Company's condensed consolidated statement of operations.
4. Intellectual Property
Intellectual property as of June 30, 2022 and December 31, 2021 is summarized as follows:
June 30, 2022 | December 31, 2021 | |||||||
| Finite lived assets - software | $ | 213,181 | $ | 213,181 | ||||
| Less accumulated amortization | (202,463 | ) | (197,887 | ) | ||||
| 10,718 | 15,294 | |||||||
| Indefinite lived assets - internet domain names | 164,415 | 164,415 | ||||||
| Intellectual property, net | $ | 175,133 | $ | 179,709 | ||||
Amortization expense for the six months ended June 30, 2022 and 2021 was $4,576 and $35,342, respectively. Amortization expense is included in software development costs in the Company's condensed consolidated statement of operations.
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5. Note Payable to Bank
On June 9, 2020, Gaming UK received an unsecured loan of $60,600 (equivalent to 47,600£) from Metro Bank PLC under the Bounce Bank Loan Scheme managed by the British Business Bank on behalf of, and with the financial backing of, The Secretary of State for Business, Energy and Industrial Strategy of the Government of the United Kingdom. The Government of the United Kingdom has provided a full guarantee to Metro Bank PLC with respect to the repayment of this loan. The proceeds from the loan are required to be used for working capital purposes, for investment in a company's business, and to support trading or commercial activity in the United Kingdom. The loan is for a term of 72 months and has a fixed interest rate of 2.5% per annum. Gaming UK is not required to make any payments of interest on the loan during the first 12 months of this loan, with such amount being paid by the Government of the United Kingdom under its business interruption payment program. Beginning in the 13th month after the drawdown of the loan, Gaming UK will be required to repay the loan by making 60 equal monthly payments of principal and interest aggregating $1,076 (equivalent to 845£) per month. During the six months ended June 30, 2022 and 2021, the Company recorded interest expense of $522 and $731, respectively. During the six months ended June 30, 2021, the interest expense of $731 was paid by the Government of the United Kingdom under this program. As of June 30, 2022, $47,419 was due under this note, of which, $12,850 was reflected as current portion due.
Maturities of long-term debt for each of the next five years and thereafter are as follows:
| Twelve month periods ending June 30, | Amount | |||
| 2023 | $ | 12,850 | ||
| 2024 | 12,850 | |||
| 2025 | 12,850 | |||
| 2026 | 8,869 | |||
| Total payments | 47,419 | |||
| Less current portion | 12,850 | |||
| Debt maturity, noncurrent | $ | 34,569 | ||
6. Secured Convertible Note Payable
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Secured Convertible Note payable, including accreted amount | $ | 2,083,334 | $ | 1,824,176 | ||||
| Valuation discount | (345,358 | ) | (795,590 | ) | ||||
| Secured convertible Note, net | $ | 1,737,976 | $ | 1,028,586 | ||||
On November 18, 2021, the Company entered into a securities purchase agreement with an accredited investor for the sale of the Company’s secured convertible note (the Secured Notes) and warrants. Pursuant to the terms of the purchase agreement, on November 18, 2021, the Company received aggregate gross proceeds of $1,500,000 and issued (i) a 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $1,666,667 and (ii) warrants to purchase an aggregate of shares of the Company’s common stock. The Note bears interest at a rate of 10% per year, payable monthly commencing after the third month, and mature 12 months from issuance The principal and interest are convertible at any time at the option of the holder into shares of the Company’s common stock at a conversion price equal to the lower of (i) $2.75 per share, and (ii) the price of the common stock of the Company in a Qualified Offering (subject to adjustment as provided in the Note). A “Qualified Offering” is an equity or equity-linked financing for the account of the Company or any of its subsidiaries or debt financing that results in cumulative aggregate proceeds to the Company of at least $8,000,000. The principal and interest on the Note will be amortized on the effective interest method commencing sixth months after the closing. In the event that the Secured Notes are repaid within three months of the date of the Secured Notes, the Company will repay 115% of the face value of the Secured Notes, plus accrued interest. In the event that the Secured Notes are repaid three months after the date of the Secured Notes, the Company will repay 120% of the face value of the Secured Notes, plus accrued interest. The exercise price of the warrants is the lesser of (i) $2.75 per share and (ii) the price of the common stock of the Company in a Qualified Offering and the term of the warrants is five years. Upon an Event of Default (as defined therein) interest shall accrue at 1 1/2% per month and the 125% of principal and interest through maturity shall be due and payable. At the holder’s option the holder shall be entitled to be paid in cash or common stock with the conversion price of the common stock equal to a 30% discount to the average of the three lowest closing prices of the common stock for the 10 prior trading days.
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In connection with the Company’s obligations under the Secured Notes, the Company and its subsidiary Gaming Technology Limited (the “Subsidiary”) each entered into a security agreement with the holder, pursuant to which the Company and the Subsidiary granted a security interest on all assets of the Company and the Subsidiary, including the stock of the Subsidiary, for the benefit of the holders, to secure, and the Subsidiary guaranteed, the Company’s obligations under the Note, the Warrant and the other transaction documents. In addition, the holder was granted customary piggyback registration rights for the shares of common stock issuable upon conversion of the Note and exercise of the Warrant and rights of participation.
At any time within the 18 months closing, upon any issuance by the Company or any of its subsidiaries of debt or common stock or common stock equivalents for cash consideration, indebtedness or a combination of units thereof, other than in an underwritten public offering (a “Subsequent Financing”), the investor will have the right to participate up to its investment amount in the Note, but not more than 25% of the Subsequent Financing, on the same terms, conditions and price provided for in the Subsequent Financing.
Upon issuance of the Secured Note, the Company recorded an aggregate discount of $901,834 from the original issue discount of $166,667, and a discount related to the relative fair value of the warrants issued in conjunction with the Secured Note of $735,167. During the six months ended June 30, 2022, the Company amortized $450,232 of the discount resulting in an unamortized discount of $345,358 as of June 30, 2022. In addition, as June 30, 2022, which is more than three months after the date of the Secured Note, the Secured Note has not been repaid, and accordingly, the Company accreted a premium of $157,509 as of December 31, 2021 and $259,158 as of June 30, 2022, which has been added to the principal amount of the note resulting in a balance due of $2,083,334 at June 30, 2022.
The Company failed to make interest payments on the Secured Note due in May, June, and July 2022, in the amount of $13,889 each. In July 2022, the Company received a notice of default on the Secured Note. The default occurred on May 18, 2022. As a result of the default the following events occurred: (a) the interest rate on the Secured Note increased to 18% per annum on the date of default; (b) the Company incurred an 18% late fee of $55,208; and, (c) the principal of the note increased to $2,083,334, representing 125% of the original principal amount of the loan. The Company recorded the late fee as interest expense and the increase in principal as an accretion premium on the Secured Note. There can be no assurance that we will be able to raise additional capital to enable us to make future payments that come due.
7. Loan Agreements
April 7, 2022, Loan
On April 7, 2022, the Company entered into an amendment to securities purchase agreements dated December 1, 2020, and February 3, 2021 (the “Purchase Agreements”) with an investor (the “Amendment”), and the Company issued to the investor a subordinated 10% Original Issue Discount Promissory Note in the principal amount of $277,778 (the “Subordinated Note”) and received gross proceeds of $250,000. Pursuant to the Amendment, the provisions in the Purchase Agreements for an adjustment due to price based dilution, which had expired by their terms, were extended, such that if, at any time until the earlier of (a) October 6, 2022, or (b) the day after the date on which the Company issues or sells shares of common stock or common stock equivalents, except for certain exempt issuances as described in the Purchase Agreements, at a price below $per share (as adjusted for stock splits), then the Company will deliver to the investor that number of restricted shares of common stock equal to the difference between the number of shares purchased by the investor pursuant to such Purchase Agreement and the number of shares of common stock the investor would have received for the investor’s original subscription amount (an aggregate of $2,000,000) at the dilutive issuance price.
The principal amount of the Subordinated Note is $277,778, and the Company received gross proceeds of $250,000 after giving effect to the original issue discount of 10%. The Subordinated Note is unsecured, bears interest at a rate of 10% per year (the “Interest Rate”), and matures on the earlier of (i) 12 months from issuance or (ii) the closing of a Qualified Offering, subject to earlier pre-payment as provided in the Subordinated Note. “Qualified Offering” is an equity or equity-linked financing for the account of the Company or any of its subsidiaries or debt financing that results in cumulative aggregate proceeds to the Company of at least $8,000,000.
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Subject to the Intercreditor Agreement described below, the Company will have the right at any time to prepay in cash all or a portion of the Subordinated Note of the principal amount thereof plus any unpaid accrued interest to the date of repayment. Upon an Event of Default (as defined therein) interest shall accrue at the Interest Rate plus 2% and the principal and interest through maturity shall be due and payable.
In connection with issuing the Subordinated Note, the Company, the Subordinated Note holder and the holder of the Company’s $1,666,667 10% Original Discount Senior Secured Convertible Note issued in November 2021 (the “Senior Note”) entered into a Intercreditor Agreement (the “Intercreditor Agreement”), pursuant to which the Subordinated Note holder agreed to fully subordinate its rights under the Subordinated Note to the Senior Note and related agreements, as described more fully in the Intercreditor Agreement.
April 26, 2022 and May 25, 2022 Loans
On April 26, 2022 and May 25, 2022, the Company entered into an amendment to securities purchase agreements dated November 20, 2020 and February 3, 2021 (the “Purchase Agreements”) with an investor (the “First Amendment”), the Company and the investor entered into a loan agreement (the “Loan Agreement”) and the Company issued to the Investor subordinated promissory notes totaling principal amount of $111,111 (the “Subordinated Note”) and received gross proceeds of $100,000 after deduction of an origination fee to the investor.
Pursuant to the Amendment, the provisions in the Purchase Agreements for an adjustment due to price based dilution, which had expired by their terms, were extended, such that if, at any time until the earlier of (a) May 15, 2022, or (b) the day after the date on which the Company completes an underwritten public offing of shares of its common stock, except for certain exempt issuances as described in the Purchase Agreements, at a price below $ per share (as adjusted for stock splits), then the Company will deliver to the investor that number of restricted shares of common stock equal to the difference between the number of shares purchased by the investor pursuant to such Purchase Agreement and the number of shares of common stock the investor would have received for the investor’s original subscription amount (an aggregate of $4,500,000) at the dilutive issuance price.
The Subordinated Note is unsecured, bears interest at a rate of 10% per year (the “Interest Rate”), and matures on the earlier of the earlier of (a) October 26, 2022 or (b) a Capital Event (the “Final Maturity Date”). “Capital Event” means (a) any transaction in which the Company, or any subsidiary of the Company, or any joint venture directly or indirectly owned by the Company: (i) refinances or incurs any indebtedness exceeding $100,000 in the aggregate of all such transactions, (ii) sells, transfers or otherwise disposes (including pursuant to a sale-leaseback transaction) of any property or asset (including securities) other than in the ordinary course of business, (iii) forms a joint venture, or (iv) issues private or public equity, stock or other financial instrument for cash consideration exceeding $100,000 in the aggregate of all such transactions; (b) any casualty or other insured damage exceeding $100,000 to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Company, or any subsidiary of the Company, or any joint venture directly or indirectly owned by the Company; or (c) any other transaction entered into for the purposes of generating cash to recapitalize the Company’s balance sheet.
If a Change of Control (as defined in the Subordinated Note) of Company occurs, then on or prior to the fifth business day following the date of such Change of Control, the Company shall prepay the Subordinated Note and all other obligations (other than, indemnity obligations under the loan documents that are not then due and payable or for which any events or claims that would give rise thereto are not then pending) in full in cash together with (i) accrued interest thereon to the date of such prepayment, (ii) all other amounts owing to investor under the loan documents, (iii) an amount equal to the difference between (x) the aggregate amount of interest that would have been due to investor, for the period from and after the date of issuance of the Subordinated Note to and including the Final Maturity Date based upon the principal amount outstanding immediately prior to and the interest rate in effect as of the date of such prepayment, less (y) the amount of interest actually paid to investor prior to the date of such prepayment.
Upon an Event of Default (as defined therein) interest shall accrue at the rate of 18% per annum.
Under the Loan Agreement, the Company may borrow up to an additional $211,111 from the investor on the same terms as described above, subject to certain conditions.
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In connection with issuing the Subordinated Note, the Company, the Subordinated Note holder and the holder of the Company’s $1,666,667 10% Original Discount Senior Secured Convertible Note issued in November 2021 (the “Senior Note”) entered into a Intercreditor Agreement (the “Intercreditor Agreement”), pursuant to which the Subordinated Note holder agreed to fully subordinate its rights under the Subordinated Note to the Senior Note and related agreements.
During the six months ended June 30, 2022, the Company recorded a discount on the three loans of $38,889 and recognized discount amortization expense of $9,800, resulting in an unamortized balance of $29,089 at June 30, 2022.
8. Related Party Transactions
During the six months ended June 30, 2022 and 2021, the Company incurred salary and fees to officers, directors, consultants and professionals in the amount of $305,770 and $390,307, as follows:
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Jason Drummond | $ | 154,292 | $ | 447,582 | ||||
| Steven Plumb | 112,136 | – | ||||||
| Julian Parge | 39,342 | – | ||||||
| Total | $ | 305,770 | $ | 447,582 | ||||
As of June 30, 2022 and December 31, 2021, $17,495 and $13,252 was due to officers, respectively. The advances were unsecured, non-interest bearing with no formal terms of repayment.
9. Stockholders' Equity
Preferred Stock
The Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. No preferred shares have been designated by the Company as of June 30, 2022 and December 31, 2021.
Common Stock
The Company is authorized to issue up to 45,000,000 shares of common stock, par value $0.001 per share. As of June 30, 2022 and December 31, 2021, the Company had 31,351,953 shares of common stock issued and outstanding.
Private Placement of Common Stock
On February 3, 2021, Gaming Technologies, Inc. (the “Company”) entered into a Securities Purchase Agreement with certain accredited investors (“Purchase Agreement”), pursuant to which the Company sold an aggregate of shares of its Common Stock for gross proceeds of $4,016,500 in a private placement. The Company paid a finder’s fee to registered brokers in the amount of $360,000 in connection with these transactions resulting in net proceeds to the Company of $3,656,500. In connection with the Purchase Agreement, the Company issued to certain registered brokers warrants to purchase an aggregate of shares of common at an exercise price of $2.50 per share, with an expiration date 5 years from the date of issuance, pursuant to the terms of certain finder’s fee agreements previously entered into by the Company and such brokers.
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Under the terms of the Purchase Agreement, each investor was granted customary piggyback registration rights in the event the Company proposes to register the offer and sale of any shares of its common stock, subject to the limitations set forth in the Purchase Agreement, such as a registration statement solely relating to an offering or sale to employees or directors of the Company pursuant to employee stock plan or in connection with any dividend or distribution. The Purchase Agreement also provides the investors the option and right to participate in future capital raising transactions at the same purchase price and on the same terms and conditions as other investors participating in such transactions, for an aggregate purchase price of up to $6,000,000.
If, at any time during the twelve months following sale of the Shares, the Company issues or sells shares of common stock or common stock equivalents, except for certain exempt issuances as described in the Purchase Agreement, at a price below $2.50 per share, then immediately upon such issuance or sale, the Company will deliver to the investors that number of restricted shares of common stock equal to the difference between the number of Shares purchased by the investor pursuant to this Purchase Agreement and the number of shares of common stock the investor would have received for the investor’s subscription amount at the dilutive issuance price.
In March 2021, the Company sold shares of its Common Stock for gross proceeds of $25,000 in a private placement.
Consulting Agreements
On November 6, 2020, the Company entered into an agreement with a consultant to serve as a board advisor. The term of the agreement is for one year and may be renewed at the end of the term. Compensation consists of the following stock grants: shares of the Company’s common stock within seven days of the execution of the agreement which was valued at $125,000 and recorded during the year ended December 31, 2020. In addition, 50,000 shares of the Company’s common stock six months after the date of the agreement; 50,000 shares of the Company’s common stock upon the first renewal of the agreement and 50,000 shares of the Company’s common stock six months after the first renewal; and, 100,000 shares of the Company common stock at each of the following two renewal periods, if the agreement is renewed. The grant date fair value of these shares will be recorded during the service period. During the period ended June 30, 2022 and 2021, the Company amortized $125,000 and $125,000, respectively, representing the pro rata portion of the grant date fair value of the next 50,000 shares to be issued. The Company is obligated to issued 100,000 shares to the consultant. These shares have not been issued as of the date of this filing.
In January 2021, the Company entered into two agreements with two consultants to provide investor relation services to the Company. The agreements are for a term of one year. The Company issued shares of its common stock in exchange for the services. The common stock was valued at $500,000 at the time the agreements were executed.
In February 2021, the Company entered into an internet advertising campaign with a consultant. The contract is for a term of one year and calls for an initial non-refundable deposit of $20,000 upon the execution of the agreement and a payment of shares of the Company’s common stock valued at $833,335 on the date of issuance.
In March 2021, the Company issued shares of its common stock to a consultant in exchange for consulting services. The fair market value of the services was $9,000.
Warrants
A summary of warrant activity for the six months ended June 30, 2022 and the year ended December 31, 2021 is presented below:
| Warrants | Weighted average exercise price | Weighted average remaining contractual life (years) | Aggregate intrinsic value | ||||||||||
| Outstanding on December 31, 2021 | 1,540,141 | $ | 2.63 | $ | – | ||||||||
| Granted | – | – | – | – | |||||||||
| Exercised | – | – | – | – | |||||||||
| Outstanding on June 30, 2022 | 1,540,141 | $ | 2.63 | $ | – | ||||||||
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Stock-option plan
On May 21, 2021, the shareholders of the Company approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”). The purposes of the 2021 Plan are to (a) enable the Company to attract and retain the types of employees, consultants and directors who will contribute to the Company’s long-term success; (b) provide incentives that align the interests of employees, consultants, and directors with those of the shareholders of the Company; and (c) promote the success of the Company’s business. The persons eligible to receive awards are the employees, consultants, and directors of the Company and such other individuals designated by the 2021 Plan’s administrative committee (the Committee) who are reasonably expected to become employees, consultants, and directors after the receipt of Awards. Awards that may be granted under the Plan include: (a) Incentive Stock Options, (b) Non-qualified Stock Options, (c) Stock Appreciation Rights, (d) Restricted Awards, € Performance Share Awards, (f) Cash Awards, and (g) Other Equity-Based Awards. 3,000,000 shares are available for issuance under the 2021 Plan. The shares available for issuance may be increased annually by the lesser of four percent (4%) of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such number of shares of common stock as determined by the Committee no later than the immediately preceding December 31.
As of June 30, 2022 and 2021, the Company did not have any outstanding stock options.
10. Commitments and Contingencies
Playboy License Agreement
On May 19, 2021, we entered into a non-exclusive license agreement with Playboy Enterprises International, Inc. (“Playboy”) to use certain trademarks (including the rabbit head logo) and other intellectual property of Playboy on and in connection with the design, creation, promotion, marketing, advertisement, sales, operation, maintenance and distribution in India of real-money game mobile apps, such as rummy, poker, fantasy sports and other games of skill approved by Playboy. We will pay Playboy as a royalty a percentage of net gaming revenue. The term of the agreement is through the end of 2025, subject to early termination upon certain events of default, which include our failure to launch a Playboy-branded game in India by November 1, 2021, or to meet certain annual minimum net gaming revenue targets. The Playboy-branded game, https://www.playboyrummy.com/, was launched on November 1, 2021. On August 1, 2022, the Playboy license agreement was terminated. The Company does not owe any royalty payments to Playboy as of the date of termination or June 30, 2022.
Pending Stock Split
On October 20, 2021, our Board approved resolutions (i) authorizing a reverse stock split of the outstanding shares of our common stock in the range from 1-for-2 to 1-for-8, and providing authority to our Board to determine whether to effect a reverse stock split and, if so to select the ratio of the reverse stock split in their discretion, and (ii) to increase the number of our authorized shares of common stock from 45,000,000 to . The Company submitted these resolutions to its stockholders for approval by written consent, and they were approved by stockholders holding a majority of the Company’s outstanding voting shares.
We have applied to list our common stock on the Nasdaq Capital Market under the symbol “GMGT”. There can be no assurance that the Nasdaq Capital Market will approve our application for the listing of our common stock. The approval process for the listing of our shares on the Nasdaq Capital Market, or any other exchange, involves factors beyond our control. Among other things, we will be required to meet the Nasdaq Capital Market’s threshold for stockholders’ equity, which will require us to raise additional capital, of which there can be no assurance. We will also be required to meet minimum market value of unrestricted publicly held shares, minimum share price (which will require us to effect a reverse stock split and other listing criteria, of which there can be no assurance. If our common stock is approved for listing on the Nasdaq Capital Market, there is no guarantee that we will be able to maintain such listing for any period of time by perpetually satisfying the Nasdaq Capital Market’s continued listing requirements. Our failure to continue to meet these requirements may result in our securities being delisted from the Nasdaq Capital Market. If our common stock is approved for listing on the Nasdaq Capital Market, we anticipate filing a certificate of amendment to affect a reverse stock split and the authorized share increase with the Secretary of State of Delaware, with such actions being effective on, or just before, the date the common stock is listed on the Nasdaq Capital Market.
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Legal Contingencies
The Company may be subject to legal proceedings from time to time as part of its business activities. As of June 30, 2022 and December 31, 2021, the Company was not subject to any threatened or pending legal actions or claims.
Impact of COVID-19 on the Company
The global outbreak of COVID-19 has led to severe disruptions in general economic activities, as businesses and governments have taken broad actions to mitigate this public health crisis. Although the Company has not experienced any significant disruption to its business to date, these conditions could significantly negatively impact the Company's business in the future.
The extent to which the COVID-19 outbreak ultimately impacts the Company's business, future revenues, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity and longevity, the actions to curtail the virus and treat its impact (including an effective vaccine), and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, the Company may be at risk of experiencing a significant impact to its business as a result of the global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
Currently, capital markets have been disrupted by the crisis, as a result of which the availability, amount and type of financing available to the Company in the near future is uncertain and cannot be assured and is largely dependent upon evolving market conditions and other factors.
The Company intends to continue to monitor the situation and may adjust its current business plans as more information and guidance become available.
Contractual Commitments
The Company has retained Julian Parge as a consultant to Gaming UK, at the request and under the sole discretion of Gaming UK, at the rate of $10,135 (equivalent to £8,333) per week up to a maximum of $121,620 (equivalent to £100,000) per annum.
In August 2021, the Company entered into an agreement with a production company to produce digital videos and promotional spots for its vale.mx brand. The Company is obligated to pay $600,000 upon the initiation of the pre-production phase of the work. The pre-production phase was completed in December 2021 and included in accounts payable as of that date, and the production company has agreed to defer payment until the Company has raised a minimum of $6,000,000 in capital through either a public offering or a private placement.
In September 2021, the Company entered into a contract with a service provider for brand awareness and social media campaigns. The service provider will be paid a monthly retainer $50,157 for the term of the agreement, which runs through February 2022. The Company has agreed to spend $1,750,000 during the term of the agreement for the placement of advertisements on various social media platforms, which will be spent in two phases. Phase 1 began upon execution of the agreement and Phase II was to begin upon the completion of a capital raise in excess of $5,000,000 from an underwritten public offering in the United States and the listing of the Company’s common stock on a U.S. national securities exchange. The Company has paid the service provider $500,000 towards the advertising obligation during the year ended December 31, 2021, which is included in advertising and marketing expenses. The parties have agreed to abandon Phase II and the contract was not renewed.
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11. Subsequent Events
July 8, 2022, Loan
On July 8, 2022, the Company entered into an amendment to securities purchase agreements dated December 1, 2020, and February 3, 2021 (the “Purchase Agreements”) with an investor (the “Second Amendment”), and the Company issued to the investor a subordinated 10% Original Issue Discount Promissory Note in the principal amount of $23,100 (the “Subordinated Note”) and received gross proceeds of $20,000. Pursuant to the Amendment, the provisions in the Purchase Agreements for an adjustment due to price based dilution, which had expired by their terms, were extended, such that if, at any time until the earlier of (a) October 6, 2022, or (b) the day after the date on which the Company issues or sells shares of common stock or common stock equivalents, except for certain exempt issuances as described in the Purchase Agreements, at a price below $2.50 per share (as adjusted for stock splits), then the Company will deliver to the investor that number of restricted shares of common stock equal to the difference between the number of shares purchased by the investor pursuant to such Purchase Agreement and the number of shares of common stock the investor would have received for the investor’s original subscription amount (an aggregate of $2,000,000) at the dilutive issuance price
The principal amount of the Subordinated Note is $23,100, and the Company received gross proceeds of $20,000 after giving effect to the original issue discount of 15%. The Subordinated Note is unsecured, bears interest at a rate of 10% per year (the “Interest Rate”), and matures on the earlier of (i) 12 months from issuance or (ii) the closing of a Qualified Offering, subject to earlier pre-payment as provided in the Subordinated Note. “Qualified Offering” is an equity or equity-linked financing for the account of the Company or any of its subsidiaries or debt financing that results in cumulative aggregate proceeds to the Company of at least $8,000,000.
Subject to the Intercreditor Agreement described below, the Company will have the right at any time to prepay in cash all or a portion of the Subordinated Note of the principal amount thereof plus any unpaid accrued interest to the date of repayment. Upon an Event of Default (as defined therein) interest shall accrue at the Interest Rate plus 2% and the principal and interest through maturity shall be due and payable.
In connection with issuing the Subordinated Note, the Company, the Subordinated Note holder and the holder of the Company’s $1,666,667 10% Original Discount Senior Secured Convertible Note issued in November 2021 (the “Senior Note”) entered into a Intercreditor Agreement (the “Intercreditor Agreement”), pursuant to which the Subordinated Note holder agreed to fully subordinate its rights under the Subordinated Note to the Senior Note and related agreements, as described more fully in the Intercreditor Agreement.
November 2021 Senior Secured Convertible Note
The Company failed to make interest payments on our 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $1,666,667 that were due in May, June, and July 2022, in the amount of $13,889 each. There can be no assurance that we will be able to raise additional capital to enable us to make future payments that come due.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and related notes appearing elsewhere in this Form 10-Q. In addition to historical information, this discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under Item 1A (“Risk Factors”) in the Form 10-K and elsewhere in this Form 10-Q.
Overview
We are a software company specializing in online gaming. Our cloud-based Player Account Management (PAM) platform enables us to rapidly deploy branded online gambling presences for land-based casinos, consumer brands and media companies. Depending on each geographical region and the restrictions/requirements of its gambling-related legislation, we form "access deals" that offer a faster and easier route to market by enabling us to operate under a gambling license already held by a local partner.
We integrate best-in-class third-party games to provide the ultimate gaming platform, and we help our international partners in regulated markets leverage online gambling presences while putting players first. We also form business partnerships with established brands such as Playboy to launch new game content.
In addition, the Company operates an online gaming operation in Mexico through its web site vale.mx, in partnership with its local partner, Big Bola.
The Company’s activities are subject to significant risks and uncertainties, including the need for additional capital, as described below. The Company commenced revenue-generating operations in February 2021, does not have positive cash flows from operations, and is dependent on periodic infusions of equity capital to fund its operating requirements.
Background and Basis of Presentation
Gaming Technologies, Inc. was incorporated in the State of Delaware on July 23, 2019 under the name Dito, Inc. and on December 21, 2020 amended its name to Gaming Technologies, Inc. Effective as of March 18, 2020, Gaming Technologies, Inc. completed a Share Exchange Agreement (the “Exchange Agreement”) to acquire all of the outstanding ordinary shares of Gaming Technologies UK that provided for each outstanding ordinary share of Gaming Technologies UK to be effectively converted into 25 shares of common stock of Gaming Technologies, Inc., As a result, Gaming Technologies UK became our wholly-owned subsidiary in a recapitalization transaction, as described below. Gaming Technologies UK was originally formed on November 3, 2017, in the United Kingdom as Dito UK Limited for the purpose of software development.
For financial reporting purposes, the Exchange Agreement was accounted for as a combination of entities under common control (the “Combination”), as Gaming Technologies, Inc. was formed by Gaming Technologies UK, with the objective of Gaming Technologies UK becoming a wholly-owned subsidiary of Gaming Technologies, Inc., and the resultant parent company being domiciled in the United States. As a result of the Combination, the former stockholders of Gaming Technologies UK became the controlling shareholders of Dito, Inc., and the Gaming Technologies UK management and board members became the management and board members of Gaming Technologies, Inc.
Our Board of Directors and our shareholders have approved a potential reverse split of our common stock in a range between 1-for-2 and 1-for-8. The Board of Directors will make the final determination whether to effect the reverse split, and if so determined, of the actual ratio within that range. There is no assurance that any reverse stock split will occur. The share and per share information in this Report does not reflect any reverse stock split.
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Going Concern
The Company's condensed consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company has had limited operating revenues to date, and has experienced recurring net losses from operations and negative operating cash flows. During the six months ended June 30, 2022, the Company incurred a net loss of $2,295,116, utilized cash in operating activities of $741,487, and had a stockholders’ deficit of $4,137,596 as of June 30, 2022. The Company has financed its working capital requirements since inception through the sale of its equity securities and from borrowings. In addition, the Company is delinquent in certain interest payments to its note holders and in its payments to Big Bola.
At June 30, 2022, the Company had cash of $0. The Company estimates that it must raise additional capital in the form of debt or equity in order to continue operations. As reflected in Note 7, Loan Agreements, the Company obtained loans for net proceeds of $350,000 during the six months ended June 30, 2022. The Company estimates that a significant amount of capital will be necessary over a sustained period of time to advance the development of the Company's business to the point at which it can become commercially viable and self-sustaining. However, there can be no assurances that the Company will be successful in this regard.
As a result, management has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year of the date that the accompanying condensed consolidated financial statements are issued. In addition, the Company's independent registered public accounting firm, in their report on the Company's condensed consolidated financial statements for the year ended December 31, 2021, has also expressed substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company's ability to raise additional funds and implement its business plan, and to ultimately achieve sustainable operating revenues and profitability. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The development and expansion of the Company's business in 2022 and thereafter will be dependent on many factors, including the capital resources available to the Company. No assurances can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company or adequate to fund the development and expansion of the Company's business to a level that is commercially viable and self-sustaining. There is also significant uncertainty as to the affect that the coronavirus pandemic may have on the availability, amount and type of financing in the future.
If cash resources are insufficient to satisfy the Company's ongoing cash requirements, the Company would be required to scale back or discontinue its operations, obtain funds, if available, although there can be no certainty, through strategic alliances that may require the Company to relinquish rights to its technology, or to discontinue its operations entirely.
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Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations is based upon the Company’s condensed consolidated financial statements for the six months ended June 30, 2022 and 2021 presented elsewhere in this Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the US (“GAAP”). Certain accounting policies and estimates are particularly important to the understanding of the Company’s financial position and results of operations and require the application of significant judgment by management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the Company’s control. As a result, these issues are subject to an inherent degree of uncertainty. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on the Company’s historical operations, the future business plans and the projected financial results, the terms of existing contracts, trends in the industry, and information available from other outside sources. For a more complete description of the Company’s significant accounting policies, see Note 2 to the condensed consolidated financial statements.
Tax Credits and Receivables
The Company is registered for provincial goods and services taxes in the United Kingdom. As such, the Company is obligated to collect from third parties, and is entitled to claim sales taxes paid on its expenses and capital expenditures incurred in the United Kingdom. In addition, the Company may be entitled to a receivable in the form of tax credit or incentive on certain research and development activities. The Company records tax credits as a reduction of expense and receivable when the Company can reasonably estimate the amounts and it is more likely than not, they will be received. During the period ended June 30, 2022, the Company recorded a receivable of $281,600 as a credit for research and development activities incurred in the United Kingdom, which has been offset against research and development costs during the period. The tax credit was received by the Company in July 2022.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers. ASC Topic 606 requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Revenue is recognized based on the following five step model:
| · | Identification of the contract with a customer |
| · | Identification of the performance obligations in the contract |
| · | Determination of the transaction price |
| · | Allocation of the transaction price to the performance obligations in the contract |
| · | Recognition of revenue when, or as, the Company satisfies a performance obligation |
Performance Obligations
The Company operates an online betting platform allowing users to place wagers on casino and other games. Each wager placed by users create a single performance obligation for the Company to administer each event wagered. Net gaming revenue is the aggregate of gaming wins and losses based on results of each event that customers wager bets on. Gross gaming revenue is split with our partners, whose share of gross gaming revenue is recorded as a reduction to net gaming revenue.
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Stock-Based Compensation
The Company issues Common Stock and intends to issue stock options to officers, directors and consultants for services rendered. Options will vest and expire according to terms established at the issuance date of each grant. Stock grants, which are generally time vested, will be measured at the grant date fair value and charged to operations ratably over the vesting period.
The fair value of stock options granted as stock-based compensation will be determined utilizing the Black-Scholes option-pricing model, and can be affected by several variables, the most significant of which are the life of the equity award, the exercise price of the stock option as compared to the fair market value of the Common Stock on the grant date, and the estimated volatility of the Common Stock. Estimated volatility will be based on the historical volatility of the Company’s Common Stock over an appropriate calculation period, or, if not available, by reference to the volatility of a representative sample of comparable public companies. The risk-free interest rate will be based on the US Treasury yield curve in effect at the time of grant. The fair market value of the Common Stock will be determined by reference to the quoted market price of the Company’s Common Stock on the grant date, or, if not available, by reference to an appropriate alternative valuation methodology.
The Company will recognize the fair value of stock-based compensation awards in general and administrative costs or in software development costs, as appropriate, in the Company’s consolidated statements of operations. The Company will issue new shares of Common Stock to satisfy stock option exercises.
As of June 30, 2022, the Company did not have any outstanding stock options.
Recent Accounting Pronouncements
See Note 2 to the condensed consolidated financial statements for discussion of Recent Accounting Policies.
Development of Our Business
Our activities are subject to significant risks and uncertainties, including the need for additional capital, as described below. We do not have positive cash flows from operations, and we expect to continue to be dependent on periodic infusions of equity capital to fund our operating requirements. We have financed our working capital requirements since inception primarily through the sale of its equity securities in private placement transactions, as well as from borrowings. In private placements to “accredited investors” (as defined in Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)) or to non-U.S. persons under Regulation S under the Securities Act, between February 2020 and February 2021 we sold an aggregate of 2,691,800 shares of our common stock at a price of $2.50 per share. In March 2021, we sold 10,000 shares of our common stock for gross proceeds of $25,000 in a private placement. In August 2021, we sold 538,694 shares of common for gross proceeds of $1,750,752 in a private placement. Our activities are subject to significant risks and uncertainties, including the need for additional capital, as described below.
Big Bola/vale.mx
On November 13, 2020, we entered into an Agreement for the Provision of Online Gaming Management and Consulting Services (as subsequently amended) with Comercial de Juegos de la Frontera, S.A. de C.V., a Mexican company doing business as Big Bola, pursuant to which we provide to Big Bola consulting and management services related to their interactive online betting and gaming business in Mexico via the web site www.vale.mx, a regulated online casino and sports betting site. vale.mx operates under Big Bola’s existing license issued by the General Directorate of Games and Raffles of the Ministry of Interior (SEGOB). Big Bola is one of only 14 operators legally authorized to offer legal betting and online casino services in Mexico. vale.mx has more than 500 online premium casino games available, which can be enjoyed both on mobile or via desktop. Players can receive promotions and play live roulette and blackjack, or high-definition slots from leading software providers such as NetEnt, Microgaming, Pragmatic Play, Evolution and Matrix Studios. We are responsible for player acquisition, promotion and retention for vale.mx. We manage players’ accounts and are required to ensure that the balance in players’ accounts at all times satisfies the requirements under applicable law, and we pay out winnings to players from Big Bola’s account. While Big Bola bears liability to the players as provided by the permit, as between us and Big Bola we bear the costs of this obligation. Each party indemnifies the other against certain liabilities and claims. Under the terms of the agreement, we share 75% of gross gaming revenue generated from the platform, subject to certain minimum guaranteed monthly amounts of Big Bola’s participation in the remaining gross gaming revenues. In February 2021, vale.mx began operations.
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In June 2022, the Company and Big Bola entered into a Side Letter Agreement (“SLA”) whereby Big Bola agreed to convert $134,669 in fees owed to it by the Company into shares of the Company’s common stock. The Company recorded the fees as incurred and they are included in accounts payable at June 30, 2022. The Company was required to issue the shares by July 10, 2022. As of the date of this filing the shares have not been issued. In addition, the Company agreed to make payments on $120,000 in guaranteed participation fees due to Big Bola as follows: $40,000 no later than July 14, 2022; $40,000 on later than August 14, 2022; and $40,000 no later than September 14, 2022. The guaranteed participation fees have been recorded by the Company as they were incurred and are included in accounts payable at June 30, 2022. The July and August payments have not been made as of the date of this filing. In addition, Big Bola agreed that it will not collect from the Company the guaranteed participation fee of $40,000 per month for the months of June, July and August of 2022 and that the guaranteed participation fee for the months of September, October and November of 2022 will be reduced to $20,000 per month. Effective December 1, 2022, the parties will revert to the terms of the original agreement, as amended.
Playboy License Agreement
On May 19, 2021, we entered into a non-exclusive license agreement with Playboy Enterprises International, Inc. (“Playboy”) to use certain trademarks (including the rabbit head logo) and other intellectual property of Playboy on and in connection with the design, creation, promotion, marketing, advertisement, sales, operation, maintenance and distribution in India of real-money game mobile apps, such as rummy, poker, fantasy sports and other games of skill approved by Playboy. We will pay Playboy as a royalty a percentage of net gaming revenue. The term of the agreement is through the end of 2025, subject to early termination upon certain events of default, which include our failure to launch a Playboy-branded game in India by November 1, 2021, or to meet certain annual minimum net gaming revenue targets. The Playboy-branded game, https://www.playboyrummy.com/, was launched on November 1, 2021. On August 1, 2022 the license agreement with Playboy was terminated.
Ortiz Gaming Partnership
On August 18, 2021, we entered into a software partnership with Ortiz Gaming to supply us with online Bingo gaming content. The deal initially cover Mexico and we plan to expand to other parts of Latin and South America.
Key Performance Indicators
Registered Players
A registered player is a customer who has registered on our app or website and met our Know Your Customer identification requirements. During the six months ended June 30, 2022 we registered 12,194 players on vale.mx. On October 4, 2021, we announced we had reached 100,000 total registrations on vale.mx.
Monthly Unique Payers
Monthly Unique Payers (“MUPs”). MUPs is the average number of unique paid users (“unique payers”) that use our online platform on a monthly basis.
MUPs is a key indicator of the scale of our user base and awareness of our brand and/or the third-party brands we partner with. We believe that year-over-year MUPs will also generally be indicative of the long-term revenue growth potential of the online gaming brands we hold directly and/or those we establish around our B2B brand partners, although MUPs in individual periods may be less indicative of our longer-term expectations. We expect the number of MUPs to grow as we attract, retain and re-engage users in new and existing jurisdictions and expand the online gambling brands we operate to appeal to a wider audience.
We define MUPs as the average number of unique payers per month who had a paid engagement (e.g., participated in a casino game) across one or more of our product offerings via our platform technology. For reported periods longer than one month, we average the MUPs for the months in the reported period.
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A “unique paid user” or “unique payer” is any person who had one or more paid engagements via our B2C technology during the period (i.e., a user that participates in a paid engagement with one of our B2C product offerings counts as a single unique paid user or unique payer for the period). We exclude users who have made a deposit but have not yet had a paid engagement. Unique payers or unique paid users include users who have participated in a paid engagement with promotional incentives, which are fungible with other funds deposited in their wallets on our technology. The number of these users included in MUPs has not been material to date and a substantial majority of such users are repeat users who have had paid engagements both prior to and after receiving incentives.
During the six months ended June 30, 2022, our MUPs were 485.
Average Revenue per MUP (“ARPMUP”). ARPMUP is the average online casino revenue per MUP, and this key metric represents our ability to drive usage and monetization of our online casino offering.
During the six months ended June 30, 2022, our ARPMUP was $139.97.
We define and calculate ARPMUP as the average monthly online casino revenue for a reporting period, divided by MUPs (i.e., the average number of unique payers) for the same period.
Handle
Handle is a casino or sports betting term referring to the total amount of money bet. We will report the handle or cash wagering which is the total amount of money bet excluding all bonuses.
During the six months ended June 30, 2022, our handle was $2,167,367.
Hold
Hold is essentially the amount of cash that our platform instances keep after paying out winning bets. The industry also refers to hold as win or revenue. During the six months ended June 30, 2022, our hold was $89,375.
Online games are characterized by an element of chance. Our revenue is impacted by variations in the hold percentage (the ratio of net win to total amount wagered) on bets placed on, or the actual outcome of, games or events on which users bet. Although our product offerings generally perform within a defined statistical range of outcomes, actual outcomes may vary for any given period, and a single large bet can have a sizeable impact on our short-term financial performance. Our hold is also affected by factors that are beyond our control, such as a user’s skill, experience and behavior, the mix of games played, the financial resources of users and the volume of bets placed. As a result of variability in these factors, actual hold rates on our products may differ from the theoretical win rates we have estimated and could result in the winnings of our gaming users exceeding those anticipated. We seek to mitigate these risks through data science and analytics and rules built into our technology, as well as active management of our amounts at risk at a point in time, but may not always be able to do so successfully, particularly over short periods, which can result in financial losses as well as revenue volatility.
During the six months ended June 30, 2022, our hold percentage was 4.12%.
Plan of Operation
Our next phase of growth is focused on scaling our customer and player base and geographies, and utilizing the existing technical capacity and investment in infrastructure which has taken place since 2017. The company intends to invest in further software development, specifically the recruitment of a further 10 developers to add sportsbook functionality to the existing PAM platform. As our platform is hosted in AWS, we do not anticipate investing further in any equipment.
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In line with the Company’s strategy of creating lean and flexible operations, we are outsourcing a number of departments including Customer Service to TelePerformance in Mexico City, and Marketing to WPP Group / Grey. Furthermore, as we are now integrating the best-in-class games from games studios worldwide, we anticipate a reduced headcount in games development.
Results of Operations
In February 2021, our online casino, vale.mx, began operations. However, as of June 30, 2022 and 2021, the Company did not have any positive cash flows from operations and was dependent on its ability to raise equity capital to fund its operating requirements.
Revenues
The Company began generating revenue in February 2021. Revenues consist of the net gaming revenues from the Company’s vale.mx online casino based in Mexico. Total revenues were $67,427 and $25,410 for the six months ended June 30, 2022 and 2021. The increase of $42,017 is due to fact that the initiation of revenue producing activities in February 2021 resulted in a few number of days in the six months ended June 30, 2021 and the fact that we have been able to increase the number of players in our system over the ensuing twelve months, resulting in an increase in revenue from the prior period.
Cost of Revenues
The Company began generating costs of revenues in February 2021. Cost of revenues consist of the direct costs of operating vale.mx, our online casino based in Mexico. Total costs of revenues were $92,447 and $91,318 for the three months ended June 30, 2022 and 2021 and $142,437 and $273,581 for the six months ended June 30, 2022 and 2021, respectively. The decrease of $131,144 during the six months ended June 30, 2022 and the increase of $1,129 during the three months ended June 30, 2022 was due to a mutually agreed upon reduction in the fee paid to Big Bola.
Operating Expenses
The Company generally recognizes operating costs and expenses as they are incurred in two general categories, software development costs and expenses and general and administrative costs and expenses. The Company’s operating costs and expenses also include non-cash components related to depreciation and amortization of property and equipment, and intellectual property, which are allocated, as appropriate, to software development costs and expenses and general and administrative costs and expenses.
Software development costs and expenses consist primarily of fees paid to consultants and amortization of intellectual property. Management expects software costs and expenses to increase in the future as the Company increases its efforts to develop technology for potential future products based on its technology and research.
General and administrative costs and expenses consist of fees for directors and officers, and their affiliates, as well as legal and other professional fees, depreciation and amortization of property and equipment, lease and rent expense, and other general corporate expenses. Management expects general and administrative costs and expenses to increase in future periods as the Company adds personnel and incurs additional costs related to its operation as a public company, including higher legal, accounting, insurance, compliance, compensation and other costs.
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Three Months Ended June 30, 2022 and 2021
The Company’s condensed consolidated statements of operations for the three months ended June 30, 2022 and 2021, as discussed herein, are presented below.
Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 23,411 | $ | 23,321 | ||||
| Costs and expenses: | ||||||||
| Cost of revenues | 92,447 | 91,318 | ||||||
| Software development | (281,600 | ) | 114,460 | |||||
| General and administrative | ||||||||
| Officers, directors, affiliates and other related parties | 141,007 | 155,727 | ||||||
| Advertising and marketing | – | 3,317,162 | ||||||
| Other | 480,383 | 571,443 | ||||||
| Total costs and expenses | 432,237 | 4,250,110 | ||||||
| Loss from operations | (408,826 | ) | (4,226,789 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | (446,910 | ) | – | |||||
| Foreign currency loss | (247 | ) | – | |||||
| Total other expense, net | (447,157 | ) | – | |||||
| Net loss | (855,983 | ) | (4,226,789 | ) | ||||
| Foreign currency translation adjustment | (6,418 | ) | (8,491 | ) | ||||
| Comprehensive loss | $ | (862,401 | ) | $ | (4,235,280 | ) | ||
| Net loss per common share – basic and diluted | $ | (0.03 | ) | $ | (0.14 | ) | ||
| Weighted average common shares outstanding – basic and diluted | 31,351,953 | 30,521,059 | ||||||
Revenue. The Company began generating revenue in February 2021. Revenues consist of the net gaming revenues from the Company’s vale.mx online casino based in Mexico. Total revenues were $23,411 and $23,321 for the three months ended June 30, 2022 and 2021. The change in revenue of $90 during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was not significant.
Cost of Revenues: The Company began generating costs of revenues in February 2021. Cost of revenues consist of the direct costs of operating and marketing vale.mx, our online casino based in Mexico. Total costs of revenues were $92,447 and $91,318 for the three months ended June 30, 2022 and 2021. The change in cost of revenues of $1,129 during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was not significant.
Software Development Costs and Expenses. For three months ended June 30, 2022, software development costs and expenses were $(281,600), which consisted of a research and development tax credit attributable to our UK subsidiary in the amount of $281,600.
For the three months ended June 30, 2021, software development costs and expenses were $114,460, which consisted of software development costs and expenses of $97,792 and amortization of intellectual property of $15,150.
Software development costs and expenses decreased by $396,060 or 346% in 2022 as compared to 2021, primarily as a result of a research and development tax credit attributable to our UK subsidiary in the amount of $281,600.
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General and Administrative Costs and Expenses. For the three months ended June 30, 2022, general and administrative costs and expenses were $621,390, which consisted of director, consulting, and professional fees to officers, directors, affiliates, and other related parties of $141,007, investor relations costs of $11,475, stock compensation expense of $62,500, legal and accounting fees to non-related parties of $195,728, consulting fees of $118,192, depreciation and amortization of property and equipment of $2,651, lease and rent expense of $9,714, and other operating costs of $80,123.
For the three months ended June 30, 2021, general and administrative costs and expenses were $4,044,332, which consisted of director, consulting, and professional fees to officers, directors, affiliates, and other related parties of $155,727, marketing and advertising costs of $3,317,162, stock compensation expense of $20,833, legal and accounting fees to non-related parties of $114,090, consulting fees of $352,441, agent fees of $48,169 depreciation and amortization of property and equipment of $4,572, lease and rent expense of $13,804, transfer agent fees of $(6,891), investor relations costs of $9,158, travel expenses of $13,964, and other operating costs of $1,303.
General and administrative costs decreased by $3,422,942 or 85% in 2022 as compared to 2021, primarily as a result of decreases in advertising and marketing expenses of $3,317,162 and consulting fees of $234,249, and increases in stock compensation expense of $41,667 and other costs of $10,827.
Interest Expense. For the three months ended June 30, 2022, the Company had interest expense of $446,910, as compared to interest expense of $0 for the three months ended June 30, 2021, primarily as a result of accretion of premium, discount amortization, late fees, and interest on notes payable.
Foreign Currency Gain (Loss). For the three months ended June 30, 2022, the Company had a foreign currency loss of $247, as compared to a foreign currency loss of $0 for the three months ended June 30, 2021, as a result of a decrease in the value of the GB Pound compared to the US Dollar.
Net Loss. For the three months ended June 30, 2022, the Company incurred a net loss of $855,983, as compared to a net loss of $4,226,789 for the three months ended June 30, 2021.
Foreign Currency Translation Adjustment. For the three months ended June 30, 2022, the Company had a foreign currency translation adjustment of $(6,418), as compared to a foreign currency translation adjustment of $(8,491) for the three months ended June 30, 2021. The foreign currency translation adjustment is a result of fluctuations between the GBP, the functional currency of the Company’s UK subsidiary, and the USD, the reporting currency of the Company.
Comprehensive Loss. For the three months ended June 30, 2022, the Company incurred a comprehensive loss of $862,401, as compared to a comprehensive loss of $4,235,280 for the three months ended June 30, 2021.
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Six Months Ended June 30, 2022 and 2021
The Company’s condensed consolidated statements of operations for the six months ended June 30, 2022 and 2021, as discussed herein, are presented below.
Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 67,427 | $ | 25,410 | ||||
| Costs and expenses: | ||||||||
| Cost of revenues | 142,437 | 273,581 | ||||||
| Software development | (267,127 | ) | 132,863 | |||||
| General and administrative | ||||||||
| Officers, directors, affiliates and other related parties | 305,770 | 447,582 | ||||||
| Advertising | – | 3,524,643 | ||||||
| Other | 1,291,067 | 2,254,353 | ||||||
| Total costs and expenses | 1,472,147 | 6,633,022 | ||||||
| Loss from operations | (1,404,720 | ) | (6,607,612 | ) | ||||
| Other expense: | ||||||||
| Interest expense | (889,506 | ) | – | |||||
| Foreign currency gain | (890 | ) | – | |||||
| Total other expense, net | (890,396 | ) | – | |||||
| Net loss | (2,295,116 | ) | (6,607,612 | ) | ||||
| Foreign currency translation adjustment | – | (21,664 | ) | |||||
| Comprehensive loss | $ | (2,295,116 | ) | $ | (6,629,276 | ) | ||
| Net loss per common share – basic and diluted | $ | (0.08 | ) | $ | (0.22 | ) | ||
| Weighted average common shares outstanding – basic and diluted | 31,351,953 | 30,033,705 | ||||||
Revenue. The Company began generating revenue in February 2021. Revenues consist of the net gaming revenues from the Company’s vale.mx online casino based in Mexico. Total revenues were $67,427 and $25,410 for the six months ended June 30, 2022 and 2021. The increase of $42,017 is due to the initiation of revenue producing activities in February 2021, as a result of which the Company enjoyed a higher number of revenue producing days in the six months ended June 30, 2022 than during the six months ended June 30, 2021.
Cost of Revenues: The Company began generating costs of revenues in February 2021. Cost of revenues consist of the direct costs of operating and marketing vale.mx, our online casino based in Mexico. Total costs of revenues were $142,437 and $273,581 for the six months ended June 30, 2022 and 2021. The decrease of $131,144 was due to a mutually agreed upon reduction in the fees paid to Big Bola.
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Software Development Costs and Expenses. For the six months ended June 30, 2022 and 2021, software development costs and expenses were $(267,127) and $132,863, respectively, which included amortization of intellectual property of $3,614 and $35,071 for the six months ended June 30, 2022 and 2021, respectively.
Software development costs and expenses decreased by $399,990 or 301% in 2022 as compared to 2021, as a result of a research and development tax credit of $281,600 recorded during the six months ended June 30, 2022.
General and Administrative Costs and Expenses. For the six months ended June 30, 2022, general and administrative costs and expenses were $1,596,837, which consisted of director, consulting, and professional fees to officers, directors, affiliates, and other related parties of $305,770, legal and accounting fees to non-related parties of $276,993, consulting fees of $339,482, stock compensation expense of $125,000, depreciation and amortization of property and equipment of $5,397, lease and rent expense of $54,402, investor relations costs of $412,633, travel expenses of $34,715, and other operating costs of $42,445.
For the six months ended June 30, 2021, general and administrative costs and expenses were $6,226,578, which consisted of director, consulting, and professional fees to officers, directors, affiliates, and other related parties of $447,582, stock compensation expense of $1,467,335, marketing and advertising of $3,524,643, legal and accounting fees to non-related parties of $234,650, consulting fees of $413,899, depreciation and amortization of property and equipment of $6,935, lease and rent expense of $25,188, transfer agent fees of $3,060, investor relations costs of $22,169, travel expenses of $24,339, and other operating costs of $56,778.
General and administrative costs decreased by $4,629,741 or 74% in 2022 as compared to 2021, primarily as a result of a decrease in stock compensation expense of $1,342,335 and a decrease in marketing and advertising of $3,524,643.
Interest Expense. For the six months ended June 30, 202, the Company had interest expense of $889,506, as compared to interest expense of $0 for the six months ended June 30, 2021, primarily as a result of accretion of premium, discount amortization, late fees, and interest on notes payable.
Foreign Currency Gain (Loss). For the six months ended June 30, 2022, the Company had a foreign currency loss of $890, as compared to a foreign currency loss of $0 for the six months ended June 30, 2021, as a result of a decrease in the value of the GB Pound compared to the US Dollar.
Net Loss. For the six months ended June 30, 2022, the Company incurred a net loss of $2,295,116, as compared to a net loss of $6,607,612 for the six months ended June 30, 2021.
Liquidity and Capital Resources – June 30, 2022 and December 31, 2021
The Company’s condensed consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had no significant operating revenues to date, and has experienced recurring net losses from operations and negative operating cash flows. The Company has financed its working capital requirements since inception through the sale of its equity securities and from borrowings.
As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the condensed consolidated financial statements are being issued. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s condensed consolidated financial statements for the year ended December 31, 2021, has also expressed substantial doubt about the Company’s ability to continue as a going concern (see “—Going Concern”).
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The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan, and to ultimately achieve sustainable operating revenues and profitability. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
As of June 30, 2022, the Company had a working capital of $(4,293,288), as compared to working capital of $(2,113,765) as of December 31, 2021, reflecting a decrease in working capital of $2,179,523 for the six months ended June 30, 2022. The decrease in working capital during the six months ended June 30, 2022, was primarily due to the operating costs incurred during the period.
As of June 30, 2022, the Company had cash of $0. As discussed in Notes 7 and 11 of the condensed consolidated financial statements, in April 2022, the Company obtained two loans with net proceeds of $60,000 and $250,000, in May 2022, the Company obtained a loan with net proceeds of $40,000, and in July 2022, the Company obtained a loan with net proceeds of $40,000 and received a tax refund in the amount of $281,600 in July 2022. As of December 31, 2021, the Company had cash of $406,526, reflecting the remaining cash on hand from the proceeds of $1,500,000 from the private placement of a secured convertible note payable in November 2021.
In February 2021, the Company began earning revenues, however they are not a level sufficient to support the Company’s operations.
The Company estimates that its working capital requirements for the next twelve months to be approximately $200,000 per month for a total of $2,400,000.
The working capital budget will enable the Company to support the existing monthly operating costs of the Company of approximately $200,000 per month, consisting of monthly (and quarterly) accounting and US securities filing costs estimated at $20,000 per month and a sales and marketing budget of $180,000 per month to engage in a sales and marketing campaign to sell licenses of the Company’s software platform to third parties and attach customers to its online casino based in Mexico.
During the year ended December 31, 2021, the Company completed a series of private placements of its Common Stock, with proceeds totaling $5,300,648 and the placement of a secured convertible note payable with net proceeds of $1,500,000. See Item 1 (“Business—The Private Placements and Share Exchange”) in the Form 10-K. In April 2022, the Company entered into two note agreements with existing investors, the first of which resulted in a note with net proceeds of $250,000 and the second of which resulted in net proceeds of $60,000. The second investor agreed to lend up to $250,000. In May 2022, the Company entered into a note agreement with an existing investor with net proceeds of $40,000. In July 2022, the Company entered into a note agreement with an existing investor with net proceeds of $40,000. The Company believes that additional working capital will be required to fund the Company’s operations for the next twenty-four months.
Since acquiring the software platform, the Company has successfully carried out development to port the software platform from its former physical server dependencies and reliance on third parties for hardware management and deployment to a cloud-based platform where deployment is automated through the use of infrastructure as code. To make the Company’s software platform work for business-to-business (B2B) licensees, the Company has modified the software to enable remote management by system administrators of prospective licensees. Previously, the platform was business to consumer (B2C) focused, with outsourced management and deployment. As a result of this software development, the Company expects to be able to monetize its software platform by selling licenses to third parties.
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The Company’s ability to raise additional funds through equity or debt financings or other sources may depend on the stage of development of the software platform, the commercial success of the software, and financial, economic and market conditions and other factors, some of which are beyond the Company’s control. No assurance can be given that the Company will be successful in raising the required capital at reasonable cost and at the required times, or at all. Further equity financings may have a dilutive effect on shareholders and any debt financing, if available, may require restrictions to be placed on the Company’s future financing and operating activities. If the Company requires additional capital and is unsuccessful in raising that capital, the Company may not be able to continue the development of its software platform and continue to advance its growth initiatives, or ultimately to be able to continue its business operations, which could adversely impact the Company’s business, financial condition and results of operations.
Operating Activities
For the six months ended June 30, 2022, operating activities utilized cash of $741,487, as compared to utilized cash of $5,119,769 for the six months ended June 30, 2021, to fund the Company’s ongoing operating expenses.
Investing Activities
For the six months ended June 30, 2022, the Company’s investing activities consisted of the acquisition of property and equipment for $10,657.
For the six months ended June 30, 2021, the Company’s investing activities consisted of the acquisition of intellectual property for $174,616 and property and equipment of $4,964.
Financing Activities
For the six months ended June 30, 2022, the Company’s financing activities consisted of repayment of note payable – bank in the amount of $6,148 and borrowing a net of $350,000 from existing investors. We failed to make interest payments on our 10% Original Issue Discount Senior Secured Convertible Note in the principal amount of $1,666,667 that were due in May, June, and July, 2022, in the amount of $13,889 each. In July 2022, the Company received a notice of default on the Secured Note. The default occurred on May 18, 2022. As a result of the default the following events occurred: (a) the interest rate on the Secured Note increased to 18% per annum on the date of default; (b) the Company incurred an 18% late fee of $55,208; and, (c) the principal of the note increased to $2,083,334, representing 125% of the original principal amount of the loan. The Company recorded the late fee as interest expense and the increase in principal as an accretion premium on the Secured Note. There can be no assurance that we will be able to raise additional capital to enable us to make future payments that come due.
For the six months ended June 30, 2021, the Company’s financing activities consisted of gross proceeds from the private placement of 1,616,600 shares of Common Stock of $3,681,500.
Off-Balance Sheet Arrangements
As of June 30, 2022, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
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Trends, Events and Uncertainties
Development of new software is, by its nature, unpredictable. Although the Company will undertake development efforts with commercially reasonable diligence, there can be no assurance that the Company’s efforts to raise funds in the future will be sufficient to enable the Company to develop its technology to the extent needed to create future revenues to sustain operations as contemplated herein.
There can be no assurances that the Company’s technology will be adopted or that the Company will ever achieve sustainable revenues sufficient to support its operations. Even if the Company is able to generate revenues, there can be no assurances that the Company will be able to achieve profitability or positive operating cash flows. There can be no assurances that the Company will be able to secure additional financing on acceptable terms or at all. If cash resources are insufficient to satisfy the Company’s ongoing cash requirements, the Company would be required to scale back or discontinue its software development programs, or obtain funds, if available (although there can be no certainty), through strategic alliances that may require the Company to relinquish rights to certain of its potential products, or to curtail or discontinue its operations entirely.
Other than as discussed above and elsewhere in this Form 10-Q, the Company is not currently aware of any trends, events or uncertainties that are likely to have a material effect on the Company’s financial condition in the near term, although it is possible that new trends or events may develop in the future that could have a material effect on the Company’s financial condition.
Inflation and Supply Chain Constraints
Recently, inflation has trended significantly higher than in prior periods, which may be negatively impacting some of our customers. This inflation has impacted the amount of disposable income that our customers have available to spend on our games. Ongoing labor shortages and global supply chain issues, driven in part by the COVID-19 pandemic, geopolitical issues and the war in Ukraine, also continue to adversely impact costs, which are resulting in higher software development costs and delays in completing software development projects.
Impact of COVID-19 on the Company
The global outbreak of COVID-19 has led to severe disruptions in general economic activities, as businesses and governments have taken broad actions to mitigate this public health crisis. Although the Company has not experienced any significant disruption to its business to date, these conditions could significantly negatively impact the Company’s business in the future.
The extent to which the COVID-19 outbreak ultimately impacts the Company’s business, future revenues, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity and longevity, the actions to curtail the virus and treat its impact (including an effective vaccine), and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, the Company may be at risk of experiencing a significant impact to its business as a result of the global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
Currently, capital markets have been disrupted by the crisis, as a result of which the availability, amount and type of financing available to the Company in the near future is uncertain and cannot be assured and is largely dependent upon evolving market conditions and other factors.
The Company intends to continue to monitor the situation and may adjust its current business plans as more information and guidance become available.
Other than as discussed above and elsewhere in this Form 10-Q, the Company is not currently aware of any trends, events or uncertainties that are likely to have a material effect on the Company’s financial condition in the near term, although it is possible that new trends or events may develop in the future that could have a material effect on the Company’s financial condition.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective as of June 30, 2022, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls.
Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in litigation relating to claims arising out of its operations in the normal course of business. Currently there are no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or that involve the Company or any of its affiliates which, in the opinion of the management of the Company, could reasonably be expected to have a material adverse effect on its business or financial condition.
Item 1A. Risk Factors.
There have been no material changes from the Risk Factors previously disclosed in Part I, Item 1A, in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
In July 2022, the Company received a notice of default on the November 18, 2021 Convertible Secured Note (the Secured Note). The original principal balance of the Secured Note was $1,666,667. The default occurred on May 18, 2022. As a result of the default the following events occurred: (a) the interest rate on the Secured Note increased from 10% per annum to 18% per annum on the date of default; (b) the Company incurred an 18% late fee of $55,208; and, (c) the principal of the note increased to $2,083,334, representing 125% of the original principal amount of the loan.
Item 4. Mine Safety Disclosure.
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibits
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
| · | may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements; |
| · | may apply standards of materiality that differ from those of a reasonable investor; and |
| · | made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
| Exhibit Number | Exhibit Description |
| 3.1 | Certificate of Incorporation (filed as Exhibit 3.1 to Form S-1 filed with the SEC on November 10, 2020) |
| 3.1 | Certificate of Amendment to Certificate of Incorporation (filed as Exhibit 3.1 to Form 8-K filed with the SEC on January 7, 2021 |
| 3.3 | Bylaws (filed as Exhibit 3.2 to Form S-1 filed with the SEC on November 10, 2020) |
| 31.1* | Certification of Principal Executive, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Certification of Principal Financial and Accounting Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1** | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2** | Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS * | XBRL Instance Document |
| 101.SCH * | XBRL Taxonomy Schema |
| 101.CAL * | XBRL Taxonomy Calculation Linkbase |
| 101.DEF * | XBRL Taxonomy Definition Linkbase |
| 101.LAB* | XBRL Taxonomy Label Linkbase |
| 101.PRE * | XBRL Taxonomy Presentation Linkbase |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
___________
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GAMING TECHNOLOGIES, INC.
Date: August 22, 2022
By: /s/ Jason Drummond
Name: Jason Drummond
Title: President, Chief Executive Officer, and Secretary
By: /s/ Steven M. Plumb
Name: Steven M. Plumb
Title: Chief Financial Officer
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