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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d) of
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015
Commission File Number 000-50045
EMPIRE GLOBAL CORP.
(Name of small business issuer in its charter)
Delaware 33-0823179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
671 Westburne Dr.
Concord, Ontario, L4K 4Z1
(647) 229-0136
(Address and telephone number of principal executive offices)
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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
Large accelerated filer [ ] Accelerated Filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if Smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
There were 23,264,800 shares of Common Stock outstanding as of May 20, 2015.
ITEM 1. FINANCIAL STATEMENTS
The unaudited quarterly financial statements for the period ended March 31,
2015, prepared by the company, immediately follow.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements F-1 - F-22
Item 2. Management's Discussion and Analysis or Plan of Operation 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits 35
SIGNATURES 35
- 2 -
PART I
ITEM 1. FINANCIAL STATEMENTS
EMPIRE GLOBAL CORP.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Consolidated Balance Sheets F-1 - F-2
Consolidated Statements of Comprehensive Loss F-3
Consolidated Statements of Cash Flows F-4 - F-5
Notes to Consolidated Financial Statements F-6 - F-22
- 3 -
EMPIRE GLOBAL CORP.
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2015 2014
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 171,923 422,276
Deposits on acquisitions - 62,698
Gaming account receivable 369,967 371,644
Prepaid expenses 239,227 393,224
Due from affiliates - 256,251
Investment in corporate bonds 346,560 389,536
Other current assets 107,577 16,676
------------ ------------
Total Current Assets 1,235,254 1,912,305
------------ ------------
Noncurrent Assets
Property, plant and equipment 77,634 17,995
Intangible assets 2,418,714 1,982,437
Goodwill 260,318 179,239
Investment in non-consolidated entities 36,115 40,594
----------- ------------
Total Noncurrent Assets 2,792,781 2,220,265
------------ ------------
Total Assets 4,028,035 $ 4,132,570
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit - Bank $ 232,462 $ 194,139
Accounts payable and accrued liabilities 411,458 377,561
Gaming accounts balances 305,282 352,605
Taxes payable 143,631 121,531
Bank loan payable 12,587 56,286
Advances from stockholders 98,434 65,717
Liability in connection with acquisition 445,242 -
Debenture, net of discount 143,540 141,346
Derivative liability 19,790 15,397
Promissory note payable 268,365 436,796
Other current liabilities 6,532 22,898
------------ ------------
Total Current Liabilities 2,087,323 1,784,276
Long term liabilities 47,075 52,912
------------ ------------
Total Liabilities 2,134,398 1,837,188
------------ ------------
F-1
Stockholders' Equity
Preferred Stock, $0.0001 par value, 20,000,000
shares authorized, none issued and outstanding - -
Common Stock, $0.0001 par value, 80,000,000 shares
authorized; 23,264,800 issued and outstanding
at March 31, 2015 and December 31, 2014 2,327 2,327
Additional - paid in capital 9,526,340 9,525,357
Accumulated other comprehensive income (loss) (63,557) 39,880
Accumulated deficit (7,571,473) (7,272,182)
------------ ------------
Total Stockholders' Equity 1,893,637 2,295,382
------------ ------------
4,028,035 $ 4,132,570
============ ============
See notes to consolidated financial statements
- F2 -
EMPIRE GLOBAL CORP.
Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended March 31,
2015 2014
------------ ------------
Revenue $ 1,227,131 $ -
Costs and expenses
Direct selling costs 869,971 -
General and administrative expenses 577,302 41,263
------------ ------------
Total costs and expenses 1,474,273 41,263
------------ ------------
Loss from operations (247,142) (41,263)
------------ ------------
Other expenses / (income)
Interest income (17,523) -
Changes in fair value of derivative liabilities 4,393 -
Imputed interest on related party advances 983 2,640
Interest expense 23,344 -
Allowance for deposit on acquisition 40,952 -
------------ ------------
Total Other Expenses 52,149 (2,640)
Net (loss) before income tax (299,291) (43,903)
Income tax - -
------------ ------------
Net loss (299,291) (43,903)
Other Comprehensive Income
Foreign currency translation adjustment (63,557) -
------------ ------------
Comprehensive loss (362,848) (43,903)
============ ============
Basic and fully diluted loss per common share (0.02) (0.00)
============ ============
Weighted average number of common shares outstanding
Basic and diluted 21,225,427 18,675,800
============ ============
See notes to consolidated financial statements
- F3 -
EMPIRE GLOBAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2015 2014
-------- --------
Cash Flows from Operating Activities
Net loss $ (299,291) $ (43,903)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities
Depreciation and amortization 96,076 -
Amortization of deferred costs 2,589 -
Non-cash interest (debenture discount) 2,194 -
Imputed interest 983 2,640
Changes in fair value of derivative liabilities 4,393 -
Impairment of assets 40,952 -
Non-cash expenses paid in stock 125,030 -
Changes in operating assets and liabilities:
Prepaid expenses 147,748 -
Accounts payable and accrued expenses 58,741 (5,345)
Gaming accounts receivable (39,325) -
Gaming account liabilities (8,422) -
Taxes payable 34,734 -
Other current assets (90,759) -
Other current liabilities (13,840) -
Deposits - (50,000)
--------- ---------
Net cash provided by (used in) operating activities 61,803 (96,608)
--------- ---------
Cash Flows from Investing Activities
Acquisition of property, plant and equipment (1,704) -
Cash acquired on acquisition 15,772 -
Deposit on acquisition 55,781 -
Cash paid for acquisition of assets (63,308) -
--------- ---------
Net cash provided by investing activities 6,541 -
--------- ---------
- F4 -
Cash Flows from Financing Activities
Repayment of bank credit line 59,741 -
Repayment of bank loan (37,489) -
Proceeds from promissory notes, net of repayment (168,430) -
Advances from stockholders, net of repayment - 96,608
--------- ---------
Net cash (used in) provided by financing activities (146,178) 96,608
--------- ---------
Effect of change in exchange rate (172,519) -
Net decrease in cash (250,353) -
Cash and cash equivalents - beginning of period 422,276 -
--------- ---------
Cash and cash equivalents - end of period 171,923 -
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 396 -
========= =========
Income taxes - -
========= =========
See notes to consolidated financial statements
- F5 -
EMPIRE GLOBAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Business
Business
Empire Global Corp. ("Empire" or "the Company") was incorporated in the state of
Delaware on August 26, 1998 as Pender International Inc. On September 30, 2005
changed its name to Empire Global Corp. and maintains its principal executive
offices headquartered in Toronto, Canada.
The Company, through its wholly owned subsidiary, Multigioco Srl ("Multigioco")
provides online gaming services mainly consisting of online and offline wagering
as well as online web based betting shops situated throughout Italy.
Acquisition
On August 15, 2014 the Company acquired 100% of the outstanding common shares of
Multigioco, an Italian corporation, in exchange for 2,000,000 restricted shares
of Empire's common stock. As a result of the acquisition, Multigioco became a
wholly owned subsidiary of Empire. For accounting purposes, the purchase was
accounted for using the acquisition method of accounting.
Multigioco was formed on November 4, 2010 by the founder of New Gioco Srl, ("New
Gioco") Beniamino Gianfelici and Doriana Gianfelici, the father-in-law and
spouse respectively of our President Alessandro Marcelli, with New Gioco holding
a 66% interest and Doriana Gianfelici holding a 34% interest respectively, in
Multigioco.
On January 1, 2015 the Company acquired 100% of the outstanding common shares of
Rifa Srl, ("Rifa") an Italian corporation making Rifa a wholly owned subsidiary.
Rifa was an inactive gaming company with a Monti license and one (1) inactive
Agency Concession right. Also on January 1, 2015, the Company acquired gaming
assets from New Gioco which included a Bersani license and 3 Corner Concession
rights as well as 1 Agency Concession right. Therefore, the Company now provides
online gaming and wagering to its customers in 850 online web shops as well as
1 Agency and 3 Corner locations throughout Italy.
The financial statements of Multigioco and Rifa were included in the
consolidated financial statements starting from the date of acquisition, August
15, 2014 and January 1, 2015 respectively. (See Note 4 and 5)
2. Going concern
The accompanying unaudited consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates
realization of assets and the satisfaction of liabilities in the normal course
of business.
The Company had operating losses for the past two years. There are no assurances
that management will be successful in achieving sufficient cash flows to fund
the Company's working capital needs, or whether the Company will be able to
refinance or renegotiate its obligations when they become due or raise
additional capital through future debt or equity. These factors among others,
raise substantial doubt about the Company's ability to continue as a going
concern. No adjustments have been made to the carrying value of assets or
liabilities as a result of this uncertainty.
F-6
Management plans to increase its marketing in order to generate more revenues
and to reduce certain other operating expenses. Therefore, for our next fiscal
year, we anticipate that our cash flow from operations will improve.
Nevertheless, the Company expects that its current cash position will be
insufficient to support the Company's operations at current capacity for the
next twelve month period and, therefore, will need to seek additional financing
of its operations. We may rely on bank borrowing as well as capital issuances
and loans from existing shareholders. We are actively exploring various
proposals and alternatives in order to secure sources of financing and improve
our financial position. We may raise such additional capital through the
issuance of our equity securities, which may result in significant dilution to
our current investors. We are also exploring potential strategic partnerships,
which could provide a capital infusion to the Company.
3. Summary of Significant Accounting Policies
a) Basis of presentation
The accompanying consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP"). The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries. All significant
inter-company transactions and balances among the Company and its subsidiaries
are eliminated upon consolidation.
c) Use of estimates
The preparation of the financial statements in conformity with Generally
Accepted Accounting Principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates. These
estimates and assumptions include valuing equity securities issued in share
based payment arrangements, determining the fair value of our common stock, the
collectability of receivables and advances and deferred taxes and related
valuation allowances. Certain of our estimates, including evaluating the
collectability of receivables and advances, could be affected by external
conditions, including those unique to our industry, and general economic
conditions. It is possible that these external factors could have an effect on
our estimates that could cause actual results to differ from our estimates. We
re-evaluate all of our accounting estimates at least quarterly based on these
conditions and record adjustments when necessary.
d) Cash and equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less at the time acquired to be cash equivalents. Cash
equivalents represent short-term investments consisting of investment-grade
corporate and government obligations, carried at cost, which approximates
market value. The Company has no cash equivalents as of March 31, 2015 and
December 31, 2014.
The Company primarily places its cash with high-credit quality financial
institutions, one of which is located in the United States which is insured by
the Federal Deposit Insurance Corporation for up to $250,000 and another which
is located in Italy and is insured by the Italian government.
F-7
e) Gaming accounts receivable & allowance for doubtful accounts
The Company extends unsecured credit to its gaming client accounts in the
ordinary course of business when a client applies credit to their gaming account
by credit card or direct deposit either through one of our websites or at the
cashier of a betting shop. The client may then place wagers or play games
immediately on the credit applied.
Gaming accounts receivable represents gaming losses and deposits (credits) made
by customers to their gaming accounts not yet credited to our bank accounts and
subject to normal trade collection terms without discounts. The Company
periodically evaluates the collectability of its gaming accounts receivable and
considers the need to record or adjust an allowance for doubtful accounts based
upon historical collection experience and specific customer information. Actual
amounts could vary from the recorded estimates. The Company has determined that
no allowance for doubtful accounts is needed for the gaming accounts receivable
balances as of March 31, 2015. The Company does not require collateral to
support customer receivables.
f) Gaming account balances
Gaming account balances represent customer gaming account balances that are held
as credits (i.e. deposits on account, winnings, etc.) and have not as of yet
been withdrawn by the customers or that customers want to keep on account for
future betting. Customers can request payment from the Company at any time and
the payment to customers can be made through bank wire, credit card, or actual
cash disbursement from any one of our locations. Gaming account credit balances
are non-interest bearing.
g) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated
depreciation and adjustments for impairment losses.
Expenditures are capitalized only when they increase the future economic
benefits embodied in an item of property, plant and equipment. All other
expenditures are recognized as expenses in the statement of income as incurred.
Depreciation is charged on a straight-line basis over the estimated remaining
useful lives of the individual assets. Amortization commences from the time an
asset is put into operation. The range of the estimated useful lives is as
follows:
Office equipment 5 years
Office furniture 8 1/3 years
Signs and displays 5 years
h) Intangible Assets
Intangible assets are amortized on a straight-line basis over their remaining
useful life and consist of the following:
Trademarks / names 14 years
Websites 5 years
AAMS GAD license 7 years
AAMS Bersani license 1.5 years
AAMS Monti license 1.5 years
Location contracts 7 years
Customer relationships 15 years
F-8
We evaluate intangible assets for impairment on an annual basis, and do so
during the last month of each year using balances as of the end of December and
at an interim date if indications of impairment exist. Intangible asset
impairment is determined by comparing the fair value of the asset to its
carrying amount with an impairment being recognized only where the fair value is
less than carrying value.
i) Goodwill
Goodwill is recognized for the excess of the purchase price over the fair value
of tangible and identifiable intangible net assets of businesses acquired.
Goodwill is reviewed at least annually for impairment. In our evaluation of
goodwill impairment, we perform a qualitative assessment to determine if it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount. If the qualitative assessment is not conclusive, we proceed to
a two-step process to test goodwill for impairment including comparing the fair
value of the reporting unit to its carrying value (including attributable
goodwill). Fair value for our reporting units is determined using an income or
market approach incorporating market participant considerations and management's
assumptions on revenue growth rates, operating margins, discount rates and
expected capital expenditures. Fair value determinations may include both
internal and third-party valuations. Unless circumstances otherwise dictate,
we perform our annual impairment testing in the fourth quarter.
We perform the allocation based on our knowledge of the market in which we
operate, and our overall knowledge of the gaming industry.
j) Long-Lived Assets
We evaluate the carrying value of our long-lived assets for impairment by
comparing the expected undiscounted future cash flows of the assets to the net
book value of the assets when events or circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable. If the expected
undiscounted future cash flows are less than the net book value of the assets,
the excess of the net book value over the estimated fair value will be charged
to earnings.
Fair value is based upon discounted cash flows of the assets at a rate deemed
reasonable for the type of asset and prevailing market conditions, appraisals,
and, if appropriate, current estimated net sales proceeds from pending offers.
k) Fair Value of Financial Instruments
We measure our financial assets and liabilities in accordance with accounting
principles generally accepted in the United States of America. The carrying
value of the Company's short term investments, prepaid, accounts receivables,
and sundry assets, accounts payable and accrued charges, gaming account balance,
and advances from shareholder approximate fair value because of the short term
maturity of these financial instruments.
The Company adopted accounting guidance for financial assets and liabilities
(ASC 820). The adoption did not have a material impact on our results of
operations, financial position or liquidity. This standard defines fair value,
provides guidance for measuring fair value and requires certain disclosures.
This standard does not require any new fair value measurements, but rather
applies to all other accounting pronouncements that require or permit fair value
measurements. This guidance does not apply to measurements related to
share-based payments. This guidance discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value
F-9
of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). The guidance utilizes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The following is a brief description
of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active market
for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists,
therefore developed using estimates and assumptions developed by us,
which reflect those that a market participant would use.
The warrant liability issued in connection with the debentures, classified as a
level 3 liability, are the only financial liability measured at fair value on a
recurring basis.
l) Investments in non-consolidated entities
Investments in non-consolidated entities are accounted for using the equity
method or cost basis depending upon the level of ownership and/or the Company's
ability to exercise significant influence over the operating and financial
policies of the investee. When the equity method is used, investments are
recorded at original cost and adjusted periodically to recognize the Company's
proportionate share of the investees' net income or losses after the date of
investment. When net losses from an investment are accounted for under the
equity method exceed its carrying amount, the investment balance is reduced to
zero and additional losses are not provided for. The Company resumes accounting
for the investment under the equity method if the entity subsequently reports
net income and the Company's share of that net income exceeds the share of net
losses not recognized during the period the equity method was suspended.
Investments are written down only when there is clear evidence that a decline in
value that is other than temporary has occurred.
The Company's investment in 2336414 Ontario Inc. and Banca Veneto were accounted
for using the cost method of accounting. The Company monitors its investment for
impairment at least annually and make appropriate reductions in the carrying
value if it determines that an impairment charge is required based on
qualitative and quantitative information.
m) Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks. The Company evaluates all of its financial
instruments, including stock purchase warrants, to determine if such instruments
are derivatives or contain features that qualify as embedded derivatives. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income.
For option-based simple derivative financial instruments, the Company uses the
Black-Scholes option-pricing model to value the derivative instruments at
inception and subsequent valuation dates. The classification of derivative
F-10
instruments, including whether such instruments should be recorded as
liabilities or as equity, is re-assessed at the end of each reporting period.
n) Leases
Leases are reviewed and classified as capital or operating at their inception
in accordance with ASC Topic 840, Accounting for Leases. For leases that contain
rent escalations, the Company records monthly rent expense equal to the total
amount of the payments due in the reporting period over the lease term. The
difference between rent expense recorded and the amount paid is credited or
charged to deferred rent account and is included in accrued expenses and other
current liabilities.
All lease agreements of the Company as leasees are accounted for as operating
leases as of March 31, 2015 and December 31, 2014.
o) Currency translation
Since the Company's subsidiary operates in the Italy, the subsidiary's
functional currency is the Euro. In the consolidated financial statements,
revenue and expense accounts are translated at the average rates during the
period, and assets and liabilities are translated at year-end rates and
equity accounts are translated at historical rate. Translation adjustments
arising from the use of different exchange rates from period to period are
included as a component of stockholders' equity. Gains and losses from foreign
currency transactions are recognized in current operations.
p) Revenue Recognition
Revenues from sports-betting; casino, cash and skill games; slots, lotteries,
bingo and horse race wagers represent the gross pay-ins from customers less
gaming taxes and payouts to customers in addition to commissions paid to us for
scratch tickets and other lottery games. Revenues are recorded when the game is
closed net of payouts and AAMS taxes from wagers by customers.
Multigioco's Net Gaming Revenues (also referred to as NGR) are derived by
subtracting total winnings and AAMS taxes from total wagers. Revenue from online
casino games is a fixed percentage of payout based on guidelines set out by the
AAMS (generally 97%) and programmed by producers of the casino software.
Multigioco determines fees based on industry standards for poker and fixed
revenue by law with respect to bingo at 30%.
q) Income Taxes
We use the asset and liability method of accounting for income taxes in
accordance with ASC Topic 740, "Income Taxes." Under this method, income tax
expense is recognized for the amount of: (i) taxes payable or refundable for the
current year and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity's financial
statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the results of operations in the period that includes the
enactment date. A valuation allowance is provided to reduce the deferred tax
assets reported if based on the weight of the available positive and negative
evidence, it is more likely than not some portion or all of the deferred tax
assets will not be realized.
F-11
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
Topic 740.10.40 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. We have no
material uncertain tax positions for any of the reporting periods presented.
As of March 31, 2015 and December 31, 2014, the earnings of the Company have
yielded cumulative losses. The Company has elected to include interest and
penalties related to uncertain tax positions, if determined, as a component of
income tax expense. To date, no penalties or interest has been accrued.
In Italy, tax years beginning 2009 forward are open and subject to examination.
The Company is not currently under examination and it has not been notified of a
pending examination.
r) Promotion, Marketing, and Advertising Costs
The costs of promotion, marketing, and advertising are charged to expense as
incurred.
s) Earnings Per Share
FASB ASC 260, "Earnings Per Share" provides for calculation of "basic" and
"diluted" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing net income (loss) available to common shareholders by
the weighted average common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution of securities that could share in the
earnings of an entity similar to fully diluted earnings per share. As a result
of the net loss in the year 2014, the calculation of diluted loss per common
share does not include the dilutive effect to outstanding warrants.
t) Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities.
The Company adopted FASB ASC 220-10-45, "Reporting Comprehensive Income". ASC
220-10-45 establishes standards for reporting and presentation of comprehensive
income and its components in a full set of financial statements. Comprehensive
income is presented in the statements of operations, and consists of net income
and unrealized gains (losses) on available for sale marketable securities;
foreign currency translation adjustments and changes in market value of future
contracts that qualify as a hedge; and negative equity adjustments.
u) Business Combinations
We allocate the fair value of purchase consideration to the tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values. The excess of the fair value of purchase consideration over the fair
values of these identifiable assets and liabilities is recorded as goodwill.
Such valuations require management to make significant estimates and
assumptions, especially with respect to intangible assets. Significant estimates
in valuing certain intangible assets include, but are not limited to, future
expected cash flows from acquired users, acquired technology, and trade names
F-12
from a market participant perspective, useful lives and discount rates.
Management's estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. During the measurement period,
which is one year from the acquisition date, we may record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to
goodwill. Upon the conclusion of the measurement period, any subsequent
adjustments are recorded to earnings.
v) Recent Accounting Pronouncements
There are no recently issued accounting standards that are expected to have a
material effect on our financial condition, results of operations or cash flows.
4. Multigioco Srl Acquisition
On August 15, 2014, the Company completed its acquisition of Multigioco in which
it acquired 100% of the outstanding common shares of Multigioco, an Italian
corporation. Based on the Share Purchase Agreement ("Agreement"), the Company
will pay EUR 1,000,000 (approximately $1,336,600 USD using the exchange rate at
the closing date) in consideration for 100% shares of Multigioco at closing. In
Lieu of the cash consideration due at closing, the Company issued 2,000,000
restricted shares of Empire's common stock, which was valued at a fair market
value of $1.00 per share. As stated in the Agreement, the shareholders of
Multigioco have the option to give back those shares in exchange for the cash
consideration no later than 90 days from the closing of this Agreement. On
October 24, 2014, the Company paid EUR 490,000 (approximately $620,700 USD) to
reacquire 49% (or 980,000 shares) of the shares issued to Multigioco
shareholders. The cash paid for reacquiring those shares was treated as
measurement period purchase price adjustment. The parties have informally agreed
to extend the option indefinitely.
The acquisition was accounted for under the acquisition method of accounting.
The assets and liabilities of Multigioco are included in the Consolidated
Balance Sheet and the results of the Multigioco operations subsequent to the
acquisition date are included in the Consolidated Statement of Comprehensive
Loss as of March 31, 2015 and December 31, 2014.
The purchase price was allocated to the fair market value of tangible and
intangible assets acquired and liabilities assumed as follows:
Useful life
Current assets $441,049
Property, Plant and Equipment 22,779
Identifiable intangible assets
Trademarks / names: 110,000 14 years
Websites: 40,000 5 years
AAMS license: 490,000 7 years
Location contracts: 1,000,000 7 years
Customer relationships: 440,000 15 years
Total identifiable intangible assets 2,080,000
Liabilities assumed (1,554,743)
Total identifiable assets less liabilities $1,461,461
Goodwill 179,239
-----------
Total purchase price $1,640,700
F-13
The unaudited pro forma combined historical results, as if Multigioco had been
acquired at the beginning of 2013 are as follows:
For the year ended
December 31, December 31,
2014 2013
-------- -----------
Revenue $ 4,682,561 $ 4,653,520
Costs and expenses ( 5,372,971) ( 4,677,080)
Other income (expenses) ( 1,558,489) 25,227
Income tax (8,609) (3,440)
-------- -----------
Net (loss) ($2,257,508) $ (1,773)
========== ===========
5. Acquisition of Offline (Land-based) Gaming Assets
(a) Rifa Srl.
On January 1, 2015 the Company completed the acquisition of Rifa Srl ("Rifa") an
inactive legal entity incorporated in Italy. Rifa's only asset is a "Monti
license" and 1 inactive Diritti Negozio Sportivo (Agency) Concession right. The
acquisition of Rifa enables the Company to operate Agency locations. During the
year ended December 31, 2014 Multigioco paid EUR 30,000 (approximately
$36,300 USD) towards the purchase price of Rifa. The Company also advanced
EUR 21,506 (approximately $26,000 USD) for payments of debts or a total of
EUR 51,506 (approximately $62,300 USD) towards the acquisition of Rifa which was
classified as deposit on acquisitions at December 31, 2014.
(b) Gaming assets from New Gioco
Also on January 1, 2015, Multigioco purchased offline gaming assets from New
Gioco which included a Bersani license along with 3 Diritti Punto Sportivo
(Corner) rights to operate under Multigioco and Rifa purchased 1 Agency right at
Via Mario Chiri, Roma from New Gioco to operate under Rifa's Monti license.
Pursuant to the agreement Rifa assumed the lease on the premises at the Mario
Chiri address. The purchase price paid to New Gioco also includes equipment and
assets related to each of the Corner and Agency locations but the Company did
not purchase the New Gioco Srl. corporate entity, its Monti license or its
liabilities.
New Gioco is an Italian gaming company which is 50% owned by Laura Tabacco an
Italian citizen and 50% owned by Beniamino Gianfelici who along with his
daughter, owned 100% of Multigioco prior to its acquisition by Empire.
The Company agreed to pay New Gioco EUR 650,649 (approximately $787,158 USD)
which included EUR 450,000 (approximately $569,700 USD) payable in 9 cash
instalments of EUR 50,000 (approximately $63,308 USD) each until paid in full
and forgiveness of debt which was comprised of EUR 210,507 (approximately
$256,261 USD) which was recorded as due from affiliates at December 31, 2014
less a credit of EUR 9,858 (approximately $12,000 USD) in consideration for a
payment made by New Gioco towards the debt.
As of the date of this report, the Company has paid EUR 50,000 (approximately
$63,308 USD) towards the cash purchase price of the assets from New Gioco and
eliminated the Due from affiliates. For accounting purposes, the purchase was
accounted for using the acquisition method of accounting. The operating results
of this acquisition for the three months ended March 31, 2015 are included in
F-14
the Corporation's consolidated results from the date of acquisition.
The total cost of the acquisition has been allocated to the assets acquired and
the liabilities assumed based upon their estimated fair values at the date of
the acquisition. The Company conducted an internal assessment on the fair value
of the tangible and intangible assets acquired. As a result, the Company
determined that the total purchase price of the New Gioco assets acquired could
be allocated equally to the Corner license and rights and the Agency rights. The
initial amounts of the transaction resulted in goodwill (the excess of the
purchase price over the fair value of net assets acquired) of EUR 66,608
(approximately $81,079 USD). The estimated purchase price allocation for the
acquisition of the offline (land-based) gaming assets is preliminary and subject
to revision as valuation work is still being conducted. The following represents
the preliminary purchase price allocation:
Useful life
Property, Plant and Equipment
Furniture and fixtures: 42,606 8 1/3 years
Lighting and electrical: 3,652 10 years
Servers, routers, computers, network: 6,087 5 years
Electronics, televisions: 4,261 4 years
Security and surveillance: 6,087 10 years
Total property, plant and equipment $ 62,693
Identifiable intangible assets
Bersani license: 36,519 1.5 years
Monti license: 36,519 1.5 years
Corner concession rights: 57,381 5 years
Agency concession rights: 226,327 5 years
Customer relationships: 346,931 15 years
Total identifiable intangible assets $ 703,677
Assets acquired (Rifa) 20,598
Liabilities assumed (39,493)
Net $ (18,895)
Total identifiable assets less net liabilities $ 747,475
Goodwill 81,079
-----------
Total purchase price $ 828,554
Pro forma results of operations have not been presented because the effect of
this acquisition was not deemed material.
6. Investment in corporate bond
The investment in the corporate bond represents bonds issued by the Veneto Banca
Societa Cooperativa Per Azioni ("SCpA") an Italian bank bearing interest from
3 - 4.2% and maturing in November 2015.
7. Line of credit - bank
The Company obtained a line of credit from Banca Veneto in Italy for maximum
amount of EUR 300,000 (approximately $414,000 USD) which was guaranteed by
certain shareholders of the Company on December 3, 2013. The line of credit
bears a fixed rate of interest at 5% per annum on the outstanding balance and
has no minimum payment requirement or maturity date.
F-15
8. Bank loan payable
The amount represents a bank loan held with Banca Veneto which was guaranteed by
certain shareholders of the Company. The loan amount of $634,260 originated in
March 2011 with a 49 month repayment term ending in May 2015. The interest rate
on the loan is 5.041% plus Euro Inter Bank Offered Rate ("EURIBOR").
9. Long term liabilities
The long term liabilities at March 31, 2015 consist of $47,075 of "TFR" which
represents the Italian "Trattamento di Fine Rapporto" which is a severance
amount set up by Italian companies to be paid to employees on termination of
employment.
10. Related party transactions and balances
Related party transactions consist of advances from and repayments to
stockholders recorded as advances from stockholders as well as transactions
between our subsidiary Multigioco and Rifa as well as Multigioco and New Gioco
Srl which we recorded as due from affiliates (See Note 11).
During the three months ended March 31, 2015 and the year ended December 31,
2014 the major stockholder of Empire Global was Gold Street Capital Corp. ("Gold
Street"). During the three months ended March 31, 2015 and the year ended
December 31, 2014 Gold Street advanced $37,708 and $423,090 to the Company
respectively while Doriana Gianfelici advanced $598 during the year ended
December 31, 2014 and the Company repaid $4,992 during the three months ended
March 31, 2015. The amount due to Doriana Gianfelici at March 31, 2015 was
$43,640 which was assumed by the Company as a result of the acquisition of
Multigioco.
During the year ended December 31, 2014, the Company repaid $214,825 in cash and
issued 325,836 shares and 31,314 shares to Gold Street Capital Corp. and Braydon
Capital Corp. respectively for repayment of advances. Those shares were valued
at fair market value of $1.00 per share. For the three months ended March 31,
2015 the Company repaid $13,232 to Gold Street Capital Corp.
The Company also issued 42,850 shares of common stock to David Ciavarella a
relative of our CEO for accounting services rendered during the year ended
December 31, 2014, which was valued at fair market value of $42,850.
On February 13, 2015 the Company obtained a Promissory Note for $150,000 from
Braydon Capital Corp. a Company owned by Claudio Ciavarella, the brother of our
CEO, which bears interest at a rate of 2% per month on the outstanding balance
due in full with the principal amount on the Maturity Date of May 15, 2015
unless extended by mutual consent. As of the date of this filing, the full
amount of the Promissory Note remains outstanding. The Company and Braydon
Capital Corp. have informally agreed to extend the due date until June 15, 2015
unless further extend by mutual consent.
Advances from stockholders represent non-interest bearing loans that are due on
demand. Interest was imputed at 5% per annum. Balances of Advances from
stockholders are as follows:
F-16
March 31, December 31,
2015 2014
-------- -----------
Gold Street Capital $ 54,794 $ 17,086
Doriana Gianfelici 43,640 48,631
-------- ---------
Total advances from related parties: $ 98,434 $ 65,717
========= =========
11. Due from affiliates
In addition to the Advances from and payments to stockholders, during the year
ended December 31, 2014, Multigioco provided management, office space and
utilities, business administration and services as well as customer care call
center (the "administrative services") to New Gioco the former shareholder of
Multigioco. Multigioco billed New Gioco, a related party, for administrative
services which was recorded as due from affiliates and a reduction of the
administrative expenses.
On January 1, 2015 the Company acquired the Bersani license and Corner rights as
well as 1 Agency right from New Gioco for a purchase price of EUR 650,649
(approximately $787,158 USD) which included a forgiveness of EUR 210,507
(approximately $256,261 USD) debt due for the administrative services.
12. Investment in non-consolidated entities
Investments in non-consolidated entities consists of the following:
2336414 Ontario Inc. $ 875,459
Banca Veneto 36,115
-------
911,574
Less impairment (875,459)
---------
$ 36,115
=========
On December 9, 2014, the Company invested CDN$1,000,000 (approximately
$875,459 USD) in a private placement of common shares of 2336414 Ontario Inc.
("2336414") representing 666,664 common shares or 2.3% of 2336414. 2336414 is an
Ontario corporation and the parent company of Paymobile Inc. a carrier-class,
PCI compliant transaction platform, delivering Visa prepaid card programs for
social disbursements, corporate payroll replacement and cheque replacement. The
Company is seeking to obtain a supplemental multi-currency payment processing
system for our various clients and partners which may offer us unique,
competitive, loyalty benefits in our markets.
The Company subscribed for 666,664 Units (CDN$1,000,000) (approximately
$875,458 USD), with each Unit being comprised of one (1) common share in the
capital of 2336414 and one-quarter (1/4) of one common share purchase warrant,
which will require four quarter warrants to acquire one additional common share
in the capital of 2336414, for CDN$2.25 within 18 months after the closing of
the Offering, or such longer period of time as 2336414 may determine.
The Company paid CDN$1,000,000 (approximately $875,459 USD) in cash, and
obtained a promissory note for CDN$500,000 (approximately $436,796 USD) from
2336414's subsidiary, Paymobile Inc, which bears interest at a rate of 1% per
F-17
month on the outstanding balance. As of the date of this filing, the final
payment of CDN$150,000 which was due on February 28, 2015 remains due. The
Company and 2336414 Ontario Inc. have informally agreed to extend the due date
until June 30, 2015 unless further extend by mutual consent.
Since Paymobile has not produced any meaningful income, the Company has
determined that it may not be able to realize its investment in 2336414 and
has therefore decided to set up a 100% impairment on the investment made as of
March 31, 2015. If the investment in 2336414 is unsuccessful, the Company may
lose some or all of its investment in 2336414 Ontario Inc.
On March 31, 2015 the Company held $36,115 in shares of Banca Veneto SCpA.
Banca Veneto is a private mutual enterprise organized under Italian banking
laws.
We carry the value of the shares of Banca Veneto SCpA and 2336414 Ontario Inc.
at cost less impairment. The Company accounts for investment in non-consolidated
entities using the cost method of accounting if the Company has an ownership
interest below 20% and does not have the ability to exercise significant
influence over an investee. The shares of Banca Veneto and 2336414 Ontario Inc.
do not have an active market.
13. Deposits on Acquisitions
Deposits on acquisitions includes the following:
Acquisition of Streamlogue Holdings Ltd. $ 696,929
---------
Less allowance for doubtful account (696,929)
---------
$ 0
=========
On September 1, 2014 the Company entered into a Share Purchase Agreement (SPA)
to acquire Streamlogue Holdings Ltd. ("Streamlogue"), a Maltese licensed gaming
company. The purpose of seeking the acquisition of Streamlogue is to expand our
gaming products and services outside of the Italian operations of our subsidiary
Multigioco. Under the terms of the SPA, the company agreed to pay Euro 600,000
(approximately $759,698 USD) of outstanding debts of Streamlogue plus
Euro 350,000 (approximately $443,157 USD) in shares of the company payable on
closing of the transaction. The Closing of the transaction is subject to full
and satisfactory due diligence which includes an audit of the financial
statements of Streamlogue. To date, the due diligence and audit of the financial
statements have not been completed.
Streamlogue owns two operating subsidiaries incorporated in Malta which are
licensed by the Lottery and Gaming Authority of Malta ("LGA"): Streamlogue
Services Ltd, a Business to Business (B2B) company which provides a "Live Online
Casino" platform to global online gaming operators situated in authorized
countries and Streamlogue Operations Ltd, a Business to Consumer (B2C) company
which provides the Live Online Casino gaming platform for direct end user
patrons that can establish betting accounts directly with the company.
As of December 31, 2014 the company made advances of $655,976 and $40,953 during
the three months ended March 31, 2015 towards the purchase price of Streamlogue.
The deposits are credited to the purchase price of EUR 950,000 (approximately
$1,202,855 USD).
If the transaction to acquire Streamlogue Holdings Ltd. is unsuccessful, the
F-18
Company may lose some or all of the deposits credited towards the purpose price.
Since Streamlogue has not produced any meaningful income, the Company determined
that it may not be able to realize its deposit in Streamlogue if the transaction
is unsuccessful. Therefore, the Company decided to set up a 100% allowance on
the advances made as of March 31, 2015.
14. Revenues
The Company derives revenues from the wagers on sports-bets; casino and card
games; slots and other gaming entertainment. The Company is subject to licensing
requirements established by the AAMS in Italy. The following table sets forth
the breakdown of gaming revenues for the three months ended March 31, 2015:
March 31, March 31,
2015 % 2014 %
-------- --------
Turnover
Turnover web-based $ 16,754,945 $ 22,669,470
Turnover land-based 634,810 -
Total Turnover $ 17,389,755 100.00% $ 22,669,470 100.00%
------------ ------------
Winnings/Payouts
Winnings web-based 15,452,519 20,900,318
Winnings land-based 474,699 -
Total Winnings/payouts 15,927,218 91.59% 20,900,318 92.23%
------------ ------------
Gross Gaming Revenues 1,462,537 8.41% 1,769,153 7.80%
Less: AAMS Gaming Taxes 235,406 1.35% 287,850 1.27%
------------ ------------
Net Gaming Revenues $ 1,227,131 7.06% $ 1,481,302 6.53%
============ ============
Turnover represents the total of bets processed for the period.
15. Debentures and Debenture Warrants
July 2014 Debentures
On July 9, 2014, the Company issued debentures to a group of accredited
investors to purchase 14 unsecured Debenture Units for gross proceeds of
$70,000. Each Debenture Unit is comprised of (i) a $5,000 debenture bearing
interest at a rate of 24% per annum, maturing two (2) year from the date of
issuance and (ii) 500 warrants which may be exercised at $1.00 per warrant to
receive one common share prior to July 9, 2016.
On October 17, 2014, the Company repurchased $70,000 in aggregate principal
amount of the July 2014 Debentures plus accrued interest of $4,741.
December 2014 Debentures
On December 17, 2014, the Company issued debentures to a group of accredited
investors to purchase 30 unsecured Debenture Units for gross proceeds of
$150,000. Each Debenture Unit is comprised of (i) a $5,000 debenture bearing
interest at a rate of 24% per annum, maturing one (1) year from the date of
issuance and (ii) 500 warrants which may be exercised at $1.50 per warrant to
receive one common share prior to December 17, 2016.
F-19
The Company recorded a total of $1,381 and $10,159 of accrued interest related
Debentures at December 31, 2014 and for the three months ended March 31, 2015
respectively, and the amount is included as a component of accrued expenses.
As of March 31, 2015, the amortized discount on the Debenture was $6,386.
The Company paid commissions of $3,500 and $10,500 for the July 2014 and the
December 2014 debentures respectively. The commissions related to the December
2014 debentures were amortized over the life of the debenture.
Warrants to Purchase Common Stock
The Company has determined that the warrants issued in connection with the
debentures on July 9, 2014 and December 17, 2014 should be treated as a
liability since it has been determined not to be indexed to the Company's own
stock.
The fair value of the warrants on the date of issuance as calculated using the
Black-Scholes model was $6,267 and $13,523 for the June 2014 and December
2014 warrants respectively, using the following weighted average assumptions:
Common
Warrant Exercise Stock Dividend Interest Forfeiture
Date Price Price Volatility Term Yield Rate Risk
per/sh per/sh
------------- -------- ------ ---------- ----- -------- -------- ----------
July 9, 2014 $1.00 $0.895 460% 2 yrs 0% 0.91% 0%
Dec. 17, 2014 $1.50 $0.897 460% 2 yrs 0% 0.91% 0%
The fair value of the warrants has been recorded as a debt discount which is to
be amortized as interest expense over the life of the Debentures.
A summary of warrant transactions during the three months ended March 31, 2015
is as follows:
Weighted Average
Warrant Exercise Price
Shares Per Common Share
Outstanding at January 1, 2015 - $ -
Issued 22,000 $ 1.34
Exercised - -
Expired - -
Outstanding at March 31, 2015 22,000 $ 1.34
Exercisable at March 31, 2015 22,000 $ 1.34
As of March 31, 2015, the weighted average remaining contractual life for
warrants outstanding and exercisable was 1.5 years and 1.75 years for the
July 9, 2014 and the December 17, 2014 warrants respectively.
16. Shareholder's Equity
(a) On August 15, 2014 the Company issued 2,000,000 shares of common stock for
the acquisition of Multigioco. (See Note 4)
F-20
(b) On October 3, 2014, the Company issued an aggregate of 900,000 restricted
shares of our common stock which were valued at fair market value of $1.00
per share as follows:
- 500,000 shares with a total value of $500,000 for legal advisory
services to Beard Winter LLP which is being amortized over the service
period of one year. As of March 31, 2015 and December 31, 2014, $187,500
and $312,500 respectively, remained unamortized and is included in
prepaid expenses.
- 150,000 shares to David Ciavarella a relative of our CEO with a total
value of $150,000 for accounting services related to the acquisition of
Multigioco and repayment of advance from shareholders.
- 250,000 shares for cancellation of $250,000 of debt recorded as advances
from a shareholder, Gold Street Capital.
(c) On October 16, 2014, Empire closed a subscription agreement with an
accredited non-US investor for a total of 2,699,000 shares of common stock
in a private placement (the "Private Placement"). The price to the
investor in the Private Placement was US$1.00 per common share for gross
proceeds to the Company of CDN$3,000,000 (US$2,669,000).
17. Commitments and contingencies
There are no legal actions, lawsuits or disputes related to Company as of the
date of the financial statements.
18. Income Taxes
The Company is incorporated in the United States of America and is subject to
United States federal taxation. No provisions for income taxes have been made,
as the Company had no U.S. taxable income for the three months ended March 31,
2015 and the year ended December 31, 2014.
The Company periodically evaluates whether it is more likely than not that it
will generate sufficient taxable income to realize the deferred income tax
asset. The ultimate realization of this asset is dependent upon the generation
of future taxable income sufficient to offset the related deductions. At the
present time, management cannot presently determine when the Company will be
able to generate sufficient taxable income to realize the deferred tax asset;
accordingly, a valuation allowance has been established to offset the asset.
The Company's Italian subsidiaries are governed by the income tax laws of Italy.
The corporate tax rate in Italy is 32.32% (IRES at 27.5% plus IRAP ordinary at
4.82%) on income reported in the statutory financial statements after
appropriate tax adjustments.
The reconciliation of income tax expense at the U.S. statutory rate of 35% to
the Company's effective income tax as of March 31, 2015 and December 31, 2014
are:
March 31, December 31,
2015 2014
-------- -----------
U.S. statutory rate of 35% ($ 96,871) ($ 730,328)
Tax rate difference between U.S and Italy (27.5%) (5,613) (42,317)
Change in valuation allowance 102,484 777,736
--------- -----------
Income tax expense $ - $ 5,091
========= ==========
F-21
The Company has accumulated a net operating loss carry forward ("NOL") of
approximately $7 million as of March 31, 2015. This NOL may be offset against
future taxable income through the year 2035. The use of these losses to reduce
future income taxes will depend on the generation of sufficient taxable income
prior to the expiration of the NOL. No tax benefit has been reported in the
consolidated financial statements for the three months ended March 31, 2015 and
the year ended December 31, 2014 because it has been fully offset by a
valuation allowance.
NOL's incurred are subject to limitation due to any ownership change (as defined
under Section 382 of the Internal Revenue Code of 1986) which resulted in a
change in business direction. Unused limitations may be carried over to future
years until the NOLs expire. Utilization of NOLs may also be limited in any one
year by alternative minimum tax rules.
Under Italian tax law the operating loss carryforwards available for offset
against future profits can be used indefinitely. Operating loss carryforwards
are only available for offset against national income tax, in the limit of 80%
of taxable annual income (this restriction does not apply to the operating loss
incurred in the first three years of the Company's activity, which are therefore
available for 100% offsetting).
The tax effects of temporary differences that give rise to the Company's net
deferred tax asset as of March 31, 2015 and December 31, 2014 are as follows:
March 31, December 31,
2015 2014
-------- -----------
Net operating loss carryforward 2,641,407 2,563,068
Less valuation allowance (2,641,407) (2,563,068)
---------- ----------
Deferred Tax Asset $ - $ -
========== ==========
The provisions for income taxes as of March 31, 2015 and December 31, 2014 are
summarized as follows:
March 31, December 31,
2015 2014
-------- -----------
Current - foreign $ 5,091
Deferred - -
--------- -----------
Total $ - 5,091
========= ==========
19. Subsequent Events
The Company has evaluated subsequent events through the filing date of these
financial statements on form 10-Q and has determined that there were no
subsequent events to recognize or disclose in these financial statements.
F-22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Except as expressly stated, the financial condition and results of operations
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") are those of Empire Global Corp. and its
consolidated subsidiaries.
The MD&A is intended to provide the reader of our consolidated financial
statements with a narrative explanation from the perspective of management of
our financial condition, results of operations, liquidity and certain other
factors that may affect future results. The MD&A is provided as a supplement to,
and should be read in conjunction with our interim unaudited consolidated
financial statements and related notes on this form 10-Q and the audited
consolidated financial statements and related notes thereto included in our
Annual Report on form 10-K for the fiscal year ended December 31, 2014 as well
as the Company's form 8-K filed on August 19, 2014 reporting the acquisition of
our wholly owned subsidiary, Multigioco. The inclusion of supplementary
analytical and related information herein may require us to make appropriate
estimates and assumptions to enable us to fairly present, in all material
respects, our analysis of trends and expectations with respect to our results
of operations and financial position taken as a whole.
General Plan of Operation
The Company was incorporated in the state of Delaware on August 26, 1998 as
Pender International Inc. On September 30, 2005 changed its name to Empire
Global Corp. and maintains its principal executive offices headquartered in
Toronto, Canada.
On August 15, 2014 we completed the acquisition of 100% ownership in Multigioco
Srl. a corporation organized under the laws of the Republic of Italy and is now
a wholly owned subsidiary of Empire. As a result of the acquisition of
Multigioco our principal business is now a licensed gaming operator offering
land based and internet based gambling and sports betting.
On January 1, 2015 we completed the acquisition of Rifa Srl ("Rifa") an inactive
legal entity incorporated in Italy. Rifa's only asset is a "Monti license"
number #4583 and 1 inactive Diritti Negozio Sportivo (Agency) Concession right.
The acquisition of Rifa enables the Company to operate Agency locations.
According to AAMS regulations, unless the purchaser already holds a Monti
License, Monti licenses must be acquired through the transfer of the legal
entity to which was granted the license at issue. Therefore, in order to acquire
the Monti license for our business development plan in Italy, Multigioco was
required to purchase the legal corporate entity "Rifa" which owned the Monti
license. As a result of the transaction, Multigioco acquired Rifa's Monti
license and an inactive Agency right.
Also on January 1, 2015, Multigioco purchased offline gaming assets from New
Gioco which included a Bersani license along with 3 Diritti Punto Sportivo
(Corner) rights to operate under Multigioco and Rifa purchased 1 Agency right at
Via Mario Chiri, Roma from New Gioco to operate under Rifa's Monti license.
Pursuant to the agreement Rifa assumed the lease on the premises at the Mario
Chiri address and also acquired the equipment assets within the agency.
New Gioco is an Italian gaming company which is 50% owned by Laura Tabacco an
- 26 -
Italian citizen and 50% owned by Beniamino Gianfelici who along with his
daughter, owned 100% of Multigioco prior to its acquisition by Empire.
Therefore, Multigioco now owns a GAD (Gioco a Distanza) online license #15133
with approximately 850 web-based shops (Punti di Commercializzazione), a Bersani
license #4070 with three (3) Corner (Punto Sportivo) rights #8358; #8359; and
#8360, as well as a Monti license #4583 with two (2) Agency (Negozio Sportivo)
rights (1 active #37925 and 1 inactive #37924 which will remain idle until
approved by AAMS.)
Our revenues are derived from Multigioco's operations offering a variety of
lottery and casino gaming as well as sports betting through online and offline
locations situated throughout Italy.
Results of Operations
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.
Overall
As a result of the acquisition of Multigioco, our business operations have
changed. Accordingly, comparisons with prior periods are generally not
meaningful.
The Company is subject to risks inherent in the establishment of a new business
enterprise, including limited capital resources, possible delays in the decision
and implementation of a new business plan. Our primary financial focus is on
growing EBITDA through our new business venture, which we expect to continue to
improve throughout 2015. EBITDA is primarily driven by increasing revenues by
capturing a larger market share by acquiring new clients and gaming locations.
We generate revenues by providing online gaming products and services in
regulated countries.
We anticipate continuing to rely on equity sales of common stock to fund our
operations and to seek out additional acquisitions or enter into new business
opportunities. The issuance of any additional shares will result in dilution to
our existing shareholders.
Revenues
Compared to no revenue for the three months ended March 31, 2014, the Company
had gross revenues of $1,227,131 for March 31, 2015. The revenues are comprised
of Net Gaming Revenue derived from gaming operations as a result of the
Acquisition of Multigioco's gaming business.
The following table represents a detailed breakdown of revenue from our gaming
operations for the three months ended March 31, 2015:
- 27 -
March 31,
2015 %
--------
Turnover
Turnover web-based $ 16,754,945
Turnover land-based 643,810
Total Turnover $ 17,389,755 100.00%
------------
Winnings/Payouts
Winnings web-based 15,452,519
Winnings land-based 474,699
Total Winnings/payouts 15,927,218 91.59%
------------
Gross Gaming Revenues 1,462,537 8.41%
Less: AAMS Gaming Taxes 235,406 1.35%
------------
Net Gaming Revenues $ 1,227,131 7.06%
============
General and Administrative Expenses
As compared to $41,263 incurred in three months ended March 31, 2014, our
general and administrative expenses are $577,302 for the three months ended
March 31, 2015 a result of the acquisition of Multigioco. The segmented
general and administrative expenses were:
Empire operations: $ 211,119
Multigioco operations: 179,506
Rifa operations: 117,251
------------
Adjustment for depreciation of
intangible assets of Multigioco: 69,426
============
General and administrative expenses: $ 577,302
The Company's major costs included in general and administrative expenses were:
cash and non-cash professional fees of $154,596, management fees of $30,000,
amortization of intangible assets acquired of $63,628, travel, foreign currency
translation differences and other miscellaneous expenses.
Direct Selling Expenses
As a result of our acquisition of the Multigioco gaming business we now incur
direct selling costs which represent the fees we pay to our network service
provider, AAMS license fees, and commissions for field agents and promoters
which is essentially considered an ongoing marketing cost. For the three months
ended March 31, 2015 our direct selling costs were $896,971 compared to no
direct selling costs for the same period ending on March 31, 2014. This change
is attributed to the acquisition of the Multigioco gaming business.
Interest Expenses
The Company recorded an interest expense of $23,344 for the three months ended
March 31, 2015 compared to no interest expense for the three months ended March
31, 2014. The increase in interest expense incurred was related to interest paid
on debentures issued in July 2014 and the promissory note issued in October 2014
which were both paid off as well as the interest accrued on the debentures
issued and promissory note issued in December 2014.
- 28 -
The Company recorded an imputed interest expense of $983 for the three months
ended March 31, 2015 compared to $2,640 for three months ended March 31, 2014
respectively. Advances from stockholders are non-interest bearing and are due
on demand. Interest was imputed at 5% per annum.
Change in Fair Value of Derivative Liability
Changes in fair value of derivative liability generated gain of $4,393 for the
three months ended March 31, 2015. This was due to a higher value of the
derivative liability at March 31, 2015. We had no change in derivative liability
for the three months ended March 31, 2014 because we did not issue debentures or
warrants.
Net Loss
For the three months ended March 31, 2015 the Company had a net loss of
$299,291, or $0.017 per share (basic and diluted), as compared to a net loss of
$43,903, or $0.001 per share (basic and diluted) for the three months ended
March 31, 2014. This increase is primarily attributed to an increase in general
and administrative expenses incurred for business development and the
acquisition of Multigioco, Rifa as well as the gaming assets of New Gioco Srl.
Other Comprehensive Income
Our other comprehensive income consists of foreign currency translation
adjustments related to the effect of foreign exchange on our operations.
The Company's reporting currency is the U.S. dollar while the functional
currency of our subsidiary Multigioco is the Euro, the local currency in Italy.
The financial statements of Multigioco are translated into United States dollars
in accordance with ASC 830, using year-end rates of exchange for assets and
liabilities, and average rates of exchange for the period for revenues, costs,
and expenses and historical rates for equity. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining other comprehensive
income.
The company experienced a foreign currency translation adjustments of $63,557
during the three months ended March 31, 2015 compared to no foreign currency
translation adjustments during the three months ended March 31, 2014.
Liquidity and Capital Resources for the Three Months Ended March 31, 2015 and
March 31, 2014.
Assets
At March 31, 2015 we had a total Assets of $4,028,035 in Assets compared to no
Assets at March 31, 2014.
Liabilities
At March 31, 2015 we had $2,087,323 in current liabilities and $47,075 in long
term debt. Compared to current liabilities of $265,499 and no long term
liabilities at March 31, 2014. The increase was a result of liabilities
associated with the acquisition of our gaming operations during 2015.
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Empire Additional Working Capital
The Company had $171,923 in cash and cash equivalents at March 31, 2015 as
compared to no cash and cash equivalents at March 31, 2014. As of March 31, 2015
we have not generated revenues to cover our expenses, and we have total
accumulated deficit of $7,571,473.
We had $2,087,323 in current liabilities and $1,235,254 in current assets, as
such we are left with a working capital deficit of $852,069.
The Company cannot assure that we will be able to achieve a profitable level of
operations sufficient to meet our ongoing cash needs.
The Company currently maintains an operating line of credit for a maximum amount
of EUR 300,000 (approximately $414,000 USD) from Banca Veneto in Italy. The line
of credit is guaranteed by certain shareholders of the Company and bears a fixed
rate of interest at 5% per annum on the outstanding balance and is fully open
with no minimum payment, maturity or due date. In addition, in March 2011 the
Company obtained a bank loan held with Banca Veneto in the amount of $634,260
which term ends in May, 2015. The loan balance outstanding as of March 31,
2015 is $12,587.
Although we intend to maintain our lending relationships with Banca Veneto, we
believe that our focus should be on obtaining additional capital through the
private placement of our securities. We are pursuing potential equity and/or
debt investors and have from time to time engaged placement agents to assist us
in this initiative. While we are pursuing the opportunities and actions
described above, there can be no assurance that we will be successful in our
efforts. Any additional equity financing may result in substantial dilution to
our stockholders.
During the past several years, we generally sustained recurring losses and
negative cash flows from operations. We currently do not generate sufficient
revenue from operations. Our operations most recently have been funded through a
combination of the sale of a debentures on July 9, 2014 and December 17, 2014
and promissory notes on October 3, 2014 and December 9, 2014 as well as through
the issuance of our common stock in exchange for $2,669,000 in cash on October
16, 2014.
On August 15, 2014 our business changed as a result of the acquisition of
Multigioco. Therefore the significant change in our cash flows is a result of
our new business. Comparisons with cash flows from prior periods are generally
not meaningful.
Below is a discussion of our sources and uses of funds for the three months
ended March 31, 2015 and 2014.
Cash Flows from Operating Activities
Cash flows from operating activities resulted in net cash provided by operating
activities of $61,803 for the three months ended March 31, 2015. Compared to
$96,608 of cash used in operating activities for the same period ended March 31,
2014.
Cash Flows from Investing Activities
The net cash provided by investing activities for the three months ended
March 31, 2015 was $6,541 compared to none for the same period ended March 31,
2014.
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Cash Flows from Financing Activities
Net cash used in financing activities for the three months ended March 31, 2015
was $146,178 compared to $96,608 in cash provided by financing activities for
the same period ended March 31, 2014.
Contractual Obligations
Current accounting standards require disclosure of material obligations and
commitments to make future payments under contracts, such as debt, lease
agreements, and purchase obligations. Please refer to Notes 7, 8, 9, 10 and 15
of the Notes to the Consolidated Financial Statements for information related to
debt obligations and Note 17 - Commitments and Contingencies of the Notes to the
Consolidated Financial Statements included in Part I, Item 1 of this form 10-Q.
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenue or expenses, results of operations, liquidity, capital
expenditures or capital resources that we expect to be material to investors. We
do not have any non-consolidated, special-purpose entities.
Related-Party Transactions
Related party transactions consist of advances from and repayments to
stockholders recorded as advances from stockholders as well as transactions
between our subsidiary Multigioco and Rifa as well as Multigioco and New Gioco
Srl which we recorded as due from affiliates (See Note 11).
During the three months ended March 31, 2015 and the year ended December 31,
2014 the major stockholder of Empire Global was Gold Street Capital Corp. ("Gold
Street"). During the three months ended March 31, 2015 and the year ended
December 31, 2014 Gold Street advanced $41,562 and $423,090 to the Company
respectively while Doriana Gianfelici advanced $598 during the year ended
December 31, 2014 and the Company repaid $4,992 during the three months ended
March 31, 2015. The amount due to Doriana Gianfelici at March 31, 2015 was
$43,640 which was assumed by the Company as a result of the acquisition of
Multigioco.
During the year ended December 31, 2014, the Company repaid $214,825 in cash and
issued 325,836 shares and 31,314 shares to Gold Street and Braydon Capital Corp.
respectively for repayment of advances. Those shares were valued at fair market
value of $1.00 per share. For the three months ended March 31, 2015 the Company
repaid $13,232 to Gold Street.
The Company also issued 42,850 shares of common stock to David Ciavarella a
relative of our CEO for accounting services rendered during the year ended
December 31, 2014, which was valued at fair market value of $42,850.
On February 13, 2015 the Company obtained a Promissory Note for $150,000 from
Braydon Capital Corp. a Company owned by Claudio Ciavarella, the brother of our
CEO, which bears interest at a rate of 2% per month on the outstanding balance
due in full with the principal amount on the Maturity Date of May 15, 2015
unless extended by mutual consent. As of the date of this filing, the full
amount of the Promissory Note remains outstanding. The Company and Braydon
Capital Corp. have informally agreed to extend the due date until June 15, 2015
unless further extend by mutual consent.
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Please see Note 10 to the consolidated financial statements in Part I, Item 1 of
this form 10-Q for additional information regarding related party transactions.
In addition to the Advances from and payments to stockholders, during the year
ended December 31, 2014, Multigioco provided management, office space and
utilities, business administration and services as well as customer care call
center (the "administrative services") to New Gioco the former shareholder of
Multigioco. Multigioco billed New Gioco, a related party, for administrative
services which was recorded as due from affiliates and a reduction of the
administrative expenses.
On January 1, 2015 the Company acquired the Bersani license and Corner rights as
well as 1 Agency right from New Gioco for a purchase price of EUR 650,649
(approximately $787,158 USD) which included a forgiveness of EUR 210,507
(approximately $256,261 USD) debt due for the administrative services.
Please see Note 11 of the Notes to the Consolidated Financial Statements in
Part I, Item 1 of this form 10-Q for additional information regarding due from
affiliates.
Inflation
We do not believe that general price inflation will have a material effect on
the Company's business in the near future.
Foreign Exchange
Transactions involving the Company are generally denominated in U.S. dollars
while the functional currency of our subsidiary is the Euro. Changes and
fluctuations in the Foreign exchange rate between the Euro and the U.S. dollar
will have an effect on our results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the interim financial statements contained elsewhere
herein, which have been prepared in accordance with U.S. GAAP. The preparation
of these financial statements required us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to income taxes,
contingencies and litigation. We based our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The critical accounting estimates that we believe affect the more significant
judgments and estimates used in preparation of the financial statements
contained elsewhere herein are described in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and in the Notes to
the Financial Statements included in the Company's annual report on form 10-K
for the fiscal year ended December 31, 2014. There have been no material changes
to the critical accounting policies.
A summary of critical accounting policies and recent accounting pronouncements
is included in Note 3 of this form 10-Q.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Empire is a smaller reporting company as defined by Rule 12b-2 of the Exchange
Act and is not required to provide the information required under this item.
Item 4. Controls and Procedures.
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer),
who are the same person, to allow for timely decisions regarding required
disclosure.
As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 15d-14 as of the end of the period covered by this report. Based on the
foregoing evaluation, our CEO and CFO concluded that due to our limited
resources our disclosure controls and procedures are not effective in providing
material information required to be included in our periodic SEC filings on a
timely basis and to ensure that information required to be disclosed in our
periodic SEC filings is accumulated and communicated to our management,
including our CEO and CFO, to allow timely decisions regarding required
disclosure about our internal control over financial reporting discussed below.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting for our company. Our internal control system
was designed to, in general, provide reasonable assurance to our management and
board regarding the preparation and fair presentation of published financial
statements, but because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2015. The framework used by management in making
that assessment was the criteria set forth in the document entitled "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on that assessment, our
management has determined that as of March 31, 2015, our internal control
over financial reporting was not effective due to material weaknesses resulting
from our limited resources.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission. This quarterly report does not include an attestation
report of the Company's registered accounting firm regarding internal control
over financial reporting.
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Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the periods covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company may be subject to claims arising in the ordinary course of business.
We are not a party to, or the subject of, any pending legal proceeding.
Item 1A. Risk Factors.
Empire is a smaller reporting company as defined by Rule 12b-2 of the Exchange
Act and is not required to provide the information required under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved)
Item 5. Other Information.
During the quarter of the fiscal year covered by this report, Empire reported
all information that was required to be disclosed in a report on form 8-K.
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Item 6. Exhibits
(a) Index to and Description of Exhibits
All Exhibits required to be filed with the form 10-Q are included in this
quarterly report or incorporated by reference to Empire's previous filings with
the SEC, which can be found in their entirety at the SEC website at www.sec.gov
under SEC File Number 000-50045.
31 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EMPIRE GLOBAL CORP.
By: /s/ Michele Ciavarella Date: May 20, 2015.
-------------------------
Michele Ciavarella
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
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