Notes to the Consolidated Financial Statements
1.
Nature of Operations and Continuance of Business
Esports Entertainment Group, Inc. (formerly VGambling Inc.) (the Company) was incorporated in the state of Nevada on July 22, 2008. On May 20, 2013, the Company entered into a Share Exchange Agreement with H&H Arizona Corporation, an Antigua and Barbuda corporation which is in the business of internet gambling.
On May 10, 2010, the Company completed its merger with Dongke Pharmaceuticals Inc., a Delaware company, in accordance with the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, the Company acquired all of the outstanding capital stock and ownership interests of Dongke from the Dongke shareholders. In exchange for their interests, the Company issued to Donke shareholders an aggregate of 1,941,818 shares of the Companys common stock. The reverse merger was cancelled on April 30, 2013, and 26,700,000 shares were returned to treasure.
On May 20, 2013, the Company entered into a Share Exchange Agreement with H&H Arizona Corporation. Under the terms of the agreement, the Company acquired all of the outstanding capital stock and ownership interests of H&H Arizona Corporation from the H&H Arizona shareholders. In exchange for the interest, the Company issued to the H&H Arizona shareholders 50,000,000 shares of the Companys common stock. As a result of the consummation of the Exchange Agreement, H&H Arizona became the Companys wholly-owned subsidiary and the Companys operating entity.
H&H Arizona Corporation is treated as the accounting acquirer in the accompanying financial statements. In the transaction, the Company issued 50,000,000 common shares to the shareholders of H&H Arizona Corporation; such shares represented, immediately following the transaction, 79% of the outstanding shares of the Company. The transaction was accounted for as a reverse merger and a reverse recapitalization and the issuances of common stock were recorded as a reclassification between paid-in-capital and par value of Common Stock.
On April 18, 2017, the majority of the shareholders of the Companys common stock voted to approve a change of the name of the Company from VGambling, Inc. to Esports Entertaiment Group, Inc.
On August 9, 2017, the Company incorporated a subsidiary, Esport Services (Malta) Limited), in Malta.
2.
Summary of Significant Accounting Policies
a)
Basis of Presentation
The accompanying unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the SEC) set forth in Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the period ended June 30, 2017 and notes thereto contained.
The Company's consolidated financial statements are prepared using the accrual method of accounting. These consolidated statements include the accounts of the Company and its subsidiaries H&H Arizona Corporation and Esport Services (Malta) Limited. All significant intercompany transactions and balances have been eliminated. The Company has elected a June 30 year-end.
8
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
2.
Summary of Significant Accounting Policies (Continued)
b)
Use of Estimates and Assumptions
Preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
c)
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
d)
Income Taxes
The Company accounts for income taxes under ASC 740 "Income Taxes," which codified SFAS 109, "Accounting for Income Taxes" and FIN 48 Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. 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. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
e)
Net Loss per Share
Net income (loss) per common share is computed pursuant to ASC Topic 260 Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.
Basic loss per share includes no dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive loss per share reflects the potential dilution of securities that could share in the losses of the Company. Because the Company does not have any potentially dilutive securities, the accompanying presentation is only of basic loss per share.
f)
Foreign Currency Translation
The Companys functional and reporting currency is the US dollar. Foreign exchange items are translated to US dollars in accordance with ASC 830, Foreign Currency Translation Matters, using the exchange rate prevailing at the balance sheet date. Monetary assets and liabilities are translated using the exchange rate at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income.
g)
Share Based Expenses
The Company records stock-based compensation in accordance with ASC 718, Compensation Stock Based Compensation, and ASC 505-50, Equity Based Payments to Non-Employees, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
9
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
2.
Summary of Significant Accounting Policies (Continued)
h)
Beneficial Conversion Feature
From time to time, the Company may issue convertible notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.
i)
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3.
Going Concern
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize it assets and discharge its liabilities in the normal course of business. During the period ended September 30, 2017, the Company had an accumulated deficit of $2,349,188. The Company is licensed to conduct online gambling. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Companys ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company had signed agreement with Monarch Bay Securities, LLC in June 2016 to raise $6 million to $8 million through sale of equity or equity linked securities in the next twelve months. However management cannot provide any assurances that the Company will be successful in accomplishing any of our plans.
4.
Acquisition of H&H Arizona Corporation and Recapitalization
On May 20, 2013, the Company entered into a Share Exchange Agreement with H&H Arizona Corporation. Under the terms of the agreement, the Company acquired all of the outstanding capital stock and ownership interests of H&H Arizona from the H&H Arizona shareholders. In exchange for the interest, the Company issued to the H&H Arizona shareholders 50,000,000 shares of the Companys common stock. As a result of the consummation of the Exchange Agreement, H&H Arizona became the Companys wholly-owned subsidiary and the Companys operating entity.
5.
Related Party Transactions
a)
During the period ended September 30, 2017 and 2016, the Company incurred salary of $30,000 and $15,000 to the President of the Company, respectively. As of September 30, 2017 and June 30, 2017, the Company owed $331 and $1,229 to the President, respectively.
b)
During the three months ended September 30, 2017, the Company incurred rent of $1,202 (2016 - $1,149) to the President of the Company.
c) On January 30, 2015 the Company appointed Chul Woong Alex Lim as a Director of the Corporation. Mr. Lim will be paid $20,000 per year for serving as a director. Mr. Lim left the Company as of October 26, 2016. The Company owed $NIL to Mr. Lim as of September 30, 2017. The Company paid $5,000 for his directors service for the year ended June 30, 2017.
10
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
5.
Related Party Transactions (Continued)
d) On March 9, 2015 the Company appointed Yan Rozum as a Director of the Corporation. Mr. Rozum will be paid $20,000 per year for serving as a director. The Company owed $25,000 to Mr. Rozum as of September 30, 2017 ($25,000 as of June 30, 2017). The Company issued 111,250 shares for $45,000 for directors services.
e) On October 26, 2016 the Company appointed David Watt as a Director of the Corporation. Mr. Watt will be paid $25,000 per year for serving as a director. The Company owed $1,107 to Mr. Watt as of September 30, 2017 ($1,107 as of June 30, 2017). The Company issued 29,190 shares for $12,352 for Directors services.
6.
Convertible promissory notes
On June 3, 2016, the Company entered into a convertible promissory note agreement with an arms length individual whereby the Company has borrowed $60,000. The convertible note is issued by discounts of $5,000 and the company paid finders fee of $5,000.
The note is interest bearing at 8% per annum commencing June 3, 2016, if the note was paid off in full within 90 days following the Effective Date, the interest would be waived. The Company is obligated to repay the principal with any interest by March 3, 2017 (the maturity date). In the event of default, additional interest will accrue from the date of the event of default at the rate equal to the lower of 18% per annum or the highest rate permitted by law.
This Note will become effective only upon the execution by both parties, and the Irrevocable Transfer Agent Instructions and delivery of the initial payment of consideration by the Holder (the Effective Date).
As an investment incentive, the Company issued 427,777 five-year cashless warrants, exercisable at $0.14 per share. The exercisable warrants were cancelled, and the Company settled the warrants with 230,300 common shares.
The Company assessed the terms of the convertible debenture in accordance with 470-20-55,
Debt with Conversion and Other Options
. On issuance, the Company recognized $38,432 for the fair value of the incentive warrants as additional paid-in capital based on the relative fair values of the convertible debenture and the incentive warrants. In addition, the Company assessed whether there was a beneficial conversion feature associated with the convertible debenture and recognize a debt discount of $11,568 for the full fair value of the convertible debenture with a corresponding adjustment to additional paid-in capital. The debt discount will be accreted over the term of the debenture. During the year ended June 30, 2017, the Company amortized $60,000 (2016 - $nil) of the debt discount to interest expense.
7. Commitments
The Company signed a three-year lease agreement with Caribbean Developments (Antigua) Ltd. To rent a commercial space starting May 1, 2017 terminating on April 30, 2020.
|
|
|
Year 1
|
$
|
20,974
|
Year 2
|
|
20,974
|
Year 3
|
|
17,478
|
|
$
|
59,426
|
11
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8. Common Stock
a)
On July 27, 2015, 60,000 common shares were issued at a price of $0.10 per share to a non- related shareholder.
b)
On August 24, 2015, 106,000 common shares were issued at a fair value of $21,200 for consulting services.
c)
On March 14, 2016, 60,000 common shares were issued at a fair value of $12,000 for consulting services.
d)
On March 14, 2016, 200,000 common shares were issued at a fair value of $40,000 for director fees.
e)
On April 7, 2016, 266,666 common shares were issued at a price of $0.15 per share to non-related shareholders.
f)
On June 30, 2016, 466,680 common shares were issued at a price of $0.15 per share to non-related shareholders.
g)
On June 30, 2016, 300,000 common shares were issued at a fair value of $60,000 for a prepayment for advertising service for the term of July 15, 2016 to July 15, 2017.
h)
On September 21, 2016, 200,000 common shares were issued at a price of $0.15 per share to non-related shareholders. Company paid stock issuance cost of $7,526. Also, the Company issued 200,000 warrants to an investor, exercisable at $0.15 per share. The warrant is exercisable before December 1, 2019.
i)
On November 30, 2016, 66,680 common shares were issued at a price of $0.15 per share to non-related shareholders.
Also the Company issued 66,680 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before December 31, 2019.
j)
On December 31, 2016, 550,000 common shares were issued at a fair value of $137,500 for consulting services.
k)
On Feb 21, 2017, 100,000 common shares were issued at a price of $0.15 per share to non-related shareholders. Also the Company issued 100,000 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before February 28, 2020
l)
On March 1, 2017, 100,000 common shares were issued at a fair value of $25,000 for director fees.
m) On March 8, 2017, the Company issued 360,000 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before March 8, 2022.
n)
On March 31, 2017, 4,136,667 common shares were issued at a price of $0.15 per share to non-related shareholders. Also the Company issued 4,136,667 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before March 31, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement with 30 days notice at a price of $0.05 per warrant.
o)
On April 1, 2017, 400,000 common shares were issued at a fair value of $60,000 for service.
p)
On April 1, 2017, 2,896,857 common shares were issued at a price of $0.15 per share to non-related shareholders. Also, the Company issued 2,896,857 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before April 1, 2020.
q)
On April 22, 2017, the Company issued 92,000 common shares to non-related investors at $0.25 per share.
12
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8.
Common Stock (continued)
r)
On May 16, 2017, 600,000 common shares were issued at a price of $0.25 per share to non-related shareholders. Also the Company issued 600,000 warrants to investors, exercisable at $0.25 per share. The warrant is exercisable before May 16, 2020. The warrants are callable by the issuer any time after 12 months from the date the equity investment is completed with 30 days notice at a price of $0.05 per warrant.
s)
On May 24, 2017, 250,000 common shares were issued for compensation of fundraising. The Company recorded common stock and paid in additional capital of $250.
t)
On June 30, 2017, 40,440 common shares were issued at a fair value of $32,352 for directors fee.
u)
On June 26, 2017 the Company adopted an Employee Stock Incentive Plan. The Plan is intended to encourage ownership of Shares by Employees and directors of and certain Consultants to the Company and its Affiliates in order to attract and retain such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The number of Shares which may be issued from time to time pursuant to this Plan shall be 2,500,000 shares. On August 1, 2017, the Company granted 521,500 options to 7 persons.
v)
On July 5, 2017, the Company signed a subscription agreement with a non-related investor to issue 800,000 common shares at $0.25 per share, and 800,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 5, 2020. The warrants are callable by the issuer any time after 12 months from the date the
Company signed the subscription agreement.
w)
On July 6, 2017, the Company signed a subscription agreement with a non-related investor to issue 40,000 common shares at $0.25 per share, and 40,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 6, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
x)
On July 16, 2017, the Company signed a subscription agreement with a non-related investor to issue 100,000 common shares at $0.25 per share, and 100,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 16, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
y)
On July 17, 2017, the Company signed a subscription agreement with a non-related investor to issue 400,000 common shares at $0.25 per share, and 400,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 17, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
z)
On July 17, 2017, the Company signed a subscription agreement with a non-related investor to issue 100,000 common shares at $0.25 per share, and 100,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 17, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
aa)
On July 19, 2017, the Company issued 200,000 common shares at $0.15 per share, and 200,000 warrants exercisable at $0.15 per share in exchange for services. The warrant is exercisable before July 18, 2020. The warrants are callable by the issuer any time after 12 months from the date the equity investment is completed with 30 days notice at a price of $0.05 per warrant.
bb)
On July 20, 2017, the Company issued 100,000 common shares at $0.25 per share, and 100,000 warrants exercisable at $0.25 per share in exchange for services. The warrant is exercisable before July 19, 2020. The warrants are callable by the issuer any time after 12 months from the date the equity investment is completed with 30 days notice at a price of $0.05 per warrant.
13
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8.
Common Stock (continued)
cc)
On July 24, 2017, the Company signed a subscription agreement with a non-related investor to issue 5,000 common shares at $0.50 per share, and 5,000 warrants exercisable at $2.00 per share. The warrant is exercisable before July 23, 2018.
dd)
On August 1, 2017, the Company granted stock options to certain Directors and employees of the Company. The stock options have an exercise price of $1.25. 213,667 stock options will vest on August 1, 2018, 100,000 stock options will vest on August 1, 2019, and 207,833 stock options will fully vest on August 1, 2020.
ee)
On August 8, 2017, the Company signed a subscription agreement with a non-related investor to issue 10,000 common shares at $1.25 per share, and 10,000 warrants exercisable at $2.00 per share. The warrant is exercisable before February 8, 2019.
ff)
On August 27, 2017, the Company signed a subscription agreement with a non-related investor to issue 300,000 common shares at $0.25 per share.
gg)
On September 7, 2017, the Company signed a subscription agreement with a non-related investor to issue 20,000 common shares at $1.25 per share, and 20,000 warrants exercisable at $4.00 per share. The warrant is exercisable before March 6, 2019.
hh)
On September 21, 2017, the Company issued 156,667 common shares when the holder of 166,667 cashless warrants were exercised.
ii)
On September 25, 2017, the Company signed a subscription agreement with a non-related investor to issue 4,000 common shares at $1.25 per share, and 4,000 warrants exercisable at $2.00 per share, and 4,000 piggyback warrants exercisable at $4.00 per share. The warrant is exercisable before September 24, 2018 and the piggyback warrant is exercisable before September 24, 2019. The Company did not receive $5,000 and recorded $5,000 as subscription receivable as of September 30, 2017. The company received $30,000 in October 2017.
jj)
On September 26, 2017, the Company issued 416,500 common shares at $0.15 per share for the 416,500 warrants were exercised.
kk)
On September 29, 2017, the Company signed a subscription agreement with a non-related investor to issue 16,000 common shares at $1.25 per share, and 16,000 warrants exercisable at $2.00 per share, and 16,000 piggyback warrants exercisable at $4.00 per share. The warrant is exercisable before September 28, 2018 and the piggyback warrant is exercisable before September 28, 2019. The Company did not receive $20,000 and recorded $20,000 as subscription receivable as of September 30, 2017. The Company received $20,000 in October 2017.
ll)
On September 30, 2017, the Company signed a subscription agreement with a non-related investor to issue 44,800 common shares at $1.25 per share. The Company did not receive $56,000 and recorded $56,000 as subscription receivable as of September 30, 2017. The company received $56,000 in October 2017.
14
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8.
Common Stock (continued)
Stock Purchase Warrant
The following table summarizes all warrant activities for the three months ended September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price Per Share
|
Remaining
term
|
Intrinsic
value
|
Outstanding, June 30, 2017
|
|
8,360,204
|
|
0.16
|
3.67 year
|
$6,688,163
|
Granted
|
|
1,890,000
|
|
0.25
|
|
|
Granted
|
|
31,000
|
|
2.00
|
|
|
Granted
|
|
24,000
|
|
4.00
|
|
|
Exercised
|
|
(583,167)
|
|
-
|
|
|
Expired
|
|
-
|
|
-
|
|
|
Outstanding and Exercisable at September 30, 2017
|
|
9,722,037
|
|
0.19
|
3.10 year
|
$22,175,000
|
9.
Stock Options
On August 1, 2017, the Company adopted the 2017 Stock Incentive Plan (the Plan) whereby Incentive Stock Options issued to employees, officers, and directors to the Company to not exceed 2,500,000 stock options of which the purchase price of the stock options shall not be less than 100% of the fair market value of the Companys common stock and the period for exercising the stock options not exceed 10 years from the date of grant. The Option price per share with respect to each option shall be determined by the Committee for non-qualified stock options.
During the period ended September 30, 2017, the Company issued 716,500 stock options to employees and officers of the Company. The stock options are exercisable at $1.25 per share for a period of five years, and vest over a period of one to three years from the date of grant.
A summary of the Companys stock option activity is as follows:
|
|
|
|
|
Number of options
|
Weighted average exercise price
$
|
Aggregate intrinsic value
$
|
|
|
|
|
Outstanding, June 30, 2017
|
-
|
-
|
-
|
Granted
|
716,500
|
1.25
|
|
|
|
|
|
Outstanding, September 30, 2017
|
716,500
|
1.25
|
874,130
|
Additional information regarding stock options outstanding as at September 30, 2017, is as follows:
|
|
|
|
|
Outstanding and Not Vested
|
Range of
exercise prices
$
|
Number of shares
|
Weighted average remaining contractual life (years)
|
Weighted average
exercise price
$
|
1.25
|
716,500
|
4.8
|
1.25
|
15
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
9.
Stock Options (continued)
The fair value of the stock options granted was determined using the Black-Scholes option pricing model assuming no expected dividends and the following assumptions:
|
|
Expected Life
|
5 years
|
Volatility
|
105-141%
|
Risk-Free Rate
|
1.60-1.68%
|
Exercise Price
|
$1.25
|
During the period ended September 30, 2017, the Company recorded stock-based compensation expense of $185,540, which has been recorded as salary expense in the statement of operations. The schedule of vesting of stock options and stock-based compensation expense is as follows:
|
|
|
Period-End Date
|
Number of Options Vested
|
Stock-based Compensation
$
|
September 30, 2017
|
-
|
185,540
|
December 31, 2017
|
-
|
302,332
|
March 31, 2018
|
-
|
299,399
|
June 30, 2018
|
-
|
302,725
|
September 30, 2018
|
265,500
|
203,180
|
December 31, 2018
|
31,375
|
126,016
|
March 31, 2019
|
31,375
|
108,497
|
June 30, 2019
|
31,375
|
96,868
|
September 30, 2019
|
131,375
|
66,245
|
December 31, 2019
|
31,375
|
46,038
|
March 31, 2020
|
31,375
|
37,167
|
June 30, 2020
|
31,375
|
29,460
|
September 30, 2020
|
131,375
|
9,730
|
|
|
|
|
716,500
|
1,813,197
|
10. Debt Forgiveness
Accounts payable was reduced $NIL (2016 - $22,068 (20,000 Euro)) because of debt forgiven by an arms length company. The Company recorded it as gain of forgiveness.
11
.
Subsequent Event
a)
On October 17, 2017, the Company issued 66,667 common shares at $0.15 per share for the 66,667 warrants were exercised.
b)
On November 7, 2017, the Company signed a subscription agreement with a non-related investor to issued 15,500 common shares at $0.25 per share.
16