Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Note
1 – Nature of Operations
Esports
Entertainment Group, Inc. (formerly VGambling Inc.) (the “Company”) was incorporated in the state of Nevada on July
22, 2008. On April 18, 2017, the majority of the shareholders of the Company’s common stock voted to approve a change of
the name of the Company from VGambling, Inc. to Esports Entertainment Group, Inc.
Esports
is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form
of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter and multiplayer online battle
arena games. As of March 20, 2020, the three largest selling esports games were Dota 2, League of Legends (each multiplayer online
battle arena games) and Counter Strike: Global Offensive (a first-person shooter game). Other popular games include Smite, StarCraft
II, Call of Duty¸ Heroes of the Storm, Hearthstone and Fortnite. Esports also includes games which can be played, primarily
by amateurs, in multiplayer competitions on the Sony PlayStation, Microsoft Xbox and Nintendo Switch. Most major professional
esports events and a wide range of amateur esports events are broadcast live via streaming services including twitch.tv, azubu.tv,
ustream.tv and youtube.com.
We
are an esports entertainment and online gambling company primarily focused on three verticals, (i): esports entertainment, (ii)
esports wagering, and (iii) iGaming and traditional sports betting. We believe focusing on these verticals positions the Company
to take advantage of a trending and expanding marketplace in esports with the rise of competitive gaming as well as the legalization
of online gambling in the United States.
Esports
Entertainment:
Our
esports entertainment vertical includes any activity that we pursue within esports that does not include real-money wagering.
Right now, the main component of this vertical is our skill-based tournament platform. This allows us to engage and monetize players
across 41 states where skill-based gambling is legal as well as create relationships with players that can eventually migrate
to our Vie.gg real-money wagering platform.
Esports
Wagering:
We
intend to be a leader in the large and rapidly growing sector of esports real-money wagering. Our Vie.gg platform offers fans
the ability to wager on professional esports events in a licensed and secure environment. At the current time, under the terms
of our existing Curacao license, we are currently able to accept wagers from residents of over 149 jurisdictions including Canada,
Japan, Germany and South Africa.
On
April 30, 2020, we received our gaming service license from the Malta Gaming Authority (MGA). We now expect that residents in
a number of European Union member states will be able to place bets on our website. On August 20, 2020, we announced that we entered
into a multi-year partnership with Twin River Worldwide Holdings, Inc (NYSE: TRWH) to launch our proprietary mobile sports betting
product in the state of New Jersey. We intend to have our platform live in the state by the end of the first quarter of 2021.
iGaming
and Traditional Sports Betting:
The
goal of our iGaming and traditional Sports Betting vertical is to provide profitable growth and access to strategic licenses in
jurisdictions that we can cross-sell into our Vie.gg platform. On July 7, 2020, we entered into a stock purchase agreement (the
“Argyll Purchase Agreement”), by and among the Company, LHE Enterprises Limited (“LHE”), and AHG Entertainment,
LLC (“AHG”) whereby, upon closing on July 31, 2020, the Company acquired all of the outstanding capital stock of LHE
and its subsidiaries, (i) Argyll Entertainment AG, (ii) Nevada Holdings Limited and (iii) Argyll Productions Limited (collectively
the “Acquired Companies” or “Argyle”). AHG is licensed and regulated by the UK Gambling Commission and
the Irish Revenue Commissioners to operate online sportsbook and casino sites in the UK and Ireland, respectively. Argyll has
a flagship brand, www.sportnation.bet, as well as two white label brands, www.redzone.bet and www.uk.fansbet.com (collectively
the “Argyll Brands”), with over 200K registered players at the end of calendar year 2019.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Online
Esports Tournament Play:
We
intend to offer players from around the world, including the United States (except in 13 states in the US and other jurisdictions
outside the US which currently prohibit playing games of skill for cash prizes), the ability to enter and participate in online
video game tournaments and win cash prizes. Online esports tournament play consists of two or more people playing against each
other in a game from their personal phones or computers, where such players do not necessarily have to be playing in real time.
These events could be held over the course of a day, a week or even a month and the winner will be the one with the top score
or the fastest time at the conclusion of the event.
Cash-based
tournaments involving games of skill are not considered gambling in most U.S. states because the generally accepted definition
of gambling involves three specific things: (1) the award of a prize, (2) paid-in consideration (meaning entrants pay to compete)
and (3) an outcome determined on the basis of chance. As a result, games of skill are not generally subject to the same laws and
regulations as our esports event wagering service. We expect participants in our tournaments being able to enter and play against
each other with prize money distributed to the last remaining competitors. We anticipate collecting a tournament entry fee for
our tournaments, as well as a percentage of total winnings that are paid to users (typically 10% of the entry fees) and thus none
of our money will be at risk or otherwise dependent on the outcome. We intend to offer users a wide selection of video games of
skill to be played online for real money in small groups to major tournaments. The tournament platform will also serve as a tool
to help us determine which markets we are finding the most esports players. We believe using the tournament platform to penetrate
the US market will allow us to grow our brand within the esports community and lead to lower customer-acquisition-costs for our
wagering platform.
International
Market Expansion
We
received a Gaming Service License for online pool betting from the Malta Gaming Authority in April 2020, established a brick and
mortar office in such jurisdiction and anticipate commencing online gaming operations in that jurisdiction in 2020, both on the
Vie.gg and Argyll Brands. We expect that residents of a number of both European Union and non-EU countries will be able to place
bets on our website.
Although
the Vie.gg brand is focused solely on offering online wagering on the widest range of esports events broadcast from around the
world, the Argyll Brands offer online users traditional casino style games such as poker, craps or slots, as well as offering
online wagering on traditional sporting events such as soccer, horse racing and football. All persons 18 years and older can presently
place bets on our online gambling website at www.vie.gg except for residents of the United States and other jurisdictions that
the Company is precluded from supplying its services to pursuant to its gaming licenses. With respect to our Argyll Brands, wagering
is only permitted by customers in the United Kingdom and Republic of Ireland. On April 30, 2020, the Company received its Gaming
Service License for online pool betting from the Malta Gaming Authority. This allows residents of certain European Union member
countries to place bets on our website.
On
July 31, 2020, the Company consummated the closing of the Argyll Purchase Agreement. As consideration for the Acquired Companies,
the Company (i) paid AHG $1,250,000 in cash (the “Cash Purchase Price”) of which $500,000 was previously paid; (ii)
issued to AHG 650,000 shares of common stock of the Company (the “Consideration Shares”); and (iii) issued to AHG
warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share (the “Consideration
Warrants” together with the Cash Purchase Price and the Consideration Shares the “Purchase Price”). The Consideration
Warrants are exercisable for a term of three (3) years.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
There have been recent outbreaks in several
countries, including the United States, of the highly transmissible and pathogenic coronavirus (“COVID-19”). At
this date, we cannot fully predict the impact of the COVID-19 outbreak on our financial results and operations and we continue
to closely monitor the situation. The measures taken by the governments of countries affected could adversely affect the Company’s
business, financial condition, and results of operations. We intend to continue to be nimble in our commercial approach and explore
all options with respect to how we can best minimize the negative impact of COVID-19 on our business.
Note
2 – Summary of Significant Accounting Policies
A
summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial
statements follows:
Basis
of presentation and principles of consolidation
The
accompanying unaudited condensed consolidated 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 annual period ended June 30, 2020. The consolidated
balance sheet as of June 30, 2020 was derived from the audited consolidated financial statements as of and for the year then ended.
The condensed consolidated statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated on consolidation.
The
Company’s financial statements are prepared using the accrual basis of accounting in accordance and the Company’s
functional and reporting currency is the U.S. dollar.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current period presentation. The Company reclassified taxes payable
from accounts payable and accrued expenses and sales and marketing from general and administrative.
Use
of estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on hand, and all highly liquid debt instruments purchased with an original maturity of three
months or less. As at September 30, 2020 and June 30, 2020 there were no cash equivalents. At times, cash deposits may exceed
FDIC-insured limits. At September 30, 2020 and June 30, 2020, the amount the Company had on deposit funds that exceeded the FDIC-insured
limits were approximately $8,500,000 and $12,000,000, respectively.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Prepaid
Expenses
Prepaid
expenses consist of stock based compensation, consulting and insurance and services paid in advance, for which the Company has
not yet received the benefit.
Equipment
Equipment
is stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly
attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized
as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow
to the Company and the cost can be measured reliably.
Repairs
and maintenance costs are charged to the statements of operations, during the year in which they are incurred.
Depreciation
is provided for over the estimated useful life of the asset as follows:
Furniture
and equipment
|
|
|
5
years
|
|
Computer
equipment
|
|
|
3
years
|
|
Useful
lives and residual values are reviewed and adjusted, if appropriate, at the end of each reporting period. An asset’s carrying
amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated
recoverable amount. The cost and accumulated depreciation of assets retired or sold are removed from the respective accounts and
any gain or loss is recognized in operations.
Business
Acquisition Accounting
The
Company applies the acquisition method of accounting for business acquisitions. The Company allocates the purchase price of our
business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference between the total
cost of the acquisition and the sum of the fair values of acquired tangible and identifiable intangible assets less liabilities
is recorded as goodwill.
Goodwill
and Intangible Assets
The
Company has recorded intangible assets, including goodwill, in connection with business acquisitions. Estimated useful lives of
amortizable intangible assets are determined by management based on an assessment of the period over which the asset is expected
to contribute to future cash flows. The allocation of intangible assets impacts the amounts allocable to goodwill.
In
accordance with U.S. GAAP for goodwill and other indefinite-lived intangibles, the Company tests these assets for impairment annually
and whenever events or circumstances make it more likely than not that impairment may have occurred. For the purposes of that
assessment, the Company has determined to assign assets acquired in business combinations to a single reporting unit including
all goodwill and indefinite-lived intangible assets acquired in business combinations.
Operating
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance
sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged.
Additional qualitative and quantitative disclosures are also required. The Company adopted the standard effective July 1, 2019
using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without
adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the following
accounting policies related to this standard update:
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
|
●
|
The
option to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs
for leases that commenced prior to July 1, 2019.
|
|
●
|
Short-term
lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term
of 12 months or less.
|
|
●
|
The
option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles
and work equipment.
|
|
●
|
The
package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing
contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii)
not reassessing initial direct costs for any existing leases.
|
As
a result of the above, the adoption of ASC 842 did not have a material effect on the consolidated financial statements. The Company
will review for the existence of embedded leases in future agreements.
Adoption
of this standard resulted in the recognition of operating lease right-of-use assets of $367,513 and lease liabilities of $236,807
on the consolidated balance sheet as of August 1, 2020 as part of the acquisition of LHE Enterprises Limited. The standard
did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows
arising from leases are included in Note 10.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an
asset might not be recoverable. An impairment loss, measured as the amount by which the carrying amount exceeds the fair value,
is recognized if the carrying amount exceeds estimated undiscounted future cash flows.
Internal-Use
Software
Capitalized
internal-use software costs include external consulting fees, payroll and payroll-related costs and stock-based compensation for
employees in the Company’s development and information technology groups who are directly associated with, and who devote
time to, the Company’s internal-use software projects. Capitalization begins when the planning stage is complete and the
Company commits resources to the software project, and continues during the application development stage. Capitalization ceases
when the software has been tested and is ready for its intended use. Costs incurred during the planning, training and post-implementation
stages of the software development life-cycle are expensed as incurred.
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.
FASB
issued ASC 740-10 “Accounting for Uncertainty in Income Taxes”. ASC 740-10 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements. This standard requires a company to determine whether
it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.
If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in
the financial statements.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Derivative
Instruments
The
Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for in accordance with Paragraph 815-10-05-4 of the Codification and Paragraph
815-40-25 of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market
each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in
fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument.
The
Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the
change in the fair value of the remaining embedded derivative warrants as other income or expense in the statements of operations.
The
Company utilizes the Monte Carlo Method that values the liability of the debt conversion feature derivative financial instruments
and derivative warrants based on exercise contingencies. The reason the Company selected the lattice binomial model is that in
many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes
valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by
simple models.
Fair
Value of Financial Instruments
ASC
820 “Fair Value Measurement” defines fair value, establishes a framework for measuring fair value under generally
accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use
of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two
are considered observable and the last unobservable, that may be used to measure fair value as follows:
Level
1 – unadjusted quoted prices in active markets for identical assets or liabilities;
Level
2 – inputs other than quoted prices that are observable for asset or liability or indirectly; and
Level
3 – inputs that are not based on observable market data.
The
carrying amounts of the Company’s financial instruments including cash, amounts receivables, prepaid expenses and other
current assets, accounts payable, accrued liabilities, and due to shareholder approximate their fair values due to their short-term
nature.
Income
(Loss) Per Share
Basic
income (loss) per share is computed by dividing net income (loss) attributable to common shareholders (the numerator) by
the weighted-average number of common shares outstanding (the denominator) for the period. In periods of losses, diluted loss
per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would
be anti-dilutive.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
The
following securities were excluded from weighted average diluted common shares outstanding for the three months ended September
30, 2020 and 2019 because their inclusion would have been antidilutive.
|
|
As
of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Common
stock equivalents:
|
|
|
|
|
|
|
|
|
Common
stock options
|
|
|
51,942
|
|
|
|
51,942
|
|
Warrants
|
|
|
5,993,129
|
|
|
|
804,390
|
|
Convertible
notes
|
|
|
-
|
|
|
|
375,833
|
|
Equity
to be issued
|
|
|
2,667
|
|
|
|
2,667
|
|
Totals
|
|
|
6,047,738
|
|
|
|
1,234,832
|
|
Foreign
Currency Translation
Monetary
assets and liabilities are translated from British pound sterling, Euros, and Canadian dollars into U.S. dollars,
which is the functional currency of the Company, at the year-end exchange rate, while foreign currency expenses are translated
at the exchange rate in effect on the date of the transaction. The resultant gains or losses are included in the statement of
operations. Non-monetary items are translated at historical rates.
Stock-based
compensation
The
Company applies ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation
expenses for all share-based payment awards made to employees and directors including employee stock options under the Company’s
stock plans based on estimated fair values.
ASC
718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing
model. The fair value of the award is recognized as an expense on a straight-line basis over the requisite service periods in
the Company’s statement of operations and comprehensive loss. The Company recognizes share-based award forfeitures as they
occur rather than estimated by applying a forfeiture rate due to lack of historical experience.
The
Company accounts for stock-based compensation in accordance with ASC Topic 718-10, “Compensation – Stock Compensation”.
Therefore, the measurement of compensation expense for all stock awards granted are at the fair value on the date of grant and
recognition of compensation expense is based on the related service periods for awards expected to vest, which is typically the
performance period. The Company has adopted ASU 2018-07, Compensation – Stock Compensation. There was no accounting impact
related to the adoption of ASU 2018-07.
All
issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the
Company are accounted for based on the fair value of the equity instruments issued. The Company recognizes compensation expense
for the fair value of non-employee awards based on the straight-line method over the requisite service period of each award. The
Company estimates the fair value of stock options granted as equity awards using a Black-Scholes options pricing model.
Advertising
Advertising
consist primarily of online search and advertising, trade shows, marketing fees, and other promotional expenses. Online search
and advertising costs, which are expensed as incurred, include online advertising media such as banner ads and pay-per-click payments
to search engines. Advertising expense for the three months ended September 30, 2020 and 2019 was approximately $315,000 and $26,000,
respectively.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Revenue
Recognition
The
Company generates revenue from end-users (“customers”) placing bets on its online gambling sites it operates for its
brands. The Company recognizes revenue through the following steps: (1) identify the contract with a customer; (2) identify the
performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance
obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. The performance obligations
in the contract are the settlements of each individual bet. The transaction price is the total Gross Gaming Revenue of the transactions
settled, less any bonuses accrued with them, less any profit share required to be paid to the externally owned brands, net of
amounts hedged to offset potential losses.
The
Company records revenue as Net Gaming Revenue (“NGR”), which is the difference between the amount of money players
wager minus the amount that they win, less any bonus costs. The Company records liabilities for amounts due to users of which
the balance consists of user deposits and user winnings less user withdrawals and user losses.
The
Company applies a practical expedient by accounting for its performance obligations on a portfolio basis as these bets have similar
characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition
guidance to the portfolio will not differ materially from that which would result if applying the guidance to an individual bet
placed.
The
Company grants two types of bonuses which are standard in the gaming industry: (i) Free bet whereby upon making a deposit and
get another free bet regardless of the outcome of the first bet (ii) Deposit match bonus in which the Company will match the player’s
deposit up to a certain specified percentage or amount. The bonuses typically expire 3-6 months after they are granted. These
bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price for the
wagering transaction. The transaction price for the bonus is variable based on the percentage of rewards expected to expire.
We
evaluate bets that users place on websites owned by third party brands in order to determine whether we are acting as the principal
or as the agent when providing services, which we consider in determining if revenue should be reported gross or net. An entity
is a principal if it has the ability to direct the use of and obtain substantially all the remaining benefits from, the asset.
Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. For
these arrangements, we are the principal as we control the wagering service; therefore, any charges, including any applicable
simulcast fees, we incur for delivering the wagering service are presented as operating expenses.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Receivables
Reserved for Users
User
deposit receivables are stated at the amount the Company expects to collect from a payment processor. These arise due to the timing
differences between a user’s deposit and the receipt of the payment into the Company’s bank accounts. Receivables
also arise as the result of the securitization policies of certain payment processors.
Recent
Accounting Pronouncements
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers
(“Topic 606”). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”)
Topic 605, Revenue Recognition (“Topic 605”), and requires the recognition of revenue when promised goods or services
are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange
for those goods or services. Collectively, we refer to Topic 606 as the “new standard.”
We
adopted the requirements of the new standard as of July 1, 2020, using the modified retrospective method. The impact of adopting
the new standard had no impact on our fiscal 2020 and fiscal 2019 financial statements as revenues is not material and resulted
in no cumulative effect adjustment on net income or cash flows. Upon adoption, the Company recorded no contract assets and a
contract liability in the amount of $1,258,919. For the three months ended September 30, 2020, the Company recognized
approximately $54,000 as revenues in relation to the contract liabilities recorded upon adoption.
We
applied the new standard using a practical expedient where all related GAAP changes are made retrospectively to contracts that
are not completed contracts at the date of initial application. The Company does not need to restate contracts that begin and
are completed within the same annual reporting period.
Recently
issued accounting standards
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down
Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. The Company adopted ASU 2017-11 which did not have any impact on the Company’s financial statement presentation
or disclosures.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
In
August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses
customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and
also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing
arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after
December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can
be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company
is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s financial
statements.
In
October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities. ASU 2018-17 eliminates the requirement that entities consider indirect interests held through related parties
under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting
entity will consider such indirect interests on a proportionate basis. This update is effective for fiscal years beginning after
December 15, 2020. We are currently evaluating the impact of this update on our consolidated financial statements and related
disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”): Simplifying the Accounting
for Income Taxes. The new standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences
related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of
accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result
in a step-up in the tax basis of goodwill. For public business entities, it is effective for fiscal years beginning after December
15, 2020, including interim periods within those fiscal years. We are currently evaluating the potential impact of this standard
on our consolidated financial statements.
In
June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
- Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion
accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity
that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies
how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation.
For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within
those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier
than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating
the potential impact of this standard on our consolidated financial statements.
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“FASB”) or other
standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact
of recently issued standards that are not yet effective will have a material impact on the Company’s financial position
or results of operations upon adoption.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Note
3 – Business Acquisitions
Business
acquisitions are accounted for under the purchase method of accounting in accordance with ASC 805. The results of operations of
the acquired businesses since the date of acquisition are included in the condensed consolidated financial statements of the Company
for the three months ended September 30, 2020. The total purchase consideration was allocated to the assets acquired and liabilities
assumed at their preliminary estimated fair values as of the date of acquisition, as determined by management. The purchase price
allocations are preliminary and a final determination of purchase accounting adjustments, which may be material, will be made
upon the finalization of the Company’s integration activities, which are expected to be completed during the fiscal year
ending 2021. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded
as goodwill. The value of the goodwill from this acquisition can be attributed to a number of business factors including, but
not limited to, cost synergies expected to be realized and trained technical workforce
Acquisition
of LHE Enterprises Limited.
On
July 7, 2020, the Company entered into a stock purchase agreement (the “Argyll Purchase Agreement”), between the Company,
LHE Enterprises Limited (“LHE”), and AHG Entertainment, LLC (“AHG”) whereby upon closing on July 31, 2020
the Company acquired all of the outstanding capital stock of LHE and its subsidiaries, (i) Argyll Entertainment AG, (ii) Nevada
Holdings Limited and (iii) Argyll Productions Limited (collectively the “Acquired Companies”). Argyll Entertainment
AG is licensed and regulated by the UK Gambling Commission and the Irish Revenue Commissioners to operate online sportsbook and
casino sites in the UK and Ireland, respectively. Argyll has a flagship brand, www.SportNation.bet, as well as two white
label brands, www.RedZone.bet and www.uk.Fansbet.com, with over 200K registered players at the end of calendar year
2019.
On
July 31, 2020, the Company consummated the closing of the Argyll Purchase Agreement. As consideration for the Acquired Companies,
the Company (i) paid AHG $1,250,000 in cash (the “Cash Purchase Price”) of which $500,000 was previously paid; (ii)
issued to AHG 650,000 shares of common stock of the Company (the “Consideration Shares”); and (iii) issued to AHG
warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share (the “Consideration
Warrants” together with the Cash Purchase Price and the Consideration Shares the “Purchase Price”). The Consideration
Warrants are exercisable for a term of three (3) years.
The
preliminary purchase price allocation of $10,617,784 as of the acquisition completion date of July 31, 2020 is as follows:
Purchase
price:
|
|
|
|
Cash
|
|
$
|
1,250,000
|
|
Value
of common stock issued
|
|
|
3,802,500
|
|
Value
of warrant issued
|
|
|
5,488,171
|
|
Total
purchase price consideration
|
|
$
|
10,540,671
|
|
|
|
|
|
|
Allocation
of the purchase price:
|
|
|
|
|
Current
assets
|
|
$
|
833,769
|
|
Long-term
assets
|
|
|
1,385,274
|
|
Player
relationships
|
|
|
2,460,798
|
|
Betting
platform software
|
|
|
2,698,968
|
|
Tradenames
|
|
|
839,189
|
|
Gaming
licenses
|
|
|
144,000
|
|
Goodwill
|
|
|
6,358,592
|
|
Less:
|
|
|
|
|
Current
liabilities assumed
|
|
|
(3,721,573
|
)
|
Non-current
liabilities assumed
|
|
|
(458,346
|
)
|
Total
allocation of purchase price consideration
|
|
$
|
10,540,671
|
|
The
estimated useful life of the identifiable intangible assets is five years. The goodwill is not amortizable for tax purposes. Transaction
related costs for the Argyll Purchase Agreement were $77,113
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Pro
Forma Operating Results
The
following table provides unaudited pro forma results for the three months ended September 30, 2020 and 2019, as if the Argyll
Purchase Agreement consummated on July 1, 2019. The pro forma results of operations were prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had the Argyll Purchase Agreement been made as of July 1, 2019
or results that may occur in the future.
|
|
Pro
Forma (Unaudited) for the Three months ended September 30, 2020 and 2019
|
|
|
|
2020
|
|
|
2019
|
|
Net
sales
|
|
$
|
324,665
|
|
|
$
|
2,944,521
|
|
Net
loss
|
|
$
|
(2,048,798
|
)
|
|
$
|
(3,213,767
|
)
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.49
|
)
|
Acquisition
of Flip
On
September 3, 2020 the Company, entered into an Assignment of Intellectual Property Rights Agreement (the “IP Assignment
Agreement”), by and among the Company, AHG and Flip Sports Limited (“Flip”) whereby the Company acquired all
intellectual property rights in connection with the software developed by Flip and owned by AHG related to AHG’s online
games and rewards platform and all other online software (the “Software”). This includes all works in relation to
the same, including, but not limited to the source code of the Software and all technical and functional information and documentation
required to operate the Software, all artwork, content and materials used in connection with the Software and any other works
in respect of which AHG is the legal and beneficial owner and which are being used in connection with the Software (the “Works”
together with the intellectual property rights in the Software the “Assigned Intellectual Property”).
As
consideration for the Assigned Intellectual Property, the Company agreed to pay AHG an aggregate of $1,100,000 (the “Flip
Purchase Price”) payable as follows: (a) $100,000 in cash on the Effective Date (“Cash Consideration”); and
(b) that certain number of shares the Company’s restricted common stock, equal to $1,000,000 (the “Share Consideration”)
at a price per share equal to the 30-day weighted average of the Company’s common stock immediately prior to the effective
date, September 3, 2020, in accordance with the following payment schedule (i) that certain number of shares equal to $500,000
issued to AHG on the Effective Date (“Closing Shares”); and (ii) that certain number of shares equal to $500,000 of
restricted common stock (the “Post Closing Shares”) issued to AHG on the sixth (6) month anniversary of the Effective
Date (“Final Payment Date”), subject to the continued employment of certain key employees of Flip as identified in
the IP Assignment Agreement (the “Key Employees”). The cash equivalent amount of the Post Closing Shares shall be
reduced by $100,000 per Key Employee no longer with the Company on the Final Payment Date. On September 14, 2020, the Company
issued 93,808 in accordance with the agreement.
The
preliminary purchase price allocation of $1,100,000 as of the acquisition completion date of September 3, 2020 is as follows:
Purchase price:
|
|
|
|
|
Cash
|
|
$
|
100,000
|
|
Value
of common stock issued
|
|
|
500,000
|
|
Value
of contingent consideration
|
|
|
500,000
|
|
Total
purchase price consideration
|
|
$
|
1,100,000
|
|
|
|
|
|
|
Allocation
of the purchase price:
|
|
|
|
|
Rewards
platform software
|
|
$
|
550,000
|
|
Goodwill
|
|
|
550,000
|
|
Total
allocation of purchase price consideration
|
|
$
|
1,100,000
|
|
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
The
unaudited pro forma financial results for Flip are immaterial for the three months ending September 30, 2020 and 2019. The estimated
useful life of the identifiable intangible assets is five years. The goodwill is amortizable for tax purposes. Transaction related
costs for the Flip acquisition were immaterial.
Note
4 – Fixed Assets
Fixed
assets as of September 30, 2020 and June 30, 2020 consists the following:
|
|
September
30, 2020
|
|
|
June
30, 2020
|
|
Computer
equipment
|
|
$
|
91,231
|
|
|
$
|
14,450
|
|
Furniture
and equipment
|
|
|
145,072
|
|
|
|
20,241
|
|
Total
|
|
|
236,303
|
|
|
|
34,691
|
|
Accumulated
depreciation
|
|
|
(166,396
|
)
|
|
|
(26,650
|
)
|
Net
carrying value
|
|
$
|
69,907
|
|
|
$
|
8,041
|
|
During
the three months ended September 30, 2020 and 2019, the Company recorded total depreciation expense of $49,096 and $2,216, respectively.
Note
5 – Intangible Assets
Intangible
assets as of September 30, 2020 and June 30, 2020 consists the following:
|
|
September
30, 2020
|
|
|
June
30, 2020
|
|
|
|
|
|
|
|
|
Player
relationships
|
|
$
|
2,460,799
|
|
|
$
|
-
|
|
Betting
platform
|
|
|
2,698,968
|
|
|
|
-
|
|
Tradename
|
|
|
839,189
|
|
|
|
-
|
|
Rewards
platform
|
|
|
648,136
|
|
|
|
-
|
|
Licenses
|
|
|
144,000
|
|
|
|
-
|
|
Online
gaming website
|
|
|
6,000
|
|
|
|
6,000
|
|
Total
intangible assets
|
|
|
6,797,092
|
|
|
|
6,000
|
|
Accumulated
amortization
|
|
|
(227,599
|
)
|
|
|
(4,000
|
)
|
Net
carrying value
|
|
$
|
6,569,493
|
|
|
$
|
2,000
|
|
During
the three months ended September 30, 2020 and 2019, the Company recorded total amortization expense of $217,352 and $10,594, respectively.
Note
6 – Loans Receivable
On
September 22, 2020, the Company entered into two credit facility agreements with two U.S. corporations (the “Borrowers”).
Under the agreements, the Company is willing to make a line of credit available to the Borrowers of up to $1,000,000, in the aggregate.
The interest rate is 0%. The credit facility was entered into to make funds available to the Borrowers until the proposed acquisition
of the Borrowers by the Company is consummated. The Company has entered into an agreement to acquire the Borrowers. The acquisition
is expected to close by fiscal year ending 2021. As of September 30, 2020, the Company had recorded $250,000 as loans receivable
in relation to the credit facility agreements.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Note
7 – Other Receivables
Other
receivables as of September 30, 2020 consists of the following:
|
|
September
30, 2020
|
|
Marketing
advances to revenue partners
|
|
$
|
453,515
|
|
Revenue
share
|
|
|
17,960
|
|
Other
receivables
|
|
|
3,953
|
|
Total
|
|
$
|
475,428
|
|
The
Company did not have other receivables as of June 30, 2020.
Note
8 – Other Non-Current Assets
Other
non-current assets as of September 30, 2020 and June 30, 2020 consists of the following:
|
|
September
30, 2020
|
|
|
June
30, 2020
|
|
Deposits
reserved for users
|
|
$
|
277,401
|
|
|
$
|
-
|
|
Despots
for gaming duties
|
|
|
706,274
|
|
|
|
-
|
|
Other
deposits
|
|
|
132,733
|
|
|
|
6,833
|
|
Total
|
|
$
|
1,116,408
|
|
|
$
|
6,833
|
|
Note
9 – Related Party Transactions
The
Company entered into transactions and owes balances related to cash to officers and directors.
a)
The Company currently leases office space from the Chief Executive Officer of the Company, Grant Johnson. During the three months
ended September 30, 2020 and 2019, the Company incurred rent of $1,200 and $0, respectively, charged by its Chief Executive Officer.
As of September 30, 2020 and June 30, 2020, the Company owed $0 and $21,658, respectively, to its Chief Executive Officer related
to rent payments and corporate expenses paid on the Company’s behalf.
b)
The Company has entered into a rental agreement and a referral agreement with Contact Advisory Services Ltd, which is partly owned
by a member of our board of directors. During the three months ended September 30, 2020 and 2019, the Company expensed approximately
$17,000 and $19,000, respectively, in accordance with the agreements.
Note
10 – Leases
In
conjunction with acquisition on July 31, 2020, the Company inherited a lease agreement for office space, which had under two years
remaining on upon the acquisition. The assets and liabilities from operating leases are recognized at the acquisition date based
on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates
or implicit rates, when readily determinable. Short-term leases, which have an initial term of 12 months or less, are not recorded
on the balance sheet.
The
Company’s operating lease does not provide an implicit rate that can readily be determined. Therefore, we use a discount
rate based on our incremental borrowing rate, which is determined using the interest rate of the acquired Company’s long-term
debt at the time of the commencement of the lease, which was 5%.
The
Company’s weighted-average remaining lease term relating to its operating leases is 1.67 years, with a weighted-average
discount rate of 5%.
The
Company incurred lease expense for its operating leases of $34,505 which was included in “General and administrative expenses,”
for the three months ended September 30, 2020.
At
September 30, 2020, the Company had a right-of-use-asset related to operating leases of $367,513, accumulated amortization related
to operating leases of $32,527, both of which are included as right of use asset, net.
The
following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating
leases as of September 30, 2020.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Maturity
of Lease Liability:
|
|
|
|
|
Remainder
of 2021
|
|
$
|
106,648
|
|
Year
ending 2022
|
|
|
142,197
|
|
Total
undiscounted operating lease payments
|
|
|
248,845
|
|
Less:
imputed interest
|
|
|
(10,061
|
)
|
Present
value of operating lease liabilities
|
|
$
|
238,785
|
|
Note
11 – Notes Payable
On
April 30, 2020, the Company obtained a sterling term loan facility from HSBC, with a limit of £250,000. The loan allowed
for a drawdown period up to 60 days following the loan acceptance date, which the Company drew down upon in its entirety on June
5, 2020. The loan is to be repaid on a monthly basis beginning on the thirteenth month following the drawdown date until the date
3 years from the date of the drawdown of the loan (“Final Repayment Date.”). Interest at a rate of 3.49% per annum
over the Bank of England Base Rate will be payable on the outstanding principal amount of the loan monthly and on the Final Repayment
Date. On September 30, 2020, the Company recorded $26,880 as notes payable, current and $295,680 as notes payable, non –
current in relation to the loan.
Note
12 – Commitments and contingencies
Consultant
Agreements
On
October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (the “Team”) in order to obtain
certain sponsorship-related rights, benefits, and opportunities with respect to the eSports team. The term of the contract was
from October 1, 2019 to June 30, 2022. The Company agreed to pay the Team $516,000 over the term of the contract and $230,000
worth of common stock. The stock is payable in 12 equal installments on the first day of each month. On August 6, 2020, the Company
entered into an amended and restated sponsorship agreement whereby the Company agreed to pay a total of $2,545,000 in cash and
$825,000 of common stock in tranches throughout the term of the contract which expires on January 31, 2023. As of September 30,
2020, the Company issued 33,333 shares of common stock to the Team. As of September 30, 2020, the Company has accrued $42,469
as accrued expenses in relation to this agreement. For the three months ended September 30, 2020, the Company has expensed $230,879
in accordance with the agreement. As of September 30, 2020, the Company owed 23,815 shares of common stock to the Team.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
On
August 17, 2020, the Company entered into an agreement with Twin River Worldwide Holdings, Inc. (“Twin River”) that
operates various online gaming and betting services in the state of New Jersey, USA. The organization will assist the Company
in the operations and support to make available sports wagering to persons in New Jersey under the State Gaming Law. On the skin
launch date (the “Launch Date”), which is expected to occur during the fiscal year ending June 30, 2021, the Company
will pay the operator $1,500,000 and issue 50,000 shares of common stock. On each one-year anniversary of the Launch Date, the
Company will pay an additional $1,250,000 and issue 10,000 shares of common stock. The agreement shall have a term of ten years
from the Launch Date.
Contingencies
In
September 2018, Boustead Securities, LLC (“Boustead”) notified us via letter of a claim that they were owed $192,664,
as well as warrants to purchase 1,417,909 shares of our common stock as compensation for their acting as the placement agent for
the sale of our securities between June 2017 and 2018. This matter was then brought to JAMS pursuant to an arbitration clause
in the placement agent agreement entered into by the Company and Boustead.
The
Arbitration is currently scheduled for December 2020.
On
August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit in the United States District Court for the District
of Nevada, entitled Tangiers Global, LLC, v. VGambling, Inc. et al, Case No. 2:20-cv-01434-APG-DJA. While filed in Nevada, the
matter is in the process of being transferred to the District of Puerto Rico. The complaint for the lawsuit alleges, among other
things, that the Company breached a certain 8% convertible promissory note, dated June 3, 2016, and Common Stock Purchase warrant
of the same date.
The
Company believes the lawsuit lacks merit and will vigorously challenge the action, in addition,
to file any counterclaims that may exist. At this time, the Company is unable to estimate potential damage exposure, if any, related
to the litigation.
Note
13 – Revenue Recognition
As
a result of the LHE Enterprises Limited, the Company is now revenue generating. Upon the acquisition of LHE
Enterprises Limited, the Company recorded no contract assets and contract liabilities in the amount of $1,258,919. For
the three months ended September 30, 2020, the Company recognized approximately $54,000 as revenues in
relation to the contract liabilities recorded upon adoption. As of September 30, 2020, contract assets were not
material.
As
of September 30, 2020 contract liabilities were $2,092,802, which are recorded as “Liabilities to customers” in the
accompanying consolidated balance sheets. Contract liabilities primarily relate to deposits received from customers where bets
were not yet placed.
The
Company did not have any contract assets or liabilities as of June 30, 2020.
Disaggregated
Revenues
The
following table presents our revenues from contracts with customers disaggregated by revenue source:
|
|
For
the three months ended
September
30, 2020
|
|
Rush
profit share*
|
|
$
|
139,619
|
|
SportNation.bet
|
|
|
67,400
|
|
RedZone
Sports Limited
|
|
|
(23,609
|
)
|
Other
services
|
|
|
38,982
|
|
Total
|
|
$
|
222,392
|
|
*The
Company entered into a revenue sharing agreement with Rush during the period ending September 30, 2020. The Company provides
software, tools and infrastructure for the operation and maintenance of an online gaming services to be offered on Rush’s
website. In return, the Company receives 25% of the related net profits with a minimum of 25,000 British pound sterling per month.
The
Company did not have any revenues for the three months ended September 30, 2019
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Note
14 – Equity
Preferred
Stock
The
Company has authorized 10,000,000 shares of preferred stock with a par value of $0.001 per share. There are no preferred shares
designated, issued, and outstanding for the periods ending September 30, 2020 and June 30, 2020.
Common
Stock
During
the three months ended September 30, 2020, the Company issued 281,626 shares of its common stock for services rendered with a
weighted average fair market value of $6.46 per share or $1,819,601 in the aggregate. Of the 281,626 shares of common stock issued,
117,450 shares of common stock were related to services received in a previous period. The Company recorded these shares as liabilities
to be settled in stock at June 30, 2020 with a fair market value of $927,855 in the aggregate. For the period ended September
30, 2020, the Company recorded $927,855 as a reduction of current liabilities and increase to additional paid-in capital.
During
the three months ended September 30, 2020, the Company issued 275,463 shares of common stock for the exercise of warrants with
a weighted average exercise price of $3.72 per share or $1,024,924 in the aggregate. Of the 275,463 shares of common stock
issued, 20,000 shares of common stock were related to an exercise in the previous period. The Company recorded these shares at
June 30, 2020 with a fair market value of $4.25 per share or $85,000. For the three months ended September 30, 2020, the Company
recorded $85,000 as a reduction in equity to be issued.
During
the three months ended September 30, 2020, the Company issued 650,000 shares of common stock in relation to the LHE
Enterprises Limited acquisition. The Company recorded these shares at fair market value in the amount of $3,802,500
(see Note 3). Additionally, the Company issued 9,630 shares as a finder’s fee in relation to the acquisition. The Company
expensed these shares as general and administrative in the amount of $54,232.
On
September 14, 2020, the Company issued 93,808 shares of common stock in relation to the Flip acquisition. The Company recorded
these shares at fair market value on the date of grant in the amount of $500,000 (see Note 3).
During
the three months ended September 30, 2019, the Company issued 16,667 shares of common stock related to a consulting agreement
dated June 4, 2019. These shares were recorded as equity to be issued at June 30, 2019, and during the three months ended September
30, 2019, the Company recorded $200,000 as a reduction to equity to be issued. As of September 30, 2019, the Company recorded
a prepaid expense in the amount of $166,667 related to the value of the common stock granted for future services to be rendered.
Common
Stock Warrants
During
the three months ended September 30, 2020, the Company issued a warrant to purchase 1,000,000 shares of common stock in relation
to the LHE Enterprises Limited acquisition. The warrant is exercisable at $8.00 per share and expires on July 31, 2023.
The Company recorded the warrant at fair market value of $5,488,171 (see Note 3). The warrant contains a cash settlement feature
which results in a warrant liability. For the period ending September 30, 2020, the Company recorded a warrant liability of $3,387,218
in relation to the cash settlement feature. For the three months ending September 30, 2020, the Company recorded a gain on the
change in fair value of warrant liability in the amount of $2,100,953. The Company valued the warrant using the Black-Scholes
option pricing model with the following terms on July 31, 2020: (a) exercise price of $8.00, (b) volatility rate of 187.40%,
(c) discount rate of 0.48%, (d) term of three years, and (e) dividend rate of 0%. The Company valued the warrant using the
Black-Scholes option pricing model with the following terms on September 30, 2020: (a) exercise price of $8.00, (b) volatility
rate of 183.25%, (c) discount rate of 0.28%, (d) term of 2 years and 10 months, and (e) dividend rate of 0%.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
A
summary of the Company’s warrant activities is as follows:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
|
Intrinsic
Value
|
|
Outstanding
and Exercisable, June 30, 2020
|
|
|
5,276,592
|
|
|
$
|
4.28
|
|
|
|
0.86
|
|
|
$
|
14,654,296
|
|
Issued
|
|
|
1,000,000
|
|
|
|
8.00
|
|
|
|
3.00
|
|
|
|
-
|
|
Exercised
|
|
|
(275,463
|
)
|
|
|
4.08
|
|
|
|
|
|
|
|
26,270
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and Exercisable, September 30, 2020
|
|
|
5,993,129
|
|
|
$
|
4.93
|
|
|
|
0.98
|
|
|
$
|
243,556
|
|
Common
Stock Options
On
August 1, 2017, the Company adopted the 2017 Stock Incentive Plan (the “2017 Plan”) whereby incentive stock options
issued to employees, officers, and directors of the Company shall not exceed 166,667 of which the purchase price of the stock
options shall not be less than 100% of the fair market value of the Company’s common stock and the period for exercising
the stock options not to 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. On September 10, 2020, the Company’s board of directors
adopted the 2020 Equity and Incentive Plan (the “2020 Plan”) which allows for 1,500,000 shares that may be awarded
under the 2020 Plan. As of September 30, 2020, there were 1,333,099 shares issuable under the 2020 Plan and no shares issuable
under the 2017 Plan.
A
summary of the Company’s stock option activity is as follows:
|
|
Number
of
Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding,
June 30, 2020
|
|
|
51,942
|
|
|
|
10.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
September 30, 2020
|
|
|
51,942
|
|
|
$
|
10.50
|
|
As
of September 30, 2020, the weighted average remaining life of the options was 4.10 years.
Stock
Based Compensation
During
the three months ended September 30, 2020 and 2019, the Company recorded stock-based compensation expense of $1,007,672
and $153,241, respectively, which has been recorded as general and administrative expense in the statements of operations.
As
of September 30, 2020, unamortized stock compensation for stock options was $39,105, with a weighted-average recognition period
of 0.75 years.
As
of September 30, 2020, unamortized stock compensation for common stock recorded as prepaid expense was $75,000, with a
weighted-average recognition period of 0.75 years.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
September
30, 2020
(Expressed
in U.S. dollars)
Note
15 – Segment Information
The
following tables summarizes financial information by geographic segment.
For
the three months ended September 30, 2020:
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
United
Kingdom
|
|
|
U.S.
|
|
|
Total
|
|
Net
income (loss)
|
|
$
|
-
|
|
|
$
|
100,816
|
|
|
$
|
155,586
|
|
|
$
|
(1,443,978
|
)
|
|
$
|
(620,915
|
)
|
|
$
|
(1,808,493
|
)
|
For
the three months ended September 30, 2019:
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
United
Kingdom
|
|
|
U.S.
|
|
|
Total
|
|
Net
loss
|
|
$
|
(8,875
|
)
|
|
$
|
(21,966
|
)
|
|
$
|
(28,908
|
)
|
|
$
|
-
|
|
|
$
|
(2,780,035
|
)
|
|
$
|
(2,839,784
|
)
|
As
of September 30, 2020:
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
United
Kingdom
|
|
|
U.S.
|
|
|
Total
|
|
Assets
|
|
$
|
14,793
|
|
|
$
|
75,913
|
|
|
$
|
1,483
|
|
|
$
|
14,879,334
|
|
|
$
|
10,425,243
|
|
|
$
|
25,396,766
|
|
As
of June 30, 2020:
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
United
Kingdom
|
|
|
U.S.
|
|
|
Total
|
|
Assets
|
|
$
|
15,293
|
|
|
$
|
49,400
|
|
|
$
|
2,257
|
|
|
$
|
-
|
|
|
$
|
13,066,576
|
|
|
$
|
13,133,526
|
|
Note
16 – Subsequent Events
Equity
Issuances
On
October 8, 2020, the Company issued options to purchase 408,900 options to purchase shares of common stock to employees. The options
are exercisable at $4.82 per share for a period of five years and begin vesting on January 8, 2021.
Subsequent
to September 30, 2020, the Company issued 155,275 shares of common stock to employees of the Company.
Subsequent
to September 30, 2020, the Company issued 188,778 shares of common stock upon the exercise of warrants at a weighted average exercise
price of $2.37 per share.
Subsequent
to September 30, 2020, the Company issued 7,609 shares of common stock to a consultant.