Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Note
2 – Summary of Significant Accounting Policies
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
consolidated financial statements. The unaudited condensed consolidated financial statements 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 unaudited condensed consolidated 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
unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions
and balances have been eliminated on consolidation.
Reportable
Segment
The
Company determined it has one reportable segment. This determination considers the organizational structure of the Company
and the nature of financial information available and reviewed by the chief operating decision maker to assess performance and
make decisions about resource allocations.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had
no effect on the reported results of operations. The Company reclassified taxes payable on its unaudited condensed consolidated
balance sheet from accounts payable and accrued expenses. The Company also reclassified sales and marketing expenses
on its unaudited condensed consolidated statements of operations and comprehensive loss from general and administrative
expenses.
Use
of estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include the valuation and accounting for equity
awards related to warrants and stock-based compensation, determination of fair value for derivative instruments, the accounting
for business combinations and allocating purchase price, estimating the useful life of fixed assets and intangible assets, as
well as the estimates related to accruals and contingencies.
Liquidity
and Going Concern
The Company has historically incurred
losses and negative cash flows as it prepared to grow its esports business through acquisitions and new venture opportunities.
As of December 31, 2020, the Company had approximately $5.6 million of available cash on-hand and has raised additional funding
of $10.7 million subsequent to December 31, 2020 from the exercise of certain warrants. The Company also raised aggregate gross proceeds of $30.0 million from an equity offering on February 16, 2021. Considering
the cash on-hand as well as these additional sources of financing, the Company currently expects that its cash will be sufficient
to fund its operating expenses and capital expenditure requirements for at least 12 months after February 16, 2021. While the
Company expects revenues and cash flows to increase related to current and planned acquisitions, the Company expects to incur
an annual operating loss and annual negative operating cash flows during the growth phase of the business.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally. Due to the outbreak of Covid-19, almost all major sports events and leagues were postponed
or put-on hold, for the period of Apr 2020-June 2020. The cancelation of major sports events had a significant short-term negative
effect on betting activity globally. As a result, iGaming operators faced major short-term losses in betting volumes. Online casino
operations have generally continued as normal without any noticeable disruption due to the Covid-19 outbreak. The virus’s
expected effect on online casino activity globally is expected to be overall positive or neutral.
Travel
restrictions and border closures have not materially impacted the Company’s ability to manage and operate the day-to-day
functions of the business. Management has been able to operate in a virtual setting. However, if such restrictions become more
severe, they could negatively impact those activities in a way that would harm the business over the long term. Travel restrictions
impacting people can restrain the ability to operate, but at present we do not expect these restrictions on personal travel to
be material to the Company’s operations or financial results.
The ultimate impact of the COVID-19 pandemic
on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning
the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the
Company, may direct, which may result in an extended period of continued business disruption and reduced operations. Any resulting
financial impact cannot be reasonably estimated at this time but may have a material adverse impact on our business, financial
condition and results of operations.
Cash
Cash
includes cash on hand. Cash equivalents consist of highly liquid debt instruments purchased with an original maturity
of three months or less. As of December 31, 2020 and June 30, 2020 there were no cash equivalents. At times, cash deposits inclusive
of restricted cash may exceed FDIC-insured limits. At December 31, 2020 and June 30, 2020, the amount the Company had on deposit
funds that exceeded the FDIC-insured limits were approximately $7,250,000 and $12,000,000, respectively.
Restricted Cash
Restricted cash includes cash reserves
maintained by the Company in satisfaction of regulatory requirements related to user account balances. The Company presents
90% of its liabilities to customer as restricted cash.
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.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Equipment
Equipment
is stated at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition
of the asset. Additions and improvements that significantly extend the useful lives of assets are capitalized.
Repairs
and maintenance costs are charged to expense 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 its
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. Transaction costs are expensed as incurred in general and administrative expenses.
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.
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. The Company did not record any impairment
of goodwill or intangible assets during the six months ending December 31, 2020. The Company recorded an impairment of intangible
assets of $67,131 during the six months ending December 31, 2019.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, Leases (“ASC 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:
|
|
●
|
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.
|
|
|
●
|
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.
|
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
As
a result of the above, the adoption of ASC 842 did not have a material effect on the unaudited condensed consolidated financial
statements.
Upon
the acquisition of LHE Enterprises Limited, the Company recognized an operating lease right-of-use asset
of $367,513 and lease liabilities of $236,807
on the unaudited condensed consolidated balance sheet .
Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 11.
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.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets, including definite-lived intangible 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.
There were no long-lived asset impairment charges recorded during the three and six months periods ended December 31, 2020
and 2019.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in the unaudited condensed consolidated
financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of
the differences between U.S. GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the
provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable
income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or
a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax
expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback years, existing
taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.
The
Company accounts for uncertainty in income taxes recognized in the unaudited condensed consolidated financial statements by applying
a twostep process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine
the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not
to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the unaudited condensed
consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than
50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting
tax reserves, or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.
Derivative
Instruments
The
Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts
qualify as derivatives. 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.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
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 utilizes the Black-Scholes valuation model to value the derivative warrants.
Fair
Value of Financial Instruments
The
carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, other receivables, loans receivable,
receivables reserved for users, prepaid expenses and other current assets, accounts payable and accrued expenses,
and liabilities to customers approximate fair value because of the immediate or short-term maturity of the financial instruments.
The
Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.
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.
The
following securities were excluded from weighted average diluted common shares outstanding for the three and six months ended
December 31, 2020 and 2019 because their inclusion would have been antidilutive.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
|
|
|
As
of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
457,009
|
|
|
|
51,942
|
|
|
Common stock warrants
|
|
|
5,156,722
|
|
|
|
807,717
|
|
|
Convertible notes
|
|
|
-
|
|
|
|
375,834
|
|
|
Contingently
issuable shares
|
|
|
15,667
|
|
|
|
2,667
|
|
|
Total
|
|
|
5,629,398
|
|
|
|
1,238,160
|
|
Comprehensive
Loss
Comprehensive
loss consists of net loss and foreign currency translation adjustments related to the effect of foreign exchange on the value
of assets and liabilities. The net translation loss for the period is included in the unaudited condensed consolidated statements
of comprehensive loss.
Foreign
Currency Translation
The
functional currencies of the Company include the U.S. dollar,
British Pounds Sterling, Euros, and Canadian dollar. The reporting currency of the Company is the U.S. Dollar. Assets and liabilities of the Company’s foreign operations with functional currencies other than the US dollar are translated at
the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the
periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
Stock-based
Compensation
The
Company applies ASC 718-10, “Share-Based Payments,” 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 consolidated statements of operations and comprehensive loss. The Company recognizes share-based award forfeitures
as they occur rather than estimating by applying a forfeiture rate due to lack of historical experience.
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
costs consist primarily of online search advertising and placement, trade shows, advertising fees, and other promotional expenses.
Advertising costs are expensed as incurred and are included in sales and marketing on the unaudited condensed consolidated
statements of operations.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”)
to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects
to be entitled. The Company determines revenue recognition through the following steps:
|
|
i.
|
Identification
of the contract, or contracts, with a customer
|
|
|
ii.
|
Identification
of the performance obligations in the contract
|
|
|
iii.
|
Determination
of the transaction price
|
|
|
iv.
|
Allocation
of the transaction price to the performance obligations in the contract
|
|
|
v.
|
Recognition
of revenue, when, or as, the Company satisfies the performance obligation
|
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
The
Company generates revenue from end-users (“customers”) placing bets on its online gambling sites it operates for its
brands. The performance obligations in the contract are the settlements of each individual bet. The Company offers a loyalty
program that includes free play, cash bonuses, and loyalty points awarded based on individual play. The loyalty program is considered
a nondiscretionary incentive available to the customer. The transaction price is the amount wagered by the customer less the amounts
returned to, or won by, the customer. This is commonly referred to as the win or Gross Gaming Revenue (“GGR”). Management
allocates the transaction price or the GGR to the performance obligations using relative standalone selling price.
The
Company’s performance obligations are as follows:
|
|
1.
|
Settlement
of each individual bet
|
|
|
2.
|
Honoring
of nondiscretionary incentives available to the customer as a result of the loyalty program.
|
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 nondiscretionary incentives awarded. The Company records liabilities for
amounts due to users of which the balance consists of user deposits, user winnings and nondiscretionary incentives awarded
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 three types of incentives that 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 and (iii) loyalty points are
earned based on the customers level of play which can be exchanged for free bets or cash. The incentives typically expire
3-6 months after they are granted and represent consideration payable to a customer that are included 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.
Recently
Adopted Accounting Pronouncements
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, 2019, 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 adopted this guidance in the first quarter of its fiscal 2021. The adoption of this guidance did not have a material
impact on the accompanying unaudited condensed consolidated 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, 2019. The Company adopted this guidance in the first quarter of its fiscal 2021. The adoption of this guidance did
not have a material impact on the accompanying unaudited condensed consolidated financial statements.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Recently
Issued Accounting Standards
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.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
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 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.
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 unaudited condensed consolidated financial statements
of the Company for the three and six months ended December 31, 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 the acquisitions described below can be attributed
to a number of business factors including, but not limited to, cost synergies expected to be realized and a trained technical
workforce.
Acquisition
of LHE Enterprises Limited.
On
July 7, 2020, the Company entered into the “Argyll Purchase Agreement” between the Company, LHE, and 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. 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 300,000 registered players at the end of calendar year 2020.
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 Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
The purchase price and purchase price allocation
are preliminary pending the final determination of fair value for warrants issued as well as a final valuation of assets
acquired and liabilities assumed. The preliminary purchase price and purchase price allocation as of the acquisition
completion date 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 and included in general and administrative expenses on the unaudited
condensed consolidated statements of operations.
Pro
Forma Operating Results
The
following table provides unaudited pro forma results for the three months ended December 31, 2019, as if the Argyll
Purchase Agreement consummated on July 1, 2019. The pro forma results of operations for these three months ended 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.
|
Net revenue
|
|
$
|
2,944,522
|
|
|
Net loss
|
|
$
|
(4,089,348
|
)
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.62
|
)
|
The following table provides unaudited
pro forma results for the six months ended December 31, 2020 and 2019, as if the Argyll Purchase Agreement consummated on July
1, 2019. The pro forma results of operations for these six month periods ended 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 six months ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net
revenue
|
|
$
|
2,725,840
|
|
|
$
|
5,889,043
|
|
|
Net loss
|
|
$
|
(9,985,552
|
)
|
|
$
|
(7,303,115
|
)
|
|
Net loss per common
share, basic and diluted
|
|
$
|
(0.76
|
)
|
|
$
|
(1.12
|
)
|
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
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 shares 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
|
|
The
unaudited pro forma financial results for Flip are immaterial for the three and six months ending December 31, 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 – Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets as of December 31, 2020 and June 30, 2020 consists of the following
|
|
|
December
31,
2020
|
|
|
June
30,
2020
|
|
|
Loan receivable from
Phoenix Games Network Limited
|
|
$
|
274,067
|
|
|
$
|
-
|
|
|
Other receivable
|
|
|
132,769
|
|
|
|
-
|
|
|
Prepaid insurance
|
|
|
60,206
|
|
|
|
159,941
|
|
|
Prepaid service contract
|
|
|
84,052
|
|
|
|
-
|
|
|
Prepaid equity
|
|
|
50,000
|
|
|
|
100,000
|
|
|
Marketing expenses
|
|
|
34,129
|
|
|
|
-
|
|
|
Licenses and fees
|
|
|
29,487
|
|
|
|
-
|
|
|
Other prepaid
operating costs
|
|
|
226,571
|
|
|
|
3,404
|
|
|
Prepaid
expenses and other current assets
|
|
$
|
891,281
|
|
|
$
|
263,345
|
|
The Company completed the acquisition of
Phoenix Games Network Limited on January 21, 2021. The settlement of the loan receivable from Phoenix Network Games Limited is
included in the purchase consideration for this acquisition discussed further in Note 16, Subsequent Events.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Note
5 – Equipment
Fixed
assets as of December 31, 2020 and June 30, 2020 consists of the following:
|
|
|
December
31, 2020
|
|
|
June
30, 2020
|
|
|
Computer equipment
|
|
$
|
100,944
|
|
|
$
|
14,450
|
|
|
Furniture
and equipment
|
|
|
152,320
|
|
|
|
20,241
|
|
|
|
|
|
253,264
|
|
|
|
34,691
|
|
|
Accumulated
depreciation
|
|
|
(185,794
|
)
|
|
|
(26,650
|
)
|
|
Equipment,
net
|
|
$
|
67,470
|
|
|
$
|
8,041
|
|
During
the six months ended December 31, 2020 and 2019, the Company recorded total depreciation expense of $159,144 and $4,432,
respectively. During the three months ended December 31, 2020 and 2019, the Company recorded total depreciation expense of $110,048
and $2,216, respectively.
Note
6 – Intangible Assets
Intangible
assets as of December 31, 2020 and June 30, 2020 consists of the following:
|
|
|
December
31, 2020
|
|
|
June
30, 2020
|
|
|
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
$
|
839,189
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
Player
relationships
|
|
|
2,460,798
|
|
|
|
-
|
|
|
Betting
platform
|
|
|
2,698,968
|
|
|
|
-
|
|
|
Rewards
platform
|
|
|
887,827
|
|
|
|
-
|
|
|
Licenses
|
|
|
144,000
|
|
|
|
-
|
|
|
Online
gaming website
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
7,036,782
|
|
|
|
6,000
|
|
|
Accumulated
amortization
|
|
|
(562,746
|
)
|
|
|
(4,000
|
)
|
|
Intangible
assets, net
|
|
$
|
6,474,036
|
|
|
$
|
2,000
|
|
During
the six months ended December 31, 2020 and 2019, the Company recorded total amortization expense of $558,746 and $11,095,
respectively. During the three months ended December 31, 2020 and 2019, the Company recorded total amortization expense of $341,394
and $501, respectively.
Note
7 – Loans Receivable
On
September 22, 2020, the Company entered into two credit facility agreements with Helix and ggCircuit (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 December 31, 2020, the Company had recorded $1,000,000 as loans
receivable in relation to the credit facility agreements.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Note
8 – Other Receivables
Other
receivables as of December 31, 2020 consists of the following:
|
|
|
December
31, 2020
|
|
|
Marketing advances to
revenue partners
|
|
$
|
466,740
|
|
|
Other
|
|
|
342,206
|
|
|
Other receivables
|
|
$
|
808,946
|
|
The
Company did not have other receivables as of June 30, 2020.
Note
9 – Other Non-Current Assets
Other
non-current assets as of December 31, 2020 and June 30, 2020 consists of the following :
|
|
|
December
31, 2020
|
|
|
June
30, 2020
|
|
|
Deposits reserved for
users
|
|
$
|
293,509
|
|
|
$
|
-
|
|
|
Deposits for gaming duties
|
|
|
747,286
|
|
|
|
-
|
|
|
Other deposits
|
|
|
128,610
|
|
|
|
6,833
|
|
|
Other non-current
assets
|
|
$
|
1,169,405
|
|
|
$
|
6,833
|
|
Note
10 – Related Party Transactions
The
Company entered into transactions the following transactions with officers and directors:
The Company currently reimburses the Chief Executive Officer for office rent and related expenses. During the three
and six months ended December 31, 2020, the Company incurred charges of $1,200 and $2,400, respectively from
the Chief Executive Officer. As of December 31, 2020, there were no amounts owed to the Chief Executive Officer. At
June 30, 2020, the Company owed $21,658 to its Chief Executive Officer for rent and corporate related expenses.
The Company has entered into a services agreement and
a referral agreement with Contact Advisory Services Ltd, which is partly owned by a member of the Board of Directors.
During the three and six months ended December 31, 2020, the Company expensed approximately $17,192 and
$68,577, respectively, in accordance with these agreements.
The
Company has retained legal and corporate secretarial services from a member of Board of Directors through consultancy and
employment agreements. The legal consultancy agreement requires payments of £18,000 per month (approximately $25,000)
to the law firm that is controlled by this member of the Board of Directors. The individual also receives payroll of $500 per
month through the employment agreement as Legal Counsel and Company Secretary.
Note
11 – Leases
In
conjunction with the acquisition on July 31, 2020 (discussed in Note 3), the Company assumed 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. The
lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend
or not terminate the lease that the Company is reasonably certain to exercise, or any option to extend or not to terminate a lease
controlled by the lessor.
Short-term
leases, which have an initial term of 12 months or less, are not recorded on the unaudited condensed consolidated balance sheets.
The
Company’s operating lease does not provide an implicit rate that can readily be determined. Therefore, we use a discount
rate based on incremental borrowing rate of the Company, 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 1.42 years, with a weighted-average
discount rate of 5%.
The
Company incurred lease expense for its operating leases of $87,868 which
was included in “General and administrative expenses,” for the six months ended December 31, 2020. The Company incurred
lease expense for its operating leases of $53,363 which was included in “General and administrative expenses,”
for the three months ended December 31, 2020.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
At
December 31, 2020, the Company had a right-of-use-asset related to operating leases of $388,854 and accumulated amortization
related to operating leases of $86,320, both of which are included as right of use asset, net on the unaudited condensed consolidated
balance sheets.
The
following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating
leases as of December 31, 2020.
|
Maturity of Lease
Liability:
|
|
|
|
|
Remainder of 2021
|
|
$
|
75,227
|
|
|
Year ending
2022
|
|
|
150,455
|
|
|
Total undiscounted operating lease
payments
|
|
|
225,682
|
|
|
Less: imputed
interest
|
|
|
(7,789
|
)
|
|
Present value
of operating lease liabilities
|
|
$
|
217,893
|
|
Note
12 – Notes Payable
The
Company assumed a sterling term loan facility from HSBC
with a limit of £250,000 (approximately $340,000) in connection with its acquisition of LHE (Note 3). The loan allows
for a drawdown period up to 60 days following the loan acceptance date, with LHE electing to borrow the total amount available
under the loan facility. 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.”). There is no interest
on the loan in the first year and interest subsequently accrues at a rate of 3.49% per annum over the Bank of England Base
Rate. Interest is payable monthly on the outstanding principal amount of the loan and on the Final Repayment
Date. On December 31, 2020, the notes payable balance related to this loan facility was $341,290.
Note
13 – Commitments and contingencies
Commitments
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. The Company
issued 33,333 shares of common stock to the Team under the agreement to-date valued at $21,000. As of December 31, 2020,
the Company has accrued $196,423 as accrued expenses in relation to this agreement. For the three and six months ended December
31, 2020, the Company has expensed $418,954 and $649,833 in accordance with the agreement. As of December 31, 2020, the commitments
under this agreement are estimate at approximately $1,250,000 for the calendar year ended December 31, 2021 and $1,500,000 for
the calendar year ended December 2022.
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.
In
the ordinary course of business, the Company enters into multi-year agreements to purchase sponsorships with professional
teams as part of its marketing efforts to expand competitive esports gaming. As of December 31, 2020, the commitments under
these agreements are estimated at approximately $700,000 for the calender year ended December 31, 2021, $700,000 for the
calender year ended December 31,2022 and $700,000 for the calender year ended December 31, 2023.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Contingencies
In
September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that they were owed $192,664,
as well as warrants to purchase 1,417,909 shares of the Company’s common stock as compensation for their acting as the placement
agent for the sale of the Company’s securities between June 2017 and 2018. This matter was then brought to arbitration
pursuant to a clause in the placement agent agreement entered into by the Company and Boustead. Prior to the Arbitration hearing,
Petitioner Boustead Securities, LLC offered a demand of nearly $500,000 to resolve the dispute. The offer was declined. The Arbitration
hearing took place on December 7, 2020 through December 11, 2020. At the end of the Arbitration, Petitioner, Boustead Securities,
LLC sought over $1.5 million in damages.
On February 3, 2021, the Arbitrator issued
her final Award on the dispute. While ultimately, the Company did not prevail on liability, the Arbitrator awarded Petitioner,
Boustead Securities, LLC significantly less in damages. In total, the Arbitrator awarded Petitioner Boustead Securities, LLC $289,874
in damages and allowable costs (not attorneys’ fees) with interest accruing approximately $21 per day. While the Company
disagrees that the Arbitrator should have awarded Petitioner, it is highly unlikely that a award is subject to an favorable appeal
or objection to Superior Court, however, the timeline do so has not passed. If no appeal is made by either party Petitioner Boustead
Securities, LLC may seek to confirm the Arbitration Award as a Superior Court Judgment and seek collection efforts. The Company
may in lieu of such seek to pay some discounted balance of the award. To date, no decisions have been made.
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 has now been successfully transferred to the District of Puerto Rico. The new case number is 3:20-cv-01520-RAM.
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 submitted an Answer with Affirmative
Defenses. The matter has not yet proceeded to the discovery phase, which is expected to begin in March, 2021. The Company believes
the lawsuit lacks merit and will continue to vigorously challenge the action. At this time, the Company is unable to estimate
potential damage exposure, if any, related to the litigation.
On
November 2, 2020, Brylan Lee Whatley (“Whatley”) filed a lawsuit in the New York State Supreme Court, New York County,
entitled Brylan Lee Whatley v. Esports Gambling Group, Inc. f/k/a VGambling, Inc., Index No. 655901/2020. On December 31,
2020, prior to serving the original Complaint, Whatley submitted an Amended Complaint in this matter. The Amended Complaint alleges
that the Company breached a consulting agreement with Whatley. The consulting agreement in question was never agreed
to, or signed by, the Company. For that reason, and in light of many other available legal defenses, the Company is
submitting a Motion to Dismiss the Amended Complaint. The Company believes the lawsuit lacks merit and will vigorously challenge
the action, in addition, to file any motions or counterclaims that may exist. At this time, the Company is unable to estimate
potential damage exposure, if any, related to the litigation.
Note
14 – Revenue Recognition
As
a result of the LHE Enterprises Limited acquisition, the Company has revenue generating operations. The Company
recorded contract liabilities in the amount of $1,737,106 in connection with the acquisition of LHE Enterprises Limited.
For the six months ended December 31, 2020, the Company recognized approximately $117,229 as revenues in relation to these
contract liabilities.
As
of December 31, 2020, contract liabilities were $2,229,724, which are recorded as “Liabilities to customers” in the
accompanying unaudited condensed consolidated balance sheets. Contract liabilities primarily relate to deposits received from
customers where bets were not yet settled.
The
following table presents revenues from contracts with customers disaggregated by revenue source:
|
|
|
For
the three months ended December 31, 2020
|
|
|
For
the six months ended December 31, 2020
|
|
|
Online betting
and casino revenues
|
|
$
|
1,823,579
|
|
|
$
|
1,891,791
|
|
|
Revenue sharing arrangements
|
|
|
416,609
|
|
|
|
533,996
|
|
|
Other services
|
|
|
122,005
|
|
|
|
158,798
|
|
|
Total
|
|
$
|
2,362,193
|
|
|
$
|
2,584,585
|
|
The
Company has revenue sharing arrangements whereby it provides wagering services to customers, software, tools and
infrastructure for the operation and maintenance of online gaming services through partner website.
The
following table presents revenues from contracts with customers disaggregated by geographical area:
|
|
|
For
the three months ended
December 31, 2020
|
|
|
For
the six months ended
December 31, 2020
|
|
|
United States
|
|
$
|
117,933
|
|
|
$
|
156,915
|
|
|
Foreign
|
|
|
2,244,260
|
|
|
|
2,427,670
|
|
|
Total
|
|
$
|
2,362,193
|
|
|
$
|
2,584,585
|
|
The
Company did not have any revenues for the three and six months ended December 31, 2019.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
Note
15 – 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 as of December 31, 2020 and June 30, 2020.
Common
Stock
During
the six months ended December 31, 2020, the Company issued 482,992 shares of its common stock for services rendered with a weighted
average fair value of $5.91 per share or $2,856,613 in the aggregate.
During
the six months ended December 31, 2020, the Company issued 1,119,871 shares of common stock for the exercise of warrants with
a weighted average exercise price of $3.85 per share or $4,258,042 in the aggregate.
During
the six months ended December 31, 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 value in the amount of $3,802,500 (see Note 3).
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 value on the date of grant in the amount of $500,000 (see Note 3).
During
the six months ended December 31, 2019, the Company issued 16,667 shares of common stock related to a consulting agreement dated
June 4, 2019.
During
the six months ended December 31, 2019, the Company issued 8,889 shares of its common stock for services rendered with a weighted
average fair value of $6.52 per share or $58,000 in the aggregate.
During
the six months ended December 31, 2019, the Company issued 4,444 shares of common stock for the exercise of warrants with a weighted
average exercise price of $2.25 per share or $10,000 in the aggregate.
On
October 8, 2019, the Company issued 41,779 shares of its common stock upon the exercise of 79,444 warrants upon a cashless
exercise.
On
October 9, 2019, the Company issued 11,248 shares of its common stock upon the exercise of 21,389 warrants upon a cashless exercise.
During
the six months ended December 31, 2019, the Company issued 5,435 shares of its common stock upon entering waiver agreements. In
consideration for the investors entrance into the waiver agreements, the Company issued to each investor an additional warrant
to purchase such number of shares of the Company’s Common Stock equal to 5% of the warrant shares initially issuable
to such investor under the warrant issued to such investor in the November 13, 2018 offering, as amended. The additional warrant
has an exercise price of $11.25 per share.
Common
Stock Warrants
During
the six months ended December 31, 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 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 December 31, 2020, the Company recorded a warrant liability of $4,859,782 in relation to the cash settlement feature.
For the three months ending December 31, 2020, the Company recorded a loss on the change in fair value of warrant liability in
the amount of $1,472,564. For the six months ending December 31, 2020, the Company recorded a gain on the change in fair
value of warrant liability in the amount of $628,389. 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 223.33%, (c) discount
rate of 0.11%, (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 December 31, 2020: (a) exercise price of $8.00, (b) volatility rate of 156.04%,
(c) discount rate of 0.17%, (d) term of 2 years and 6 months, and (e) dividend rate of 0%.
The
warrant issued to LHE Enterprises Limited has a call feature where the Company shall have the right to cause the exercise of the
warrant (the “Forced Exercise”) if the volume weighted average price of the common stock of the Company shall equal
or exceed 125% of the $8.00 exercise price of the warrant. For twenty consecutive trading days. As of December 31, 2020, the warrants
are callable by the Company.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(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
|
|
|
(1,119,871
|
)
|
|
|
3.85
|
|
|
|
|
|
|
|
2,853,035
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable, December
31, 2020
|
|
|
5,156,722
|
|
|
$
|
5.09
|
|
|
|
0.77
|
|
|
$
|
8,561,967
|
|
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 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 December 31, 2020, there were 683,854 shares available for issuance under the 2020 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
|
|
|
408,400
|
|
|
$
|
4.82
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
(3,333
|
)
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
457,009
|
|
|
$
|
5.42
|
|
As
of December 31, 2020, the weighted average remaining life of the options outstanding was 4.94 years. As of December
31, 2020, there were 48,609 stocks options that were available for exercise.
Stock
Based Compensation
During
the six months ended December 31, 2020 and 2019, the Company recorded stock-based compensation expense of $2,311,591 and
$329,960, respectively, for the amortization of stock options and the issuance of common stock to employees which has been
recorded as general and administrative expense in the unaudited condensed consolidated statements of operations.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
As
of December 31, 2020, unamortized stock compensation for stock options was $1,051,455 with a weighted-average
recognition period of 1.07 years.
The
options granted during the six months ended December 31, 2020 were valued using the Black-Scholes option pricing model using the
following weighted average assumptions:
|
|
|
Six
Months Ended December 31, 2020
|
|
|
Expected term, in years
|
|
|
2.63
|
|
|
Expected volatility
|
|
|
128.5
|
%
|
|
Risk-free interest rate
|
|
|
0.33
|
%
|
|
Dividend yield
|
|
|
-
|
|
|
Grant date fair value
|
|
$
|
4.60
|
|
Note
16 – Subsequent Events
Equity
Issuances
On
February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain
investors resulting in the raise of $30,000,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement,
the Company agreed to sell, in a registered direct offering, an aggregate of 2,000,000 shares (the “Shares”) of the
Company’s common stock, par value $0.001 per share at a price of $15.00 per Share. The closing of the sale of the Shares
under the Purchase Agreement is expected to occur on or about February 16, 2021, subject
to customary closing conditions.
Subsequent
to December 31, 2020, the Company issued 1,672,159 shares of common stock upon the exercise of warrants at a weighted average
exercise price of $6.48 per share.
Lucky
Dino Purchase Agreement
On
December 14, 2020, the Company, via its wholly owned subsidiary, Esports Entertainment (Malta) Limited (“EEL”), entered
into an asset purchase agreement (the “Lucky Dino Purchase Agreement”), subject to certain closing conditions, by
and among EEL, Lucky Dino Gaming Limited, a company registered in Malta (“Lucky Dino”), and Hiidenkivi Estonia OU,
a company registered in Estonia (“HEOU” and, together with Lucky Dino, the “Sellers”) whereby EEL purchased
and assumed from the Sellers substantially all the assets and assumed certain specified liabilities of the Sellers’ business
of real money online casino gaming (the “Acquired Business”).
As
consideration for the Acquired Business, the Company agreed to pay the Sellers EUR €25,000,000 (approximately USD $30,000,000)
(the “Lucky Dino Purchase Price”) subject to certain adjustments set forth in the Lucky Dino Purchase Agreement.
The
Lucky Dino Purchase Agreement contains customary representations, warranties, covenants, indemnification and other terms for transactions
of this nature. The closing of the transactions contemplated by the Lucky Dino Purchase Agreement is subject to certain conditions,
including, among other things, the completion of an audit of Lucky Dino and HEOU.
Phoenix
Purchase Agreement
On
December 17, 2020, the Company entered into a share purchase agreement (the “Purchase Agreement”), by and among the
Company, Phoenix Games Network Limited, a company registered in England and Wales (“Phoenix”), and the shareholders
of Phoenix (the “Phoenix Shareholders” and, together with Phoenix, the “Selling Parties”), whereby the
Company acquired from the Selling Parties all of the issued and outstanding share capital of Phoenix (the “Phoenix Shares”).
Pursuant to the Purchase Agreement, as consideration for the Phoenix Shares, the Company agreed to pay the Sellers: (i) GBP £1,000,000
(approximately $1,370,000) (the “Original Cash Consideration”); and (ii) shares of common stock of the Company,
par value $0.001 per share, in the aggregate value of GBP£3,000,000 (approximately $4,100,600) (the “Original
Share Consideration” and, together with the Cash Consideration, the “Original Purchase Price”), subject to adjustment
based on certain revenue milestones as outlined therein.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
On
January 21, 2021, the Company and Sellers, having met all conditions precedent, consummated the closing for the Phoenix Shares
pursuant to the terms of the Purchase Agreement. The Original Purchase Price was adjusted at closing and as consideration for
the Phoenix Shares, the Company paid the Sellers: (i) GBP £350,000 (US $493,495) (the “Closing Cash Consideration”);
and (ii) 292,211 shares of common stock of the Company, par value $0.001 per share (aggregate value of $1,927,647) (the “Closing
Share Consideration” and, together with the Cash Closing Consideration, the “Closing Purchase Price”). The Closing
Cash Consideration was be paid in US Dollars and was calculated in accordance with the applicable exchange rate on the Closing
Date (as such term is defined in the Purchase Agreement). The Sellers shall remain eligible to receive the remainder of the Original
Purchase Price upon Phoenix meeting certain revenue targets by May 16, 2021.
Pursuant
to the Purchase Agreement, the Selling Parties shall be entitled to receive an additional GBP£2,000,000 (approximately
$2,700,000) if Phoenix has reached certain revenue milestones by the 18 month anniversary of the Closing Date as further outlined
therein.
Helix
Holdings, LLC Purchase Agreement
On
January 22, 2021, the Company entered into an equity purchase agreement (the
“Helix Purchase Agreement”), by and among the Company, Helix Holdings, LLC, a limited liability company incorporated
under the laws of Delaware (“Helix”), and the equity holders of Helix (the “Helix Equity Holders”), whereby
the Company can acquire from the Helix Equity Holders all of the issued and outstanding membership units of Helix (the “Helix
Units”), making Helix a wholly owned subsidiary of the Company.
As
consideration for the Helix Units, the Company agreed to pay the Helix Equity Holders $17,000,000 (the “Helix Purchase Price”),
to be paid fifty percent (50%) in shares of common stock of the Company, par value $0.001 per share (the “Common Stock”)
(the “Helix Share Consideration”), and fifty percent (50%) in cash (the “Helix Cash Consideration”. The
per share price of the Common Stock issuable as Helix Share Consideration shall be the Closing Base Price minus the Discount.
“Closing Base Price” means the volume weighted average price (“VWAP”) of the Common Stock during the thirty
(30) trading days immediately preceding the date of the closing under the Helix Purchase Agreement (the “Closing”).
“Discount” equals the greater of (A) and (B) minus the lesser of (A) and (B) multiplied by 0.25 where (A) is the VWAP
of the common stock during the thirty (30) trading days immediately preceding October 26, 2020 (which was $4.54 per share) multiplied
by 1.25 (which is $5.675); and (B) is the Closing Base Price.
The
Closing under the Helix Purchase Agreement is subject to the simultaneous closing under an equity purchase agreement (the “GGC
Purchase Agreement”) among the Company, ggCircuit LLC, an Indiana limited liability company (“GGC”) and the
equity holders of GGC (the “GGC Equity Holders”), the principal terms of which are described below. The Closing is
also subject to (i) the completion of an opinion (the “Fairness Opinion”) respecting the fairness of the consideration
to be paid by the Company and received by the Helix Equity Holders and the GGC Equity Holders pursuant to the Helix Purchase Agreement
and the GGC Purchase Agreement from a financial point of view; (ii) an audit, as of and for the two years ending December 31,
2019, and a financial review, for the nine month periods ended September 30, 2019 and 2020, of Helix and affiliated entities;
and (iii) the approval of the Company’s shareholders to the issuance of the Helix Share Consideration and GGC Share Consideration
(as defined below) in satisfaction of NASDAQ Rule 5635(a).
The
parties to the Helix Purchase Agreement may terminate the Helix Purchase Agreement, among other reasons, if (i) the Fairness Opinion
does not support an aggregate purchase price for Helix and GGC of $43,000,000 and, based thereon, the Company is no longer willing
to pay the Helix Purchase Price, or (ii) the Closing has not occurred on or before May 14, 2021 or such later date as may be mutually
agreed to by the parties. The Company can also terminate the Helix Purchase Agreement if (i) upon completion of its legal, financial,
tax and commercial due diligence of Helix and affiliated entities, it is not satisfied, with the results thereof; (ii) the audit
and/or review of Helix and affiliated entities cannot be completed due to fraud, material accounting errors or otherwise or if
the results of the audit or the review are materially and adversely different from the financial information provided by Helix
and the Helix Equity Holders to the Company prior to the execution of the Helix Purchase Agreement.
In connection with the negotiation of the
Helix Purchase Agreement, the Company advanced an aggregate of $400,000 to Helix during 2020 in the form of loans (the “Helix
Loans”). Upon execution of the Helix Purchase Agreement, the Company paid Helix an additional $400,000 to be used for operating
expenses pending the Closing (the “Operating Expense Payments”). If the Closing takes place on or prior to May 14,
2021, the Company will receive a full credit against the Helix Purchase Price for the Helix Loans and if the Closing takes place
prior to April 30, 2021 the Company will receive a full credit against the Helix Purchase Price for the Operating Expense Payments.
If Closing takes place after April 30, 2021, but on or prior to May 14, 2021, the Company shall receive a credit against the Helix
Purchase Price for 60% of the Operating Expense Payments. If the transaction does not close, depending on the reason, a portion
of the Helix Loans and the Operating Expense Payments may be forgiven.
The
Helix Purchase Agreement contains customary representations, warranties, covenants, indemnification and other terms for transactions
of a similar nature.
Esports
Entertainment Group, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(Expressed
in U.S. dollars)
ggCIRCUIT
LLC Purchase Agreement
On
January 22, 2021, the Company entered into the GGC Purchase Agreement whereby the Company can acquire from the GGC Equity Holders
all of the issued and outstanding membership units of GGC (the “GGC Units”), making GGC a wholly owned subsidiary
of the Company.
As
consideration for the GGC Units, the Company agreed to pay the GGC Equity Holders $26,000,000 (the “GGC Purchase Price”)
to be paid fifty percent (50%) in shares of Common Stock (the “GGC Share Consideration”), and fifty percent (50%)
in cash (the “GGC Cash Consideration”) The per share price of the Common Stock issuable as GGC Share Consideration
shall be the Closing Base Price minus the Discount. “Closing Base Price” means the volume weighted average price (“VWAP”)
of the Common Stock during the thirty (30) trading days immediately preceding the date of the closing under the GGC Purchase Agreement
(the “Closing”). “Discount” equals the greater of (A) and (B) minus the lesser of (A) and (B) multiplied
by 0.25 where (A) is the VWAP of the common stock during the thirty (30) trading days immediately preceding October 26, 2020 (which
was $4.54 per share) multiplied by 1.25(which is $5.675); and (B) is the Closing Base Price.
The
Closing under the GGC Purchase Agreement is subject to the simultaneous closing under the Helix Purchase Agreement. The Closing
is also subject to (i) the completion of the Fairness Opinion; (ii) an audit, as of and for the two years ending December 31,
2019, and a financial review, for the nine month periods ended September 30, 2019 and 2020, of GGC and affiliated entities; and
(iii) the approval of the Company’s shareholders to the issuance of the GGC Share Consideration and Helix Share Consideration
in satisfaction of NASDAQ Rule 5635(a).
The
parties to the GGC Purchase Agreement may terminate the GGC Purchase Agreement, among other reasons, if (i) the Fairness Opinion
does not support an aggregate purchase price for Helix and GGC of $43,000,000 and, based thereon, the Company is no longer willing
to pay the GGC Purchase Price, or (ii) the Closing has not occurred on or before May 14, 2021 or such later date as may be mutually
agreed to by the parties. The Company can also terminate the GGC Purchase Agreement if (i) upon completion of its legal, financial,
tax and commercial due diligence of GGC and affiliated entities, it is not satisfied, with the results thereof; (ii) the audit
and/or review of GGC and affiliated entities cannot be completed due to fraud, material accounting errors or otherwise or if the
results of the audit or the review are materially and adversely different from the financial information provided by GGC and the
GGC Equity Holders to the Company prior to the execution of the GGC Purchase Agreement.
In connection
with the negotiation of the GGC Purchase Agreement, the Company advanced an aggregate of $600,000 to GGC during 2020 in the form
of loans (the “GGC Loans”). Upon execution of the GGC Purchase Agreement, the Company paid GGC an additional $600,000
to be used for operating expenses pending the Closing (the “Operating Expense Payments’). If the Closing takes place
on or prior to May 14, 2021, the Company will receive a full credit against the GGC Purchase Price for the GGC Loans and if the
Closing takes place prior to April 30, 2021 the Company will receive a full credit against the GGC Purchase Price for the Operating
Expense Payments. If Closing takes place after April 30, 2021, but on or prior to May 14, 2021, the Company shall receive a credit
against the GGC Purchase Price for 60% of the Operating Expense Payments. If the transaction does not close, depending on the
reason, a portion of the GGC Loans and the Operating Expense Payments may be forgiven.
The
GGC Purchase Agreement contains customary representations, warranties, covenants, indemnification and other terms for transactions
of a similar nature.