PART
I
Item
1. Business
Corporate
History
Esports
Entertainment Group, Inc. (the “Company” or “EEG”) was formed in the State of Nevada on July 22, 2008 under its
prior name Virtual Closet, Inc. Virtual Closet, Inc. changed its name to DK Sinopharma, Inc. on June 6, 2010. DK Sinopharma, Inc. changed
its name to VGambling, Inc. on August 12, 2014. On or about April 24, 2017, VGambling, Inc. changed its name to Esports Entertainment
Group, Inc. The Company was engaged in a number of different enterprises up until May 20, 2013, when, pursuant to the terms of the Share
Exchange Agreement, the Company acquired all of the outstanding capital stock of H&H Arizona Corporation in exchange for 3,333,334
shares of its common stock. From May 2013 until August 2018, its operations were limited to designing, developing and testing its wagering
systems. The Company launched its online esports wagering website (www.vie.gg) in August 2018.
Business
Overview
Esports
is the competitive playing of video games by amateur and professional teams as a spectator sport. Esports typically takes the form of
organized, multiplayer video games that include genre’s such as real-time strategy, fighting, first-person shooter and multiplayer
online battle arena games. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming
services including twitch.tv and youtube.com.
EEG
is an esports focused iGaming and entertainment company with a global footprint. EEG’s strategy is to build and acquire betting
and related platforms, and lever them into the rapidly growing esports vertical. We operate the business in two verticals, EEG iGaming
and EEG Games.
Recent Developments:
Bethard
Acquisition
On
July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited that provides sportsbook,
casino, live casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain, Malta and Ireland (“Bethard
Business”). The initial payment of purchase consideration for the Bethard Business of €17,000,000 (approximately $20,067,871
using exchange rates in effect at the acquisition date) includes €13,000,000 (approximately $15,346,019 using exchange rates in
effect at the acquisition date) that was paid in cash at closing and €4,000,000 (approximately $4,721,852 using exchange rates in
effect at the acquisition date) payable in cash (“Second Payment”) no later than October 1, 2021 (“Second Payment Date”).
The Company is also required to pay additional cash purchase consideration during the 24 month period following the acquisition date
(“Additional Payment”) equal to 15% of net gaming revenue until the Second Payment Date, with the percentage then decreasing
to 10% - 12% of net gaming revenue during subsequent months. The total purchase consideration also includes a payment of up to €7,600,000
(approximately $8,971,519 using exchange rates in effect at the acquisition date) of contingent share consideration should a specific
ambassador agreement be successfully assigned to Bethard following the acquisition date.
The
acquisition of the Bethard Business included (i) the brand names of the Bethard Business (Bethard, Fastbet and Betive); (ii) domains
relating to the brands acquired; (iii) the customer databases relating to the acquired brands; (iv) website content, materials and code
pertaining to the domains acquired; (v) certain licensee rights under an ambassador agreement; and (vi) B2C online gambling licenses
in Sweden, Spain, Malta, and Ireland.
The
acquisition was completed pursuant to the terms of the purchase agreement dated May 25, 2021 whereby the Company acquired the outstanding
share capital, of Prozone Limited (“Prozone”) that had previously received the assets of the Bethard Business in a pre-closing
restructuring (“Pre-Closing Restructuring”) by the seller. The purchase price for the shares of Prozone was originally determined
as the aggregate of (i) a closing payment of EUR 16,000,000; (ii) subject to certain conditions as outlined in the purchase agreement,
an amount corresponding to 12% of Net Gaming Revenue (as defined in the Purchase Agreement) for 24 months from the date of the closing
of the Purchase Agreement ( the “Relevant Period”) and payable by the Purchaser to the Seller on a monthly basis (in respect
of Net Gaming Revenue generated during the relevant month during the Relevant Period) (the “Additional Payment”); and (iii)
subject to certain conditions as outlined in the purchase agreement, shares of the Company’s common stock to be allotted and issued
to the Seller by the second year anniversary of the Closing Date, representing an aggregate value of the USD Currency Equivalent of EUR
7,600,000 or such lower amount as may be applicable in accordance with the purchase agreement.
Prior
to the closing of the Bethard acquisition, the purchase agreement had been amended (“First Amendment”) to (i) defer the Second
Payment of EUR 4,000,000 no later than the Second Payment Date (ii) require the Company to pay an additional EUR 1,000,000 on the First
Payment Date to acquire a deposit that had been funded by the seller with the Spanish Gaming Authority (DGOJ) as a guarantee for regulatory
purposes, and (iii) require the Additional Payment, discussed above, be increased from 12% of the Net Gaming Revenue during Relevant
Period, effective July 1 2021, to 15% of Net Gaming Revenue until the Second Payment Due Date, following which it would be reduced to
12% of Net Gaming Revenue for the remainder of the Relevant Period. On October 6, 2021, the Company entered into second amendment agreement
(“Second Amendment”) to extend the Second Payment Date until October 14, 2021 during which time the Additional Payment will
remain at 15% of NGR.
In
connection with the Pre-Closing Restructuring, Prozone also entered into agreements that included (i) a white label platform licensing
agreement (“White Label Agreement’), (ii) a turnkey platform licensing agreement (“Turnkey Agreement”), and (iii)
a services agreement whereby the seller will provide transitional and support services to Prozone during a 24 month period following
the acquisition. Pursuant to the terms of the White Label Agreement and/or the Turnkey Agreement, Prozone has agreed to operate for a
minimum period of 24 months utilizing the seller’s platform. After 24 months, Prozone shall be free to terminate the White Label
Agreement and/or Turnkey Agreement (as applicable) and migrate any domains and customer databases acquired to another platform of Prozone’s
choice. The seller has agreed to ensure that each of the licenses acquired by the Company and included in the acquisition of the Bethard
Business will be transferred to Prozone as soon as practicable, subject to such transfers being permitted under the relevant local regulations.
On
July 13, 2021, the Company and Seller, having met all conditions precedent, consummated the closing of the Bethard acquisition. The Company
paid the Seller EUR 12,000,000 representing the cash due at closing pursuant to the purchase agreement and EUR 1,000,000 pursuant to
the First Amendment. The Second Payment remains payable by October 14, 2021.
ggCircuit
Acquisition
On
June 1, 2021, the Company completed the acquisition of issued and outstanding membership units of ggCIRCUIT LLC (“GGC”).
The acquisition was completed in accordance with the equity purchase agreement dated January 22, 2021 and amended on May 21, 2021. GGC
offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers
and product manufacturers. GGC offers proprietary software management and rewards platforms for esports gaming centers and connects player
communities with publishers and product manufacturers. The total consideration paid at closing was $24,273,211 with $14,100,000 paid
in cash at closing and $900,000 paid through application of loans receivable from GGC, inclusive of operating advances, toward the purchase
consideration. The Company also issued 830,189 shares common stock at closing using a value per share $13.25 pursuant to the purchase
agreement. The fair value of the share consideration paid at closing was determined to be $9,273,211 using the closing share price of
the Company on the date of acquisition.
Helix
Acquisition
On
June 1, 2021, the Company the acquisition of the issued and outstanding membership units of Helix Holdings, LLC (“Helix”).
The acquisition was completed in accordance with the equity purchase agreement dated January 22, 2021 and amended on May 21, 2021. Helix
is an owner and operator of esports centers providing esports programming and gaming infrastructure, and is also the owner of the esports
analytics platform, Genji Analytics, and LANduel, a proprietary player-versus-player esports wagering platform. The total consideration
paid at closing was $15,901,133, with $9,400,000 paid in cash and $600,000 paid through application of loans receivable from Helix, inclusive
of operating advances, toward the purchase consideration. The Company also issued 528,302 shares of common stock at closing using a value
per share of $13.25 pursuant to the purchase agreement. The fair value of the share consideration paid at closing to be $5,901,133 using
the closing share price of the Company on the date of acquisition.
Issuance
of Senior Convertible Note
On
May 28, 2021, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor pursuant
to which we sold a Senior Convertible Note dated June 2, 2021, with an initial principal amount of $35 million (the “Senior Convertible
Note”) in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder. The Convertible Note bears interest at a rate of 8% per annum and matures two years following
the date of issuance (the “Maturity Date”, subject to extension in certain circumstances, including bankruptcy and outstanding
events of default). In addition to the principal amount the Company is required to pay an additional amount equal to 6% of the outstanding
principal amount. After the occurrence and during the continuance of an Event of Default, as defined in the Senior Convertible Note,
the Convertible Note will accrue interest at the rate of 12.0% per annum.
The
Senior Convertible Note is convertible, at the option of the holder, into shares of the Company’s common stock at a conversion
price of $17.50 per share. The Convertible Note is subject to a most favored nations provision and standard adjustments in the event
of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If we enter into any agreement
to issue (or issue) any variable rate securities, the noteholder has the additional right to substitute such variable price (or formula)
for the conversion price.
In
connection with the sale of the Senior Convertible Note, the Company issued Series A Warrants and Series B Warrants. The Series A Warrants
provide the holder of the Senior Convertible Note with the right to purchase 2,000,000 shares of the Company’s common stock at
an exercise price of $17.50 per share. The Series A Warrants expire in 4 years after the issuance date. The Series A Warrants have a
cashless exercise provision provides that no effective registration statement exists and a beneficial ownership limitation of 4.99% which
may be increased or decreased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of
a notice to us of such increase.
The
Series B Warrants provide the holder of the Senior Convertible Note with the right to purchase 2,000,000 shares of the Company’s
common stock at an exercise price of $17.50 per share. The Series B Warrant expires in 2 years after the issuance date. The Series B
Warrants have a cashless exercise provision provides that no effective registration statement exists and a beneficial ownership limitation
of 4.99% which may be increased or decreased up to 9.99%, provided that any such increase will not be effective until the 61st day after
delivery of a notice to us of such increase. The Series B Warrants are only exercisable to the extent that the indebtedness owing under
the Senior Convertible Note is redeemed. For every share of common stock issuable upon conversion of the redemption amount on the Senior
Convertible Note, one warrant share will vest and be eligible for exercise.
On
July 13, 2021, the holder of the Senior Convertible Note consented to the pledge agreement entered into with the Bethard acquisition
discussed above. The holder waived a provision of the Senior Convertible Note prohibiting a pledge of assets, and agreed that such a
lien represented by the pledge shall constitute a “permitted lien” for purposes of Senior Convertible Note.
FLIP
Acquisition
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 Entertainment Associates (“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 (“FLIP acquisition”). 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”). The IP Assignment Agreement was also
subject to Transfer of Undertakings (Protection of Employment) Regulations 2006 pursuant to U.K. labour law, protecting employees whose
business is being transferred to another business. Accordingly, as of the acquisition date, the FLIP employees had become
employees of the Company.
As
consideration for the FLIP acquisition, the Company agreed to pay AHG an aggregate of $1,100,000 payable as follows: (a) $100,000
in cash on the closing date; and (b) that certain number of shares the Company’s restricted common stock, equal to $1,000,000
at a price per share equal to the 30-day weighted average of the Company’s common stock immediately prior to the issuance in accordance
with the following payment schedule (i) that certain number of shares equal to $500,000 issued to AHG on the closing date; and
(ii) that certain number of shares equal to $500,000 of restricted common stock issued to AHG on the sixth (6) month anniversary of the
closing date, subject to the continued employment of certain key employees of Flip as identified in the IP Assignment Agreement.
In
addition to satisfying the cash consideration payable for FLIP acquisition of $100,000, the Company also issued 93,808 shares of common
stock with a fair value $411,817 on the closing date of September 2, 2020. The Company had estimated the contingent share consideration
payable based on the retention of certain key FLIP employees to have a fair value of $500,000 on the closing date. The contingent share
consideration was settled on March 3, 2021 through the issuance of 93,808 shares of common stock have a market value on the date of settlement
of $1,805,804, resulting in the recognition of $1,305,804 as the change in fair value of contingent consideration in the consolidated
statement of operations for the year ended June 30, 2021.
For
the period up until the 4th anniversary following the FLIP acquisition, the terms of the acquisition provide that
AHG may (i) use, reproduce and exploit the AHG Software Copy (as defined in the license agreement) on an exclusive basis within
the jurisdictions outlined therein; (ii) after the 4th anniversary use, reproduce and exploit the AHG Software Copy on a non-exclusive
basis anywhere in the world; and (iii) at any time after the FLIP acquisition change, copy, alter, add to, take from, adapt or
translate the Software in order to create, use and exploit versions of the Software created for AHG and the Company in accordance with
the terms of License Agreement.
In
consideration of the development of software customized by the Company pursuant to certain modifications as set forth in the license
agreement, as well the installation of such software and the knowledge transfer services (“Knowledge Transfer”)
provided by the Company in order to assist AHG in its project of creating custom software to adapt to its own needs, AHG shall
pay the Company the sum of thirty thousand pounds (30,000 GBP) per month from the FLIP acquisition date until such development
and Knowledge Transfer are completed. In consideration for the Company providing any further support services, AHG shall pay to the Company
such fee as may be agreed in writing between the parties from time to time based on a developer day rate of £500 per day.
EGL
Acquisition
On
January 21, 2021, the Company completed its acquisition of Phoenix Games Networks Limited, a company incorporated in the United Kingdom,
acquiring all of the issued and outstanding share capital of Phoenix pursuant to a purchase agreement dated December 21, 2020. Phoenix,
through its wholly owned subsidiary Xseries Limited, operates the Esports Gaming League (“EGL”), a business-to-business (“B2B”)
centric provider of live and online events and tournaments where gamers can compete and engage with content relating to esports and video
games. The Company acquired the business herein referred to by its brand name EGL for
total purchase consideration of $2,975,219. The total purchase consideration included $481,386 of cash paid at closing, (net cash paid
at closing being $477,350 after adjustment for cash acquired of $4,036), and the issuance of 292,511 shares of common stock with a fair
value of $2,193,833 as determined using the closing share price on the date of acquisition. The purchase consideration also included
an estimate of $300,000 for contingent consideration (“Holdback Consideration”) payable by the Company in cash and share
consideration based on the progress of EGL towards the achievement of certain revenue targets based on the ability of EGL to achieve
certain revenue targets by May 16, 2021. The Holdback Consideration was settled by the Company for $145,153 paid in cash, (increasing
the total cash paid for EGL to $622,503), and through issuance of 63,110 shares of common stock with a fair value of $597,650, as determined
using the closing price on the date of settlement. The incremental consideration paid in excess of the amount estimated at Holdback Consideration
of $442,803 was recorded to change in fair value of contingent consideration within the statement of operations for the year ended June
30, 2021.
The
terms of the EGL purchase agreement may further require the Company to pay an additional $2,750,000 (equivalent to approximately £2,000,000
of purchase price using exchange rates at the acquisition date) in contingent earnout consideration (“Earnout Consideration”)
if EGL is to achieve an earnings benchmark on the 18 month anniversary of the closing date. On the date of acquisition, the Company determined
that the likelihood of a payout of the Earnout Consideration was remote and therefore did not assign a value to the Earnout Consideration
on the date of acquisition. This considers the Earnout Consideration benchmark increases during the earnout period for amounts invested
by the Company in the operations of EGL. The Earnout Consideration benchmark used to determine the minimum threshold for payment of additional
purchase consideration payable by the Company also increases should there be an increase in the value of the share consideration that
was issued by the Company on the date of acquisition.
Lucky
Dino Acquisition
On
March 1, 2021, the Company completed its acquisition of the operating assets and specified liabilities that comprise the online gaming
operations of Lucky Dino Gaming Limited, a company registered in Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered
in Estonia (collectively referred to as “Lucky Dino”). Lucky Dino is licensed by the Malta Gaming Authority to operate online
casinos under four brands, namely luckydino.com, casinojefe.com, kalevalakasino.com, and olaspill.com. The acquisition of the assets
of Lucky Dino was completed in accordance with an asset purchase agreement dated December 14, 2020 resulting in the payment of cash by
the Company of €25,000,000 (approximately $30,133,725 using exchange rates in effect at the acquisition date).
Argyll
Acquisition
On
July 7, 2020, Esports Entertainment Group, Inc. (the “Company”), entered into a stock purchase agreement (the “Purchase
Agreement”), by and among the Company, LHE Enterprises Limited (“LHE”), and AHG Entertainment, LLC (“AHG”)
whereby 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”).
On
July 31, 2020, the Company consummated the closing of the Purchase Agreement. As consideration for the Acquired Companies, the
Company (i) paid AHG $1,250,000 in cash (the “Cash Purchase Price”); (ii) issued to AHG 650,000 shares of common stock
of the Company with a fair value of $3,802,500 (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”).
EEG
iGaming:
In
the EEG iGaming vertical, we have a best-in-class esports betting platform with full casino and sportsbook functionality. Our in-house
gambling software platform, Phoenix, is a modern reimagined sportsbook that caters to both millennial esports bettors as well as traditional
sports bettors. Phoenix is being developed through the assets and resources of FLIP Sports Limited, a software development company, that
we acquired in September 2020.
EEG’s
goal is to be a leader in the large and rapidly growing sector of esports real-money wagering, offering fans the ability to wager on
professional esports events in a licensed and secure environment. From February 2021, under the terms of our Maltese Gaming Authority
(MGA) license, we are now able to accept wagers from residents of over 180 jurisdictions including countries within the European Union,
Canada, New Zealand and South Africa, on our ‘‘Vie.bet’’ platform.
Alongside
the Vie.bet esports focused platform, EEG owns and operates:
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Argyll
Entertainment’s flagship Sportnation.bet online sportsbook and casino brand, licensed in the UK and Ireland,
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Lucky
Dino’s 5 online casino brands licensed by the MGA on its in-house built iDefix casino-platform, and
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The
recently acquired Bethard online sportsbook and casino brands, operating under MGA, Spanish, Irish and Swedish licenses.
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On
August 17, 2020, we announced entry into a multi-year partnership with Twin River Worldwide Holdings, Inc, now Bally’s
Corporation, to launch their proprietary mobile sports betting product, ‘‘Vie.gg’, in the state of New Jersey,
as we intend to have this platform, which was previously licensed in Curacao, live in the state in prior to December 31,
2021, as a real-money wagering ‘’skin’’ of Bally’s
Atlantic City, the holder of a New Jersey Casino License, Internet Gaming Permit and Sports Wagering License. However, there is no assurance
that the ‘’live’’ date will be met, as there are numerous technology and other approvals required before going
‘’live’’. See Item IA, Risk Factors.
In
total, we currently hold five Tier-1 gambling licenses (Malta, UK, Ireland, Spain and Sweden) and are in the process of obtaining
a casino service industry enterprise (‘’CSIE’’) license in New Jersey. Our acquisitions of Argyll Entertainment,
Lucky Dino and Bethard provide a foothold in mature markets in Europe into which we believe we can cross-sell our esports offerings.
EEG
Games:
In
the EEG Games vertical, our focus is on providing esports entertainment experiences for every gamer. We do this through a combination
of 1) in-person experiences (at Helix Centers), 2) online tournaments (through recently acquired EGL tournament platform), and 3) player-vs-player
wagering (through our soon-to-be-released LANDuel product). In order to provide exposure for our platforms, we have signed numerous exclusive
marketing relationships with professional sports organizations across the NFL, NBA, NHL and MLS.
Underpinning
our EEG Games vertical is our proprietary infrastructure software, ggCircuit. ggCircuit is the leading provider of local area network
(“LAN”) center management software, enabling us to seamlessly manage mission critical functions such as game licensing and
payments.
Competition/Competitive
Advantages/Operational Strengths
The
online gambling and wagering industry is increasingly competitive. With relatively low barriers to entry, new competitors are entering
the esports wagering and video game tournament segments. In both of these segments, there currently exist several major competitors.
Most of EEG’s current competitors, including Unikrn, bet365, William Hill, Betway, and Pinnacle Sports, have far greater resources
than us.
We believe the following strengths position us for sustainable growth:
Management
Team and Key Personnel Experience: EEG’s Board includes senior managers with extensive experience in online gambling, esports,
information technology, compliance, regulation, accounting and finance. EEG’s Officers and management include individuals with
extensive experience in online gambling, esports, information technology, marketing, business development, payment processing, compliance,
regulation, accounting, finance and customer service.
Unique
Positioning within Digital Gaming: EEG is a digital gaming company with an esports-first focus and digital gaming company with
full esports businesses; leading the effort to broaden legislation for betting on esports competitions. We are uniquely focused on connecting
to customers across a broad set of retail and digital businesses to achieve greater revenue, scale, and profitability, as well as shaping
esports infrastructure to facilitate omni-channel betting.
Top
Tier Technology Assets:
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EEG
has acquired businesses with state-of-the-art B2B/B2C technologies across esports competition infrastructure, for in-person and internet-based
competitions, for tournaments, esports wagering and skill-based betting.
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Genji
Analytics: an established esports analytics provider for game publishers and esports leagues included with the acquisition of Helix
facilitates betting through provision of customized marketing, better betting lines and greater customer retention.
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ggCircuit
Proprietary Platform: ggCircuit’s ggLeap cloud-based management software solution enables Gaming Centers to run games through
the stat integrated client, reward gamers for playing the games they love, as well as run their own local tournaments. ggCircuit
is currently used by over 600 LAN centers and connects with over 2 million gamers monthly. In the future, we plan to offer products
such as player-vs-player betting to the gamers on the network.
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Lucky
Dino’s online casino platform - iDefix, a modern online casino platform licensed in Malta, upon which the Lucky Dino’s
online casino brands operate. iDefix provides a full technical solution for casino operations, with various management tools as well
as in-depth business intelligence reporting and analysis. The technology is built on a scalable event-driven micro-services-based
architecture offering advanced automation features including AML compliance and KYC handling, responsible gambling management and
monitoring, fraud and bonus abuse detection, as well as gamification, CRM and bonus management.
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Argyll’s
proprietary sports betting rewards and bonus efficiency technology, provides an industry-leading customer loyalty program, driving
above industry customer retention rates and player lifetime values. The Program helped earn Argyll the Innovative Start-up of the
Year award and the 2018 EGR Marketing & Innovation Awards, and will be able to be leveraged across all of EEG’s verticals.
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Argyll’s
technology and Lucky Dino’s full iGaming tech stack will accelerate the development of EEG’s new Vie esports-centric
platform, and generate synergies from further digital gaming acquisitions.
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Strong
Brand Partnerships: EEG has already partnered, via “affiliate Marketing Agreements’’, with twelve leading brands
in pro sports, including football, hockey, basketball and soccer, with an aggregate fanbase of over 50 million, as well as with several
individual social media influencers.
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Pro
sports team partnerships lever huge customer databases for esports tournament participation and betting, lowering EEGs customer acquisition
costs.
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As
a “Marketing Affiliate’’, the esports team will provide their fans with a link to the online tournament platform
of EGL, where the fan can enter tournaments to win team merchandise, and subscribe to subsequent tournaments.
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Helix
LAN Center Expertise: Our Helix team prides themselves on building LAN Centers in an efficient manner and programming the centers to
engage local communities. This programming (community tournaments, after-school camps, pro-team watch parties) is what drives traffic
to these centers on a day-in day-out basis. Because of the team’s expertise in this area, we plan to drive further engagement through
universities, theme parks and pro sports teams by building and managing centers on their properties.
Growth
Strategy
In
the future, we intend to:
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Expand
our Esports services into more of the 41 states where skill-based gambling is legal, enhance our Product offering, as well as create
relationships with players that will migrate into our Vie.gg real-money wagering platform.
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Expand
our Esports Wagering services into more jurisdictions, utilizing the MGA gaming license, which provides opportunity for access into
over 180 countries, as well as the recent multi-year partnership with Bally’s Corporation, to launch our proprietary mobile
sports betting product in the State of New Jersey, as a real-money wagering ‘’skin’’ of Bally’s
Atlantic City, the holder of a New Jersey Casino License, Internet Gaming Permit and a Sports Wagering License. In accordance with
standard practice, prior to our CSIE Licensure, we will request approval from the New Jersey Division of Gaming Enforcement (‘’DGE’’)
to operate pursuant to a transactional waiver order.
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Continue
with our M&A strategy in the iGaming and Traditional Sports Betting space, to acquire profitable operators in different jurisdictions,
that will also allow for cross-pollination of services (Sportsbook, Casino and Esports).
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Future
Products and Services:
Online
Esports Tournament Play
EEG
intends to offer players from around the world, including the United States, (unless prohibited in a state or international jurisdiction),
the ability to enter and participate in online video game tournaments and win cash prizes, via our enhanced EGL Tournament platform.
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 their 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 them determine which markets they 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
EEG
received a Gaming Service License for online betting from the Malta Gaming Authority in April 2020, established a brick and mortar office
in such jurisdiction and commenced online gaming operations in that jurisdiction in February 2021, through the Vie.gg and Argyll Brands.
The Lucky Dino and Bethard brand acquisitions added additional Spanish and Swedish licenses, together with UK and Irish licenses that
Argyll already operates under. In order to effectively penetrate international markets, we intend to translate our website into several
additional languages and offer customer service and technical support in the local language of key markets.
EEG’s
Online Wagering Platforms
According
to Zion Market Research’s, Online Gambling & Betting Market by Game Form (Poker, Casino, Sports Betting, Bingo, Lottery, Horse
Racing Betting, and Others) and by Component (Hardware, Software, and Service): Global Industry Perspective, Comprehensive Analysis and
Forecast, 2017 – 2024, the online gambling market represents one of the fastest growing segments of the gambling industry. Zion
Market estimated the size of the global online gambling market in 2018 was in excess of US$45.8 billion and is projected to reach US$94.4
billion by 2024.
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 acquisition of Lucky Dino included the acquisition of iDefix, a modern online casino platform licensed in Malta, that the Lucky Dino
online casino brands operate on. iDefix provides a full technical solution for casino operations, with various management tools as well
as in-depth business intelligence reporting and analysis. The Argyll and Bethard Brands offer online users traditional casino style games
such as roulette, blackjack, or slots, as well as offering online wagering on traditional sporting events such as soccer, horse racing
and football.
On
the Vie.gg esports-focused wagering platform, a player can place a bet on a team participating in any number of tournaments which are
scheduled to be held in the upcoming weeks. They also maintain a “how to play” section on the website which provides players
with instructional videos on placing bets as well as other pieces of information that may be beneficial to an inexperienced player or
a new user of our website. Additionally, we maintain a “frequently asked questions” section which provides customers with
the ability to easily navigate general questions relating to the website, personal account information, payment processing, betting rules
and procedures as well as tips.
Marketing
and Sales Initiatives
The
Company has several sponsorship marketing agreements in place for its website as well as an extended marketing agreement with Dignitas,
an esports brand owned by Harris Blitzer sports and entertainment with multiple professional teams playing several titles with over a
million fans worldwide.
EEG
is looking to expand into new geographic territories by obtaining licenses to operate in those territories. The need for hands-on implementation
in these territories and support will require investment in additional marketing activities, offices, and other overhead.
We
will also accelerate our expansion if we find complementary businesses that we are able to acquire in other markets. Marketing efforts
to expand into new territories have included esports team and tournament sponsorship, affiliate marketing, social media advertising,
content creation, and attendance at esports and gaming events in addition to personal contact with other industry leaders.
We
plan to increase our marketing efforts and awareness of our brands through our websites, www.vie.gg and www.sportnation.bet,
as well as future offerings by:
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Educating
sports betting consumers to bet on esports and we want gamers to start betting on esports.
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Sponsoring
professional esports teams and tournaments that have a global reach.
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Working
with sports and gaming celebrities and social media influencers who have an interest in video games and esports to generate new customers.
We intend to increase our efforts in attracting esports players and other celebrities who have an interest in video games and esports.
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Using
a multichannel approach focused on acquiring and retaining customers we intend to utilize multiple social media platforms to promote
our wagering business including, but not limited to, Facebook Twitter, Instagram, Snapchat, TikTok, Youtube, Twitch, Whatsapp, QQ,
WeChat, email and SMS messages and using online advertisements, paid search optimization, and various social media campaigns to increase
our online presence and drive traffic to our website. We intend to increase investments in online advertisements, including esports
gambling-related websites. We also intend to continue to invest in optimizing the Company’s website in an effort to become
the premier esports gaming and gambling website in the industry.
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Regulations
Affecting our Business
The
offering and operation of online real-money gambling platforms and related software and solutions is subject to extensive regulation
and approval by various national, federal, state, provincial, tribal and foreign agencies (collectively, “gaming authorities”).
Gambling laws are usually based on public policy declaration designed to protect the integrity of the gaming industry and its consumers,
as well as to enhance economic development and tourism and to increase tax revenue. To accomplish these goals, gambling laws require
EEG to obtain licenses or findings of suitability from gaming authorities for EEG, including each of our subsidiaries engaged in these
activities, and certain of our directors, officers, employees and in some instances, significant shareholders (typically beneficial owners
of more than 5% of a company’s outstanding equity unless waived as a passive institutional investor). The criteria used
by gambling authorities to make determinations as to qualification and suitability of an applicant varies among jurisdictions, but generally
require the submission of detailed personal and financial information followed by a thorough and sometimes lengthy investigation. Gaming
authorities have broad discretion in determining whether an applicant qualifies for licensing or should be found suitable. Gambling authorities
generally look, at a minimum, to the following criteria when determining to grant a license or finding of suitability, including
(i) the financial stability, integrity and responsibility of the applicant, (ii) the quality, security and regulatory compliance of
the applicant’s online real-money platform and gaming equipment and related software, as applicable, and (iii) the history and
associations of the applicant. Gambling authorities may, subject to certain administrative proceeding requirements, (i) deny an application,
or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, and (ii) fine any person
licensed, registered or found suitable or approved. Notwithstanding the foregoing, some jurisdictions explicitly prohibit gaming in all
or certain forms and we will not market our gambling services in these jurisdictions. If any director, officer or employee of EEG fails
to qualify for a license or is found unsuitable (including due to the failure to submit the required documentation) by a gaming authority,
EEG may deem it necessary, or be required to, sever its relationship with such person, which may include terminating the employment of
any such person. Gambling authorities have the right to investigate any individual or entity having a material relationship with EEG,
to determine whether such individual or entity is suitable or should be licensed to do business as a business associate of ours. In addition,
certain gambling authorities monitor the activities of the entities they regulate both in their respective jurisdiction and in other
jurisdictions to ensure that these entities are in compliance with local standards on a worldwide basis.
On
May 14, 2018, the Supreme Court of the United States struck down the Professional and Amateur Sports Protection Act, a 1992 law that
barred state-authorized sports gambling with some exceptions and made Nevada the only state where a person could wager on the results
of a single game. Since the Supreme Court’s decision, sports gambling has commenced in numerous states and many more
states have enabling legislation pending. We plan to explore expansion of our esports online wagering platform into other US States,
at the appropriate time, and seek licenses in the United States in addition to the New Jersey license
The
Unlawful Internet Gambling Enforcement Act of 2006 (“UIEGA”) made it a federal offense, punishable by up to five years in
prison, for a business to accept payments “in connection with the participation of another person in unlawful internet gambling.”
In support of such new prohibitions, the UIGEA uses a variety of terms — some of which are ambiguous or undefined. Initially, the
UIGEA broadly defines a “bet or wager” as: the staking or risking by any person of something of value upon the outcome of
a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person
will receive something of value in the event of a certain outcome.
Further,
a “bet or wager” specifically includes a chance on a lottery or prize awarded predominantly by chance; a “scheme”
as defined in Title 28, U.S.C. § 3702 relating to government-sponsored amateur or professional sports betting and, “any instructions
or information pertaining to the establishment or movement of funds by the bettor or customer in, to, or from, an account with the business
of betting or wagering.” While this final prohibition incorporates the term “business of betting or wagering,” that
term is not specifically defined anywhere in the UIGEA. The only reference to that term comes in § 5362(2), which states: The term
“business of betting or wagering” does not include the activities of a financial transaction provider, or any interactive
computer service or telecommunications service.
Nonetheless,
the law does contain specific prohibitions. In order to establish a violation of the UIGEA, it must be shown that:
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A
“person” was engaged in the business of betting or wagering;
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2.
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That
person knowingly accepted a financial instrument or proceeds thereof; and,
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3.
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That
instrument was accepted (by the person) in connection with the participation of another person in “unlawful Internet gambling.”
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In
the context of this statute “unlawful Internet gambling” is defined as follows:
To
place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet
where such bet or wager is unlawful under any applicable Federal or State law in the state or tribal lands in which the bet or wager
is initiated, received, or otherwise made.
Therefore,
the UIGEA only applies to online gambling transactions that are already prohibited by other state, federal, or tribal laws. Therefore,
in order for the financial transaction to be prohibited by § 5363 of the UIGEA, the bet or wager must be “initiated, received,
or otherwise made” in a place where such activity (the bet of wager) violates preexisting state, federal, or tribal law.
Similarly, several
other laws provide federal law enforcement with the authority to enforce and prosecute gambling operations conducted in violation of
underlying state gambling laws. As with UIEGA, these enforcement laws include the Illegal Gambling Business Act and the Travel Act. No
violation of the UIGEA, the Illegal Gambling Business Act or the Travel Act can be found absent a violation of an underlying state law
or other federal law. In addition, the Wire Act of 1961 (the “Wire Act”) provides that anyone engaged in the business of
betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers
or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication
which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of
bets or wagers, will be fined or imprisoned, or both. However, the Wire Act notes that it shall not be construed to prevent the transmission
in interstate or foreign commerce of information for use in news reporting of sporting events or contests, or for the transmission of
information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on
that sporting event or contest is legal into a State or foreign country in which such betting is legal. In
2018, the U.S. Department of Justice (the “DOJ”) reversed its previously-issued opinion published in 2011, which
stated that interstate transmissions of wire communications that do not relate to a “sporting event or contest” fall outside
the purview of the Wire Act. The DOJ’s updated opinion concluded instead that the Wire Act was not limited to wagering on sporting
events or contests, and that certain of its provisions apply to non-sports-related wagering activity. In June 2019, a federal district
court in New Hampshire ruled that the DOJ’s new interpretation of the Wire Act was erroneous and vacated the DOJ’s new opinion.
On January 20, 2021, the First Circuit reaffirmed the district court’s decision. The DOJ did not appeal to the Supreme Court. However,
while a positive result, arguably the case is binding precedent only within the First Circuit, and only applies to the specific parties
in the lawsuit. Accordingly, the Wire Act could still impact our ability to engage in online internet gaming in the future
At
the current time, we are able to accept wagers on our vie.gg website from residents of over 149 jurisdictions including Canada, Japan,
Germany and South Africa. We do not accept wagers from United States residents at this time and therefore the bet or wager on our platform
is not “initiated, received, or otherwise made” in a place where such activity violates preexisting state, federal, or tribal
law.
Intellectual
Property
We
have not filed to register any patents, trade names or trademarks in any jurisdictions in relation to our Vie.gg brand, but we do intend
to file applications to register patents, tradenames or trademarks in the near future.
Within
the European Union, Argyll Entertainment owns a registered trademark for its SportNation brand, and Esports Entertainment Malta owns
several trademarks for its Lucky Dino, Kalevala, Casinojefi and Fiksukasino brands. ggCircuit, LLC also owns the ggCircuit trademark.
Esports
Entertainment Group has applied for trademarks for its VIE and EGL brands, and are awaiting them being officially granted by the respective
IP Office.
Item
1A. Risk Factors.
Risks
Related to Our Business
Since
we have a limited operating history and have only recently commenced revenue producing operations, it is difficult for potential investors
to evaluate our business.
While
we were incorporated under the laws of Nevada in July 2008, we did not begin to commence revenue generating operations until July 2020
with the acquisition of Argyll Entertainment. Since this acquisition, we also acquired several businesses including FLIP, EGL, Lucky
Dino, ggCircuit, Helix and Bethard. Prior to these acquisitions, our operations had focused primarily on the design, development and
testing of our wagering systems. We continue to be subject to all the risks and uncertainties inherent in a new business and sale of
new products and services. As a result, we still must establish many corporate functions necessary to operate our business, including
finalizing our administrative structure, continuing our product development, assessing and expanding our marketing activities, implementing
financial systems and controls and personnel recruitment. Accordingly, you should consider the Company’s prospects in light of
the costs, uncertainties, delays, and difficulties frequently encountered by companies that are in a development stage. You should carefully
consider the risks and uncertainties that a company, such as ours, with a limited operating history will face. In particular, you should
consider that we cannot provide assurance that we will be able to:
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successfully
implement or execute our current business plan;
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maintain
our management team;
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raise
sufficient funds in the capital markets to effectuate our business plan;
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attract,
enter into or maintain contracts with, and retain customers; and/or
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compete
effectively in the extremely competitive environment in which we operate.
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If
we cannot successfully accomplish any of the foregoing objectives, our business may not succeed.
We
have a history of accumulated deficits, recurring losses and negative cash flows from operating activities. We may be unable to achieve
or sustain profitability.
We
have only recently commenced revenue producing operations during the year ended June 30, 2021 through the previously mentioned
acquisitions. If we are unable to increase revenues in future periods, we will not be able to achieve and maintain profitability.
Beyond this, we may incur significant losses in the future for a number of reasons including other risks described in this document,
and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not ever
be able to achieve profitability. We incurred negative cash flows from operating activities and recurring net losses in fiscal years
2021 and 2020. As of June 30, 2021, and 2020, our accumulated deficit was $46,908,336 and $20,535,602,
respectively. These factors, among others, raised substantial doubt about our ability to continue as a going concern.
Our
quarterly results can fluctuate and if we fail to meet the expectations of analysts or investors, our stock price and the value of your
investment could decline substantially.
The
betting operations of the Company are subject to the seasonal variations dictated by the sporting calendar, which may have an effect
on its financial performance. Traditional sports have an off-season that can cause a corresponding, temporary decrease in their respective
revenues. The Company’s ability to generate revenues is also affected by the scheduling of major events that do not occur annually.
Cancellation
or curtailment of significant sporting events, for example due to adverse weather, traffic or transport disruption or civil disturbances
or the outbreak of infectious diseases, or the failure of certain sporting teams to qualify for sporting events, may adversely impact
the business, financial condition and results of operations of the Company for the relevant period.
We
may require additional capital to support our growth plans, and such capital may not be available on terms acceptable to us, if at all.
This could hamper our growth and adversely affect our business.
We
intend to make significant investments to support our business growth and may require additional funds to respond to business challenges,
including the need to develop new offerings and features or enhance our existing offerings and features, improve our operating infrastructure
or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure
additional funds. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand,
our operating performance, capital markets conditions and other factors. If we raise additional funds by issuing equity, equity-linked
or debt securities, those securities may have rights, preferences or privileges senior to the rights of our currently issued and outstanding
equity or debt, and our existing shareholders may experience dilution. If we are unable to obtain additional capital when required, or
on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges or
unforeseen circumstances could be adversely affected, and our business may be harmed.
We
may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses
into our company or otherwise manage the growth associated with multiple acquisitions.
As
part of our business strategy, we have made, and we intend to continue to make, acquisitions as opportunities arise to add new or complementary
businesses, products, brands or technologies. In some cases, the costs of such acquisitions may be substantial, including as a result
of professional fees and due diligence efforts. There is no assurance that the time and resources expended on pursuing a particular acquisition
will result in a completed transaction, or that any completed transaction will ultimately be successful. In addition, we may be unable
to identify suitable acquisition or strategic investment opportunities, or may be unable to obtain any required financing or regulatory
approvals, and therefore may be unable to complete such acquisitions or strategic investments on favorable terms, if at all. We may decide
to pursue acquisitions with which our investors may not agree and we cannot assure investors that any acquisition or investment will
be successful or otherwise provide a favorable return on investment. In addition, acquisitions and the integration thereof require significant
time and resources and place significant demands on our management, as well as on our operational and financial infrastructure. In addition,
if we fail to successfully close transactions or integrate new teams, or integrate the products and technologies associated with these
acquisitions into our company, our business could be seriously harmed. Acquisitions may expose us to operational challenges and risks,
including:
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the
ability to profitably manage acquired businesses or successfully integrate the acquired businesses’ operations, personnel,
financial reporting, accounting and internal controls, technologies and products into our business;
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increased
indebtedness and the expense of integrating acquired businesses, including significant administrative, operational, economic, geographic
or cultural challenges in managing and integrating the expanded or combined operations;
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entry
into jurisdictions or acquisition of products or technologies with which we have limited or no prior experience, and the potential
of increased competition with new or existing competitors as a result of such acquisitions;
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diversion
of management’s attention and the over-extension of our operating infrastructure and our management systems, information technology
systems, and internal controls and procedures, which may be inadequate to support growth;
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the
ability to fund our capital needs and any cash flow shortages that may occur if anticipated revenue is not realized or is delayed,
whether by general economic or market conditions, or unforeseen internal difficulties; and
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the
ability to retain or hire qualified personnel required for expanded operations.
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Our
acquisition strategy may not succeed if we are unable to remain attractive to target companies or expeditiously close transactions. Issuing
shares of Class A common stock to fund an acquisition would cause economic dilution to existing stockholders. If we develop a reputation
for being a difficult acquirer or having an unfavorable work environment, or target companies view our Class A common stock unfavorably,
we may be unable to consummate key acquisition transactions essential to our corporate strategy and our business may be seriously harmed.
Risks
that impact our customers may impact us.
Because
we generate website traffic through our affiliate marketing program, if participants in our affiliate marketing program see a slowdown
in business or website traffic it may lead to fewer visitors on our website, which could have an adverse effect on our business.
Because
four of our directors and a substantial portion of our assets are located in jurisdictions other than the United States and Canada, you
may have no effective recourse against the directors not located in the United States and Canada for misconduct and may not be able to
enforce judgment and civil liabilities against these directors.
Four
of our directors and a substantial portion of our assets are or may be located in jurisdictions outside the U.S. As a result, a person
may not be able to affect service of process within the U.S. on our directors and officers. A person also may not be able to recover
against them on judgments of U.S. courts or to obtain original judgments against them in foreign courts, including judgments predicated
upon civil liability provisions of the U.S. federal securities laws.
We
are vulnerable to additional or increased taxes and fees.
We
believe that the prospect of raising significant additional revenue through taxes and fees is one of the primary reasons that certain
jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant taxes and fees in addition
to the normal federal, state, provincial and local income taxes and such taxes and fees may be increased at any time. From time to time,
legislators and officials have proposed changes in tax laws or in the administration of laws affecting the gaming industry. Many states
and municipalities, including ones in which we operate, are currently experiencing budgetary pressures that may make it more likely they
would seek to impose additional taxes and fees on our operations. It is not possible to determine the likelihood or extent of any such
future changes in tax laws or fees, or changes in the administration of such laws; however, if enacted, such changes could have a material
adverse impact on our business.
Our
growth prospects depend on the legal status of real-money gaming in various jurisdictions, including within the United States, and legalization
may not occur in as many states or countries as we expect, or may occur at a slower pace than we anticipate. Additionally, even if jurisdictions
legalize real money gaming, this may be accompanied by legislative or regulatory restrictions and/or taxes that make it impracticable
or less attractive to operate in those jurisdictions, or the process of implementing regulations or securing the necessary licenses to
operate in a particular jurisdiction may take longer than we anticipate, which could adversely affect our future results of operations
and make it more difficult to meet our expectations for financial performance.
A
number of US states have legalized, or are currently considering legalizing, real money gaming, and our business, financial condition,
results of operations and prospects are significantly dependent upon legalization of real money gaming. If a large number of additional
states or the federal government enact real money gaming legislation and we are unable to obtain, or are otherwise delayed in obtaining
the necessary licenses to operate online sports betting or iGaming websites in U.S. jurisdictions where such games are legalized, our
future growth in online sports betting and iGaming could be materially impaired.
As
we enter into new jurisdictions, states or the federal government may legalize real money gaming in a manner that is unfavorable to us.
As a result, we may encounter legal, regulatory and political challenges that are difficult or impossible to foresee and which could
result in an unforeseen adverse impact on planned revenues or costs associated with the new opportunity. For example, certain states
require us to have a relationship with a retail operator for online Sportsbook access, which tends to increase our costs of revenue.
States that have established state-run monopolies may limit opportunities for participants like us. States also impose substantial tax
rates on online sports betting and iGaming revenue, in addition to the federal excise tax of 25 basis points on the amount of each wager.
As most state product taxes apply to various measures of modified gross profit, tax rates, whether federal- or state-based, that are
higher than we expect will make it more costly and less desirable for us to launch in a given jurisdiction, while tax increases in any
of our existing jurisdictions may adversely impact our profitability.
Therefore,
even in cases in which a jurisdiction purports to license and regulate sports betting or iGaming, the licensing and regulatory regimes
can vary considerably in terms of their business-friendliness and at times may be intended to provide incumbent operators with advantages
over new licensees. Therefore, some “liberalized” regulatory regimes are considerably more commercially attractive than others.
Furthermore,
in the online real money gaming industry, a significant “first mover” advantage exists. Our ability to compete effectively
in respect of a particular style of online real money gaming in the United States may be premised on introducing a style of gaming before
our competitors. Failing to do so (“move first”) could materially impair our ability to grow in the online real money gaming
space. We may fail to accurately predict when online real money gaming will be legalized in significant jurisdictions. The legislative
process in each state and at the Federal level is unique and capable of rapid, often unpredictable change. If we fail to accurately forecast
when and how, if at all, online real money gaming will be legalized in additional state jurisdictions, such failure could impair our
readiness to introduce online real money gaming offerings in such jurisdictions which could have a material adverse impact on our business.
Our
business is subject to online security risk, including security breaches, and loss or misuse of our stored information as a result of
such a breach, including customers’ personal information, could lead to government enforcement action or other litigation, potential
liability, or otherwise harm our business.
We
receive, process, store and use personal information and other customer data. There are numerous federal, state and local laws regarding
privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data. Any failure or perceived
failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related
legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information
or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy
groups or others and could cause our customers to lose trust in us which could have an adverse impact on our business. In the area of
information security and data protection, many states have passed laws requiring notification to customers when there is a security breach
for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information
security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these types of
laws may increase in the future as a result of changes in interpretation or changes in law. Any failure on our part to comply with these
types of laws may subject us to significant liabilities.
Third
parties we work with, such as vendors, may violate applicable laws or our policies, and such violations may also put our customers’
information at risk and could in turn have an adverse impact on our business. We are also subject to payment card association rules and
obligations under each association’s contracts with payment card processors. Under these rules and obligations, if information
is compromised, we could be liable to payment card issuers for the associated expense and penalties. If we fail to follow payment card
industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant
increase in payment card transaction costs.
Security
breaches, computer malware and computer hacking attacks have become more prevalent in our industry. Many companies, including ours, have
been the targets of such attacks. Any security breach caused by hacking which involves efforts to gain unauthorized access to information
or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the
inadvertent transmission of computer viruses could harm our business. Though it is difficult to determine what harm may directly result
from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network
infrastructure to the satisfaction of our players may harm our reputation and our ability to retain existing players and attract new
players.
If
unauthorized disclosure of the source code we currently license we could potentially lose future trade secret protection for that source
code. This could make it easier for third parties to compete with our products by copying functionality which could adversely affect
our revenue and operating margins. Unauthorized disclosure of source code also could increase security risks.
Because
the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not
recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
We have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches,
including systems and processes designed to reduce the impact of a security breach at a third party vendor; however, such measures cannot
provide absolute security.
Risks
related to our reliance on third party technology, platforms and software (“third-party software”), and any failures, errors,
defects or disruptions in such third-party software could diminish our brand and reputation, subject us to liability, disrupt our business
and adversely affect our operating results and growth prospects.
We
rely on third party software that is critical to the performance of our platform and offerings and to user satisfaction, the principal
suppliers being SB Tech for our Argyll and Bethard Brands, and Betconstruct, for our Vie.bet and SportNation.com brands.
If
there is any interruption to the third-party software provided by these suppliers or their products or services are not as scalable as
anticipated or at all, or if there are problems in upgrading such products or services, our business could be adversely affected, and
we may be unable to find adequate replacement services on a timely basis or at all and/or at a reasonable price. Additionally, third-party
software may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch. If a particular
product offering is unavailable when end users attempt to access it or navigation through our platforms is slower than they expect, users
may be unable to place their bets and may be less likely to return to our platforms as often, if at all. Furthermore, programming errors,
defects and data corruption could disrupt our operations, adversely affect the experience of our users, harm our reputation, cause our
users to stop utilizing our platforms, divert our resources and delay market acceptance of our offerings, any of which could result in
legal liability to us or harm our business, financial condition, results of operations and prospects. Moreover, end users are discriminating
about the nature of the products offered and our suppliers do not provide new and improved products on a regular basis, we may lose market
share.
There
is a risk that if the contracts with such third parties are terminated and not renewed, or not renewed on favorable terms, or if they
do not get the level of support (in terms of updates and technical assistance) they require as we grow, this will materially impact upon
our financial condition and performance going forward. There may be circumstances in which we wish to terminate our arrangements with
such suppliers due to poor performance or other reasons but we are unable to do so. Any such circumstance may have a material adverse
effect on our reputation, business, financial condition and results of operations.
We
are dependent upon such software suppliers defending any challenges to their intellectual property; any litigation that arises as a result
of such change could materially impact upon us and, following even if legal actions were successfully defended, such actions could disrupt
our business in the interim, divert management time and result in significant cost and expense for us. Further, any negative publicity
related to any of our third-party partners, including any publicity related to regulatory concerns, could adversely affect our reputation
and brand, and could potentially lead to increased regulatory or litigation exposure.
As
a condition of an ongoing licence, permit or other authorization required for their business, a key supplier to the Company may determine
that a condition of the ongoing use of their products and services, or the continuation of the licence, is that the Company should block
custom from certain territories, which may cause business disruption and loss should the Company either need to switch suppliers at short
notice or discontinue business in certain territories, either permanently (while such suppliers are necessary) or pending the expiry
of contract notice periods and/or the sourcing of alternative suppliers.
We
rely on third-party providers to validate the identity and identify the location of our users, and if such providers fail to perform
adequately, provide accurate information or we do not maintain business relationships with them, our business, financial condition and
results of operations could be adversely affected.
There
is no guarantee that the third-party geolocation and identity verification systems that we rely on will perform adequately, or be effective.
We rely on our geolocation and identity verification systems to ensure we are in compliance with certain laws and regulations, and any
service disruption to those systems would prohibit us from operating our offerings, and would adversely affect our business. Additionally,
incorrect or misleading geolocation and identity verification data with respect to current or potential users received from third-party
service providers may result in us inadvertently allowing access to our offerings to individuals who should not be permitted to access
them, or otherwise inadvertently deny access to individuals who should be able to access our offerings, in each case based on inaccurate
identity or geographic location determination. Our third-party geolocation services provider relies on its ability to obtain information
necessary to determine geolocation from mobile devices, operating systems, and other sources. Changes, disruptions or temporary or permanent
failure to access such sources by our third-party services providers may result in their inability to accurately determine the location
of our users. Moreover, our inability to maintain our existing contracts with third-party services providers, or to replace them with
equivalent third parties, may result in our inability to access geolocation and identity verification data necessary for our day-to-day
operations. If any of these risks materializes, we may be subject to disciplinary action, fines, lawsuits, and our business, financial
condition and results of operations could be adversely affected.
We
rely on third-party payment processors to process deposits and withdrawals made by our users, and if we cannot manage our relationships
with such third parties and other payment-related risks, our business, financial condition and results of operations could be adversely
affected.
We
rely on a limited number of third-party payment processors to process deposits and withdrawals made by our users. If any of our third-party
payment processors terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we
would need to find an alternate payment processor, and may not be able to secure similar terms or replace such payment processor in an
acceptable time frame. Further, the software and services provided by our third-party payment processors may not meet our expectations,
contain errors or vulnerabilities, be compromised or experience outages. Any of these risks could cause us to lose our ability to accept
online payments or other payment transactions or make timely payments to our users, any of which could make our technology less trustworthy
and convenient and adversely affect our ability to attract and retain our users.
Nearly
all of our payments are made by credit card, debit card or through other third-party payment services, which subjects us to certain regulations
and to the risk of fraud. Any introduction of legislation or regulations restricting financial transactions with online gambling
operators or prohibiting the use of credit cards and other banking instruments for online gambling transactions, or any other increase
in the stringency of regulation of financial transactions, whether in general or in relation to the online gambling industry in particular,
may restrict the ability of EEG to accept payment from its customers or facilitate withdrawals by them. Certain governments may seek
to impede the online gambling industry by introducing legislation or through enforcement measures designed to prevent customers or financial
institutions based in their jurisdictions from transferring money to online gambling operations. They may seek to impose embargoes on
currency use, wherever transactions are taking place. This may result in the providers of payment systems for a particular market deciding
to cease providing their services for such market. This in turn would lead to an increased risk of payments due to EEG being misappropriated,
frozen or diverted by banks and credit card companies. We may in the future offer new payment options to users that may be subject
to additional regulations and risks. There may be a limited availability of alternative systems, in particular in light of recent
consolidation in the financial services industry. We are also subject to a number of other laws and regulations relating to the payments
we accept from our users, including with respect to money laundering, money transfers, privacy and information security. If we fail to
comply with applicable rules and regulations, we may be subject to civil or criminal penalties, fines and/or higher transaction fees
and may lose our ability to accept online payments or other payment card transactions, which could make our offerings less convenient
and attractive to our users. If any of these events were to occur, our business, financial condition and results of operations could
be adversely affected.
For
example, if we are deemed to be a money transmitter as defined by applicable regulation, we could be subject to certain laws, rules and
regulations enforced by multiple authorities and governing bodies in the United States and numerous state and local agencies who may
define money transmitter differently. For example, certain states may have a more expansive view of who qualifies as a money transmitter.
Additionally, outside of the United States, we could be subject to additional laws, rules and regulations related to the provision of
payments and financial services, and if we expand into new jurisdictions, the foreign regulations and regulators governing our business
that we are subject to will expand as well. If we are found to be a money transmitter under any applicable regulation and we are not
in compliance with such regulations, we may be subject to fines or other penalties in one or more jurisdictions levied by federal or
state or local regulators, including state Attorneys General, as well as those levied by foreign regulators. In addition to fines, penalties
for failing to comply with applicable rules and regulations could include criminal and civil proceedings, forfeiture of significant assets
or other enforcement actions. We could also be required to make changes to our business practices or compliance programs as a result
of regulatory scrutiny.
If
we fail to detect fraud or theft, including by our users and employees, our reputation may suffer which could harm our brand and reputation
and negatively impact our business, financial condition and results of operations and can subject us to investigations and litigation.
We
have in the past incurred, and may in the future incur, losses from various types of financial fraud, including use of stolen or fraudulent
credit card data, claims of unauthorized payments by a user and attempted payments by users with insufficient funds. Bad actors use increasingly
sophisticated methods to engage in illegal activities involving personal information, such as unauthorized use of another person’s
identity, account information or payment information and unauthorized acquisition or use of credit or debit card details, bank account
information and mobile phone numbers and accounts. Under current credit card practices, we may be liable for use of funds on our products
with fraudulent credit card data, even if the associated financial institution approved the credit card transaction.
Acts
of fraud may involve various tactics, including collusion. Successful exploitation of our systems could have negative effects on our
product offerings, services and user experience and could harm our reputation. Failure to discover such acts or schemes in a timely manner
could result in harm to our operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation,
potentially causing a material adverse effect on our business, financial condition, results of operations and prospects. In the event
of the occurrence of any such issues with our existing technology or product offerings, substantial engineering and marketing resources
and management attention may be diverted from other projects to correct these issues, which may delay other projects and the achievement
of our strategic objectives.
In
addition, any misappropriation of, or access to, users’ or other proprietary information or other breach of our information security
could result in legal claims or legal proceedings, including regulatory investigations and actions, or liability for failure to comply
with privacy and information security laws, including for failure to protect personal information or for misusing personal information,
which could disrupt our operations, force us to modify our business practices, damage our reputation and expose us to claims from our
users, regulators, employees and other persons, any of which could have an adverse effect on our business, financial condition, results
of operations and prospects.
Despite
measures we have taken to detect and reduce the occurrence of fraudulent or other malicious activity on our offerings, we cannot guarantee
that any of our measures will be effective or will scale efficiently with our business. Our failure to adequately detect or prevent fraudulent
transactions could harm our reputation or brand, result in litigation or regulatory action and lead to expenses that could adversely
affect our business, financial condition and results of operations.
We
are required to comply with applicable anti-money laundering and countering the financing of terrorism legislation a breach of which
could lead to government enforcement action or other litigation, potential liability, or otherwise harm our business.
The
Company receive deposits and other payments from customers in the normal course of their business. The receipt of monies from customers
imposes anti-money laundering and other obligations and potential liabilities on the Company. Compliance with all such laws and regulations
creates complex regulatory obligations which involves a risk of large financial penalties (in not being fully compliant) and additional
potential burdens (in being fully compliant). While the Company has processes in place regarding customer profiling and the identification
of customers’ source of funds, such processes may fail or prove to be inadequate whether in respect of the source of customers’
funds or otherwise. Any such failure or inadequacy could have a material adverse effect on the Company’s financial position and
impact upon its licensing obligations.
Handling,
or any form of facilitating the use of criminal property, is a crime in all jurisdictions in which the Company takes material custom
(and going forward will take material custom). In instances where no local licensing regime is in place and there is doubt in connection
with the legality of the remote supply of gambling services, there is a risk that the authorities will claim that money movements in
connection with gambling amounts to money laundering, irrespective of whether the intention is actually to launder money (i.e. to disguise
or conceal its provenance). This gives rise to a risk that when monies are held in (or moved into) certain territories, authorities may
wish to freeze their onward payment, seek to trace money movements into different jurisdictions and recover the relevant sums. This would
give rise to conflicts of law issues (not all the definitions of what comprises criminal property are identical in all jurisdictions)
and what may not amount to money laundering in one jurisdiction may satisfy the definition in that other territory. There is a risk that
should any such claim be brought and be successful, significant funds may have to be repatriated to the jurisdiction bringing a claim,
which would have a significant impact on the profitability of the Company.
We
rely on other third-party data and live-streaming providers for real-time and accurate data and/or live streams for sporting events,
and if such third parties do not perform adequately or terminate their relationships with us, our costs may increase and our business,
financial condition and results of operations could be adversely affected.
We
rely on third-party sports data and live streaming providers to obtain accurate information regarding schedules, results, performance
and outcomes of sporting events and the live streaming of such events, such as horse racing. We rely on this data to determine when and
how bets are settled. We have experienced, and may continue to experience, errors in this data and/or streaming feed which may result
in us incorrectly settling bets. If we cannot adequately resolve the issue with our end users, our end users may have a negative experience
with our offerings, our brand or reputation may be negatively affected and our users may be less inclined to continue or resume utilizing
our products or recommend our platform to other potential users. As such, a failure or significant interruption in our service would
harm our reputation, business and operating results.
Furthermore,
if any of our data and/or live streaming partners terminates its relationship with us or refuses to renew its agreement with us on commercially
reasonable terms, we would need to find an alternate provider, and may not be able to secure similar terms or replace such providers
in an acceptable time frame. Any of these risks could increase our costs and adversely affect our business, financial condition and results
of operations. Further, any negative publicity related to any of our third-party partners, including any publicity related to regulatory
concerns, could adversely affect our reputation and brand, and could potentially lead to increased regulatory or litigation exposure.
We
may be subject to the payment of contributions or fees to sporting bodies or rights holders for the use of their data.
Gambling
operators can be liable to make contributions to sporting bodies whether under regulations or agreement, such as The Horserace Betting
Levy Board in the UK, as a way of ensuring certain revenues generated from betting on sports are used to benefit those sports or related
interests. We may also be required to pay royalties or other types of levy to the organizers of sporting events, or the rights holders
in respect of such, to offer betting markets on such events. Any requirement to pay additional levies, fees or royalties would have a
material adverse effect on our business. In all such cases, the level of any such levy, fee or royalty will be outside the control of
the Company. The Company cannot predict with any certainty what future payments may be required for the success of their business in
the future and what other additional resources will need to be made available to address the conditions which impose fees, royalties
or other levies, as well as sports integrity issues.
The
success, including win or hold rates, of existing or future online betting and casino gaming products depends on a variety of factors
and is not completely controlled by us.
The
sports betting and casino gaming industries are characterized by an element of chance. Accordingly, our Argyll Brands employ theoretical
win rates to estimate what a certain type of sports bet or game, on average, will win or lose in the long run. Net win is impacted by
variations in the hold percentage (the ratio of net win to total amount wagered), or actual outcome, on our games and sports betting
we offer to our users. We use the hold percentage as an indicator of a casino game’s or sports bet’s performance against
its expected outcome. Although each game or sports bet generally performs within a defined statistical range of outcomes, actual outcomes
may vary for any given period. In addition to the element of chance, win rates (hold percentages) may also (depending on the game involved)
be affected by the spread of limits and factors that are beyond our control, such as an end user’s skill, experience and behavior,
the mix of games played, the financial resources of users, the volume of bets placed and the amount of time spent gambling. As a result
of the variability in these factors, the actual win rates on our online casino games and sports bets may differ from the theoretical
win rates we have estimated and could result in the winnings of our casino game’s or sports bet’s users exceeding those anticipated.
The variability of win rates (hold rates) also have the potential to negatively impact our financial condition, results of operations,
and cash flows.
Participation
in the sports betting industry exposes us to trading, liability management and pricing risk. We may experience lower than expected profitability
and potentially significant losses as a result of a failure to determine accurately the odds in relation to any particular event and/or
any failure of its sports risk management processes.
Our
fixed-odds betting products involve betting where winnings are paid on the basis of the stake placed and the odds quoted. Odds are determined
with the objective of providing an average return to the Company over a large number of events and therefore, over the long term, gross
win percentage is expected to remain fairly constant. However, there can be significant variation in gross win percentage event-by-event
and day-by-day. As a result, in the short term, there is less certainty of generating a positive gross win, and we may experience significant
losses with respect to individual events or betting outcomes, in particular if large individual bets are placed on an event or betting
outcome or series of events or betting outcomes. Odds compilers and risk managers are capable of human error, thus even allowing for
the fact that a number of betting products are subject to capped pay-outs, significant volatility can occur. In addition, it is possible
that there may be such a high volume of trading during any particular period that even automated systems would be unable to address and
eradicate all risks. Any significant losses on a gross-win basis could have a material adverse effect on our business, financial condition
and results of operations. In addition, if a jurisdiction where we hold or wish to apply for a license imposes a high turnover tax for
betting (as opposed to a gross-win tax), this too would impact profitability, particularly with high value/low margin bets, and likewise
have a material adverse effect on our business.
Our
profitability depends upon many factors for which no assurance can be given.
Profitability
depends upon many factors, including the ability to develop and maintain valuable products and services, our ability to identify and
obtain the rights to additional products to add to our existing product line, success and expansion of our sales programs, expansion
of our customer base, obtaining the right balance of expense levels and the overall success of our business activities. While we expect
significant revenue growth during the next 12 months as a result of our recent acquisitions of Argyll, EGL, Lucky Dino,
ggCircuit, Helix and Bethard, we may not may not be able to achieve or sustain profitability on a quarterly or annual
basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital,
expand our business, diversify our product offerings or even continue our operations. A decline in the value of our stock could also
cause you to lose all or part of your investment.
Future
cash flows fluctuations may affect our ability to fund our working capital requirements or achieve our business objectives in a timely
manner.
Our
working capital requirements and cash flows are expected to be subject to quarterly and yearly fluctuations, depending on such factors
as timing and size of capital expenditures, levels of sales and collection of receivables, customer payment terms and supplier terms
and conditions. We expect that a greater than expected slow-down in capital spending by our customers may require us to adjust our current
business model. As a result, our revenues and cash flows may be materially lower than we expect and we may be required to reduce our
capital expenditures and investments or take other measures in order to meet our cash requirements. We may seek additional funds from
liquidity-generating transactions and other conventional sources of external financing (which may include a variety of debt, convertible
debt and/or equity financings). We cannot provide any assurance that our net cash requirements will be as we currently expect. Our inability
to manage cash flow fluctuations resulting from the above factors could have a material adverse effect on our ability to fund our working
capital requirements from operating cash flows and other sources of liquidity or to achieve our business objectives in a timely manner.
Our
business may be materially and adversely affected by increased levels of debt and debt covenants.
In
order to finance our business or to finance possible acquisitions we may incur significant levels of debt compared to historical levels,
and we may need to secure additional sources of funding, which may include debt or convertible debt financing, in the future. A high
level of debt, arduous or restrictive terms and conditions relating to accessing certain sources of funding, failure to meet the financial
and/or other covenants in our credit and/or support facilities and any significant reduction in, or access to, such facilities, poor
business performance or lower than expected cash inflows could have adverse consequences on our ability to fund our business operations.
Other effects of a high level of debt include the following:
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may have difficulty borrowing money in the future or accessing sources of funding;
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we
may need to use a large portion of our cash flows from operating activities to pay principal and interest on our indebtedness, which
would reduce the amount of cash available to finance our operations and other business activities;
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a
high debt level, arduous or restrictive terms and conditions, or lower than expected cash flows would make us more vulnerable to
economic downturns and adverse developments in our business; putting us at risk of violating debt covenants; and
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if
operating cash flows are not sufficient to meet our operating expenses, capital expenditures and debt service requirements as they
become due, we may be required, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction
of new products and services, sell assets and/or forego business opportunities including acquisitions, research and development projects
or product design enhancements.
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The
gaming and interactive entertainment industries are intensely competitive. Esports faces competition from a growing number of companies
and, if Esports is unable to compete effectively, its business could be negatively impacted.
There
is intense competition amongst gaming solution providers. There are a number of established, well financed companies producing both land-based
and online gaming and interactive entertainment products and systems that compete with the products of the Company. As some of our competitors
have financial resources that are greater than Esports’, they may spend more money and time on developing and testing products,
undertake more extensive marketing campaigns, adopt more aggressive pricing policies or otherwise develop more commercially successful
products than the Company, which could impact the Company’s ability to win new marketing contracts and renew our existing ones.
Furthermore, new competitors may enter the Company’s key market areas. If the Company is unable to obtain significant market presence
or if it loses market share to its competitors, the Company’s results of operations and future prospects would be materially adversely
affected. There are many companies with already established relationships with third parties, including gaming operators that are able
to introduce directly competitive products and have the potential and resources to quickly develop competitive technologies. The Company’s
success depends on its ability to develop new products and enhance existing products at prices and on terms that are attractive to its
customers.
There
has also been consolidation among the Company’s competitors in the esports and gaming industry. Such consolidation could result
in the formation of larger competitors with increased financial resources and altered cost structures, which may enable them to offer
more competitive pricing models, gain a larger market share of customers, expand product offerings and broaden their geographic scope
of operations.
Esports’
online offerings are part of new and evolving industries, which presents significant uncertainty and business risks.
The
online gaming and interactive entertainment industry, which includes social, casual and mobile gaming and interactive entertainment,
is relatively new and continues to evolve. Whether these industries grow and whether Esports’ online business will ultimately succeed,
will be affected by, among other things, developments in social networks, mobile platforms, legal and regulatory developments (such as
the passage of new laws or regulations or the extension of existing laws or regulations to online gaming activities), taxation of gaming
activities, data privacy laws and regulation and other factors that the Company is unable to predict and which are beyond the Company’s
control. Given the dynamic evolution of these industries, it can be difficult to plan strategically, and it is possible that competitors
will be more successful than the Company at adapting to change and pursuing business opportunities. Additionally, as the online gaming
industry advances, including with respect to regulation, the Company may become subject to additional compliance-related costs. Consequently,
the Company cannot provide assurance that its online and interactive offerings will grow at the rates expected or be successful in the
long term.
Several
companies have launched online social casino offerings, and new competitors are likely to continue to emerge, some of which may be operated
by social gaming companies with a larger base of existing users, or by casino operators with more experience in operating a casino. If
our products do not obtain popularity or maintain popularity or fail to grow in a manner that meets management’s expectations,
our results of operations and financial condition could be harmed.
We
operate in a very competitive business environment and if we do not adapt our approach and our products to meet this competitive environment,
our business, results of operations or financial condition could be adversely impacted.
There
is intense competition in the gaming management and gaming products industry which is characterized by dynamic customer demand and rapid
technological advances. Today, there are many systems providers in the U.S. and abroad offering casinos and gaming operators “total
solution” casino management and table games management systems. As a result, we must continually adapt our approach and our products
to meet this demand and match technological advances and if we cannot do so, our business results of operations or financial condition
may be adversely impacted. Conversely, the development of new competitive products or the enhancement of existing competitive products
in any market in which we operate could have an adverse impact on our business, results of operations or financial condition. If we are
unable to remain dynamic in the face of changes in the market, it could have a material adverse effect on our business, results of operations
or financial condition.
Our
growth will depend on our ability to attract and retain users, and the loss of our users, failure to attract new users in a cost-effective
manner, or failure to effectively manage our growth could adversely affect our business, financial condition, results of operations and
prospects.
Our
ability to achieve growth in revenue in the future will depend, in large part, upon our ability to attract new users to our offerings,
retain existing users of our offerings and reactivate users in a cost-effective manner. Achieving growth in our community of users may
require us to increasingly engage in sophisticated and costly sales and marketing efforts, which may not make sense in terms of return
on investment. We have used and expect to continue to use a variety of free and paid marketing channels, in combination with compelling
offers and exciting games to achieve our objectives. For paid marketing, we intend to leverage a broad array of advertising channels,
including sponsorships, affiliate networks, social media platforms, such as Facebook, Instagram, Twitter and Twitch, paid and organic
search, and other digital channels, such as mobile display. If the search engines on which we rely modify their algorithms, change their
terms around gaming, or if the prices at which we may purchase listings increase, then our costs could increase, and fewer users may
click through to our website. If links to our website are not displayed prominently in online search results, if fewer users click through
to our website, if our other digital marketing campaigns are not effective, or if the costs of attracting users using any of our current
methods significantly increase, then our ability to efficiently attract new users could be reduced, our revenue could decline and our
business, financial condition and results of operations could be harmed.
In
addition, our ability to increase the number of users of our offerings will depend on continued user adoption of esports. Growth in the
esports industry and the level of demand for and market acceptance of our product offerings will be subject to a high degree of uncertainty.
We cannot assure that consumer adoption of our product offerings will continue or exceed current growth rates, or that the industry will
achieve more widespread acceptance.
Additionally,
as technological or regulatory standards change and we modify our platforms to comply with those standards, we may need users to take
certain actions to continue playing, such as performing age verification checks or accepting new terms and conditions. Users may stop
using our product offerings at any time, including if the quality of the user experience on our platform, including our support capabilities
in the event of a problem, does not meet their expectations or keep pace with the quality of the customer experience generally offered
by competitive offerings.
Failure
to attract, retain and motivate key employees may adversely affect the Company’s ability to compete and the loss of the services
of key personnel could have a material adverse effect on Esports’ business.
The
Company depends on the services of a few key executive officers. The loss of any of these key persons could have a material adverse effect
on the Company’s business, results of operations and financial condition. The Company’s success is also highly dependent
on its continuing ability to identify, hire, train, motivate and retain highly qualified technical, marketing and management personnel.
Competition for such personnel can be intense, and the Company cannot provide assurance that it will be able to attract or retain highly
qualified technical, marketing and management personnel in the future. Stock options may comprise a significant component of key employee
compensation, and if the Company’s Common Share price declines, it may be difficult to retain such individuals. Similarly, changes
in the Company’s share price may hinder the Company’s ability to recruit key employees, as they may elect to seek employment
with other companies that they believe have better long-term prospects. The Company’s inability to attract and retain the necessary
technical, marketing and management personnel may adversely affect its future growth and profitability. The Company’s retention
and recruiting may require significant increases in compensation expense, which would adversely affect the Company’s results of
operation.
The
leadership of Esports’ Chief Executive Officer, Mr. Grant Johnson (“Mr. Johnson”), has been a critical element of the
Company’s success. The departure, death or disability of Mr. Johnson or other extended or permanent loss of his services, or any
negative market or industry perception with respect to him or arising from his loss, could have a material adverse effect on the Company’s
business. Esports’ other executive officers and other members of senior management have substantial experience and expertise in
Esports’ business and have made significant contributions to its growth and success. The unexpected loss of services of one or
more of these individuals could also adversely affect the Company. Esports is not protected by key man or similar life insurance covering
members of senior management but is contemplating obtaining key man insurance.
Our
management team has limited experience managing a public company and regulatory compliance may divert our attention from the day-to-day
management of its business.
Our
management team has limited experience managing a publicly-traded company and limited experience complying with the increasingly complex
laws pertaining to public companies. These obligations typically require substantial attention from our senior management and could divert
our attention away from the day-to-day management of our business.
Our
internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act of
2002, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act could have a material adverse effect on our business and stock price.
We
are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Although we are not required to provide
an attestation report on the internal controls over financial reporting by our independent registered public accounting firm, we are
required to comply with applicable requirements of the Sarbanes-Oxley Act as well as other rules and regulations that include, and not
limited to, the listing standards of The Nasdaq Stock Market, including changes in corporate governance practices and the establishment
and maintenance of effective disclosure and financial controls. The rules governing the standards that must be met for our management
to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.
We might encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our
internal control over financial reporting as it relates to our operations inclusive of recent business combinations. If we cannot favorably
assess the effectiveness of our internal control over financial reporting, investors could lose confidence in our financial information
and the price of our common stock could decline.
Failure
to remediate our material weakness or maintain adequate financial, information technology and management processes and
controls could lead to errors in our financial reporting, which could adversely affect our business.
We have identified material weaknesses in our
internal control that includes the inability to (i) complete an effective assessment of our internal controls over financial reporting,
(ii) maintain sufficient period-end financial reporting controls related to segregation of duties, reviews of completed or non-recurring
transactions, and procedures for preparing the financial statements and disclosures, and (iii) maintain sufficient information technology
controls and perform testing of information technology controls for operating effectiveness. If we do not remediate our material weaknesses
and complete our implementation of internal controls, we may not detect errors timely, produce reliable financial reports, and prevent
financial fraud. A lack of internal control could also result in regulatory scrutiny and a loss of confidence by stakeholders, which
in-turn could harm our business and adversely affect the market price of our common stock. Failure to comply with Section 404 of Sarbanes-Oxley
could also potentially subject us to sanctions or investigations by the SEC, FINRA or other regulatory authorities, as well as increase
the risk of liability arising from litigation based on securities law.
The
Company’s business is vulnerable to changing economic conditions and to other factors that adversely affect the industries in which
it operates.
The
demand for entertainment and leisure activities tends to be highly sensitive to changes in consumers’ disposable income, and thus
can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond the control of the Company.
Unfavorable changes in general economic conditions, including recessions, economic slowdown, sustained high levels of unemployment, and
increasing fuel or transportation costs, may reduce customers’ disposable income or result in fewer individuals visiting casinos,
whether land-based or online, or otherwise engaging in entertainment and leisure activities, including gambling. As a result, the Company
cannot ensure that demand for its products or services will remain constant. Continued or renewed adverse developments affecting economies
throughout the world, including a general tightening of availability of credit, decreased liquidity in many financial markets, increasing
interest rates, increasing energy costs, acts of war or terrorism, transportation disruptions, natural disasters, declining consumer
confidence, sustained high levels of unemployment or significant declines in stock markets, could lead to a further reduction in discretionary
spending on leisure activities, such as gambling. Any significant or prolonged decrease in consumer spending on entertainment or leisure
activities could reduce the Company’s online games, reducing the Company’s cash flows and revenues. If the Company experiences
a significant unexpected decrease in demand for its products, it could incur losses.
Changes
in ownership of competitors or consolidations within the gaming industry may negatively impact pricing and lead to downward pricing pressures
which could reduce revenue.
A
decline in demand for the Company’s products in the gaming industry could adversely affect its business. Demand for the Company’s
products is driven primarily by the replacement of existing services as well as the expansion of existing online gaming, and the expansion
of new channels of distribution, such as mobile gaming. Additionally, consolidation within the online gambling market could result in
the Company facing competition from larger combined entities, which may benefit from greater resources and economies of scale. Also,
any fragmentation within the industry creating a number of smaller, independent operators with fewer resources could also adversely affect
the Company’s business as these operators might cause a further slowdown in the replacement cycle for the Company’s products.
Litigation
costs and the outcome of litigation could have a material adverse effect on the Company’s business.
From
time to time, Esports may be subject to litigation claims through the ordinary course of its business operations regarding, but not limited
to, employment matters, security of consumer and employee personal information, contractual relations with suppliers, marketing and infringement
of trademarks and other intellectual property rights. Litigation to defend Esports against claims by third parties, or to enforce any
rights that Esports may have against third parties, may be necessary, which could result in substantial costs and diversion of Esports’
resources, causing a material adverse effect on its business, financial condition and results of operations. Aside from the lawsuit and
other matters referenced herein under the heading “Legal Proceedings”, the Company is not aware of any current material legal
proceedings outstanding, threatened or pending as of the date hereof by or against the Company, given the nature of its business, it
is, and may from time to time in the future be, party to various, and at times numerous, legal, administrative and regulatory inquiries,
investigations, proceedings and claims that arise in the ordinary course of business. Because the outcome of litigation is inherently
uncertain, if one or more of such legal matters were to be resolved against the Company for amounts in excess of management’s expectations,
the Company’s results of operations and financial condition could be materially adversely affected.
Our
business may be materially and adversely affected by the combined company’s business following acquisitions. If the Company is
required to write down goodwill and other intangible assets, the Company’s financial condition and results would be negatively
affected.
When
the Company acquires a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable
intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess
of the purchase price over the net identifiable assets acquired. According to the Board issued Accounting Standards Update No. 2014-02,
Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and Accounting Standards Update No. 2014-18, Business Combinations
(Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent
to their acquisition. This accounting standard requires that goodwill and intangible assets deemed to have indefinite lives no longer
be amortized but instead be tested for impairment at three different points in time. The first is the transitional test, which was required
at the beginning of the fiscal year in which ASC Topic 350 was adopted. In general, the valuation methods used for the transitional test
must be consistent with all subsequent impairment testing. The second type of impairment testing is the interim test, which is required
if certain “trigger events” occur, such as adverse changes in the business climate or market which might negatively impact
the value of a reporting unit. Finally, companies must also perform annual tests for impairment. However, upon meeting certain criteria,
some firms may not require a quantitative annual test. Other intangible assets will continue to be amortized over their useful lives.
Under current accounting standards, if the Company determines goodwill or intangible assets are impaired, the Company will be required
to write down these assets. Any write-down would have a negative effect on the consolidated financial statements.
Risks
Related to International Operations
The
risks related to international operations, in particular in countries outside of the United States and Canada, could negatively affect
the Company’s results.
A
material proportion of the Company’s operations are conducted in foreign jurisdictions including, but not limited to: the United
Kingdom, Malta and Sweden. It is expected that the Company will derive more than 80% of its revenue from transactions denominated in
currencies other than the United States dollar, and the Company expects that receivables with respect to foreign sales will continue
to account for a significant majority of its total accounts and receivables outstanding. As such, the Company’s operations may
be adversely affected by changes in foreign government policies and legislation or social instability and other factors which are not
within the control of the Company, including, but not limited to, recessions in foreign economies, expropriation, nationalization and
limitation or restriction on repatriation of funds, assets or earnings, longer receivables collection periods and greater difficulty
in collecting accounts receivable, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses,
changes in gaming policies, regulatory requirements or the personnel administering them, currency fluctuations and devaluations, exchange
controls, economic sanctions and royalty and tax increases, risk of terrorist activities, revolution, border disputes, implementation
of tariffs and other trade barriers and protectionist practices, taxation policies, including royalty and tax increases and retroactive
tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection of intellectual
property particularly in countries with fewer intellectual property protections, the effects that evolving regulations regarding data
privacy may have on the Company’s online operations, adverse changes in the creditworthiness of parties with whom the Company has
significant receivables or forward currency exchange contracts, labor disputes and other risks arising out of foreign governmental sovereignty
over the areas in which the Company’s operations are conducted. The Company’s operations may also be adversely affected by
social, political and economic instability and by laws and policies of such foreign jurisdictions affecting foreign trade, taxation and
investment. If the Company’s operations are disrupted and/or the economic integrity of its contracts is threatened for unexpected
reasons, its business may be harmed.
The
Company’s international activities may require protracted negotiations with host governments, national companies and third parties.
Foreign government regulations may favor or require the awarding of contracts to local contractors or require foreign contractors to
employ citizens of, or purchase supplies from, a particular jurisdiction. In the event of a dispute arising in connection with the Company’s
operations in a foreign jurisdiction where it conducts its business, the Company may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the jurisdictions of the courts of United States or Canada or enforcing
American and Canadian judgments in such other jurisdictions. The Company may also be hindered or prevented from enforcing its rights
with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly, the Company’s activities
in foreign jurisdictions could be substantially affected by factors beyond the Company’s control, any of which could have a material
adverse effect on it. The Company believes that management’s experience to date in commercializing its products and solutions in
Europe and the Caribbean may be of assistance in helping to reduce these risks. Some countries in which the Company may operate may be
considered politically and economically unstable.
Doing
business in the industries in which the Company operates often requires compliance with numerous and extensive procedures and formalities.
These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities. In some cases,
failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity or the actions taken.
Management of the Company is unable to predict the effect of additional corporate and regulatory formalities which may be adopted in
the future including whether any such laws or regulations would materially increase Esports’ cost of doing business or affect its
operations in any area.
Esports
may in the future enter into agreements and conduct activities outside of the jurisdictions where it currently carries on business, which
expansion may present challenges and risks that Esports has not faced in the past, any of which could adversely affect the results of
operations and/or financial condition of Esports.
The
Company is subject to foreign exchange and currency risks that could adversely affect its operations, and the Company’s ability
to mitigate its foreign exchange risk through hedging transactions may be limited.
The
Company expects that it will derive in excess of 80% of its revenues in currencies other than the United States dollar; however, a substantial
portion of the Company’s operating expenses are incurred in United States dollars. Fluctuations in the exchange rate between the
U.S. dollar, the Euro and other currencies may have a material adverse effect on the Company’s business, financial condition and
operating results. The Company’s consolidated financial results are affected by foreign currency exchange rate fluctuations. Foreign
currency exchange rate exposures arise from current transactions and anticipated transactions denominated in currencies other than United
States dollars and from the translation of foreign-currency-denominated balance sheet accounts into United States dollar-denominated
balance sheet accounts. The Company is exposed to currency exchange rate fluctuations because portions of its revenue and expenses are
denominated in currencies other than the United States dollar, particularly the Euro. In particular, uncertainty regarding economic conditions
in Europe and the debt crisis affecting certain countries in the European Union pose risk to the stability of the Euro. Exchange rate
fluctuations could adversely affect the Company’s operating results and cash flows and the value of its assets outside of United
States. If a foreign currency is devalued in a jurisdiction in which the Company is paid in such currency, then the Company’s customers
may be required to pay higher amounts for the Company’s products, which they may be unable or unwilling to pay.
While
the Company may enter into forward currency swaps and other derivative instruments intended to mitigate the foreign currency exchange
risk, there can be no assurance the Company will do so or that any instruments that the Company enters into will successfully mitigate
such risk. If the Company enters into foreign currency forward or other hedging contracts, the Company would be subject to the risk that
a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic downturn, a counterparty’s
financial condition may deteriorate rapidly and with little notice, and the Company may be unable to take action to protect its exposure.
In the event of a counterparty default, the Company could lose the benefit of its hedging contract, which may harm its business and financial
condition. In the event that one or more of the Company’s counterparties becomes insolvent or files for bankruptcy, its ability
to eventually recover any benefit lost as a result of that counterparty’s default may be limited by the liquidity of the counterparty.
The Company expects that it will not be able to hedge all of its exposure to any particular foreign currency, and it may not hedge its
exposure at all with respect to certain foreign currencies. Changes in exchange rates and the Company’s limited ability or inability
to successfully hedge exchange rate risk could have an adverse impact on the Company’s liquidity and results of operations.
Global
privacy concerns could result in regulatory changes and impose additional costs and liabilities on the Company, limit its use of information,
and adversely affect its business.
Personal
privacy has become a significant issue in Canada, the United States, Europe, and many other countries in which the Company currently
operates and may operate in the future. Many federal, state, and foreign legislatures and government agencies have imposed or are considering
imposing restrictions and requirements about the collection, use, and disclosure of personal information obtained from individuals. Changes
to laws or regulations affecting privacy could impose additional costs and liability on the Company and could limit its use of such information
to add value for customers. If the Company were required to change its business activities or revise or eliminate services, or to implement
burdensome compliance measures, its business and results of operations could be harmed. In addition, the Company may be subject to fines,
penalties, and potential litigation if it fails to comply with applicable privacy regulations, any of which could adversely affect the
Company’s business, liquidity and results of operation.
The
Company’s results of operations could be affected by natural events in the locations in which it operates or where its customers
or suppliers operate.
Esports,
its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and other geological
events, including hurricanes, earthquakes, or flood that could disrupt operations. Any serious disruption at any of Esports’ facilities
or the facilities of its customers or suppliers due to a natural disaster could have a material adverse effect on Esports’ revenues
and increase its costs and expenses. If there is a natural disaster or other serious disruption at any of Esports’ facilities,
it could impair its ability to adequately supply its customers, cause a significant disruption to its operations, cause Esports to incur
significant costs to relocate or re-establish these functions and negatively impact its operating results. While Esports intends to seek
insurance against certain business interruption risks, such insurance may not adequately compensate Esports for any losses incurred as
a result of natural or other disasters. In addition, any natural disaster that results in a prolonged disruption to the operations of
Esports’ customers or suppliers may adversely affect its business, results of operations or financial condition.
Risks
Related to Regulation
The
Company is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could adversely
affect its operations, reputation, business, prospects, operating results and financial condition.
We
are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S. regulations
such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally prohibit U.S. companies
and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Violations
of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions and other penalties. It may be difficult
to oversee the conduct of any contractors, third-party partners, representatives or agents who are not our employees, potentially exposing
us to greater risk from their actions. If our employees or agents fail to comply with applicable laws or company policies governing our
international operations, we may face legal proceedings and actions which could result in civil penalties, administration actions and
criminal sanctions. Any determination that we have violated any anti-corruption laws could have a material adverse impact on our business.
Changes in trade sanctions laws may restrict the Company’s business practices, including cessation of business activities in sanctioned
countries or with sanctioned entities.
Violations
of these laws and regulations could result in significant fines, criminal sanctions against Esports, its officers or its employees, requirements
to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, prohibitions on the conduct
of its business and its inability to market and sell the Company’s products in one or more countries. Additionally, any such violations
could materially damage the Company’s reputation, brand, international expansion efforts, ability to attract and retain employees
and the Company’s business, prospects, operating results and financial condition.
We
also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations.
Any violation of anti-money laundering laws or regulations by any of our properties could have a material adverse impact on our business.
The
gaming industry is heavily regulated and failure by the Company to comply with applicable requirements could be disruptive to its business
and could adversely affect its operations.
The
gaming industry is subject to extensive scrutiny and regulation at all levels of government, both domestic and foreign, including but
not limited to, federal, state, provincial, local, and in some instances, tribal authorities. While the regulatory requirements vary
by jurisdiction, most require:
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licenses
and/or permits;
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findings
of suitability;
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documentation
of qualifications, including evidence of financial stability; and
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other
required approvals for companies who operate in online gaming or manufacture or distribute gaming equipment and services, including
but not limited to approvals for new products.
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Compliance
with the various regulations applicable to internet gaming is costly and time-consuming. Regulatory authorities at the non-U.S., U.S.
federal, state and local levels have broad powers with respect to the regulation and licensing of internet gaming operations and the
Company’s licenses may be revoked, suspended or limited for non-compliance and regulators have the power to impose substantial
fines on us and take other actions, any one of which could have a material adverse effect on our business, financial condition, results
of operations and prospects. These laws and regulations are dynamic and subject to potentially differing interpretations, and various
legislative and regulatory bodies may expand current laws or regulations or enact new laws and regulations regarding these matters. We
will strive to comply with all applicable laws and regulations relating to our business. It is possible, however, that these requirements
may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules. Non-compliance
with any such law or regulations could expose us to claims, proceedings, litigation and investigations by private parties and regulatory
authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business.
Any
license, permit, approval or finding of suitability may be revoked, suspended or conditioned at any time. The loss of a license in one
jurisdiction could trigger the loss of a license or affect the Company’s eligibility for a license in another jurisdiction. The
Company may be unable to obtain or maintain all necessary registrations, licenses, permits or approvals, and could incur fines or experience
delays related to the licensing process which could adversely affect its operations. The finding of suitability process may be expensive
and time-consuming. The Company’s delay or failure to obtain licenses and approvals in any jurisdiction may prevent it from distributing
its solutions and generating revenues. A gaming regulatory body may refuse to issue or renew a registration, license or other approval
if the Company, or one of its directors, officers, employees or associates: (i) is considered to be a detriment to the integrity
or lawful conduct or management of gaming, (ii) no longer meets a registration, license or other approval requirement, (iii) has
breached or is in breach of a condition of registration, licensure, other approval or an operational agreement with a regulatory
authority, (iv) has made a material misrepresentation, omission or misstatement in an application for registration, license or other
approval or in reply to an enquiry by a person conducting an audit, investigation or inspection for a gaming regulatory authority,
(v) has been refused a similar registration, license or other approval in another jurisdiction, (vi) has held a similar registration,
or license or other approval in that province, state or another jurisdiction which has been suspended, revoked or cancelled, or
(vii) has been convicted of an offence, inside or outside of the United States that calls into question the Company’s honesty or
integrity or the honesty or integrity of one of its directors, officers, employees or associates. Or is otherwise a disqualifying
offense
Generally,
any person who fails or refuses to apply for a finding of suitability or a license within the prescribed period after being advised that
it is required by gaming authorities may be denied a license or found unsuitable, as applicable. Furthermore, we may be subject to disciplinary
action or our licenses may be in peril if, after we receive notice that a person is unsuitable to be a stockholder or to have any other
relationship with us or any of our subsidiaries, we: (i) pay that person any dividend or interest upon our voting securities; (ii) allow
that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration
in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities.
Additionally,
the Company’s services must be approved in some jurisdictions in which they are offered; this process cannot be assured or guaranteed.
Obtaining these approvals is a time-consuming process that can be extremely costly. Even where a jurisdiction regulates online gaming,
it may not be commercially desirable to secure a license in such a jurisdiction due to tax or other operational considerations.
A
provider of gaming solutions may pursue corporate regulatory approval with regulators of a particular jurisdiction while it pursues technical
regulatory approval for its gaming solutions by that same jurisdiction. It is possible that after incurring significant expenses and
dedicating substantial time and effort towards such regulatory approvals, that Esports may not obtain either of them. If the Company
fails to obtain the necessary certification, registration, license, approval or finding of suitability in a given jurisdiction, it would
likely be prohibited from distributing its services in that particular jurisdiction altogether. If the Company fails to seek, does not
receive, or receives a revocation of a license in a particular jurisdiction for its games, hardware or software, then it cannot sell,
service or place on a participation or leased basis or license its products in that jurisdiction and its issued licenses in other jurisdictions
may be impacted. Furthermore, some jurisdictions require license holders to obtain government approval before engaging in some transactions,
such as business combinations, reorganizations, stock offerings and repurchases. The Company may not be able to obtain all necessary
registrations, licenses, permits, approvals or findings of suitability in a timely manner, or at all. Delays in regulatory approvals
or failure to obtain such approvals may also serve as a barrier to entry to the market for the Company’s solutions. If the Company
is unable to overcome the barriers to entry, it will materially affect its results of operations and future prospects. To the extent
new gaming jurisdictions are established or expanded, the Company cannot guarantee it will be successful in penetrating such new jurisdictions
or expanding its business in line with the growth of existing jurisdictions. As the Company enters into new markets, it may encounter
legal and regulatory challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on
planned revenues or costs associated with the new market opportunity. If the Company is unable to effectively develop and operate within
these new markets, then its business, operating results and financial condition could be impaired. The Company’s failure to obtain
the necessary regulatory approvals in jurisdictions, whether individually or collectively, would have a material adverse effect on its
business.
To
expand into new jurisdictions, the Company may need to be licensed, obtain approvals of its products and/or seek licensure of its officers,
directors, major shareholders, key employees or business partners. Any delays in obtaining or difficulty in maintaining regulatory approvals
needed for expansion within existing markets or into new jurisdictions can negatively affect the Company’s opportunities for growth
or delay its ability to recognize revenue from the sale or installation of products in any such jurisdictions.
The
Company is subject to regulation affecting internet gaming which varies from one jurisdiction to another and future legislative and court
proceedings pertaining to internet gaming may have a material impact on the operations and financial results of Esports.
Online
gambling is not unequivocally legal in all jurisdictions. The Company is licensed to supply gambling services from jurisdictions in which
it operates but not in every jurisdiction where the customer is located.
Some
countries have introduced regulations attempting to restrict or prohibit internet gaming, while others have taken the position that internet
gaming should be regulated and have adopted or are in the process of considering legislation to enable that regulation.
While
the U.K. and other European countries and territories such as Malta, Alderney and Gibraltar have currently adopted a regime which permits
its licensees to accept wagers from any jurisdiction, other countries, including the United States have, or are in the process of implementing,
regimes which permit only the targeting of the domestic market provided a local license is obtained and local taxes accounted for. Other
European countries and territories continue to defend a licensing regime that protects monopoly providers and have combined this with
an attempt to outlaw all other supplies. By contrast, a number of countries have not passed legislation in relation to online gambling
but may introduce it. Some jurisdictions have not updated legislation focused on land-based gambling which may be interpreted in an unfavorable
way to online gambling. Different jurisdictions have different views to determining where gambling takes place and which jurisdiction’s
law applies and these views may change from time to time.
We
currently block, through IP address filtering, direct access to wagering on our website from the United States and other jurisdictions
that the Company is precluded from supplying its services to pursuant to its gaming licenses. Individuals are required to enter their
age upon gaining access to our platform and any misrepresentation of such users age will result in the forfeiting of his or her deposit
and any withdrawals from such users account requires proof of government issued identification. In addition, our payment service providers
use their own identity and ISP verification software. Despite all such measures, it is conceivable that that a user, under age, or otherwise
could devise a way to evade our blocking measures and access our website from the United States or any other foreign jurisdiction in
which we do not currently permit users to use our services.
Future
legislative and court decisions may have a material impact on the operations and financial results. Therefore, there is a risk that civil
and criminal proceedings, including class actions brought by or on behalf of prosecutors or public entities incumbent monopoly providers,
or private individuals, could be initiated against the Company, internet service providers, credit card processors, advertisers and others
involved in the internet gaming industry. Such potential proceedings could involve substantial litigation expense, penalties, fines,
seizure of assets, injunctions or other restrictions being imposed upon the Company or its licensees or other business partners, while
diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues,
operating results and financial condition as well as impact upon the Company’s reputation.
There
can be no assurance that legally enforceable prohibiting legislation will not be proposed and passed in jurisdictions relevant or potentially
relevant to the Company’s business to legislate or regulate various aspects of the internet or the online gaming industry (or that
existing laws in those jurisdictions will not be interpreted negatively). Compliance with any such legislation may have a material adverse
effect on the Company’s business, financial condition and results of operations, either as a result of the Company’s determining
that a jurisdiction should be blocked, or because a local license may be costly for the Company or its licensees to obtain and/or such
licenses may contain other commercially undesirable conditions.
The
Company may not be able to capitalize on the expansion of online or other forms of interactive gaming or other trends and changes in
the gaming industry, including due to laws and regulations governing these industries.
The
Company participates in the new and evolving interactive gaming industry through its online, social and mobile products. The Company
intends to take advantage of the liberalization of online and mobile gaming, within Canada, the U.S. and internationally; however, expansion
of online and mobile gaming involves significant risks and uncertainties, including legal, business and financial risks. The success
of online and mobile gaming and the Company’s interactive products and services may be affected by future developments in social
networks, including Facebook, mobile platforms, regulatory developments, data privacy laws and other factors that the Company is unable
to predict and are beyond its control. Consequently, the Company’s future operating results relating to its online gaming products
and services are difficult to predict, and Esports cannot provide assurance that its products and services will grow at expected rates
or be successful in the long term.
Additionally,
the Company’s ability to successfully pursue its interactive gaming strategy depends on the laws and regulations relating to wagering
through interactive channels. Internationally, laws relating to online gaming are evolving, particularly in Europe. To varying degrees,
a number of European governments have taken steps to change the regulation of online wagering through the implementation of new or revised
licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers. The Company cannot predict the
timing, scope or terms of any such state, federal or foreign laws and regulations, or the extent to which any such laws and regulations
will facilitate or hinder its interactive strategy.
The
Company’s ability to operate in its proposed online jurisdictions or expand in new online jurisdictions could be adversely affected
by new or changing laws or regulations, new interpretations of existing laws or regulations, and difficulties or delays in obtaining
or maintaining required licenses or product approvals.
Changes
in existing gaming laws or regulations, new interpretations of existing gaming laws or regulations or changes in the manner in which
existing laws and regulations are enforced, all with respect to online gaming activities, may hinder or prevent the Company from continuing
to operate in those jurisdictions where it currently carries on business, which would harm its operating results and financial condition.
Furthermore, gaming regulatory bodies may from time to time amend the various disclosures and reporting requirements. If the Company
fails to comply with any existing or future disclosure or reporting requirements, the regulators may take action against the Company
which could ultimately include fines, the conditioning, suspension or revocation of approvals, registrations, permits or licenses and
other disciplinary action. It cannot be assured that the Company will be able to adequately adjust to such potential changes. Additionally,
evolving laws and regulations regarding data privacy, cyber security and anti-money laundering could adversely impact opportunities for
growth in Esports’ online business, and could result in additional compliance-related costs.
Public
opinion can also exert a significant influence over the regulation of the gaming industry. A negative shift in the public’s perception
of gaming could affect future legislation in different jurisdictions. Among other things, such a shift could cause jurisdictions to abandon
proposals to legalize gaming, thereby limiting the number of new jurisdictions into which the Company could expand. Negative public perception
could also lead to new restrictions on or to the prohibition of gaming in jurisdictions in which the Company currently operates.
Regulations
that may be adopted with respect to the internet and electronic commerce may decrease the growth in the use of the internet and lead
to the decrease in the demand for Esports’ products and services.
In
addition to regulations pertaining to the gaming industry in general and specifically to online gaming, the Company may become subject
to any number of laws and regulations that may be adopted with respect to the internet and electronic commerce. New laws and regulations
that address issues such as user privacy, pricing, online content regulation, taxation, advertising, intellectual property, information
security, and the characteristics and quality of online products and services may be enacted. As well, current laws, which predate or
are incompatible with the internet and electronic commerce, may be applied and enforced in a manner that restricts the electronic commerce
market. The application of such pre-existing laws regulating communications or commerce in the context of the internet and electronic
commerce is uncertain. Moreover, it may take years to determine the extent to which existing laws relating to issues such as intellectual
property ownership and infringement, libel and personal privacy are applicable to the internet. The adoption of new laws or regulations
relating to the internet, or particular applications or interpretations of existing laws, could decrease the growth in the use of the
internet, decrease the demand for Esports’ products and services, increase Esports’ cost of doing business or could otherwise
have a material adverse effect on Esports’ business, revenues, operating results and financial condition.
Esports
shareholders are subject to extensive governmental regulation and if a shareholder is found unsuitable by a gaming authority, that shareholder
would not be able to beneficially own the Company’s Common Shares directly or indirectly.
In
many jurisdictions, gaming laws can require any of the Company’s shareholders to file an application, be investigated, and qualify
or have his, her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether
an applicant should be deemed suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority
to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval,
or fine any person licensed, registered or found suitable or approved, for any cause deemed reasonable by the gaming authorities.
Furthermore,
any person required by a gaming authority to be found suitable, who is found unsuitable by the gaming authority, may not hold directly
or indirectly ownership of any voting security or the beneficial or record ownership of any non-voting security or any debt security
of any public corporation which is registered with the relevant gaming authority beyond the time prescribed by the relevant gaming authority.
A violation of the foregoing may constitute a criminal offence. A finding of unsuitability by a particular gaming authority impacts that
person’s ability to associate or affiliate with gaming licenses in that particular jurisdiction and could impact the person’s
ability to associate or affiliate with gaming licenses in other jurisdictions.
Many
jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage of voting securities of a gaming
company and, in some jurisdictions, non-voting securities, typically 5%, to report the acquisition to gaming authorities, and gaming
authorities may require such holders to apply for qualification or a finding of suitability, subject to limited exceptions for “institutional
investors” that hold a company’s voting securities for investment purposes only.
Current
environmental laws and regulations, or those enacted in the future, could result in additional liabilities and costs. Compliance with
these laws could increase Esports’ costs and impact the availability of components required to manufacture its products. Violation
of these laws may subject Esports to significant fines, penalties or disposal costs, which could negatively impact its results of operations,
financial position or cash flows.
Legislative
and regulatory changes could negatively affect our business and the business of our customers.
Legislative
and regulatory changes may affect demand for or place limitations on the placement of our products. Such changes could affect us in a
variety of ways. Legislation or regulation may introduce limitations on our products or opportunities for the use of our products and
could foster competitive products or solutions at our or our customers’ expense. Our business will likely also suffer if our products
became obsolete due to changes in laws or the regulatory framework.
Legislative
or regulatory changes negatively impacting the gaming industry as a whole or our customers in particular could also decrease the demand
for our products. Opposition to gaming could result in restrictions or even prohibitions of gaming operations in any jurisdiction or
could result in increased taxes on gaming revenues. Tax matters, including changes in state, federal or other tax legislation or assessments
by tax authorities could have a negative impact on our business. A reduction in growth of the gaming industry or in the number of gaming
jurisdictions or delays in the opening of new or expanded casinos could reduce demand for our products. Changes in current or future
laws or regulations or future judicial intervention in any particular jurisdiction may have a material adverse effect on our existing
and proposed foreign and domestic operations. Any such adverse change in the legislative or regulatory environment could have a material
adverse effect on our business, results of operations or financial condition.
In
the context of our EU-facing operations, we may be subject to specific compliance obligations under the General Data Protection Regulation
(EU) 2016/679 (the “GDPR”) and associated laws and regulations in different EU Member States in which we operate. In addition,
portions of our business established outside the EU may be required to comply with the requirements of the GDPR and associated EU legislation
with respect to the offering of products or services to, or the monitoring of, individuals in the EU. We may also be subject to the local
privacy and data protection laws of the EU Member States in which we offer products or services. Failure to comply with these EU data
protection and privacy laws, can carry penalties and potential criminal sanctions, as well as the risk of litigation. In addition, Directive
2002/58/EC (as amended by Directive 2009/136/EC) (together, the “e-Privacy Directive”) governs, among other things, the use
of cookies and the sending of electronic direct marketing within the European Union and, as such, will apply to our marketing activities
within the EU. Following Brexit, the UK has adopted its own data protection and direct marketing laws (the “UK data protection
laws”) which are currently based on the corresponding EU legislation. Our UK-facing operations may therefore be subject to specific
compliance obligations under the UK data protection laws.
In
our efforts to comply with these requirements, we rely on positions and interpretations of the law that have yet to be fully tested before
the relevant courts and regulators. While the UK data protection laws are currently similar to the corresponding EU laws, it is possible
that those laws will diverge in the future; to the extent that those laws do diverge, then that may increase the costs of maintaining
regulatory compliance. There is also a risk that it may become more difficult to make cross-border transfers of personal data, as a result
of diverging data protection regimes in the territories where our customers are located and the territories where our operations are
based. If a regulator or court of competent jurisdiction determined that one or more of our compliance efforts does not satisfy the applicable
requirements of the GDPR or the e-Privacy Directive, or the UK data protection laws, or if any party brought a claim in this regard,
there could be potential governmental or regulatory investigations, enforcement actions, regulatory fines, compliance orders, litigation
or public statements against us by consumer advocacy groups or others, and that could cause customers to lose trust in us and damage
our reputation. Likewise, a change in guidance could be costly and have an adverse effect on our business.
Risks
Related to Intellectual Property and Technology
Esports’
intellectual property may be insufficient to properly safeguard its technology and brands.
The
Company may apply for patent protection in the United States, Canada, Europe and other countries relating to certain existing and proposed
processes, designs and methods and other product innovations. Patent applications can, however, take many years to issue and the Company
can provide no assurance that any of these patents will be issued at all. If the Company is denied any or all of these patents, it may
not be able to successfully prevent its competitors from imitating its solutions or using some or all of the processes that are the subject
of such patent applications. Such imitation may lead to increased competition within the finite market for the Company’s solutions.
Even if pending patents are issued to the Company, its intellectual property rights may not be sufficiently comprehensive to prevent
its competitors from developing similar competitive products and technologies. The Company’s success may also depend on its ability
to obtain trademark protection for the names or symbols under which it markets its products and to obtain copyright protection and patent
protection of its proprietary technologies, intellectual property and other game innovations and if the granted patents are challenged,
protection may be lost. The Company may not be able to build and maintain goodwill in its trademarks or obtain trademark or patent protection,
and there can be no assurance that any trademark, copyright or issued patent will provide competitive advantages for Esports or that
Esports’ intellectual property will not be successfully challenged or circumvented by competitors.
Computer
source codes for technology Esports licenses may also receive protection under international copyright laws. As such, EEG, or the party
which it licenses the source code from, may need to initiate legal proceedings following such use to obtain orders to prevent further
use of the source code.
The
Company will also rely on trade secrets, ideas and proprietary know-how. Although the Company generally requires its employees and independent
contractors to enter into confidentiality and intellectual property assignment agreements, it cannot be assured that the obligations
therein will be maintained and honored. If these agreements are breached, it is unlikely that the remedies available to the Company will
be sufficient to compensate it for the damages suffered. In spite of confidentiality agreements and other methods of protecting trade
secrets, the Company’s proprietary information could become known to or independently developed by competitors. If the Company
fails to adequately protect its intellectual property and confidential information, its business may be harmed, and its liquidity and
results of operations may be materially adversely impacted.
The
Company may be subject to claims of intellectual property infringement or invalidity and adverse outcomes of litigation could unfavorably
affect its operating results.
Monitoring
infringement and misappropriation of intellectual property can be difficult and expensive, and the Company may not be able to detect
infringement or misappropriation of its proprietary rights. Although the Company intends to aggressively pursue anyone who is reasonably
believed to be infringing upon its intellectual property rights and who poses a significant commercial risk to the business, to protect
and enforce its intellectual property rights, initiating and maintaining suits against such third parties will require substantial financial
resources. The Company may not have the financial resources to bring such suits, and, if it does bring such suits, it may not prevail.
Regardless of the Company’s success in any such actions, the expenses and management distraction involved may have a material adverse
effect on its financial position.
A
significant portion of the Company’s revenues may be generated from products using certain intellectual property rights, and EEG’s
operating results would be negatively impacted if it was unsuccessful in licensing certain of those rights and/or protecting those rights
from infringement, including losses of proprietary information from breaches of the Company’s cyber security efforts.
Further,
the Company’s competitors have been granted patents protecting various gaming products and solutions features, including systems,
methods and designs. If the Company’s products and solutions employ these processes, or other subject matter that is claimed under
its competitors’ patents, or if other companies obtain patents claiming subject matter that the Company uses, those companies may
bring infringement actions against it. The question of whether a product infringes a patent involves complex legal and factual issues,
the determination of which is often uncertain. In addition, because patent applications can take many years to issue, there may be applications
now pending of which the Company is unaware, which might later result in issued patents that the Company’s products and solutions
may infringe. There can be no assurance that the Company’s products, including those with currently pending patent applications,
will not be determined to have infringed upon an existing third-party patent. If any of the Company’s products and solutions infringes
a valid patent, the Company may be required to discontinue offering certain products or systems, pay damages, purchase a license to use
the intellectual property in question from its owner, or redesign the product in question to avoid infringement. A license may not be
available or may require EEG to pay substantial royalties, which could in turn force EEG to attempt to redesign the infringing product
or to develop alternative technologies at a considerable expense. Additionally, the Company may not be successful in any attempt to redesign
the infringing product or to develop alternative technologies, which could force the Company to withdraw its product or services from
the market.
The
Company may also infringe other intellectual property rights belonging to third parties, such as trademarks, copyrights and confidential
information. As with patent litigation, the infringement of trademarks, copyrights and confidential information involve complex legal
and factual issues and the Company’s products, branding or associated marketing materials may be found to have infringed existing
third-party rights. When any third-party infringement occurs, the Company may be required to stop using the infringing intellectual property
rights, pay damages and, if it wishes to keep using the third party intellectual property, purchase a license or otherwise redesign the
product, branding or associated marketing materials to avoid further infringement. Such a license may not be available or may require
EEG to pay substantial royalties.
It
is also possible that the validity of any of EEG’s intellectual property rights might be challenged either in standalone proceedings
or as part of infringement claims in the future. There can be no assurance that EEG’s intellectual property rights will withstand
an invalidity claim and, if declared invalid, the protection afforded to the product, branding or marketing material will be lost.
Moreover,
the future interpretation of intellectual property law regarding the validity of intellectual property by governmental agencies or courts
in the United States, Canada, Europe or other jurisdictions in which EEG has rights could negatively affect the validity or enforceability
of the Company’s current or future intellectual property. This could have multiple negative impacts including, without limitation,
the marketability of, or anticipated revenue from, certain of EEG’s products. Additionally, due to the differences in foreign patent,
trademark, copyright and other laws concerning proprietary rights, the Company’s intellectual property may not receive the same
degree of protection in foreign countries as it would in the United States, Canada, or Europe. The Company’s failure to possess,
obtain or maintain adequate protection of its intellectual property rights for any reason in these jurisdictions could have a material
adverse effect on its business, results of operations and financial condition.
Furthermore,
infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and the
Company may not have the financial and human resources to defend itself against any infringement suits that may be brought against EEG.
Litigation can also distract management from day-to-day operations of the business.
In
addition, the Company’s business is dependent in part on the intellectual property of third-parties. For example, the Company licenses
intellectual property from third parties for use in its gaming products. The future success of the Company may depend upon its ability
to obtain licenses to use new and existing intellectual property and its ability to retain or expand existing licenses for certain products.
If the Company is unable to obtain new licenses or renew or expand existing licenses, it may be required to discontinue or limit its
use of such products that use the licensed marks and its financial condition, operating results or prospects may be harmed.
The
failure to enforce and maintain our intellectual property rights could enable others to use trademarks used by our business which could
adversely affect the value of the Company.
The
success of our business depends on our continued ability to use our existing tradenames in order to increase our brand awareness. Argyll
owns a European Union registered trademark for its SportNation brand, and Esports Entertainment Malta owns European Union registered
trademarks for its Lucky Dino brands. As of the date hereof, we do not have any federally registered trademarks owned by us in relation
to the Vie.gg brand, but we plan to pursue registered trademarks for Vie.gg and the Esports Entertainment Group. The unauthorized use
or other misappropriation of any of the foregoing trademarks or tradenames could diminish the value of our business which would have
a material adverse effect on our financial condition and results of operation.
Compromises
of the Company’s systems or unauthorized access to confidential information or EEG’s customers’ personal information
could materially harm EEG’s reputation and business.
EEG
collects and stores confidential, personal information relating to its customers for various business purposes, including marketing and
financial purposes, and credit card information for processing payments. For example, the Company handles, collects and stores personal
information in connection with its online gaming products. The Company may share this personal and confidential information with vendors
or other third parties in connection with processing of transactions, operating certain aspects of EEG’s business or for marketing
purposes. The Company’s collection and use of personal data is governed by federal, state and provincial laws and regulations as
well as the applicable laws and regulations in other countries in which it operates. Privacy law is an area that changes often and varies
significantly by jurisdiction. EEG may incur significant costs in order to ensure compliance with the various privacy requirements. In
addition, privacy laws and regulations may limit EEG’s ability to market to its customers.
EEG
intends to assess and monitor the security of collection, storage and transmission of customer information on an ongoing basis. EEG intends
to utilize commercially available software and technologies to monitor, assess and secure its network. However, the systems currently
intended for transmissions and approval of payment card transactions, and the technology utilized in payment cards themselves, all of
which can put payment card data at risk, are determined and controlled by the payment card industry, not EEG. Although EEG intends to
take steps designed to safeguard its customers’ confidential personal information, its network and other systems and those of third
parties, such as service providers, could be compromised by a third-party breach of EEG’s system’s security or that of a
third-party provider or as a result of purposeful or accidental actions of third parties, EEG’s employees or those employees of
a third party. Advances in computer and software capabilities and encryption technology, new tools and other developments may increase
the risk of such a breach. As a result of any security breach, customer information or other proprietary data may be accessed or transmitted
by or to a third party. Despite these measures, there can be no assurance that EEG is adequately protecting its customers’ information.
Any
loss, disclosure or misappropriation of, or access to, customers’ or other proprietary information or other breach of EEG’s
information security could result in legal claims or legal proceedings, including regulatory investigations and actions, or liability
for failure to comply with privacy and information security laws, including for failure to protect personal information or for misusing
personal information, which could disrupt EEG’s operations, damage its reputation and expose it to claims from its customers, financial
institutions, regulators, payment card associations, employees and other persons, any of which could have a material adverse effect on
EEG’s business, revenues, financial conditions and operations.
Service
interruptions of internet service providers could impair the Company’s ability to carry on its business.
Most
of the Company’s customers will rely on internet service providers to allow the Company’s customers and servers to communicate
with each other. If internet service providers experience service interruptions, communications over the internet may be interrupted
and impair the Company’s ability to carry on business. In addition, the Company’s ability to process e-commerce transactions
depends on bank processing and credit card systems. In order to prepare for system problems, the Company intends to continuously seek
to strengthen and enhance its planned facilities and the capability of its system infrastructure and support. Nevertheless, any system
failure as a result of reliance on third parties, including network, software or hardware failure, which causes a delay or interruption
in the Company’s online services and products and e-commerce services, could have a material adverse effect on the Company’s
business, revenues, operating results and financial condition.
There
is a risk that the Company’s network systems will be unable to meet the growing demand for its online products.
The
growth of internet usage has caused frequent interruptions and delays in processing and transmitting data over the internet. There can
be no assurance that the internet infrastructure or the Company’s own network systems will be able to meet the demand placed on
it by the continued growth of the internet, the overall online gaming and interactive entertainment industry and the Company’s
customers.
The
internet’s viability as a medium for products and services offered by the Company could be affected if the necessary infrastructure
is not sufficient, or if other technologies and technological devices eclipse the internet as a viable channel.
End-users
of the Company’s products and services will depend on internet service providers and the Company’s system infrastructure
(or those of its licensed partners) for access to the Company’s or its licensees’ products and services. Many of these services
have experienced service outages in the past and could experience service outages, delays and other difficulties due to system failures,
stability or interruption.
Systems,
network or telecommunications failures or cyber-attacks may disrupt the Company’s business and have an adverse effect on EEG’s
results of operations.
Any
disruption in the Company’s network or telecommunications services could affect the Company’s ability to operate its games
and online offerings, which would result in reduced revenues and customer down time. The Company’s network and databases of business
or customer information, including intellectual property, trade secrets, and other proprietary business information and those of third
parties EEG utilizes, will be susceptible to outages due to fire, floods, power loss, break-ins, cyber-attacks, hackers, network penetration,
data privacy or security breaches, denial of service attacks and similar events, including inadvertent dissemination of information due
to increased use of social media. Despite implementation of network security measures and data protection safeguards by EEG, including
a disaster recovery strategy for back office systems, the Company’s servers and computer resources will be vulnerable to viruses,
malicious software, hacking, break-ins or theft, third-party security breaches, employee error or malfeasance, and other potential compromises.
Disruptions from unauthorized access to or tampering with the Company’s computer systems, or those of third parties EEG utilizes,
in any such event could result in a wide range of negative outcomes, including devaluation of the Company’s intellectual property
goodwill and/or brand appeal, increased expenditures on data security, and costly litigation, and can have a material adverse effect
on the Company’s business, revenues, reputation, operating results and financial condition.
Malfunctions
of third-party communications infrastructure, hardware and software expose Esports to a variety of risks Esports cannot control.
Our
business will depend upon the capacity, reliability and security of the infrastructure owned by third parties over which our offerings
would be deployed. Esports has no control over the operation, quality or maintenance of a significant portion of that infrastructure
or whether or not those third parties will upgrade or improve their equipment. Esports depends on these companies to maintain the operational
integrity of our connections. If one or more of these companies is unable or unwilling to supply or expand our levels of service in the
future, our operations could be adversely impacted. Also, to the extent the number of users of networks utilizing our future products
and services suddenly increases, the technology platform and secure hosting services which will be required to accommodate a higher volume
of traffic may result in slower response times or service interruptions. System interruptions or increases in response time could result
in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of the networks to users. In addition,
users depend on real-time communications; outages caused by increased traffic could result in delays and system failures. These types
of occurrences could cause users to perceive that our products and services do not function properly and could therefore adversely affect
our ability to attract and retain licensees, strategic partners and customers.
Risks
Related to Our Common Stock
The
trading price of our Class A common stock has been, and will likely continue to be, volatile and you could lose all or part of your investment.
The
trading price of our Class A common stock has been, and will likely continue to be, volatile and subject to wide fluctuations in response
to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your
investment in our Class A common stock and our Class A common stock may trade at prices significantly below the price you paid for them.
In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors
affecting the trading price of our Class A common stock may include:
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actual
or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar
to us;
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changes
in the market’s expectations about our operating results;
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success
of competitors;
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lack
of adjacent competitors;
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our
opening results failing to meet the expectation of securities analysts or investors in a particular period;
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changes
in financial estimates and recommendations by securities analysts concerning DraftKings or the industries in which we operate in
general;
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our
ability to market new and enhanced products and services on a timely basis;
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commencement
of, or involvement in, litigation involving us;
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changes
in our capital structure, such as future issuances of securities or the incurrence of additional debt;
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the
volume of shares of our Class A common stock by our directors, executive officers or significant stockholder or the perception that
such sales could occur; and
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general
economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of
war or terrorism.
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Broad
market and industry factors may materially harm the market price of our Class A common stock irrespective of our operating performance.
The stock market in general, and The Nasdaq Stock Market, have experienced price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of the affected companies. The trading prices and valuations of these stocks, and of
our Class A common stock, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which
investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results
of operations. A decline in the market price of our Class A common stock also could adversely affect our ability to issue additional
securities and our ability to obtain additional financing in the future.
We
may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative
effect on our financial condition, results of operations and stock price, which could cause you to lose some or all of your investment.
We
may be forced to write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in
losses. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges
of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause
us to violate net worth or other covenants to which we may be subject. Accordingly, a stockholder could suffer a reduction in the value
of their shares.
The
coverage of our business or our Class A common stock by securities or industry analysts or the absence thereof could adversely affect
our securities and trading volume.
The
trading market for our Class A common stock is influenced in part by the research and other reports that industry or securities analysts
publish about us or our business or industry from time to time. We do not control these analysts, or the content and opinions included
in their reports. Analysts who publish information about our securities may have had relatively little experience with our company given
our history, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates.
If analysts do cover us and one or more of them downgrade our securities, or if they issue other unfavorable commentary about us or our
industry or inaccurate research, our stock price would likely decline. Furthermore, if one or more of these analysts cease coverage or
fail to regularly publish reports on us, we could lose visibility in the financial markets. Any of the foregoing would likely cause our
stock price and trading volume to decline.
We
currently do not intend to pay dividends on our common stock. As a result, your only opportunity to achieve a return on your investment
is if the price of our common stock appreciates.
We
currently do not expect to declare or pay dividends on our common stock. In addition, in the future we may enter into agreements that
prohibit or restrict our ability to declare or pay dividends on our common stock. As a result, your only opportunity to achieve a return
on your investment will be if the market price of our common stock appreciates and you sell your shares at a profit.
You
may experience dilution of your ownership interest due to the future issuance of additional shares of our common stock.
We
are in a capital intensive business and we do not have sufficient funds to finance the growth of our business or to support our projected
capital expenditures. As a result, we will require additional funds from future equity or debt financings, including sales of preferred
shares or convertible debt, to complete the development of new projects and pay the general and administrative costs of our business.
We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of
holders of our common stock. We are currently authorized to issue 500,000,000 shares of common stock and 10,000,000 shares of preferred
stock. Additionally, the Board may subsequently approve increases in authorized common stock. The potential issuance of such additional
shares of common or preferred stock or convertible debt may create downward pressure on the trading price of our common stock. We may
also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in future
public offerings or private placements for capital raising purposes or for other business purposes. The future issuance of a substantial
number of common shares into the public market, or the perception that such issuance could occur, could adversely affect the prevailing
market price of our common shares. A decline in the price of our common shares could make it more difficult to raise funds through future
offerings of our common shares or securities convertible into common shares.
Our
amended and restated certificate of incorporation allows for our board of directors to create new series of preferred stock without further
approval by our stockholders, which could have an anti-takeover effect and could adversely affect holders of our common stock.
Our
authorized capital includes preferred stock issuable in one or more series. Our board has the authority to issue preferred stock and
determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights,
of those shares without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of additional
preferred stock, while providing desirable flexibility in connection with possible financings and acquisitions and other corporate purposes,
could make it more difficult for a third party to acquire a majority of the voting power of our outstanding voting securities, which
could deprive our holders of common stock of a premium that they might otherwise realize in connection with a proposed acquisition of
our company.
Efforts
to remediate our material weakness and comply with the applicable provisions of Section 404 of the Sarbanes-Oxley Act will involve
significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price
of our common stock.
Under
current SEC rules, we have been required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act, or Section 404, and related rules and regulations of the SEC. We will be required to review on an annual basis our internal control
over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial
reporting. This process may result in a diversion of management’s time and attention and may involve significant expenditures.
We have not maintained internal control over financial reporting in a manner that meets the standards of publicly traded companies required
by Section 404 of the Sarbanes-Oxley Act of 2002. The rules governing the standards that must be met for our evaluation management to
assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.
We might encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our
internal control over financial reporting. If we cannot remediate our material weakness or favorably assess the effectiveness
of our internal control over financial reporting, investors could lose confidence in our financial information and the price of our common
stock could decline.
Anti-takeover
provisions in our charter documents and Nevada law could discourage, delay or prevent a change in control of our company and may affect
the trading price of our common stock and warrants.
We
are a Nevada corporation and the anti-takeover provisions of the Nevada Revised Statutes may discourage, delay or prevent a change in
control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the
person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition,
our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders
may consider favorable. Our certificate of incorporation and bylaws:
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authorize
the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
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provide
that vacancies on our board of directors, including newly created directorships, may be filled by a majority vote of directors then
in office;
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place
restrictive requirements (including advance notification of stockholder nominations and proposals) on how special meetings of stockholders
may be called by our stockholders; do not provide stockholders with the ability to cumulate their votes; and
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provide
that our board of directors or a majority of our stockholders may amend our bylaws.
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Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
We
relocated our executive and business offices to Block 6, Triq Paceville, Saint Julians, Malta, STJ 3109 effective August 19, 2021. The
terms of the lease require annual rent of €83,000 with respect to the first year, with the rent increasing by 4% in each of the
subsequent year for a term of 5 years. Prior to the relocation, our executive and business offices were located at 170 Pater House, Psaila
Street, Birkirkara, Malta, BKR 9077 where we sub-leased approximately 150 square feet of property. We have also entered into a lease
in Hoboken New Jersey effective September 1, 2021 that serves as the headquarters for our gaming operations in the United States.
Item
3. Legal Proceedings.
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 brought to arbitration on December 7, 2020.
On February 3, 2021, the arbitration awarded Boustead Securities, LLC $289,874 in damages and allowable costs (excluding attorneys’
fees) with interest accruing approximately $21 per day. The Company paid $294,051 to settle the arbitration award, inclusive of accrued
interest, on August 24, 2021.
On
August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit against the Company alleging that it had breached its obligations
related to an 8% convertible promissory note dated June 3, 2016 and common stock purchase warrants of the same date. On April 30, 2021,
a Settlement Agreement was entered into with Tangiers for an undisclosed amount. The Company has recorded a liability for the amount
of the settlement in accounts payable and accrued expenses at June 30, 2021. The amount of the settlement was not material to the consolidated
financial statements of the Company.
From
time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. With
the exception of the foregoing, we are currently not involved in any litigation that we believe could have a material adverse effect
on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of
our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of
our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a
material adverse effect.
Item
4. Mine Safety Disclosures.
Not
applicable.
Notes
to the Consolidated Financial Statements
June
30, 2021
Note
1 – Nature of Operations
Esports
Entertainment Group, Inc. (“Company” or “EEG”) was formed in the State of Nevada on July 22, 2008 under the name
Virtual Closet, Inc., before changing its name to DK Sinopharma, Inc. on June 6, 2010 and then to, VGambling, Inc. on August 12, 2014.
On or about April 24, 2017, VGambling, Inc. changed its name to Esports Entertainment Group, Inc.
The
Company is a diversified operator of iGaming, traditional sports betting and esports businesses with a global footprint. The Company’s
strategy is to build and acquire iGaming and traditional sports betting platforms and use them to grow the esports business whereby customers
have access to game centers, online tournaments and player-versus-player wagering. On July 31, 2020, the Company commenced revenue generating
operations with the acquisition of LHE Enterprises Limited, holding company for Argyll Entertainment (“Argyll”), an online
sportsbook and casino operator. On January 21, 2021, the Company completed its acquisition of Phoenix Games Network Limited, the holding
company for the Esports Gaming League (“EGL”), and provider of event management and team services, including live and online
events and tournaments. On March 1, 2021, completed the acquisition of the operating assets and specified liabilities that comprise the
online gaming operations of Lucky Dino Gaming Limited, a company registered in Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary
registered in Estonia (collectively referred to as “Lucky Dino”).
On
June 1, 2021, the Company also acquired Helix Holdings, LLC (“Helix”) and ggCircuit, LLC (“GGC”). Helix is an
owner and operator of esports centers that provide esports programming and gaming infrastructure and is also the owner of the Genji Analytics,
an analytics platform, and LANduel, a proprietary player-versus-player wagering platform. GGC is a business-to-business software company
that provides cloud-based management for gaming centers, a tournament platform and integrated wallet and point-of-sale solutions. On
July 13, 2021, the Company completed its acquisition of the online casino and sports book business operating under the brand of Bethard
(referred to herein as “Bethard”). The acquisition of Bethard is discussed further in Note 19, Subsequent Events.
Note
2 – Summary of Significant Accounting Policies
Basis
of presentation and principles of consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated in 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 year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect
on the reported results of operations or total assets, liabilities and stockholders’ equity. The Company reclassified sales and
marketing expenses on its consolidated statements of operations from general and administrative expenses. The amounts previously reported
in other income, impairment of intangible assets, gain on settlement of debt and foreign exchange loss were also reclassified to other
non-operating income (loss) on the consolidated statements of operations and comprehensive loss. The prior year amounts reported
as taxes payable, due to officers and equity to be issued were classified to accounts payable and accrued expenses for the current year
presentation on the consolidated balance sheets.
Use
of Estimates
The
preparation of 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. 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, including estimating contingent consideration 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 accompanying consolidated financial statements
of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes
that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize
its assets and discharge its liabilities and commitments in the normal course of business.
The evaluation of going concern under the accounting
guidance requires significant judgment. The Company must consider it has historically incurred losses and negative cash flows in recent
years as it has prepared to grow its esports business through acquisition and new venture opportunities. The Company must also consider
its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates
to obtaining financing and generating future profits. As of June 30, 2021, the Company had approximately $19.9 million of available cash
on-hand. On October 12, 2021, one business day preceding this filing, the Company had approximately $2.4 million of available cash on-hand,
with the decrease in the available cash balance resulting primarily from the cash payment of €13,000,000 (equivalent to $15,346,019
using exchange rates on the date of acquisition) on July 13, 2021 to acquire the Bethard Business (discussed in Note 19 – Subsequent
Events). The Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations
without additional financing. Although the Company has financing available, as further described below, the ability to raise financing
using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it
relates to the Company and the esports and iGaming industry. These conditions were determined to raise substantial doubt regarding our
ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial statements.
In determining whether there is substantial doubt
about the Company’s ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional
sources of financing. The Company identified additional financing sources it believes are currently available to fund its operations
and drive future growth that include (i) the ability to access capital using the at-the-money (“ATM”) equity offering program
available to the Company whereby the Company may sell up to approximately $20,000,000 shares of its common stock (discussed in Note 19
– Subsequent Events), (ii) the ability to sell shares of common stock of the Company through a shelf registration statement on
Form S-3 (File No. 333-252370) declared effective by the Securities and Exchange Commission (SEC) on February 5, 2021, and (iii) the
ability to raise additional financing from other sources. These plans were however determined to require the Company to place reliance
on several factors as described above, and therefore were not sufficient to overcome the presumption of substantial doubt about the Company’s
ability to continue as a going concern.
COVID-19
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 from April 2020 through June 2020. The cancelation of major sports events had a significant short-term negative
effect on betting activity globally. As a result, iGaming and event 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
and Cash Equivalents
Cash
includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months
or less. As of June 30, 2021 and June 30, 2020 the Company did not have any financial instruments classified as cash equivalents. At
times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
The Company’s cash is held with financial institutions, and the account balances may exceed the Federal Deposit Insurance Corporation
(FDIC) insurance limit at times. Accounts are insured by the FDIC up to $250,000 per financial institution. There have been no losses
recognized on cash balances held at these financial institutions.
Restricted
Cash
Restricted
cash includes cash reserves maintained for compliance with gaming regulations that require adequate liquidity to satisfy cash amounts
available to users. At June 30, 2021, restricted cash includes amounts due to users of $1,812,168 as required by the Malta Gaming Authority
and $1,631,004 representing cash amounts available to users in other jurisdictions.
Accounts
Receivable
Accounts
receivable is comprised of the amounts billed to customers principally for esport event and team management services. Accounts receivable
is recorded net of an allowance for credit losses. The Company performs ongoing credit evaluations for its customers and determines the
amount of the allowance for credit losses upon considering such factors as historical losses, known disputes or collectability issues,
the age of a receivable balance as well as current economic conditions. Bad debt expense is recorded to maintain the allowance for credit
losses at an appropriate level and changes in the allowance for credit losses are included in general and administrative expense in the
consolidated statements of operations. At June 30, 2021 and 2020, the allowance for credit losses was not significant to the consolidated
financial statements of the Company.
Receivables
Reserved for Users
User
deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with
a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded
as a receivable reserved for users on the consolidated balance sheets. An allowance for doubtful accounts may be established if it is
determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance for doubtful accounts
is recognized as a loss within general and administrative expenses in the consolidated statements of operations. The allowance for doubtful
accounts is not material to the consolidated financial statements.
Equipment
Equipment
is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related
to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing
the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease
term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:
|
Computer
Equipment
|
Up
to 5 years
|
|
Furniture
and fixtures
|
Up
to 7 years
|
|
Leasehold
improvements
|
Shorter
of the remaining lease term or estimated life of the improvement
|
The
estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period.
The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the
resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the consolidated statement of operations.
Business
Combinations
The
Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities
assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase
price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust
the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the
acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at
the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition
date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Goodwill
Goodwill
represents the excess of fair value of consideration paid for an acquired entity over the fair value of the assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized but rather it is tested at least annually for impairment, or more often
if events or changes in circumstances indicate that more likely than not the carrying amount of the asset may not be recoverable. Goodwill
is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating
segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation
is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform
a quantitative impairment test.
The
Company performs a quantitative impairment test for goodwill utilizing the two-step approach. The first step of the goodwill impairment
test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and thus the second step of the impairment test
is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test compares the implied
fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds
the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The discounted estimates
of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average costs
of capital, and future economic and market conditions. If the carrying value of the reporting unit exceeds fair value, goodwill is considered
impaired and an impairment charge will be recorded to reduce the reporting unit to fair value. There was no goodwill recorded by the
Company during the year ended June 30, 2020. There was no impairment of goodwill for the year ended June 30, 2021.
Intangible
assets
Intangible
assets with determinable lives consist of player relationships, developed software, tradename and gaming licenses. Intangible assets
with determinable lives are amortized on a straight-line basis over their estimated useful lives of 5 years for player relationships
and developed software, 10 years for tradename and 2 years for gaming licenses. The Company also capitalizes internal-use software costs
such as 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
Equipment
and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and circumstances
indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of future undiscounted
cash flows are determined through estimated disposition date of the asset. To the extent that estimated future undiscounted net cash
flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the
carrying value of such asset and its fair value, considering external market participant assumptions. An estimation of future cash flows
requires significant judgment as the Company makes assumptions about future revenues and market conditions. Since the determination of
future cash flows is an estimate of future performance, there may be impairments recognized in future periods in the event future cash
flows do not meet expectations. The Company recorded an impairment of intangible assets of $67,132 during the year ended June 30, 2020.
There was no impairment of long-lived assets identified for the year ended June 30, 2021.
Liabilities
to Customers
The
Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at
a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings
and player losses.
Jackpot
Provision
The
jackpot provision liability is an estimate of the amount due to players for jackpot winnings. The jackpot liability is accrued monthly
based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming casino
machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be paid out
randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount that varies
across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot and therefore
the winning of a jackpot affects other players on the network of participating iGaming casino machines. Jackpot winnings reduce revenue
at the time the entity has the obligation to pay the jackpot, which occurs when the jackpot is won by the player.
Leases
The
Company leases for office space through operating lease agreements that were a result of its acquisitions of Argyll, and Lucky
Dino. The Company also leases properties and equipment, through its acquisition of Helix, that provide customers with in-person gaming
experiences. The Company measures an operating lease right-of-use (“ROU”) asset and liability, as well as a finance
lease asset and liability, based on the present value of the future minimum lease payments over the lease term at the commencement date.
Minimum lease payments include the fixed lease and non-lease components of the agreement, as well as any variable rent payments that
depend on an index, initially measured using the index at the lease commencement date.
The
minimum payments under operating leases are recognized on a straight-line basis over the lease term in the consolidated statements of
operations. Operating lease expenses related to variable lease payments are recognized as operating expenses in a manner consistent with
the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of
less than 12 months (“short-term leases”) are not recognized on the consolidated balance sheets. The rent expense for short-term
leases is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated
statements of operations.
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 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 consolidated financial statements by applying a two-step 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 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 recorded at fair value each
reporting period 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.
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 reassessed
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 records 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 consolidated statements of operations. Refer to Note 18 for additional disclosures
related to the change in fair value of derivative liabilities.
Fair
Value Measurements
Fair
value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable
inputs. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous
market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The
following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and
the third is considered unobservable:
|
Level
1:
|
Unadjusted
quoted prices in active markets for identical assets or liabilities.
|
|
Level
2:
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
|
|
Level
3:
|
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Certain
assets and liabilities are required to be recorded at fair value on a recurring basis. The Company adjusts contingent consideration resulting
from a business combination, as well as derivative financial instruments and warrant liabilities to fair value on a recurring basis.
The fair value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other
receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been
determined to approximate carrying amounts due to the short maturities of these instruments. The Company believes that its indebtedness
approximates fair value based on current yields for debt instruments with similar terms.
Earnings
Per Share
Basic
net income or loss per share is computed by dividing net income or 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 because their inclusion would have been antidilutive.
|
|
|
2021
|
|
|
2020
|
|
|
Common
stock options
|
|
$
|
474,676
|
|
|
$
|
51,942
|
|
|
Common
stock warrants
|
|
|
5,350,558
|
|
|
|
5,264,592
|
|
|
Common
stock issuable upon conversion of Senior Convertible Note
|
|
|
2,120,000
|
|
|
|
—
|
|
|
Total
|
|
$
|
7,954,234
|
|
|
$
|
5,316,534
|
|
Comprehensive
Loss
Comprehensive
loss consists of the net loss for the year 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 year is included in the consolidated statements of comprehensive
loss.
Foreign
Currency
The
transaction currencies of the Company include the U.S. dollar, British Pound and Euro. 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 U.S. 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. The Company recorded a foreign exchange transaction loss for the year ended June 30, 2021 of $440,452.
The foreign exchange transaction gains and losses for the year ended June 30, 2020 were not material. Transaction gains and losses are
reported within other non-operating income (loss) on the consolidated statements of operations.
Stock-based
Compensation
The
Company periodically issues stock-based compensation to employees, directors, contractors and consultants for services rendered. Stock-based
compensation granted to employees and non-employee directors includes grants of restricted stock and employee stock options that are
measured and recognized based on their fair values determined on the grant date. The award of restricted stock and stock options, which
are generally time vested, are measured at the grant date fair value and charged to earnings on a straight-line basis over the vesting
period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several
variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price
of the stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common
stock over the term of the equity award. The fair value of restricted stock is determined by the closing market price of our common stock
on the date of grant. The compensation cost for service-based stock options granted to consultants is measured at the grant date, based
on the fair value of the award, and is expensed on a straight-line basis over the requisite service period (the vesting period of the
award).
Sales
and Marketing
Sales
and marketing expenses are comprised primarily of advertising costs that include online search advertising and placement, including advertising
with affiliates for the online betting and casino operations, as well as other promotional expenses paid to third parties, including
expenses related to sponsorship agreements. Advertising expense for the years ended June 30, 2021 and 2020 was $10,038,524 and $322,517,
respectively.
Revenue
and Cost Recognition
The
revenue of the Company is currently generated from online casino and sports betting (referred to herein as “iGaming” revenue),
as well from the provision of esports event and team management services. The Company recognizes revenue in accordance with Topic 606
– Revenue from Contracts with Customers (“Topic 606”) when control of a product or service is transferred to
a customer. The amount of revenue is measured at the transaction price, or the amount of consideration that the Company expects to receive
in exchange for transferring a promised good or service. The transaction price includes estimates of variable consideration to the extent
that it is probable that a significant reversal of revenue recognized will not occur.
Revenue
generating activities of the Company are subject to value added tax (“VAT”) in most jurisdictions in which the Company operates.
Revenue is presented net of VAT in the consolidated statements of operations. VAT receivables and VAT payables are included in other
receivables and accounts payable and accrued expenses, respectively on the consolidated balance sheets. Sales to customers do not have
significant financing components or payment terms greater than 12 months.
iGaming
Revenue
iGaming
revenue is derived from the placement of bets by end-users, also referred to as customers, through online gaming sites. The transaction
price in an iGaming contract, or Net Gaming Revenue (“NGR”), is the difference between gaming wins and losses, as further
reduced by any nondiscretionary incentives awarded to the customer. Gaming transactions involve four performance obligations, namely
the settlement of each individual bet, the honoring of discretionary incentives available to the customer through loyalty reward programs,
the award of free spin and deposit match bonuses, and the winning of a casino jackpot. The total amount wagered by a customer is commonly
referred to as the win or Gross Gaming Revenue (“GGR”). The GGR is allocated to each performance obligation using the relative
standalone selling price (“SSP”) determined for iGaming contracts.
Revenue
recognition for individual wagers is recognized when the gaming occurs, as such gaming activities are settled immediately. The revenue
allocated to incentives, such as loyalty points offered through a rewards program, is deferred and recognized as revenue when the loyalty
points are redeemed. Revenue allocated to free spins and deposit matches, referred to as bonuses, are recognized at the time that they
are wagered. The revenue for jackpot games is recognized when the jackpot is won by the customer. The Company applies a practical expedient
by accounting for its performance obligations on a portfolio basis as iGaming contracts have similar characteristics. The Company expects
the application of the revenue recognition guidance to a portfolio of iGaming contracts will not materially differ from the application
of the revenue recognition guidance on an individual contract basis.
The
Company evaluates bets that its users place on websites owned by third party brands in order to determine whether it may recognize revenue
on a gross basis, when acting as the principal provider of the wagering service, or on a net basis, when acting as an intermediary or
agent. The principal in a wagering service involving a third party is generally the entity that controls the wagering service such that
it has a right to the services being performed by the third party and can direct the third party in delivery of the service to its users.
The Company records revenue on a gross basis as it has determined it is the principal in transactions involving third parties, such as
revenue sharing arrangements, as it controls the wagering service being offered to the users such that it has a right to the service
performed by third parties and can further direct third parties in providing services to users. The Company further records expenses
related to its revenue sharing arrangements and other third party iGaming expenses within costs of revenue in the consolidated statement
of operations.
Esports
Gaming Service Revenue
The
Company derives revenue from the operation of esports game centers, sales of subscriptions to access cloud-based software used by independent
operators of game centers, as well as from consulting and data analytic services provided to game operators. The revenue from the operation
of esports centers by the Company is recognized when a customer purchases time to use the esports gaming equipment at each center. The
revenue from time purchased by a customer and from the sale of food and beverages is recognized at the point of sale. The revenue derived
from the sale of subscription services to cloud-based software used by game centers is recognized over the term of the contract, which
generally can range from one month to one year in duration, beginning on the date the customer is provided access to the Company’s
hosted software platform.
The
Company may further provide consultation services related to the use of hardware and equipment for gaming operations together with implementation
services that include sourcing, training, planning, and installation of technology. The Company considers services related to hardware
and equipment, implementation, and any design of user interface for the customer as separate performance obligations. Revenue for hardware
equipment and design of custom user interface is recognized at a point in time upon delivery and completion. Implementation services
are recognized over time, as services are performed.
The
Company also has contracts with software companies to provide talent data analytics and related esports services, which include analytic
development, other related services to develop software and applications for tournaments, to provide data support, data gathering, gameplay
analysis and reporting which includes talent analytics and related esports services, including analytic development, data analysis, survey
design, interview services, player dossiers, and expert services. The Company recognizes revenue from its data analytic services over
the life of the contract utilizing the output method, using a direct measurement of the value to the customer of the goods or services
transferred to date relative to the remaining goods or services promised under the contact. The Company elected to use the right to invoice
practical expedient and recognize revenue based on the amounts invoiced. The payment terms and conditions vary by contract; however,
the Company’s terms generally require payment within 30 to 60 days from the invoice date.
The
Company may further enter partnership contracts with strategic customers within the esports industry. The partnership contracts are negotiated
agreements, which contain both licensing arrangements of intellectual property and development services, including fixed and variable
components. The variability of revenue is driven by development plans and results of sales as specified by the partnership contract,
which are known as of an invoice date. Partnership contracts generally do not have terms that extend beyond one year. The Company considers
licensing arrangements and development services as separate performance obligations. Licensing revenues are recorded over time. Revenue
associated with development is recognized over time, as labor is incurred.
Contracts
that contain multiple performance obligations require an allocation of the transaction price to each distinct performance obligation
based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely
to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines
standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is
not observable through past transactions, the Company estimates the standalone selling price taking into our overall pricing objectives,
taking into consideration market conditions and other factors, including the value of the deliverables in the contracts, customer demographics,
geographic locations, and the number and types of users within the contracts.
Esports
Event Management and Team Service Revenue
The
Company derives revenue from esports event management and team services. Esports event management services support the creation, production
and delivery of an esports event by providing event staffing, gaming consoles, and other technical goods and services for a customer
event that is either hosted live or online. The revenue generated from esports event management services is generally earned on a fixed
fee basis per event. The esports team services offering of the Company include recruitment and management services offered to sports
clubs to facilitate their entrance into esports tournament competition. Team services provided to a customer may include player recruitment,
administration of player contracts, processing of tournament admission, providing logistical arrangements, as well as providing ongoing
support to the team during the event. Team services are earned on a fixed fee basis per tournament.
Esports
event management and team services revenues are recognized over the term of the event or the relevant contractual term for services as
this method best depicts the transfer of control to the customer. The Company recognizes revenue for event management services based
on the number of days completed for the event relative to the total days of the event. Revenue from team management services is recognized
from inception of the contract through the end of the tournament using the number of days completed relative to the total number of days
in the contract term. Revenue collected in advance of the event management or team services is recorded as deferred revenue on the consolidated
balance sheets. The Company may also enter profit sharing arrangements determined based on the net revenue earned by the customer for
an event in addition to a fixed fee. Revenue recognition for profit sharing arrangements is recognized at the time the revenue from the
event is determined, which is generally at the conclusion of the event. An event or team services contact may further require the Company
to distribute payments to event or tournament attendees resulting in the recognition of a processing fee by the Company. The Company
does not recognize revenue from the processing of payments until the conclusion of the event or tournament.
The
Company evaluates the service being provided under an esports event and team services contract to determine whether it should recognize
revenue on a gross basis as the principal provider of the service, or on a net basis in a manner similar to that of an agent. The Company
has determined that for esports event and team services contracts that allow for the assignment of individual tasks to a third-party
contractor, the Company acts as the principal provider of the service being offered to the customer as it remains primarily responsible
for fulfilling the contractual promise to the customer. In profit sharing arrangements, such as events that allow for the Company to
share in the revenue earned by a customer for an event, the Company has determined it acts in the role of an agent to the customer as
the event creator. The Company has also determined it acts as an agent when it collects a processing fee for performing the service of
distributing prize money on behalf of its customers to event or tournament winners.
Contract
Liabilities
Liabilities
to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities.
The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing
a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage
or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price
in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play
or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue
from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users
is based on the estimated fair value of the loyalty point incentive available to the user.
The
Company also records payments received in advance of performance under an esports gaming services contract or event management or team
services contract as deferred revenue.
Recently
Adopted Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 consolidated financial statements.
Recently
Issued Accounting Standards
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
The new standard eliminates certain exceptions related to the approach for intra-period 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. ASU 2019-12 is effective for the Company beginning on July 1, 2021. The Company is currently evaluating the potential impact
of this standard on its 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. ASU 2020-06 is effective for the Company beginning on July 1,
2022. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held
at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new
standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most
other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees,
loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking
information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted,
although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends
the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU
2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB
issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842): Effective Dates, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years for smaller reporting companies. ASU 2016-13 is effective for the Company beginning on July
1, 2023. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASC 350).
The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting
unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount
of goodwill in that reporting unit. The guidance is effective for the Company beginning after December 15, 2022; and aligns with
the effective date of ASU 2016-13. Early adoption is permitted. ASU 2017-04 is effective for the Company beginning on July 1, 2023. The
Company is currently evaluating the impact that the adoption of this guidance will have on its 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
Acquisition
of GGC
On
June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of GGC. The total consideration paid
at closing was $24,273,211, with $14,100,000 paid in cash at closing and $900,000 paid through application of loans receivable from GGC,
inclusive of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advanced as loans receivable was $14,993,977 after adjustment for
cash acquired of $6,023). The Company also issued 830,189 shares common stock at closing using a value per share $13.25 pursuant to the
GGC Purchase Agreement. The fair value of the share consideration paid at closing was determined to be $9,273,211 using the closing share
price of the Company on the date of acquisition.
The
loans receivable applied toward the purchase consideration had originated during the negotiation to purchase GGC, whereby the Company
had advanced an aggregate of $600,000 to GGC during 2020 in the form of loans (“GGC Loans”). Upon execution of the purchase
agreement to acquire GGC, the Company paid GGC an additional $600,000 to be used for operating expenses pending the closing of the GGC
acquisition (“GGC Operating Expense Payments”). The Company had recorded these advances totaling $1,200,000 as loans receivable
at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase consideration for
the GGC Loans and GGC Operating Expense Payments if the acquisition of GGC were to close by April 30, 2021. If acquisition of GGC were
to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward the purchase price for
the GGC Loans, and a credit toward the purchase price equal to 60% of the GGC Operating Expense Payments. If the acquisition closed after
May 14, 2021, the Company was to receive full credit toward the purchase price for the GGC Loans, and a credit toward the purchase price
equal to 50% of the GGC Operating Expense Payments. The acquisition did not close by May 14, 2021, and therefore the Company had forgiven
50% of the GGC Operating Expense Payments or $300,000 and applied the remaining balance of the total loans receivable, or $900,000 toward
the purchase price of GGC.
A
summary of the purchase consideration follows:
|
Cash
paid at closing
|
|
$
|
14,100,000
|
|
|
Loans
receivable applied toward purchase consideration
|
|
|
900,000
|
|
|
Share
consideration issued at closing
|
|
|
9,273,211
|
|
|
Total
purchase price consideration
|
|
$
|
24,273,211
|
|
The
allocation of assets acquired and liabilities assumed follows:
|
Cash
|
|
$
|
6,023
|
|
|
Accounts
receivable
|
|
|
102,701
|
|
|
Prepaid
expenses and other current assets
|
|
|
97,083
|
|
|
Equipment
|
|
|
7,704
|
|
|
Intangible
assets
|
|
|
16,300,000
|
|
|
Goodwill
|
|
|
11,445,832
|
|
|
Accounts
payable and accrued expenses
|
|
|
(263,132)
|
|
|
Deferred
tax liability
|
|
|
(3,423,000
|
)
|
|
Total
|
|
$
|
24,273,211
|
|
The
acquired intangible assets, useful life and fair value determined at the acquisition date follows:
|
|
|
Useful
Life (years)
|
|
Fair
Value
|
|
|
Tradename
|
|
10
|
|
$
|
2,600,000
|
|
|
Developed
technology
|
|
5
|
|
|
13,300,000
|
|
|
Customer
relationships
|
|
5
|
|
|
400,000
|
|
|
Total
|
|
|
|
$
|
16,300,000
|
|
The
results of operations of GGC are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the GGC acquisition is not deductible for tax purposes. Transaction related expenses
were $801,317 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated statements
of operations. The transaction expenses incurred for the GGC acquisition include a charge of $300,000 related to the forgiveness of the
GGC Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the GGC operations prior
to closing that were not eligible to be applied toward the purchase consideration.
Acquisition
of Helix
On
June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of Helix. The total consideration
paid at closing was $17,000,000, with $9,400,000 paid in cash and $600,000 paid through application of loans receivable from Helix,
inclusive of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advances as loans
receivable was $9,964,691 after adjustment for cash acquired of $35,309). The Company also issued 528,302 shares of common stock at
closing using a value per share of $13.25 pursuant to the Helix Purchase Agreement. The fair value of the share consideration paid
at closing to be $5,901,133 using the closing share price of the Company on the date of acquisition.
The
loans receivable applied toward the purchase consideration had originated during the negotiation to purchase Helix, whereby the Company
had advanced an aggregate of $400,000 to Helix during 2020 and 2021 in the form of loans (“Helix Loans”). Upon execution
of the purchase agreement to acquire Helix, the Company paid Helix an additional $400,000 to be used for operating expenses pending the
closing of the Helix acquisition (“Helix Operating Expense Payments”). The Company had recorded these advances totaling $800,000
as loans receivable at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase
consideration for the Helix Loans and Helix Operating Expense Payments if the acquisition of Helix were to close by April 30, 2021. If
acquisition of Helix were to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward
the purchase price for the Helix Loans, and a credit toward the purchase price equal to 60% of the Helix Operating Expense Payments.
If the acquisition closed after May 14, 2021, the Company was to receive full credit toward the purchase price for the Helix Loans, and
a credit toward the purchase price equal to 50% of the Helix Operating Expense Payments. The acquisition did not close by May 14, 2021,
and therefore the Company had forgiven 50% of the Helix Operating Expense Payments or $200,000 and applied the remaining balance of the
total loans receivable, or $600,000 toward the purchase price of Helix.
A
summary of the purchase consideration follows:
|
Cash
paid at closing
|
|
$
|
9,400,000
|
|
|
Loans
receivable applied toward purchase consideration
|
|
|
600,000
|
|
|
Share
consideration issued at closing
|
|
|
5,901,133
|
|
|
Total
purchase price consideration
|
|
$
|
15,901,133
|
|
The
allocation of assets acquired and liabilities assumed follows:
|
Cash
|
|
$
|
35,309
|
|
|
Accounts
receivable
|
|
|
3,054
|
|
|
Prepaid
expenses and other current assets
|
|
|
76,933
|
|
|
Equipment
|
|
|
643,537
|
|
|
Operating
lease right-of-use asset
|
|
|
803,503
|
|
|
Intangible
assets
|
|
|
3,600,000
|
|
|
Goodwill
|
|
|
12,393,591
|
|
|
Other
non-current assets
|
|
|
31,014
|
|
|
Deferred
revenue
|
|
|
(9,036
|
)
|
|
Deferred
income taxes
|
|
|
(756,000
|
)
|
|
Operating
lease liability
|
|
|
(803,503
|
)
|
|
Long-term
debt
|
|
|
(117,270
|
)
|
|
Total
|
|
$
|
15,901,133
|
|
The
acquired intangible assets, useful lives fair value determined at the acquisition date follows:
|
|
|
Useful
Life (years)
|
|
Fair
Value
|
|
|
Tradename
|
|
10
|
|
$
|
800,000
|
|
|
Developed
technology
|
|
5
|
|
|
2,800,000
|
|
|
Total
|
|
|
|
$
|
3,600,000
|
|
The
results of operations of Helix are in the consolidated financial statements of the Company for the year ended June 30, 2021 since the
date of acquisition. The goodwill recorded in the Helix acquisition is not deductible for tax purposes. Transaction related expenses
were $604,603 for the year ended June 30, 2021 are included in general and administrative expenses in the consolidated statements of
operations. The transaction expenses incurred for the Helix acquisition include a charge of $200,000 related to the forgiveness
of Helix Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund
the Helix operations prior to closing that were not eligible to be applied toward the purchase consideration.
Acquisition
of Lucky Dino
On
March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming
casino operations of Lucky Dino for cash paid at closing €25,000,000 ($30,133,725 using exchange rates in effect at the acquisition
date), or with net cash paid being €24,001,795 ($28,930,540 using exchange rates in effect at the acquisition date) after adjustment
for cash acquired of €998,205 ($1,203,185 using exchange rates in effect at the acquisition date). The acquisition of Lucky Dino
was funded with available cash on hand.
The
allocation assets acquired and liabilities assumed follows:
|
Restricted
cash
|
|
$
|
1,203,185
|
|
|
Other
receivables
|
|
|
131,111
|
|
|
Equipment
|
|
|
13,765
|
|
|
Operating
lease right-of-use asset
|
|
|
371,898
|
|
|
Intangible
assets
|
|
|
19,100,000
|
|
|
Goodwill
|
|
|
10,541,217
|
|
|
Other non-current
assets
|
|
|
37,840
|
|
|
Accounts
payable and accrued expenses
|
|
|
(319,149
|
)
|
|
Liabilities
to customers
|
|
|
(574,244
|
)
|
|
Operating
lease liability
|
|
|
(371,898
|
)
|
|
Total
|
|
$
|
30,133,725
|
|
The
acquired intangible assets, useful lives and fair value determined at the acquisition date follows:
|
|
|
Useful
Life (years)
|
|
Fair
Value
|
|
|
Tradename
|
|
10
|
|
$
|
2,100,000
|
|
|
Gaming
licenses
|
|
2
|
|
|
800,000
|
|
|
Developed
technology
|
|
5
|
|
|
5,500,000
|
|
|
Player
relationships
|
|
5
|
|
|
10,700,000
|
|
|
Total
|
|
|
|
$
|
19,100,000
|
|
The
results of operations of Lucky Dino are included in the consolidated financial statements of the Company for the year ended June 30,
2021 since the date of acquisition. The goodwill recorded in the Lucky Dino acquisition is deductible for tax purposes. Transaction related
expenses were $1,280,766 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated
statements of operations.
Acquisition
of EGL
On
January 21, 2021, the Company acquired all the issued and outstanding share capital of EGL for total purchase consideration of $2,975,219.
The total purchase consideration included $481,386 of cash paid at closing, (net cash paid at closing being $477,350 after adjustment
for cash acquired of $4,036), and the issuance of 292,511 shares of common stock with a fair value of $2,193,833 as determined using
the closing share price on the date of acquisition. The purchase consideration also included an estimate of $300,000 for contingent consideration
(“Holdback Consideration”) payable by the Company in cash and share consideration based on the progress of EGL towards the
achievement of certain revenue targets based on the ability of EGL to achieve certain revenue targets by May 16, 2021. The Holdback Consideration
was settled by the Company for $145,153 paid in cash, (increasing the total cash paid for EGL to $622,503), and through issuance of 63,109
shares of common stock with a fair value of $597,650, as determined using the closing price on the date of settlement. The
incremental consideration paid in excess of the amount estimated at Holdback Consideration of $442,803 was recorded to change
in fair value of contingent consideration within the statement of operations for the year ended June 30, 2021.
The
terms of the EGL purchase agreement may further require the Company to pay an additional $2,750,000 (equivalent to approximately £2,000,000
of purchase price using exchange rates at the acquisition date) in contingent earnout consideration (“Earnout Consideration”)
if EGL is to achieve an earnings benchmark on the 18 month anniversary of the closing date. On the date of acquisition, the Company determined
that the likelihood of a payout of the Earnout Consideration was remote and therefore did not assign a value to the Earnout Consideration
on the date of acquisition. This considers the Earnout Consideration benchmark increases during the earnout period for amounts invested
by the Company in the operations of EGL. The Earnout Consideration benchmark used to determine the minimum threshold for payment of additional
purchase consideration payable by the Company also increases should there be an increase in the value of the share consideration that
was issued by the Company on the date of acquisition.
A
summary of the purchase consideration follows:
|
Cash
paid at closing
|
|
$
|
481,386
|
|
|
Share
consideration issued at closing
|
|
|
2,193,833
|
|
|
Holdback
Consideration
|
|
|
300,000
|
|
|
Total
purchase price consideration
|
|
$
|
2,975,219
|
|
The
allocation of assets acquired and liabilities assumed follows:
|
Cash
|
|
$
|
4,036
|
|
|
Accounts
receivable
|
|
|
141,031
|
|
|
Other
receivables
|
|
|
32,923
|
|
|
Equipment
|
|
|
11,274
|
|
|
Intangible
assets
|
|
|
1,371,789
|
|
|
Goodwill
|
|
|
1,978,668
|
|
|
Other
non-current assets
|
|
|
5,382
|
|
|
Accounts
payable and accrued expenses
|
|
|
(118,157
|
)
|
|
Deferred
revenue
|
|
|
(95,062
|
)
|
|
Notes
payable
|
|
|
(68,589
|
)
|
|
Deferred
income taxes
|
|
|
(288,076
|
)
|
|
Total
|
|
$
|
2,975,219
|
|
The
acquired intangible assets, useful lives and fair value at the acquisition date follows:
|
|
|
Useful
Life (years)
|
|
Fair
Value
|
|
|
Tradename
|
|
10
|
|
$
|
411,537
|
|
|
Developed
technology
|
|
5
|
|
|
823,073
|
|
|
Customer
relationships
|
|
5
|
|
|
137,179
|
|
|
Total
|
|
|
|
$
|
1,371,789
|
|
The
following table summarizes the change in fair value of the Holdback Consideration that was settled by the Company through the payment
of cash and issuance of common stock:
|
Fair
value of contingent share consideration at January 21, 2021
|
|
$
|
300,000
|
|
|
Change
in fair value contingent consideration
|
|
|
442,803
|
|
|
Payment
of Holdback Consideration in cash
|
|
|
(145,153
|
)
|
|
Stock
issued of Holdback Contingent in shares
|
|
|
(597,650
|
)
|
|
Fair
value of contingent share consideration at June 30, 2021
|
|
$
|
—
|
|
The
results of operations of EGL are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the EGL acquisition is not deductible for tax purposes. Transaction related expenses
were immaterial for the year ended June 30, 2021.
Acquisition
of Argyll
On
July 31, 2020, the Company acquired Argyll, an online casino and sportsbook operator for total purchase consideration $7,802,576. The
purchase consideration includes $1,250,000 in cash comprised of a cash deposit of $500,000 that had been paid during the year ended June
30, 2020, as well as cash paid at closing of $750,000 (net cash paid being $728,926 in fiscal 2021 after adjustment for cash acquired
of $21,074). The purchase consideration also includes the issuance of 650,000 shares of common stock with a fair value of $3,802,500
and the issuance of warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share
during a term of three years.
A
summary of the purchase consideration follows:
|
Cash
paid
|
|
$
|
1,250,000
|
|
|
Share
consideration issued at closing
|
|
|
3,802,500
|
|
|
Fair
value of warrants issued at closing
|
|
|
2,750,076
|
|
|
Total
purchase price consideration
|
|
$
|
7,802,576
|
|
The
allocation of assets acquired and liabilities assumed follows:
|
Cash
|
|
$
|
21,074
|
|
|
Receivables
reserved for users
|
|
|
27,777
|
|
|
Other
receivables
|
|
|
605,898
|
|
|
Prepaid
expenses and other current assets
|
|
|
413,441
|
|
|
Equipment
|
|
|
70,712
|
|
|
Operating
lease right-of-use asset
|
|
|
373,016
|
|
|
Intangible
assets
|
|
|
7,333,536
|
|
|
Goodwill
|
|
|
4,143,224
|
|
|
Other
non-current assets
|
|
|
1,130,034
|
|
|
Accounts
payable and accrued expenses
|
|
|
(2,471,244
|
)
|
|
Liabilities
to customers
|
|
|
(1,737,106
|
)
|
|
Notes
payable
|
|
|
(327,390
|
)
|
|
Operating
lease liability
|
|
|
(240,353
|
)
|
|
Deferred
income taxes
|
|
|
(1,540,043
|
)
|
|
Total
|
|
$
|
7,802,576
|
|
The
acquired intangible assets, useful lives and a fair value at the acquisition date follows:
|
|
|
Useful
Life (years)
|
|
Fair
Value
|
|
|
Tradename
|
|
10
|
|
$
|
1,440,516
|
|
|
Gaming
licenses
|
|
2
|
|
|
916,692
|
|
|
Player
interface
|
|
5
|
|
|
2,226,252
|
|
|
Player
relationships
|
|
5
|
|
|
2,750,076
|
|
|
Total
|
|
|
|
$
|
7,333,536
|
|
The
results of operations of Argyll are included in the consolidated financial statements of the Company for the year ended June 30, 2021
since the date of acquisition. During the year ended June 30, 2021, the Company recorded a measurement period adjustment to reduce the
preliminary purchase consideration by $2,738,095 as the Company updated the fair value of the warrants issued using a Monte Carlo simulation.
The Company also recorded a measurement period adjusted to update the preliminary purchase price allocation based on final allocation
of fair value to identifiable intangible assets. The goodwill is not deductible for tax purposes. Transaction related expenses were immaterial
for the year ended June 30, 2021.
Acquisition
of Flip
On
September 3, 2020 the Company acquired the software development operations of Flip Sports Limited (“FLIP”) for cash of $100,000,
share consideration of $411,817 resulting from the issuance 93,808 shares of common stock by the Company at the share price on the date
of acquisition, and contingent share consideration payable based on the retention of certain key FLIP employees and having an estimated
fair value of $500,000 on the date of acquisition. The contingent share consideration was settled on March 3, 2021 through the issuance
of 93,808 shares of common stock have a market value on the date of settlement of $1,805,804, resulting in the recognition of $1,305,804
as the change in fair value of contingent consideration in the consolidated statement of operations for the year ended June 30, 2021.
A
summary of the purchase consideration follows:
|
Cash
|
|
$
|
100,000
|
|
|
Share
consideration issued at closing
|
|
|
411,817
|
|
|
Contingent
share consideration
|
|
|
500,000
|
|
|
Total
purchase price consideration
|
|
$
|
1,011,817
|
|
The
allocation to the assets acquired follows:
|
Intangible
assets (developed software)
|
|
$
|
550,000
|
|
|
Goodwill
|
|
|
461,817
|
|
|
Total
purchase price consideration
|
|
$
|
1,011,817
|
|
The
developed software was determined to have an estimated useful life of 5 years. During the year ended June 30, 2021, the Company recorded
a measurement period adjustment of $88,183 to reduce the amount of goodwill due to a decrease in the fair value of the purchase share
consideration issued at closing. The following table summarizes the change in fair value of the FLIP contingent share consideration that
was settled by the Company through the issuance of common stock:
|
Fair
value of contingent share consideration at September 3, 2020
|
|
$
|
500,000
|
|
|
Change
in fair value contingent consideration
|
|
|
1,305,804
|
|
|
Stock
issued settlement of contingent share consideration (March 3, 2021)
|
|
|
(1,805,804
|
)
|
|
Fair
value of contingent share consideration at June 30, 2021
|
|
$
|
—
|
|
The
results of operations of FLIP are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the FLIP acquisition is deductible for tax purposes. Transaction related expenses for
FLIP were not material to the consolidated statement of operations.
Pro
Forma Operating Results
The
following table summarizes pro forma results of operations for the year ended June 30, 2021 and 2020 as if the Argyll, Lucky Dino, EGL,
ggCircuit and Helix have been acquired on July 1, 2019. The results of operations of FLIP were excluded due to immateriality. The pro
forma results of operations for the year ended June 30, 2021 and 2020 were prepared for comparative purposes only and do not purport
to be indicative of what would have occurred had these acquisitions been made as of July 1, 2019 and may not be useful in predicting
the future results of operations for the Company. The actual results of operations may differ materially from the pro forma amounts included
in the table below.
|
|
|
Pro
Forma (unaudited)
for the year ended
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net
revenue
|
|
$
|
36,748,329
|
|
|
$
|
35,321,912
|
|
|
Net
loss
|
|
$
|
(37,776,598
|
)
|
|
$
|
(20,556,084
|
)
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(2.06
|
)
|
|
$
|
(1.84
|
)
|
The
pro forma operating results of operations for the year ended June 30, 2021 and 2020 include amortization of intangibles, depreciation
of equipment and cash proceeds made available through the issuance of equity to facilitate the acquisitions.
Note
4 – Other Receivables
The
components of other receivables follows:
|
|
|
June
30, 2021
|
|
|
Marketing
receivables from revenue partners
|
|
$
|
233,725
|
|
|
Receivable
from revenue sharing arrangement
|
|
|
137,461
|
|
|
Other
|
|
|
287,559
|
|
|
Other
receivables
|
|
$
|
658,745
|
|
At
June 30, 2020, there were no amounts recorded as other receivables.
Note
5 – Prepaid Expenses and Other Current Assets
The
components of prepaid expenses and other current assets follow:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Prepaid
marketing costs
|
|
$
|
1,727,669
|
|
|
$
|
—
|
|
|
Prepaid
insurance
|
|
|
175,620
|
|
|
|
159,941
|
|
|
Prepaid
equity
|
|
|
—
|
|
|
|
100,000
|
|
|
Other
prepaid operating costs
|
|
|
1,361,055
|
|
|
|
3,404
|
|
|
Prepaid
expenses and other current assets
|
|
$
|
3,264,344
|
|
|
$
|
263,345
|
|
Note
6 – Equipment
The
components of equipment follow:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Computer
equipment
|
|
$
|
258,049
|
|
|
$
|
14,450
|
|
|
Furniture
and equipment
|
|
|
249,070
|
|
|
|
20,241
|
|
|
Leasehold
improvements
|
|
|
221,787
|
|
|
|
—
|
|
|
Finance
lease asset
|
|
|
117,979
|
|
|
|
—
|
|
|
Equipment,
at cost
|
|
|
846,885
|
|
|
|
34,691
|
|
|
Accumulated
depreciation and finance lease amortization
|
|
|
(119,943
|
)
|
|
|
(6,650
|
)
|
|
Equipment,
net
|
|
$
|
726,942
|
|
|
$
|
8,041
|
|
During
the years ended June 30, 2021 and 2020, the Company recorded total depreciation expense and finance lease amortization of $111,380 and
$8,537, respectively.
Note
7 – Goodwill and Intangible Assets
A
summary of the changes in the balance of goodwill follows:
|
|
|
Fiscal
2021
|
|
|
Goodwill,
balance at beginning of year
|
|
$
|
—
|
|
|
Acquisitions
|
|
|
40,964,350
|
|
|
Foreign
currency translation
|
|
|
(26,890
|
)
|
|
Goodwill,
balance at end of year
|
|
$
|
40,937,370
|
|
The
intangible asset balance was not material to the consolidated financial statements at June 30, 2020. The intangible amounts comprising
the intangible asset balance at June 30, 2021 follows:
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
Tradename
|
|
$
|
7,396,804
|
|
|
$
|
(257,018
|
)
|
|
$
|
7,139,786
|
|
|
Developed
technology and software
|
|
|
25,231,659
|
|
|
|
(1,242,605
|
)
|
|
|
23,989,054
|
|
|
Gaming
licenses
|
|
|
1,752,612
|
|
|
|
(573,876
|
)
|
|
|
1,178,736
|
|
|
Player
relationships
|
|
|
13,956,083
|
|
|
|
(1,253,135
|
)
|
|
|
12,702,948
|
|
|
Internal-use
software
|
|
|
777,171
|
|
|
|
(15,140
|
)
|
|
|
762,031
|
|
|
Total
|
|
$
|
49,114,329
|
|
|
$
|
(3,341,774
|
)
|
|
$
|
45,772,555
|
|
During
the year ended June 30, 2021, the Company recorded amortization expense for its intangible assets of $3,304,872. During the year ended
June 30, 2020, the Company recorded an impairment associated with the website asset of $67,132. There was no impairment of intangibles
assets recorded by the Company during the year ended June 30, 2021.
The
estimated future amortization related to definite-lived of intangible assets, including amortization related to the preliminary allocation
of fair value to the intangible assets of ggCircuit and Helix, follows:
|
Fiscal
2022
|
|
$
|
9,569,242
|
|
|
Fiscal
2023
|
|
|
9,032,065
|
|
|
Fiscal
2024
|
|
|
8,729,635
|
|
|
Fiscal
2025
|
|
|
8,729,635
|
|
|
Fiscal
2026
|
|
|
6,192,914
|
|
|
Thereafter
|
|
|
3,519,064
|
|
|
Total
|
|
$
|
45,772,555
|
|
Note
8 – Other Non-Current Assets
The
components of other non-current assets follows:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Deposit
for gaming duties
|
|
$
|
755,474
|
|
|
$
|
—
|
|
|
iGaming
deposits with service providers
|
|
|
434,738
|
|
|
|
—
|
|
|
Rent
deposit
|
|
|
91,253
|
|
|
|
—
|
|
|
Other
|
|
|
33,544
|
|
|
|
6,833
|
|
|
Other
non-current assets
|
|
$
|
1,315,009
|
|
|
$
|
6,833
|
|
Note
9 – Account Payable and Accrued Expenses
The
components of account payable and accrued expenses follows:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Trade
accounts payable
|
|
$
|
2,609,212
|
|
|
$
|
499,343
|
|
|
Accrued
marketing
|
|
|
1,582,470
|
|
|
|
—
|
|
|
Accrued
payroll and benefits
|
|
|
1,093,263
|
|
|
|
96,500
|
|
|
Accrued
professional and other expenses
|
|
|
2,451,366
|
|
|
|
181,940
|
|
|
Accrued
jackpot liabilities
|
|
|
432,504
|
|
|
|
—
|
|
|
Accrued
legal settlement (Note 13)
|
|
|
289,874
|
|
|
|
—
|
|
|
Related
party payable
|
|
|
—
|
|
|
|
21,658
|
|
|
Total
|
|
$
|
8,458,689
|
|
|
$
|
811,549
|
|
Note
10 – Related party transactions
The
Company reimburses the Chief Executive Officer for office rent and related expenses. During the year ended June 30, 2021, the Company
incurred charges of $4,800 from the Chief Executive Officer for office expense reimbursement. As of June 30, 2021, there were no amounts
payable to the Chief Executive Officer. As of June 30, 2020, there was $21,658 payable to the Chief Executive Officer for office expense
reimbursement and for business expenses.
On
May 4, 2017, the Company entered into a services agreement and a referral agreement with Contact Advisory Services Ltd., an entity that
is partly owned by a member of the Board of Directors. During the year ended June 30, 2021 and 2020 the Company expensed approximately
$96,020 and $43,107, respectively, in accordance with these agreements.
The
Company has retained legal and corporate secretarial services from a member of Board of Directors through a consultancy agreement dated
August 1, 2020 and an employment agreement dated June 15, 2020. The legal consultancy agreement requires payments of £18,000 ($24,842
translated using the exchange rate in effect at June 30, 2021) per month 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
The
consolidated balance sheet allocation of assets and liabilities related to operating and finance leases follow:
|
|
|
Consolidated
Balance Sheet Caption
|
|
June
30, 2021
|
|
|
Assets:
|
|
|
|
|
|
|
|
Operating
lease assets
|
|
Operating
lease right-of-use assets
|
|
$
|
1,272,920
|
|
|
Finance
lease assets
|
|
Equipment,
net
|
|
|
114,540
|
|
|
Total
lease assets
|
|
|
|
$
|
1,387,460
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Operating
lease liabilities
|
|
Operating
lease liability - current
|
|
$
|
414,215
|
|
|
Finance
lease liabilities
|
|
Current
portion of long-term debt
|
|
|
50,702
|
|
|
Long-term:
|
|
|
|
|
|
|
|
Operating
lease liabilities
|
|
Operating
lease liability - non-current
|
|
|
878,809
|
|
|
Finance
lease liabilities
|
|
Long-term
debt
|
|
|
63,161
|
|
|
Total
lease liabilities
|
|
|
|
$
|
1,406,887
|
|
The
operating lease expense and finance lease expense for the year ended June 30, 2021 were $156,543 and $2,039, respectively. The rent expense
for short-term leases was not material to the consolidated financial statements.
Weighted
average remaining lease terms and discount rates follow:
|
|
|
June
30, 2021
|
|
|
Weighted
Average Remaining Lease Term (Years):
|
|
|
|
|
|
Operating
leases
|
|
|
4.11
|
|
|
Finance
leases
|
|
|
2.50
|
|
|
|
|
|
|
|
|
Weighted
Average Discount Rate:
|
|
|
|
|
|
Operating
leases
|
|
|
6.82
|
%
|
|
Finance
leases
|
|
|
8.00
|
%
|
The
future minimum lease payments at June 30, 2021 follows:
|
|
|
Operating
Lease
|
|
|
Finance
Lease
|
|
|
Fiscal
2022
|
|
$
|
481,072
|
|
|
$
|
50,702
|
|
|
Fiscal
2023
|
|
|
313,065
|
|
|
|
50,702
|
|
|
Fiscal
2024
|
|
|
323,065
|
|
|
|
25,352
|
|
|
Fiscal
2025
|
|
|
233,417
|
|
|
|
—
|
|
|
Fiscal
2026
|
|
|
76,396
|
|
|
|
—
|
|
|
Thereafter
|
|
|
58,564
|
|
|
|
—
|
|
|
Total
lease payments
|
|
|
1,485,579
|
|
|
|
126,756
|
|
|
Less:
imputed interest
|
|
|
192,556
|
|
|
|
12,893
|
|
|
Present
value of lease liabilities
|
|
$
|
1,293,023
|
|
|
$
|
113,863
|
|
Note
12 – Long-term Debt
Notes
Payable and other long term debt
The components
of notes payable and other long-term follows:
|
Notes
payable
|
|
$
|
330,654
|
|
|
Finance
lease obligation (See Note 11)
|
|
|
113,863
|
|
|
|
|
|
444,517
|
|
|
Less
current portion of notes payable and long-term debt
|
|
|
(223,217
|
)
|
|
Notes
payable and other long-term debt
|
|
$
|
221,300
|
|
The
Company assumed a note payable of £250,000 (equivalent to $327,390) in connection with its acquisition of Argyll on July 31, 2021.
The term loan was issued on April 30, 2020 and has a maturity of
3 years, bears interest at 3.49% per annum over the Bank of England base rate, and is secured by the assets and equity of Argyll. The
monthly principal and interest payments on the notes payable commenced in June 2021 and continue for two years through May 2023. The
principal balance of the notes payable at June 30, 2021 was £239,583 ($330,654 using exchange rates at June 30, 2021). Interest
expense on the notes payable was $962 for the year ended June 30, 2021.
The
Company assumed a note payable of £50,000 (equivalent to $68,589) in connection with the acquisition of EGL on January 21, 2021.
The loan allowed for a drawdown period of up to 60 days following
the loan acceptance date and EGL had elected to borrow the total amount available under the loan facility. The Company repaid the principal
amount of £50,000 of this sterling term loan facility (equivalent to $69,257) on March 31, 2021. The loan did not accrue interest
at the time of the repayment.
Senior
Convertible Note
On
June 2, 2021 the Company issued a Senior Convertible Note in the principal amount of $35,000,000 million with the Company receiving proceeds
at issuance of $32.5 million, net of debt issuance costs of $2.5 million. The Senior Convertible Note matures on June 2, 2023,
at which time the Company is required to repay the original principal balance and a “minimum return” equal to 6% of any outstanding
principal. The aggregate principal of the Senior Convertible Note repayable at maturity is $37,100,000 and the Senior Convertible Note
accrues interest at rate of 8% per annum payable in cash monthly. The Senior Convertible Note was issued with 2,000,000 Series
A Warrants and 2,000,000 Series B Warrants . On the date of issuance, the Company recorded the fair value of the Series
A Warrants and Series B Warrants as a discount to the Senior Convertible Note totaling $26,680,000. The debt discount is being amortizing
to interest expense over the term of the Senior Convertible Note using the effective interest method. The obligation resulting from the
issuance of the Series A Warrants and Series B Warrants was determined to qualify for liability classification on the consolidated balance
sheet. See below for further discussion of the Series A Warrants and Series B Warrants.
The
Senior Convertible Note is convertible, at the option of the holder, into shares of the Company’s common stock at a conversion
price of $17.50 per share. The conversion amount is calculated as the principal balance identified for conversion plus a minimum return
of 6% on such principal balance. At any time after issuance, the Company has the option, subject to certain conditions, to redeem some
or all of outstanding principal, inclusive of any minimum return due to the holder based on the number of days the principal is outstanding.
The
Senior Convertible Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock
dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue,
or issue any variable rate securities, the holder of the Senior Convertible Note has the additional right to substitute such variable
price (or formula) for the conversion price. If the holder were to substitute a floor price of $2.1832 as the variable price, the Company
would be required to settle in cash any difference between the market value of the shares subject to conversion at the floor price and
the market value of the shares using the variable price, excluding any reference to the floor. The holder of the Senior Convertible Note
also has the right to have the Company redeem all or a portion of the Senior Convertible Note at a redemption price equal to 106% of
the portion of the Senior Convertible Note being redeemed should the Company provide notice of incurring additional debt.
If
an event of default occurs, the holder of the Senior Convertible Note has the right to alternate conversion (“Alternate Conversion”)
and may elect to convert the Senior Convertible Note, inclusive of a 15% premium payable in a cash due such an acceleration of the applicable
principal, at a price (“Alternate Conversion Price”) equal to the greater of the floor price of $2.1832 or a price derived
from the volume weighted average price of the Company’s common stock at the time of Alternate Conversion. If the Alternate Conversion
were to include the floor price of $2.1832 as the Alternate Conversion Price, the Company would be required to settle in cash any difference
between the market value of the shares subject to the Alternate Conversion using the floor price and the market value of the shares using
the Alternate Conversion Price, excluding any reference to the floor.
In
connection with an event of default, the holder may require the Company to redeem in cash any or all of the Senior Convertible
Note. The redemption price will equal 115% of the outstanding principal of the Convertible Note to be redeemed, and accrued and unpaid
interest and unpaid late charges thereon, or an amount equal to market value of the shares of the Company’s common stock
underlying the Convertible Note, as determined in accordance with the Convertible Note, if greater. The noteholder will not have the
right to convert any portion of a Senior Convertible Note, to the extent that, after giving effect to such conversion, the holder, together
with certain related parties, would beneficially own in excess of 4.99% of the shares of our common stock outstanding immediately after
giving effect to such conversion. The holder may from time to time increase this limit to 9.99%, provided that any such increase will
not be effective until the 61st day after delivery of a notice to us of such increase.
In
addition, unless obtain approval is obtained from the Company’s stockholders as required by Nasdaq, the Company is
prohibited from issuing any shares of common stock upon conversion of the Senior Convertible Note or otherwise pursuant to the terms
of the Senior Convertible Note, if the issuance of such shares of common stock would exceed 19.99% of the Company’s outstanding
shares of common stock, or otherwise exceed the aggregate number of shares of common stock which the Company may issue without
breaching our obligations under the rules and regulations of Nasdaq.
In
connection with a change of control, as defined in the Senior Convertible Note, the holder may require the Company to redeem all or any
portion of the Senior Convertible Note. The redemption price per share will equal the greatest of (i) 115% of the outstanding principal
of the Senior Convertible Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, (ii) 115% of the market
value of the shares of our common stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible
Note, and (iii) 115% of the aggregate cash consideration that would have been payable in respect of the shares of the Company’s
common stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note.
The
Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of
liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of
assets, among other matters. We also will be subject to certain financial covenants relating to available cash, ratio of outstanding
indebtedness to market capitalization and minimum cash flow. The Company is also subject to financial covenants as it relates minimum
revenues commencing June 30, 2022.
The
Company evaluated its compliance with the debt covenants in the Senior Convertible Note as of June 30, 2021 and the period from July
1, 2021 through October 13, 2021 and determined that it had not maintained compliance with certain covenants in the Senior Convertible
Note. The Company therefore requested and received a waiver for (i) any known breaches or potential breaches of financial covenants in
effect related to the available cash test and minimum cash flow test through December 25, 2021, (ii) any known breach resulting from
the existing lien on the shares of Prozone Limited obtained in the acquisition of the Bethard Business (see discussion of the acquisition
of the Bethard Business as a subsequent event in Note 19) and (iii) any known breach which would result from the issuances of up to 200,000
shares common stock in connection with the Company’s proposed purchase of certain equity interests in Game Fund Partners Group
LLC (as further discussed as a subsequent event in Note 19). In addition, the Company requested and received an amendment to the Senior
Convertible Note wherein the permitted ratio of outstanding debt to market capitalization was increased temporarily from 25% to 35% through
December 25, 2021.
In
consideration for the waiver, the Company agreed to permit the immediate conversion of up to $7,500,000 of the outstanding balance of
the Senior Convertible Note at the Alternate Conversion Price into shares of common stock of the Company. In the event of default following
December 25, 2021, the holder may exercise any and all rights available to it following such a default that includes redemption of the
Senior Convertible Note for cash. The holder may also choose to convert any outstanding indebtedness in the form of the Alternate Conversion
Price as provided in the Senior Convertible Note, subject to the terms and conditions contained therein, until such time as the Company
is in compliance with the above-mentioned Sections.
Warrants
The
Company issued 2,000,000 Series A Warrants and 2,000,000 Series B Warrants to the holder of the Series Convertible Note.
The Series A warrants may be exercised at any time after issuance for one share of common stock of the Company at an exercise price of
$17.50. The Series B Warrants may only be exercised to the extent that the indebtedness owing under the Senor Convertible Note is redeemed.
As a result, for each share of common stock determined to be issuable upon a redemption of principal of the Senior Convertible Note,
one Series B Warrant will vest and be eligible for exercise at an exercise price of $17.50. The Series A Warrants and B Warrants are
callable by the Company should the volume weighted average share price of the Company exceed $32.50 for each of 30 consecutive trading
days following the date such warrants become eligible for exercise. The Series A Warrants and Series B Warrants also contain a beneficial
ownership limitation of 4.99% which may be increased or decreased up to 9.99%, provided that any such increase will not be effective
until the 61st day after delivery of a notice to us of such increase.
The
Company determined the Series A and Series B Warrants should be classified as a liability as the warrants are redeemable for cash in
the event of a fundamental transaction, as defined in the Senior Convertible Note agreement, which includes a change in control. The
Company has recorded a liability for the Series A Warrants and Series B at fair value on the issuance date with subsequent changes in
fair value reflected in earnings. On the date of issuance, the Company determined the total fair value of the Series A Warrants
and Series B Warrants to be $26,680,000, with a fair value of $15,320,000 determined for the Series A Warrants and a fair value
of $11,360,000 determined for the Series B Warrants. The Company recorded a gain resulting from the change in fair value of
the Series A Warrants and Series B warrants of $3,180,000 for the period from the issuance date through June 30, 2021. Refer to Note
18 for additional disclosures related to the change in the fair value of the warrant liabilities.
The
proceeds from the issuance of the Senior Convertible Note were allocated to the Series A and Series B Warrants using the with-and-without
method. Under this method, the Company first allocated the proceeds from the issuance of the Senior Convertible Note to the Series A
Warrants and Series B Warrants based on their initial fair value measurement, and then allocated the remaining proceeds to the Senior
Convertible Note. The debt discount on the Senior Convertible Note is being amortized over its term of two years. The Company recorded
$467,503 to interest expense for amortization of the debt discount for the period from the issuance date through June 30, 2021. The Company
recorded total interest expense of $693,059 for period from the issuance date through June 30, 2021.
The
maturities of long-term debt follows:
|
Fiscal
2022
|
|
$
|
223,217
|
|
|
Fiscal
2023
|
|
|
37,334,193
|
|
|
Total
before unamortized discount
|
|
|
37,557,410
|
|
|
Less:
unamortized discount and issuance costs
|
|
|
(30,810,389
|
)
|
|
Total
debt
|
|
$
|
6,747,021
|
|
Note
13 – Public Offering and Conversion of Debt
On
April 16, 2020, the Company closed its public offering (“April Offering”) in which it sold 1,980,000 units consisting of
one share of common stock and two warrants (“Unit A Warrant” and “Unit B Warrant”, and collectively with the
common stock the “Units”) at the public offering price of $4.25 per share. The Units were offered and sold to the public
pursuant to the registration statement on Form S-1 filed by the Company with the Securities and Exchange Commission on May 2, 2019, as
amended, which became effective on April 14, 2020. In connection with the April Offering, the Company (i) received net proceeds of $6,771,440,
after deducting underwriting discounts, commissions and offering fees, (ii) issued 1,217,241 shares of common stock and 2,434,482 warrants
with an exercise price of $4.25 per share upon the conversion of $4,138,585 of the Company’s convertible debt and accrued interest,
(iii) recorded $4,793,462 of additional paid in capital in connection with the extinguishment of the Company’s derivative liability
associated with the convertible debt, and (iv) paid $125,000 of principal on convertible debt and recognized a gain on settlement of
debt of $153,401 upon extinguishment of a derivative liability attributed to the convertible debt.
In
connection with the April Offering, the Company entered into an underwriting agreement (the “Underwriting Agreement”) dated
April 14, 2020 that granted a 45-day option to purchase up to 297,000 additional shares of Common Stock, and/or 297,000 Unit A Warrants,
and/or 297,000 Unit B Warrants, or any combination thereof, to cover over-allotments, if any. Pursuant to the Underwriting Agreement,
the underwriters exercised the over-allotment option to purchase 209,400 additional Unit A Warrants and 209,400 additional Unit B Warrants
at a price of $0.01 for each of the Unit A and Unit B Warrants. The Company received net proceeds of $823,759 from the exercise of the
over-allotment option granted to the underwriters.
The
April Offering also resulted in the conversion of the outstanding debt obligations of the Company into shares of common stock and warrants
to purchase shares of common stock of the Company. The outstanding debt obligations that were settled upon conversion included the Secured
Convertible note dated November 13, 2018 as well as the bridge notes issued by the Company in connection with the private placement offerings,
as discussed further below.
Conversion
of $2,200,000 Secured Convertible Note
On
November 13, 2018 the Company issued face value $2,200,000 Senior Convertible Notes (“2018 Senior Convertible Notes”) at
a 10% original issue discount together with 244,445 warrants for net proceeds received of $2,000,000 (herein referred to as the “November
2018 Offering”). The cash paid for financing costs by the Company was $336,193. The 2018 Senior Convertible Notes were secured
by the assets of the Company and accrued interest at 5% per annum, payable in cash at maturity. The principal on the 2018 Senior Convertible
was convertible into shares of common stock of the Company at the option of the holder upon issuance at a conversion price of $9.00 per
share, subject to adjustment for reorganization events and subsequent sales by the Company of its common stock at a price per share below
$9.00. The 2018 Senior Convertible Notes also contained certain traditional default provisions that were linked to credit or interest
risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company had concluded that the 2018 Senior Convertible
Notes contained an embedded conversion option that was indexed to the Company’s stock which contain an optional cash settlement
feature. The embedded conversion option was determined to be a derivative and was recognized as a liability at fair value at inception
and further adjusted based on changes in fair value through earnings at each reporting period.
The
warrants issued with the 2018 Senior Convertible Notes were exercisable at a price of $11.25 through November 13, 2021,subject to adjustment
for reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25.The Company
had concluded that these warrants issued contained an optional cash settlement feature. Therefore, these warrants were recognized as
a liability at fair value at inception and further adjusted based on changes in fair value through earnings at each reporting period.
The
Company also issued 48,889 warrants its placement agents warrants to purchase its common stock in connection with the November 2018 Offering.
The warrants were exercisable until December 12, 2023 at a price of $11.25 per share, subject to adjustment for reorganization events
and subsequent sales by the Company of shares of its common stock at a price per share below $11.25. The Company had initially concluded
that these warrants contained an optional cash settlement feature. Therefore, these warrants were recognized as a liability at fair value
at inception and further adjusted based on changes in fair value through earnings at each reporting period. During the year ended June
30, 2020, the placement agent warrants were exchanged and replaced with new warrants whereby their derivative feature was removed. Upon
replacement, the warrants were adjusted to fair value and the derivative feature was recorded as additional paid in capital in the amount
of $221,222.
On
July 17, 2019, the Company and the investors to the November 2018 Offering (“Investors”) entered into Waiver Agreements (the
“July 2019 Waiver Agreements”). Pursuant to the terms of the July 2019 Waiver Agreements, the Investors waived the exercise
of remedies with regard to certain breaches of agreements and any and all events of defaults between the Company and the Investors. In
consideration for the Investors entrance into the July 2019 Waiver Agreements, the Company increased the principal amount of each note
issued in the November 2018 Offering by 30%, in the form of an Amended and Restated Senior Secured Convertible Promissory Note (the “Amended
and Restated Notes”). Additionally, for its role as lead investor, facilitator and negotiating the terms of the 2019 Waiver Agreements,
the Company issued to Cavalry Fund I LP warrants to purchase 3,333 shares of Common Stock exercisable on or after October 1, 2019 for
a term of three (3) years from such date at an exercise price of $11.25 per share (the “Cavalry Warrant”).
The
Company evaluated the debt modification for the Amended and Restated Notes in accordance with ASC 470-50 and concluded that the debt
qualified for debt extinguishment as the 10% cash flow test was met. As a result, the $2,200,000 Secured Convertible Note was written
off and the Amended and Restated Notes were recorded at fair value as of July 17, 2019. On July 17, 2019 the Company wrote off the remaining
principal balance of $2,200,000 and recorded the Amended and Restated Notes at fair value in the amount of $4,476,412. On July 17, 2019,
of the $4,476,412 fair value, $2,860,000 represents the face amount of the Amended and Restated Note and $1,616,412 represents the deemed
premium paid for the Amended and Restated Notes which was recorded as additional debt principal to be amortized over the remaining life
of the Amended and Restated Notes.
On
November 19, 2019, the Company and the Investors had entered into subsequent waiver agreements (the “November 2019 Waiver Agreements”).
Pursuant to the terms of the November 2019 Waiver Agreement, the Investors agreed to waive the exercise of remedies with regard to any
and all events of default between the Company and the Investors, and the Investors agreed to extend the maturity of the Amended and Restated
Note until February 14, 2020. In consideration for the November 2019 Waiver Agreements, the Company issued 5,435 shares of common stock
and recorded $26,902 as interest expense. The Company also accelerated the remaining amortization of the July 17, 2019 premium on November
19, 2019. As of March 31, 2020, the Investors verbally agreed to extend the maturity date until the filing of the Company’s registration
statement, which was filed on April 15, 2020.
In
consideration for the Investors entrance into the November 2019 Waiver Agreements, the Company has agreed to issue to each Investor an
additional warrant to purchase such number of shares of the Company’s Common Stock equal to 5% of the warrants initially issuable
to such Investor in the November 13, 2018 Offering, as amended. These additional warrants had an exercise price of $11.25 per share and
were substantially the same as the warrants issued in the November 13, 2018 Offering, except that they contained no cashless provision,
ratchet provision or piggyback registration provisions.
The
Company evaluated the debt modification for the Amended and Restated Notes in accordance with ASC 470-50 and concluded that the debt
did not qualify for debt extinguishment as the 10% cash flow test was not met. As a result, the additional warrants issued in connection
with the waiver were fair valued and recorded as a debt discount, and are being amortized to interest expense over the remaining term
of the debt. In addition, the Company incurred $50,000 of deferred financing fees in connection with the modification and expensed the
fees to interest expense immediately.
The
Amended and Restated Notes were mandatorily converted in full on April 15, 2020 upon the consummation of the Company’s public offering
of its securities and simultaneous listing on the Nasdaq Capital Market. The Company accrued interest at the default interest rate, which
was recorded as a gain on extinguishment of debt upon conversion as no default interest was called. For the year ended June 30, 2020,
the Company recorded a reduction to amortization expense in the amount of $1,616,412 for the amortization of the deemed premium and a
loss on extinguishment of debt in the amount of $2,795,582.
Private
Placement Offerings
On
August 14, 2019 and August 29, 2019, the Company consummated the initial closings (“Initial Closings”) of a private placement
offering (“Private Offerings”) whereby the Company entered into those certain securities purchase agreement (the “August
2019 Purchase Agreements”) with seven accredited investors (the “August Investors”). Pursuant to the August 2019 Purchase
Agreements, the Company issued the August Investors those certain convertible promissory notes (the “August Convertible Promissory
Notes”) in the aggregate principal amount of $522,500 (including a 10% original issue discount) and warrants (the “August
Investor Warrants”) to purchase 58,057 shares of the Company’s common stock for aggregate gross proceeds of $475,000.
On
October 11, 2019 and December 16, 2019, Company consummated additional closings of the Private Offerings whereby the Company entered
into certain securities purchase agreement accredited investors (the “Q2 Closings”). Pursuant to the Q2 Closings, the Company
issued the investors those certain convertible promissory notes (the “Q2 Promissory Notes”) in the aggregate principal amount
of $753,500 (including a 10% original issue discount) and to purchase 83,722 shares of the Company’s common stock for aggregate
gross proceeds of $685,000.
The
August Convertible Promissory Notes and Q2 Promissory Notes, together and in the aggregate the (“Bridge Notes”) accrued interest
at a rate of 5% per annum and were initially convertible into shares of the Company’s common stock at a conversion price of $9.00
per share, subject to adjustment (the “Conversion Price”). The Bridge Notes also contained a mandatory conversion mechanism
whereby unpaid principal and accrued interest on the Bridge Notes, upon the closing of a Qualified Offering (as defined therein) converts
into the securities offered in such a Qualified Offering at the lower of (i) the Conversion Price and (ii) 80% of the offering price
in the Qualified Offering. The Bridge Notes contain customary events of default (each an “Event of Default”) and mature on
August 14, 2020, August 29, 2020, October 16, 2020 and December 6, 2020. If an Event of Default occurs, the outstanding principal amount
of the Bridge Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Bridge Notes will
become, at the holder’s election, immediately due and payable in cash at the “Mandatory Default Amount”. The Mandatory
Default Amount means the sum of 130% of the outstanding principal amount of the Bridge Notes plus accrued and unpaid interest, including
default interest of 18% per year, and all other amounts, costs, expenses and liquidated damages due in respect of the Bridge Notes.
Pursuant
to the Bridge Notes, each investor was entitled to 100% warrant coverage, such that investor in the Bridge Notes received the same number
of warrants to purchase shares of Common Stock as is the number of shares of Common Stock initially issuable upon conversion of the Bridge
Notes as of the date of issuance. The warrants issued in accordance with the Bridge Notes were exercisable at a price of $11.25 per share,
subject to adjustment from the date of issuance through August 14, 2022, August 29, 2022, October 11, 2022 and December 16, 2022.
Joseph
Gunnar & Co., LLC (the “Placement Agent”) acted as placement agent for the Offerings and received cash compensation of
$85,000 and warrants to purchase 20,778 shares of the Company’s common stock, at an initial exercise price of $11.25 per share,
subject to adjustment (“Agent Warrants”). The Agent Warrants may be exercised on a “cashless” basis and expire
August 14, 2024 and August 29, 2024.
The
Bridge Notes were mandatorily converted in full on April 15, 2020 upon the consummation of the April Offering.
Note
14 – Commitments and contingencies
Commitments
On
October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (“Team”) to obtain certain sponsorship-related
rights and benefits that include the ability to access commercial opportunities. The Company had agreed to initially pay the Team $516,000
in cash and $230,000 in common stock during the period from October 1, 2019 to June 30, 2022. On August 6, 2020, the Company entered
into an amended and restated sponsorship agreement (“Amended Sponsorship Agreement”) with the Team that included cash payments
totaling $2,545,000 and the issuance of common stock totaling $825,0000 for the term of the agreement ending January 31, 2023. The cost
of the sponsorship arrangement with the Team is recorded to sales and marketing expense on the consolidated statements of operations
over the term of the Amended Sponsorship Agreement. During the year ended June 30, 2021, the Company has recorded $1,217,357 in sales
and marketing expense related to the Team sponsorship. The amount accrued in accounts payable and accrued expenses on the consolidated
balance sheets for the Team sponsorship was $180,696 at June 30, 2021. As of June 30, 2021, the commitments under this agreement are
estimated at $1,375,000 for the year ended June 30, 2022, and $750,000 for the year ended June 30, 2023.
On
August 17, 2020, the Company entered into an agreement with Bally’s Corporation, an operator of various online gaming and wagering
services in the state of New Jersey, USA, to assist the Company in its entrance into the sports wagering market in New Jersey under the
State Gaming Law. The commencement date of the arrangement with Bally’s is set as the earlier of launch date of the online gaming
service being offered in New Jersey, or March 31, 2021. The Company determined the commencement date of the arrangement to be March 31,
2021. The Bally’s agreement extends for 10 years from the date of commencement requiring the Company to pay $1,250,000 and issue
10,000 shares of common stock on each annual anniversary date. The Company also paid the $1,550,000 on June 11, 2021, and issue 50,000
shares of common stock on July 1, 2021 in connection with the commencement of the arrangement. During the year ended June 30, 2021, the
Company has recorded $357,167 in sales and marketing expense and has further recorded an asset of $1,142,833 at June 30, 2021 in prepaid
expenses and other current assets on the consolidated balance sheets. As of June 30, 2021, the commitments under this agreement are estimated
at $1,250,000 and 10,000 shares of common stock for the year ended June 30, 2022 through the year ended June 30, 2030.
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. At June 30, 2021, the commitments under these agreements are estimated
at $1,654,813 for the year ended June 30, 2022, $1,718,903 for the year ended June 30, 2023, $1,1,282,508 for year ended June 30, 2024,
$908,423 for the year ended June 30, 2025 and $459,756 for the year ended June 30, 2026.
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 brought to arbitration on December 7, 2020.
On February 3, 2021, the arbitration awarded Boustead Securities, LLC $289,874 in damages and allowable costs (excluding attorneys’
fees) with interest accruing approximately $21 per day. At June 30, 2021, the Company has recorded a liability for the amount awarded
in arbitration in accounts payable and accrued expenses in the consolidated balance sheet. The Company paid $294,051 to settle the arbitration
award, inclusive of accrued interest, on August 24, 2021.
On
August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit against the Company alleging that it had breached its obligations
related to an 8% convertible promissory note dated June 3, 2016 and common stock purchase warrants of the same date. On April 30, 2021,
a Settlement Agreement was entered into with Tangiers for an undisclosed amount. The amount of the settlement was not material to the
consolidated financial statements of the Company.
Note
15 – Revenue and Geographic Information
The
Company is a provider of iGaming, traditional sports betting and esports services that commenced revenue generating operations during
the year ended June 30, 2021 with the acquisitions of Argyll, FLIP, EGL, Lucky Dino, GGC and Helix. The revenues and long-lived assets
of Argyll, EGL and Lucky Dino have been identified to our international operations as they principally service customers in Europe, inclusive
of the United Kingdom. The revenues and long-lived assets of FLIP, GGC and Helix principally service customers in the United States.
The
Company did not record revenue during the year ended June 30, 2020. A disaggregation of revenue by type of service for the year ended
June 30, 2021 follows:
|
|
|
Fiscal
2021
|
|
|
Online
betting and casino revenues
|
|
$
|
15,824,054
|
|
|
Esport
service revenues
|
|
|
959,860
|
|
|
Total
|
|
$
|
16,783,914
|
|
A
summary of revenue by geography follows for the year ended June 30, 2021 follows:
|
|
|
Fiscal
2021
|
|
|
United
States
|
|
$
|
671,519
|
|
|
International
|
|
|
16,112,395
|
|
|
Total
|
|
$
|
16,783,914
|
|
A
summary of long-lived assets by geography follows:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
United
States
|
|
$
|
48,144,926
|
|
|
$
|
1,189
|
|
|
International
|
|
|
41,942,870
|
|
|
|
15,685
|
|
|
Total
|
|
$
|
90,087,796
|
|
|
$
|
16,874
|
|
Note
16 – Equity
Preferred
Stock
The
Company has authorized 10,000,000 shares of preferred stock with a par value of $0.001 per share. There were no preferred shares issued
and outstanding at June 30, 2021 and June 30, 2020.
Common
Stock
The
following is a summary of common stock issuances for the year ended June 30, 2021:
|
●
|
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 offering was consummated on February 16, 2021, at which
time the Company received net proceeds of $27,340,000.
|
|
|
|
|
●
|
On
July 31, 2020, the Company issued 650,000 shares of common stock as a component of the purchase consideration for Argyll. The Company
recorded the issuance of these shares at fair value in the amount of $3,802,500. During the year ended June 30, 2021, the Company
also issued 1,000,000 shares of common stock in connection with the exercise of warrants that were included as a component of the
purchase consideration paid for Argyll. The warrants entitled the holder to purchase one share of common stock at $8.00 per share.
The Company recorded the issuance of these shares at the settlement date fair value of $15,480,000 comprised of $8,000,000 of cash
received from the exercise, and non-cash settlement of the warrant liability totalling $7,480,000. The warrant liability established
on the date of acquisition of Argyll was $2,750,076 and subsequently increased to the settlement date fair value by recording a charge
of $4,729,924 in the statement of operations for the year ended June 30, 2021. Refer to discussion of the Argyll acquisition at Note
3.
|
|
●
|
During
the year ended June 30, 2021, the Company issued a total of 187,616 shares of common stock as a component of the purchase consideration
for FLIP, inclusive of share consideration paid to settle a portion of the purchase consideration that was recorded as a contingent
liability. The Company recorded the issuances of these shares at a total fair value of $2,217,621, which includes the initial issuance
of 93,808 shares of common stock at a fair value of $411,817 on September 3, 2020, and the subsequent issuance of 93,808 shares of
common stock on March 3, 2021 at a fair value of $1,805,804 in settlement of contingent purchase consideration. Refer to discussion
of the FLIP acquisition at Note 3.
|
|
|
|
|
●
|
On
January 21, 2021 the Company issued 292,511 shares of common stock as a component of the purchase consideration for EGL. The Company
recorded the issuance of these shares at fair value in the amount of $2,193,833. On May 21, 2021, the Company issued an additional
63,109 shares of common stock with a fair value of $597,650 to settle contingent holdback purchase consideration for the EGL acquisition.
Refer to discussion of the EGL acquisition at Note 3.
|
|
|
|
|
●
|
On
June 1, 2021 the Company issued 830,189 shares of common stock with a fair value of $9,273,211 in connection with the acquisition
of ggCircuit, LLC.
|
|
|
|
|
●
|
On
June 1, 2021 the Company issued 528,302 shares of common stock with a fair value of $5,901,133 in connection with the acquisition
of Helix Holdings, LLC.
|
|
|
|
|
●
|
During
the year ended June 30, 2021, the Company issued 5,503,167 shares of common stock for the exercise of warrants with a weighted average
exercise price of $4.86 per share or $26,737,849 in the aggregate. The warrants issued for shares of common stock in the statement
of stockholders equity (deficit) also includes the cash received of $8,000,000 from the exercise of warrants issued in the acquisition
of Argyll, and the non-cash settlement of the related warrant liability of $7,480,000, discussed above. The Company
recorded issuance costs of $197,627 related to the issuance of warrants during the year ended June 20, 2021.
|
|
●
|
During
the year ended June 30, 2021, the Company issued 5,333 shares of common stock from the exercise of stock options with a weighted
average exercise price of $8.37 per share or $44,637 in the aggregate.
|
|
|
|
|
●
|
During
the year ended June 30, 2021, the Company issued 602,695 shares of its common stock for services rendered with a weighted average
fair value of $4,024,746 per share or $6.68 in the aggregate.
|
The
following is a summary of common stock issuances for the year ended June 30, 2020:
|
●
|
On
January 17, 2020 the Company entered into Exchange Agreements with eighteen of its investors whereby the investors agreed to exchange
warrants to purchase an aggregate of 288,722 shares of common stock for 288,722 shares of the Company’s common stock (the “Warrant
Exchange”). The Company recorded $1,894,418 as a gain on Warrant Exchange which represents the difference in the fair value
of the exchanged warrants in the amount of $3,583,442 and the fair value of the common stock issued in the amount of $1,689,024.
The Exchange Agreements were entered into in order to extinguish the derivative liability associated with the warrants.
|
|
|
|
|
●
|
On
October 8, 2019, the Company issued 41,780 shares of its common stock upon the exercise of 79,444 warrants in a cashless exercise.
|
|
|
|
|
●
|
On
October 9, 2019, the Company issued 11,248 shares of its common stock upon the exercise of 21,389 warrants in a cashless exercise.
|
|
|
|
|
●
|
During
the year ended June 30, 2020, the Company issued 44,445 shares of common stock from the exercise of warrants with a weighted average
exercise price of $2.25 per share or $100,000 in the aggregate.
|
|
|
|
|
●
|
During
the year ended June 30, 2020, 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 year ended June 30, 2020, the Company issued 16,667 shares of common stock related to a consulting agreement dated June 4, 2019.
The Company recorded these shares at fair value in the amount of $200,000.
|
|
|
|
|
●
|
During
the year ended June 30, 2020, 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
On
April 16, 2020, the Company closed an offering, (“April 2020 Offering”), in which it sold 1,980,000 units consisting of one
share of common stock and one Unit A Warrant and one Unit B Warrant, for a total of 3,960,000 warrants, with each warrant entitling the
holder to purchase one share of common stock price at $4.25 per share. The Company issued an additional 209,400 Unit A Warrants and 209,400
additional Unit B Warrants to the underwriter pursuant to an over-allotment option (“Over-allotment”) each entitling the
holder to purchase one share of common stock at $0.01 per share. There were 1,136,763 of Unit A Warrants outstanding at June 30, 2021.
The Unit B Warrants expired one year from the date of issuance on April 19, 2021 and there were no Unit B Warrants outstanding at June
30, 2021.
In
connection with the April 2020 Offering the Company also issued 1,217,241 shares of common stock and 2,434,482 warrants (“Conversion
Warrants”) to purchase one share of common stock at $4.25 per share upon the conversion of $4,138,585 of the Company’s convertible
debt and accrued interest. There were 40,582 Unit A Conversion Warrants outstanding at June 30, 2021. The Unit B Conversion Warrants
have been fully exercised for shares of common stock.
On
July 31, 2020, the Company issued 1,000,000 warrants in connection with the acquisition of Argyll with an exercise price of $8.00. These
warrants were exercised during the year ended June 30, 2021 as described above. On June 2, 2021, the Company issued 2,000,000 Series
A Warrants and 2,000,000 Series B Warrants with an exercises price of $17.50 to the holders of the Senior Convertible Note. There were
no Series A Warrants exercised during the year ended June 30, 2021. The Series B Warrants may not be exercised until there is a redemption
of principal under the Senior Convertible Note. The Series B Warrants were not exercisable at June 30, 2021.
A
summary of the warrant activity follows:
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
|
Intrinsic
Value
|
|
|
Outstanding,
July 1, 2019
|
|
|
727,779
|
|
|
$
|
6.30
|
|
|
|
2.09
|
|
|
$
|
2,563,939
|
|
|
Issued
|
|
|
6,570,302
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,674,542
|
)
|
|
|
4.59
|
|
|
|
|
|
|
|
|
|
|
Exchanged
|
|
|
(288,722
|
)
|
|
|
11.25
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or cancelled
|
|
|
(70,225
|
)
|
|
|
3.12
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2020
|
|
|
5,264,592
|
|
|
|
4.28
|
|
|
|
0.86
|
|
|
|
14,654,296
|
|
|
Issued
|
|
|
5,603,674
|
|
|
|
14.38
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,503,167
|
)
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or cancelled
|
|
|
(14,541
|
)
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2021
|
|
|
5,350,558
|
|
|
$
|
14.19
|
|
|
|
3.14
|
|
|
$
|
8,743,588
|
|
There
were 3,350,558 warrants exercisable at June 30, 2021 with a weighted average exercise price of $12.21. The
intrinsic value of the warrants exercised during the years ended June 30, 2021 and 2020 was $33,029,828 and $4,561,472, respectively
Common
Stock Options
On
September 10, 2020, the Company’s board of directors adopted the 2020 Equity and Incentive Plan (the “2020 Plan”) that
provides for the issuance of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation
rights to officers, employees, directors, consultants, and other key persons. Under the 2020 Plan, the maximum number of shares of common
stock authorized for issuance was 1,500,000 shares. Each year on January 1, for a period of up to nine years, the maximum number of shares
authorized for issuance under the 2020 is automatically increased by 233,968 shares. At June 30, 2021, there was a maximum of 1,733,968
shares of common stock authorized for issuance under the 2020 Plan. There were no additional equity awards eligible for issuance from
the 2017 Stock Incentive Plan that had been adopted by the Company on August 1, 2017. The outstanding stock options granted under the
2017 Plan were transferred to the 2020 Plan. As of June 30, 2021, there were 1,281,959 shares of common stock available for future
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 and July 1, 2019
|
|
|
51,942
|
|
|
$
|
10.50
|
|
|
Granted
|
|
|
436,400
|
|
|
|
4.96
|
|
|
Exercised
|
|
|
(5,333
|
)
|
|
|
8.37
|
|
|
Cancelled
|
|
|
(8,333
|
)
|
|
|
7.09
|
|
|
Outstanding,
June 30, 2021
|
|
|
474,676
|
|
|
|
5.49
|
|
As
of June 30, 2021, the weighted average remaining life of the options outstanding was 4.37 years. As of June 30, 2021, there were 147,376
stock options that were available for exercise. The aggregate intrinsic value of options outstanding at June 30, 2021 was $2,537,975.
Stock
Based Compensation
During
the year ended June 30, 2021 and 2020, the Company recorded stock-based compensation expense of $4,129,726 and $1,614,236, respectively,
for the amortization of stock options and the issuance of common stock to employees and contractors for services which has been recorded
as general and administrative expense in the audited condensed consolidated statements of operations.
The
Company had previously recognized stock-based compensation expense of $927,855 during its year ended June 30, 2020 related to the issuance
of 117,450 shares of common stock for services rendered, comprised of 1,333 shares granted to management, 16,966 shares granted to employees,
and 99,151 shares granted to consultants. At June 30, 2020, the Company had recorded the fair value of these shares issued as liabilities
to be settled in stock. During the first quarter of the Company’s fiscal year ended June 30, 2021, the Company settled the balance
of the liabilities to be settled in stock through the issuance of common stock in a non-cash transaction.
As
of June 30, 2021, unamortized stock compensation for stock options was $598,105 with a weighted-average recognition period of 0.60 years.
The options granted during the year ended June 30, 2021 were valued using the Black-Scholes option pricing model using the following
weighted average assumptions:
|
|
|
The
Year Ended
June
30, 2021
|
|
|
Expected
term, in years
|
|
|
2.76
|
|
|
Expected
volatility
|
|
|
132.60
|
%
|
|
Risk-free
interest rate
|
|
|
0.32
|
%
|
|
Dividend
yield
|
|
|
—
|
|
|
Grant
date fair value
|
|
$
|
3.41
|
|
Note
17 – Income Taxes
The
income (loss) before income taxes follows:
|
|
|
Fiscal
2021
|
|
|
Fiscal
2020
|
|
|
United
States
|
|
$
|
(19,987,348
|
)
|
|
$
|
(10,242,024
|
)
|
|
International
|
|
|
(10,196,922
|
)
|
|
|
(106,993
|
)
|
|
Total
loss before income taxes
|
|
$
|
(30,184,270
|
)
|
|
$
|
(10,349,017
|
)
|
The
provision (benefit) from income taxes follows:
|
|
|
Fiscal
2021
|
|
|
Fiscal
2020
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
300,000
|
|
|
$
|
2,398
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
Foreign
|
|
|
24,722
|
|
|
|
—
|
|
|
Total
current
|
|
|
324,722
|
|
|
|
2,398
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,136,258
|
)
|
|
|
—
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
Total
deferred
|
|
|
(4,136,258
|
)
|
|
|
—
|
|
|
Income
tax provision (benefit)
|
|
$
|
(3,811,536
|
)
|
|
$
|
2,398
|
|
During
the year ended June 30, 2021, the Company recorded a deferred tax liability in connection with its acquisitions of Argyll, EGL, Helix
and ggCircuit. These acquisitions impacted the Company’s estimate of realizability of its deferred tax assets and resulted in a
reduction to the valuation allowance of $4,136,256 during the year ended June 30, 2021. There was no tax benefit recognized during
the year ended June 30, 2020 as the Company did not yet have revenue generating operations and maintained a valuation allowance equal
to the balance of its deferred tax assets
The
reconciliation of the expected tax expense (benefit) based on U.S. federal statutory rate of 21% with the actual expense follows:
|
|
|
Fiscal
2021
|
|
|
Fiscal
2020
|
|
|
U.S.
federal statutory rate
|
|
$
|
(6,338,697
|
)
|
|
$
|
(2,173,293
|
)
|
|
Change
in valuation allowance
|
|
|
1,133,233
|
|
|
|
863,264
|
|
|
Foreign
tax rate and other foreign tax
|
|
|
(150,274
|
)
|
|
|
(5,953
|
)
|
|
Non-deductible
warrant revaluations
|
|
|
325,484
|
|
|
|
|
|
|
Non-deductible
revaluation of contingent consideration
|
|
|
367,207
|
|
|
|
|
|
|
Change
in fair value of derivatives
|
|
|
—
|
|
|
|
510,783
|
|
|
Debt
restructure
|
|
|
—
|
|
|
|
797,981
|
|
|
Acquisition
costs
|
|
|
521,235
|
|
|
|
—
|
|
|
Other
|
|
|
330,276
|
|
|
|
9,616
|
|
|
Income
tax provision
|
|
$
|
(3,811,536
|
)
|
|
$
|
2,398
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities
consist of the following:
|
|
|
Fiscal
2021
|
|
|
Fiscal
2020
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
9,728,136
|
|
|
$
|
1,864,962
|
|
|
Nonqualified
stock options
|
|
|
382,974
|
|
|
|
187,209
|
|
|
Stock
compensation payable
|
|
|
—
|
|
|
|
190,370
|
|
|
Depreciation
and amortization
|
|
|
452,388
|
|
|
|
—
|
|
|
Other
|
|
|
26,264
|
|
|
|
—
|
|
|
Gross
deferred tax assets
|
|
|
10,589,762
|
|
|
|
2,242,541
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
|
Acquired
intangible assets
|
|
|
(5,593,787
|
)
|
|
|
—
|
|
|
Net
deferred tax assets
|
|
|
4,995,975
|
|
|
|
2,242,541
|
|
|
Valuation
allowance
|
|
|
(6,866,836
|
)
|
|
|
(2,242,541
|
)
|
|
Deferred
tax liabilities, net
|
|
$
|
(1,870,861
|
)
|
|
$
|
—
|
|
The
Company has net deferred tax assets of $3,722,926 at June 30, 2021 for which there is no valuation allowance. The Company anticipates
its deferred tax assets will be realized through the future reversal of existing temporary differences recorded as deferred tax liabilities.
Should the Company determine that it would not be able to realize the remaining deferred tax assets in the future, an adjustment to the
valuation allowance would be recorded in the period of determination. The need to maintain a valuation allowance against the Company’s
deferred tax assets may cause greater volatility to our effective tax rate.
At
June 30, 2021, the Company had estimated federal net operating loss carry forwards of $19.7 million that may be offset against
future taxable income subject to limitation under IRC Section 382. The total federal net operating losses include $2.8 million
of benefit that begins to expire in 2032, with the remaining federal net operating losses having no expiration. At June 30, 2021, the
Company had net operating loss carryforwards related to its foreign operations in Malta of $2.0 million and the United Kingdom
of $4.5 million that do not expire, as well as net operating loss carryforwards for Switzerland $19.9 million that can
be carried forward for 7 years. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in
response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryovers and carrybacks to offset
taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be
carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Due to historical losses,
the net operating loss carryback provision of the CARES Act is would not yield a material benefit to the Company.
The
Company applied the “more-likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a
tax return, which resulted in no unrecognized tax benefits as of June 30, 2021 and June 30, 2020, respectively. The Company records interest
and penalties, if any, for uncertain tax positions, in income tax expense. The Company believes any estimated accrued interest and penalties
that may be imposed related to tax filings are not material to the consolidated financial statements for the year ended June 30, 2021.
Note
18 – Fair Value Measurements
The
following financials instruments were measured at fair value on a recurring basis:
|
|
|
June
30, 2021
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Warrant
liability (Senior Convertible Note)
|
|
$
|
23,500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,500,000
|
|
There
were no assets or liabilities measured at fair value on a recurring basis at June 30, 2020 as derivative liabilities and warrant liabilities
were settled in connection with the public offering and conversion of debt discussed in Note 13. A summary of the changes in Level 3
financial instruments follows:
|
Balance
at June 30, 2019
|
|
$
|
4,655,031
|
|
|
Change
due to warrant exercise
|
|
|
(1,222,602
|
)
|
|
Change
due to extinguishment of debt
|
|
|
(1,426,323
|
)
|
|
Change
due to acquired amended and restated note
|
|
|
2,504,127
|
|
|
Change
due to issuance of warrants
|
|
|
1,851,892
|
|
|
Change
in fair value of derivative liabilities
|
|
|
(2,134,592
|
)
|
|
Change
in fair value of warrant liabilities
|
|
|
(297,706
|
)
|
|
Change
due to redemption of convertible debt
|
|
|
(196,297
|
)
|
|
Change
due to extinguishment of warrant liabilities upon Warrant Exchange
|
|
|
(3,583,442
|
)
|
|
Change
due to extinguishment of derivative liabilities upon conversion of notes
|
|
|
(4,793,462
|
)
|
|
Change
due to extinguishment of derivative upon exchange of derivative warrants
|
|
|
(221,222
|
)
|
|
Balance
at June 30, 2020
|
|
|
—
|
|
|
Fair
value of warrants issued for Argyll acquisition (“Argyll Warrant Liability”) (Note 3)
|
|
|
2,750,076
|
|
|
Revaluation
of Argyll warrant liability for warrants issued in Argyll Acquisition (Note 16)
|
|
|
4,729,924
|
|
|
Settlement
of Argyll warrant liability (Note 16)
|
|
|
(7,480,000
|
)
|
|
Issuance
of Series A and Series B warrants with Senior Convertible Note (Note 12)
|
|
|
26,680,000
|
|
|
Revaluation
of Series A and Series B Warrants issued with Senior Convertible Note (Note 12)
|
|
|
(3,180,000
|
)
|
|
Balance
at June 30, 2021
|
|
$
|
23,500,000
|
|
The
warrants outstanding at June 30, 2021 issued with the Senior Convertible Note were valued using a Monte Carlo based valuation model with
the following assumptions:
|
|
|
June
30, 2021
|
|
|
Contractual
term, in years
|
|
|
2.00
– 4.00
|
|
|
Expected
volatility
|
|
|
120%
– 140
|
%
|
|
Risk-free
interest rate
|
|
|
0.24%
– 0.65
|
%
|
|
Dividend
yield
|
|
|
—
|
|
|
Conversion
/ exercise price
|
|
$
|
17.50
|
|
Note
19 – Subsequent Events
Equity
Issuances
Subsequent
to June 30, 2021 and through October 11, 2021, 2021, the Company issued 78,527 shares for services.
On
October 1, 2021, the Company issued a total of 1,121,150 stock options to employees and non-employer directors with an exercise price
of $6.71 under the 2020 Equity and Incentive Plan. During the period from July 1, 2021 through October 11, 2021, the Company issued 10,500
shares of common stock from stock option exercises with a weighted average exercise price $4.82.
Bethard
Acquisition
On
July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited that provides sportsbook,
casino, live casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain, Malta and Ireland (“Bethard
Business”). The initial payment of purchase consideration for the Bethard Business of €17,000,000 (equivalent to $20,067,871
using exchange rates in effect at the acquisition date) includes €13,000,000 (equivalent to $15,346,019 using exchange rates
in effect at the acquisition date) that was paid in cash at closing, and €4,000,000 (approximately $4,721,852 using exchange
rates in effect at the acquisition date) that was initially payable in cash by October 1, 2021 pursuant an amendment agreement
dated July 12, 2021, and subsequently extended to October 14, 2021 (“Additional Payment Due Date”) pursuant to a second
amendment agreement (“Bethard Second Amendment Agreement”). The Company is also required to pay additional cash purchase
consideration during the 24 month period following the acquisition date equal to 15% of net gaming revenue until the Additional Payment
Due Date, with the percentage then decreasing to 10% - 12% of net gaming revenue during subsequent months. The total purchase consideration
also includes a payment of up to €7,600,000 (equivalent to $8,971,519 using exchange rates in effect at the acquisition date)
of contingent share consideration should a specific ambassador agreement be successfully assigned to Bethard business following the acquisition
date.
The
acquisition was the Bethard Business was completed pursuant to the terms of the purchase agreement dated May 25, 2021 whereby the Company
acquired the outstanding share capital, of Prozone Limited that had previously received the assets of the Bethard Business in a pre-closing
restructuring by the seller.
The
preliminary estimate of the purchase consideration follows pending the completion of the valuation of contingent consideration:
|
Cash
paid at closing
|
|
$
|
15,346,019
|
|
|
Cash
consideration payable by October 14, 2021 (Additional Payment Due Date)
|
|
|
4,721,852
|
|
|
Contingent
cash consideration
|
|
|
7,500,000
|
|
|
Contingent
share consideration
|
|
|
2,242,880
|
|
|
Total
purchase price consideration
|
|
$
|
29,810,751
|
|
The
preliminary estimated contingent cash consideration assumes a cash payment equal to 15% of net gaming revenue for the Bethard Business
through the Additional Payment Due Date as set forth through the Second Payment Due Date estimated to be approximately four
months, then reverting to 12% thereafter for the remainder of a two-year period following the acquisition date. The preliminary estimated
contingent cash consideration is calculated using the applicable percentages applied to projected net gaming revenue of the Bethard Business
at the date of acquisition.
The
preliminary estimated contingent share consideration “assumes” in an adjusted payout of the contingent share consideration
as there is currently no indication the ambassador agreement will be successfully assigned to the Company. The sellers of the Bethard
Business have up to 6 months to assign the ambassador agreement to receive the contingent share consideration. After 6 months, the contingent
share consideration is reduced by €422,222 (equivalent to $498,417 using exchange rates in effect at the acquisition date)
for each month the contract is not assigned to the Company through the 24 month anniversary. The share consideration included in the
total estimated preliminary purchase consideration are estimated using the exchange rates at the date of acquisition. The share consideration
is not payable until the 24 month anniversary following the acquisition of the Bethard Business and therefore the contingent share consideration
is classified as a noncurrent liability.
A preliminary purchase price allocation for the
Bethard Business has not yet been performed as the acquisition was only recently completed. However, the Company anticipates the purchase
price to be allocated to intangible assets and goodwill. Transaction related expenses incurred for the acquisition of the Bethard Business
are estimated to total $765,863, with $750,113 incurred during the year ended June 30, 2021 and $15,750 incurred during
the three months ended September 30, 2021. Transaction expenses are recorded in general and administrative expenses in the consolidated
statements of operations.
Pro
Forma Operating Results
The
following table summarizes pro forma results of operations for the year ended June 30, 2021 and 2020 as if the Bethard Business had been
acquired on July 1, 2019. The pro forma results of operations for the year ended June 30, 2021 and 2020 were prepared for comparative
purposes only and do not purport to be indicative of what would have occurred had these acquisitions been made as of July 1, 2019 and
may not be useful in predicting the future results of operations for the Company. The actual results of operations may differ materially
from the pro forma amounts included in the table below.
|
|
|
Pro
Forma (unaudited)
for the year ended
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net
revenue
|
|
$
|
27,217,991
|
|
|
$
|
32,482,076
|
|
|
Net
loss
|
|
$
|
(13,677,602
|
)
|
|
$
|
(13,251,236
|
)
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.87
|
)
|
|
$
|
(1.93
|
)
|
The
pro forma operating results of operations for the year ended June 30, 2021 and 2020 include amortization of intangibles, depreciation
of equipment and cash proceeds made available through the issuance of equity to facilitate the acquisitions.
At-the
Market Equity Offering Program
On
September 3, 2021, the Company entered “at the market” equity offering program (“ATM”) to sell up to an aggregate
of $20,000,000 of common stock. The shares are being issued pursuant to the Company’s shelf registration statement on Form S-3
(File No. 333-252370) and the Company filed a prospectus supplement, dated September 3, 2021 with the SEC in connection with the offer
and sale of the shares pursuant to the Equity Distribution Agreement with the broker. The Company has sold 1,250 shares through
the ATM subsequent to June 30, 2021.
Investment
in Game Fund Partners LLC
The
Company has signed a partnership agreement with Game Fund Partners LLC to become a part of their Venture Capital Arm and a new planned
$300,000,000 game fund. As part of the new multi-year agreement, the Company will initially invest approximately $2,000,000 million dollars
of EEG shares into 20% of the General Partnership of the fund and will become part of the management and investment committee that manages
an investment fund focused on joint projects and investment vehicles to fuel growth in the areas of gaming, data, blockchain, online
gaming, and joint casino hotel investments. The Company has agreed to contribute 100,000 shares to the fund during the period in which
the fund receives total capital commitments of $100,000,000. The Company has agreed to contribute an additional 100,000 shares to the
fund during the period in which the fund reaches total capital commitments of $200,000,000. As of October 13, 2021, the Company has not
contributed any shares of its common stock to the fund.
Services Agreement, Loan Agreement and Put-Agreement
with Metaverse Partners LP
Services Agreement
On October 12, 2021, the Company entered into
a services agreement with Metaverse Partners, LP, a Delaware limited partnership (“Metaverse”), pursuant to which Metaverse
will subcontract the performance of certain services and obligations by Metaverse related to Club Contracts (as defined herein) to the
Company. Various member teams of the National Football League and other sporting clubs (the “Clubs”), may enter into one
or more agreements (each a, “Club Contract”) with Metaverse that licenses the right to use certain names, trademarks, service
marks, logos and colors of that Club (the ‘Club Marks”) in connection with Metaverse’s sales, marketing, planning,
hosting, and execution of certain products and services in the live online gaming tournament broadcast, including in person white label
or co-branded gaming events in the esports gaming industry. The services to be provided by the Company under the Services Agreement (the
“Services”), which are intended to satisfy Metaverse’s obligations under the Club Contracts and give rise to certain
rights in favor of the Company, will include technical and operation support services as it relates to the esports gaming industry and
the management of video game tournament sponsorships and will be provided by the Company on an exclusive basis and in accordance with
the terms of the Agreement and each Club Contract.
In connection with the provision of the Services,
the Company has agreed to maintain all permits, licenses, certifications, regulatory approvals rights, and authorizations necessary to
perform the Services, including all such rights, authorizations, and licenses to the Company’s technology (inclusive of all Company
software, hardware, networks, IT systems, data, and other intellectual property used by the Company in connection with its performance
of the Services) and any other third-party software, data, or other intellectual property utilized by the Company in providing the Services.
Subject to the terms of the Agreement and the
applicable Club Contract, and to the extent permitted under the applicable Club Contract, Metaverse will allow the Company to use the
applicable Club Marks for the term of the Agreement solely to the extent necessary to enable the Company to perform its obligations under
the Agreement and in each case subject to Metaverse’s prior, written approval, which approval may be conditioned upon the applicable
Club’s approval.
The Agreement has an initial term of two years
(the “Initial Term”). At the end of the Initial Term and each extension, the Agreement automatically extends on the same
terms for an additional 1-year period unless either party provides the other with at least 30 days’ prior written notice of its
intent to not extend the term of the Agreement. Notwithstanding the foregoing, Metaverse may terminate the Agreement for cause and effective
as of the date specified in such notice if the Company commits any material breach of the Agreement that is not reasonably capable of
being cured or, if curable, that the Company fails to cure within thirty days of its receipt of written notice thereof.
Under the Services Agreement, the Company is entitled
to receive 100% of the revenue from each Club in consideration of the Services performed; provided that, if there are opportunities for
additional revenue under the Club Contracts that the Company isn’t currently performing or pursuing, Metaverse will receive 100%
of such revenue.
Loan Agreement
Concurrently
with and in consideration of the execution of the Agreement, Metaverse agreed to make to the Company, one or several loans, to be used
by the Company for operational purposes, in the aggregate principal amount of at least $15,000,000 and up to $25,000,000 (collectively
and each individually, the “Loan”) pursuant to that certain Loan Agreement dated October 12, 2021 by and between Metaverse
and the Company, (the “Loan Agreement Pursuant to the terms of the Loan Agreement, Metaverse is to make a $15,000,000 loan to the
Company (the “Initial Loan”) and committed to make an additional loan to the Company in the amount of $10,000,000 (the “Second
Loan”). In connection with the Initial Loan, the Company signed a promissory note to Metaverse dated October 12, 2021 in the principal
amount of $15,000,000 (the “Initial Loan Note”). The Second Loan. If applicable, will be on the same terms as the Initial
Loan in all material respects, will be reflected by a promissory note (the “Second Loan Note”) that will be identical, in
all material respects to the Initial Loan Note and will be due and payable at the same time as the Initial Loan Note.
The principal amount of the Initial Loan and,
as applicable, the Second Loan and the amount of all interest accrued under the Initial Note and, as applicable, the Second Note will
together become immediately due and payable within fifteen calendar days following any of the enumerated events of default set forth
in the Loan Agreement.
Upon (i) full repayment of the amounts due under
the Loan Agreement and the applicable notes and the performance by the Company of all of its other obligations under the Loan Agreement
, or (ii) exercise in full of either the “Put Right” or the “Call Right” or payment in full of the “Cash
Alternative Amount” under that certain Put-Call Option Agreement, dated October 12, 2021, among the Company, Metaverse and the
limited partners of Metaverse (the “Put-Call Option Agreement”), except as otherwise provided in the Loan Agreement and the
other loan documents, the Company will thereupon automatically be fully, finally, and forever released and discharged from any claim,
liability, or obligation in connection with the Loan Agreement and the other loan documents.
The Initial Loan Note and, if applicable, the
Second Loan Note will bear interest at the rate of 8% per year and will mature on October 12, 2023 (the “Maturity Date”).
Subject to acceleration, upon an event of default, interest on the Initial Loan Note and, if applicable, the Second Loan Note is due
and payable on October 12, 2022, April 12, 2023 and on the Maturity Date and principal on the Initial Loan Note and, if applicable, the
Second Loan Note is due on the Maturity Date.
Put-Call Option Agreement
On October 12, 2021, the Company, Metaverse and
the limited partners of Metaverse entered into a Put-Call Option Agreement (the “PCO Agreement”) under which the limited
partners of Metaverse (the “Limited Partners”) can, under certain circumstances, require the Company to purchase their interests
in Metaverse and the Company can, under certain circumstances, require the Limited Partners to sell their interests in Metaverse to the
Company. Subject to the terms and conditions of the PCO Agreement, beginning on the date that is two years after the date of the PCO
Agreement (the “Put Commencement Date”) and ending on the date that is two years and ten business days after the date of
the PCO Agreement, a majority in interest of the Limited Partners, acting with the written consent of the general partner of Metaverse
(the “Put Limited Partners”), have the right (the “Put Right”), but not the obligation, to cause the Company
to purchase all of the Limited Partners’ interests in Metaverse in exchange for the applicable number of Consideration Shares (as
defined herein) being issued to each Limited Partner (the “Put”), and have the right to require that each other Limited Partner
(collectively, the “Non-Put Limited Partners”) participate in and be otherwise bound to the Put. Notwithstanding the foregoing,
in the event that the Company’s common stock (or any class of securities inro which such common stock has been converted) is suspended
from trading on, or removed or delisted from, either the Nasdaq Stock Market or the NYSE for longer than thirty consecutive days, the
Put Limited Partners have the right to exercise the Put Right beginning on the date of such event and ending on the date that is two
years and ten business days after the date of this Agreement, regardless if such date is before the Put Commencement Date (the “Accelerated
Put Commencement Date”).
In the event the Put Limited Partners exercises
the Put Right, the consideration for which the Company will be required to purchase the Metaverse limited partnership interests from
all of the Limited Partners will consist of a number of shares of common stock of the Company equal to the amount determined by the following
calculation (issuable to each Limited Partner, the “Consideration Shares”):
Consideration Shares equals Base Capital divided
by Company Price Per Share.
For purposes of the PCO Agreement, (i) “Base
Capital” equals, as of the date of the Put Exercise or Call Exercise Notice, as applicable, the applicable Limited Partner’s
(A) capital contribution plus (B) an amount equal to an 8% per annum cumulative preferred return, compounded annually, on the amount
of such Limited Partner’s capital contribution minus (C) any distributions received pursuant to the Metaverse Partnership Agreement
and (ii) “Company Price Per Share” equals the lesser of: (X) $20.00 and (Y) 80% of the 30-day volume weighted average of
the closing sales prices of the Company’s common stock for such day on all domestic securities exchanges on which the Company’s
common stock may be listed as of the date of the Put Commencement Date, Accelerated Put Commencement Date or Call Commencement Date,
as applicable.
The closing of the sale of the Metaverse limited
partnership interests pursuant to the Put Right will take place no later than 60 days following receipt by the Company of a put exercise
notice (the “Put Right Closing Date”). Within thirty days after the Put Right Closing Date, the Company will file with the
Securities and Exchange Commission (the “SEC”) a registration statement on Form S-3 (or, if not available, on Form S-1) registering
the resale of the applicable Consideration Shares, and the Company will use its commercially reasonable efforts to have such registration
statement declared effective as soon as practicable after the filing thereof. In the event such registration statement is not filed within
thirty days after the Put Right Closing Date or is not declared effective within 120 days of the Put Right Closing Date, each Limited
Partner will have the right, but not the obligation, to exchange such Limited Partner’s Consideration Shares for such Limited Partner’s
Cash Alternative Amount (as defined below).
If (i) the Company fails to deliver the Consideration
Shares to the applicable Limited Partner within 60 days following the receipt by the Company of the put exercise notice or (ii) as of
the Put Right Closing Date, the class of shares of which the Consideration Shares are a part is no longer eligible for trading on either
the Nasdaq Stock Market or the NYSE (such event, a “Put Failure Event”), the Company will deliver, within ten business days
of such Put Failure Event, to each Limited Partner an amount in cash equal to the result of dividing such Limited Partner’s Base
Capital by 0.8 (such amount, the “Cash Alternative Amount”), with such payment to be made by wire transfer of immediately
available funds.
Subject to the terms and conditions of the PCO
Agreement, beginning on the date that is two years after the date of the PCO Agreement (the “Call Commencement Date”) the
Company has the right (the “Call Right”), but not the obligation, to cause all of the Limited Partners to sell all of their
interests in Metaverse to the Company. In the event the Company exercises the Call Right, the consideration for which Limited Partners
will be required to sell their interests in Metaverse will be in the form of the Company issuing to each Limited Partner the number of
Consideration Shares calculated in accordance with the formula set forth above.
The closing of the sale of the Metaverse interests
pursuant to the Call Right will take place no later than 60 days following receipt by the Limited Partners of a call exercise notice
(the “Call Right Closing Date”). Within thirty days after the Call Right Closing Date, the Company will file with the SEC
a registration statement on Form S-3 (or, if not available, on Form S-1) registering the resale of the applicable Consideration Shares,
and the Company will use its commercially reasonable efforts to have such registration statement declared effective as soon as practicable
after the filing thereof. In the event such registration statement is not filed within thirty days after the Call Right Closing Date
or is not declared effective within 120 days of the Call Right Closing Date, each Limited Partner will have the right, but not the obligation,
to exchange such Limited Partner’s Consideration Shares for such Limited Partner’s Cash Alternative Amount.
If the Company fails to deliver the Consideration
Shares to the applicable Limited Partners within 60 days following the delivery by the Company of the call exercise notice or (ii) as
of the Call Right Closing Date, the class of shares of which the Consideration Shares are a part is no longer eligible for trading on
either the Nasdaq Stock Market or the NYSE (such event, a “Call Failure Event”), the Company will deliver, within ten business
days of such Call Failure Event, to each Limited Partner an amount in cash equal such Limited Partner’s Cash Alternative Amount.