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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended: September 30, 2021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________________ to __________________
Commission
File Number: 000-55954
ESPORTS
ENTERTAINMENT GROUP, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
000-55954
|
|
26-3062752
|
(State
of
incorporation)
|
|
(Commission
File
No.)
|
|
(IRS
Employer
Identification
No.)
|
13/14
Penthouse Office, Mannarino Road
Birkirkara,
Malta, BKR 9080
(Address
of principal executive offices)
356
2713 1276
(Registrant’s
telephone number, including area code)
170
Pater House, Psaila Street
Birkirkara,
Malta, BKR 9077
(Former
name or former address, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Trading
Symbol(s)
|
|
Name
of each exchange on which registered
Symbol(s)
|
Common
Stock
|
|
GMBL
|
|
The
Nasdaq Stock Market LLC
|
Common
Stock Purchase Warrants
|
|
GMBLW
|
|
The
Nasdaq Stock Market LLC
|
10.0% Series A Cumulative Redeemable
Convertible Preferred Stock
|
|
GMBLP
|
|
The Nasdaq Stock Market LLC
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☒
|
Smaller
reporting company
|
☒
|
|
|
Emerging
growth company
|
☐
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 12, 2021, there were 22,390,453
shares of common stock, par value $0.001 issued and outstanding.
ESPORTS
ENTERTAINMENT GROUP, INC.
Quarterly
Report on Form 10-Q
For
the Quarter ended September 30, 2021
TABLE
OF CONTENTS
Esports
Entertainment Group, Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Esports
Entertainment Group, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Esports
Entertainment Group, Inc.
Condensed
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Esports
Entertainment Group, Inc.
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
For
the Three Months Ended September 30, 2021 and 2020
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Esports
Entertainment Group, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
Reconciliation of cash and restricted cash to the unaudited condensed
consolidated balance sheets:
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Cash
|
|
$
|
2,817,536
|
|
|
$
|
8,885,484
|
|
Restricted cash
|
|
|
1,055,101
|
|
|
|
-
|
|
Cash and restricted cash
|
|
$
|
3,872,637
|
|
|
$
|
8,885,484
|
|
Reconciliation of cash and restricted cash
at the beginning of the period follows:
|
|
|
June
30, 2021
|
|
|
|
June
30, 2020
|
|
Cash
|
|
$
|
19,917,196
|
|
|
$
|
12,353,307
|
|
Restricted
cash
|
|
|
3,443,172
|
|
|
|
-
|
|
Cash
and restricted cash
|
|
$
|
23,360,368
|
|
|
$
|
12,353,307
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
CASH PAID FOR:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
700,000
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISLCOSURE OF NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash consideration payable for Bethard acquisition
|
|
$
|
4,721,852
|
|
|
$
|
-
|
|
Fair value of contingent consideration payable in cash and common stock for Bethard acquisition
|
|
$
|
6,700,000
|
|
|
$
|
-
|
|
Common stock issued for Argyll
|
|
$
|
-
|
|
|
$
|
3,802,500
|
|
Settlement of Argyll acquisition warrant liability for common stock
|
|
$
|
-
|
|
|
$
|
5,488,171
|
|
Common stock issued for FLIP acquisition at closing
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Settlement of FLIP contingent consideration in common stock
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Share settlement of liabilities to be settled in stock account
|
|
$
|
-
|
|
|
$
|
927,855
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Esports
Entertainment Group, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
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, a 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, the Company 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”). Bethard’s business-to-consumer operations that provides sportsbook, casino, live
casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain, Malta and Ireland.
Note
2 – Summary of Significant Accounting Policies
Basis
of presentation and principles of consolidation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the
rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation
S-X. Pursuant to the rules and regulations of the SEC, certain information and footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been omitted. The unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly state
the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full fiscal year.
The unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company
for the annual period ended June 30, 2021.
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated 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 period 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 amounts previously reported in other
income and foreign exchange loss were reclassified to other non-operating income (loss) on the unaudited condensed consolidated statements
of operations. The prior period amounts reported as taxes payable and equity to be issued were classified to accounts payable and accrued
expenses for the current period presentation on the unaudited condensed consolidated balance sheets.
Use
of estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities 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 unaudited condensed 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 September 30, 2021, the
Company had approximately $2,817,536 of available cash on-hand. On November 12, 2021, one business day preceding this filing,
the Company had approximately $1,301,846 of available cash on-hand. 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 unaudited condensed 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 announcement on November 11, 2021 of the pricing of an underwritten
registered public offering by the Company to issue 800,000
shares of 10.0%
Series A cumulative redeemable convertible preferred stock (“Series A Preferred Stock”) with a liquidation preference of
$11.00
per share, and at a purchase price of $10.00
per share, for total gross proceeds to be raised of $8.0
million before deducting underwriting discounts, other estimated offering expenses and the
payment of €4,000,000 (approximately $4,721,852 using exchange rates in effect at the
acquisition date) due for the acquisition of the Bethard business (see Note 3 for discussion of the Bethard
acquisition and Note 17 for further discussion of the Series A Preferred Stock), (ii)
the ability to access capital using the at-the-money (“ATM”) equity offering program available to the Company whereby
the Company has sold 1,250
shares to raise gross proceed of $8,046
and has $19,991,954
in gross proceeds remaining under the ATM equity offering program (iii) 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 (iv) the ability to raise additional financing from other sources. These above plans are
likely to require the Company to place reliance on several factors, including favorable market conditions, to access additional
capital in the future. These plans were therefore determined not to be 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 September 30, 2021 and June 30, 2021 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 the Company’s liabilities
to customers.
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.
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. The Company
maintains a restricted cash balance and player deposits held by third parties, recorded as receivables reserved for users on the unaudited
condensed consolidated balance sheets, at levels that equal to or exceeding its liabilities to customers.
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.
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.
There was no impairment of long-lived assets identified for the three months ended September 30, 2021 and 2020.
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.
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.
Earnings
Per Share
Basic
income (loss) per share is computed by dividing net income (loss) attributable to common shareholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the period. In periods of losses, diluted loss per share is computed on the
same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.
The
following securities were excluded from weighted average diluted common shares outstanding for the three months ended September 30, 2021
and 2020 because their inclusion would have been antidilutive.
Schedule
of Weighted Average Diluted Common Shares Outstanding
|
|
As of September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Common stock options
|
|
|
466,176
|
|
|
|
51,942
|
|
Common stock warrants
|
|
|
5,350,558
|
|
|
|
6,001,129
|
|
Common stock issuable upon conversion of Senior Convertible Note
|
|
|
2,120,000
|
|
|
|
—
|
|
Contingently issuable shares
|
|
|
—
|
|
|
|
2,667
|
|
Total
|
|
|
7,936,734
|
|
|
|
6,055,738
|
|
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 account the Company’s
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 offerings 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 into profit sharing arrangements which are 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
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 adoption of this guidance did not have a material
impact on the accompanying unaudited condensed consolidated financial statements.
Recently
Issued Accounting Standards
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 unaudited condensed 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 unaudited condensed 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 unaudited condensed 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
Bethard
Acquisition
On
July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited
(“Bethard”) that provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses to
customers in Sweden, Spain, Malta and Ireland (the “Bethard Business”). The acquisition of Bethard expands the igaming
operations of the Company in Europe and provides the Company with increased opportunity to cross-sell its esports offerings to a
larger customer base. The acquisition of Bethard resulted in the Company acquiring the outstanding share capital of Prozone Limited,
a public liability company registered in Malta, that had previously received the assets of Bethard in a pre-closing restructuring by
the seller. The initial payment of purchase consideration for Bethard included cash paid at closing of €13,000,000 (equivalent
to $15,346,019 using
exchange rates in effect at the acquisition date), with the net cash paid at closing being €12,662,688 (equivalent
to $14,947,835 using
exchange rates in effect at the acquisition date). The cash purchase consideration of Bethard also included a second payment (“Second
Payment”) of €4,000,000 (approximately
$4,721,852 using
exchange rates in effect at the acquisition date) that is due to be paid by the Company using the proceeds raised from the
issuance of the Series A Preferred Stock (see discussion of the Series A Preferred Stock at Note 15). The total purchase consideration of Bethard also requires the
Company to pay additional contingent cash 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 12% of net gaming revenue for
the remaining term ending July 2023.
The total purchase consideration also provides for a payment of up €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 the Bethard business acquired by the Company following the acquisition
date.
The
preliminary estimate of the purchase consideration, pending the completion of a final valuation to calculate the fair value of the contingent
cash consideration, is as follows:
Schedule
of Preliminary Purchase Price Allocation of Acquisition
Cash paid at closing
|
|
$
|
15,346,019
|
|
Second Payment
|
|
|
4,721,852
|
|
Contingent cash consideration
|
|
|
6,700,000
|
|
Total preliminary purchase price consideration
|
|
$
|
26,767,871
|
|
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 purchase consideration
excludes contingent share consideration payable to the sellers as there is no indication such contingent share contingent consideration
will become payable from a successful assignment of the specified ambassador agreement. 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. As of November 15, 2021, the ambassador agreement had not been assigned
to the Company.
The
acquired intangible assets, useful lives and a preliminary estimate of fair value at the acquisition date follows:
Schedule
of Fair Value of Acquired Intangible Assets
|
|
Useful Life
(years)
|
|
|
Fair Value
|
|
Tradename
|
|
|
10
|
|
|
$
|
3,700,000
|
|
Player interface
|
|
|
5
|
|
|
|
1,200,000
|
|
Gaming licenses
|
|
|
2
|
|
|
|
700,000
|
|
Player relationships
|
|
|
5
|
|
|
|
11,700,000
|
|
Total
|
|
|
|
|
|
$
|
17,300,000
|
|
The
goodwill of Bethard is not deductible for tax purposes. 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 unaudited condensed consolidated
statements of operations.
Pro
Forma Operating Results
The
following table summarizes pro forma results of operations for the three months ended September 30, 2020 as if Bethard,
as well as the recent acquisitions of the Company completed during the year ended June 30, 2021, namely Argyll, Lucky Dino, EGL, ggCircuit
and Helix, had been acquired on July 1, 2020. The results of operations of FLIP acquired during the year ended June 30, 2021 were
excluded from the pro forma presentation for the three months ended September 30, 2020 due to immateriality. The results of operations
of Bethard, as well as the previous acquisitions identified above, are included in the unaudited condensed consolidated statement of
operations of the Company for the three months ended September 30, 2021, with any differences resulting from the acquisition of Bethard
on July 13, 2021 assessed as immaterial.
The pro forma results of operations for the three months ended September 30, 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, 2020 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.
Schedule
of Unaudited Pro Forma Operating Results
|
|
|
Three
months ended
September 30, 2020
|
|
Net revenue
|
|
$
|
16,950,997
|
|
Net loss
|
|
$
|
(6,638,077
|
)
|
Net loss per common share, basic and diluted
|
|
$
|
(0.40
|
)
|
The pro forma operating results of operations
for the three months ended September 30, 2020 are based on the individual historical results of
the Company and the businesses acquired, with adjustments to give effect as if the acquisitions had occurred on July 1, 2020, after giving
effect to certain adjustments including the amortization of intangible assets and depreciation of equipment resulting from the acquisitions.
Note
4 – Other Receivables
The
components of other receivables are as follows:
Schedule
of Other Receivables
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
Marketing receivables from revenue partners
|
|
$
|
132,123
|
|
|
$
|
233,725
|
|
Receivable from revenue sharing arrangement
|
|
|
134,120
|
|
|
|
137,461
|
|
Other
|
|
|
537,461
|
|
|
|
287,559
|
|
Other receivables
|
|
$
|
803,704
|
|
|
$
|
658,745
|
|
Note
5 – Prepaid Expenses and Other Current Assets
The
components of prepaid expenses and other current assets are as follows:
Schedule
of Prepaid Expenses and Other Current Assets
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
Prepaid marketing costs
|
|
$
|
1,939,241
|
|
|
$
|
1,727,669
|
|
Prepaid insurance
|
|
|
172,297
|
|
|
|
175,620
|
|
Other
|
|
|
810,566
|
|
|
|
1,361,055
|
|
Prepaid expenses and other current assets
|
|
$
|
2,922,104
|
|
|
$
|
3,264,344
|
|
Note
6 – Equipment
The
components of equipment are as follow:
Schedule
of Equipment
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
Computer equipment
|
|
$
|
321,615
|
|
|
$
|
258,049
|
|
Furniture and equipment
|
|
|
263,835
|
|
|
|
249,070
|
|
Leasehold improvements
|
|
|
221,787
|
|
|
|
221,787
|
|
Finance lease asset
|
|
|
117,979
|
|
|
|
117,979
|
|
Equipment, at cost
|
|
|
925,216
|
|
|
|
846,885
|
|
Accumulated depreciation and finance lease amortization
|
|
|
(135,579
|
)
|
|
|
(119,943
|
)
|
Equipment, net
|
|
$
|
789,637
|
|
|
$
|
726,942
|
|
During
the three months ended September 30, 2021 and 2020, the Company recorded total depreciation expense and finance lease amortization of
$46,736 and $49,096, respectively.
Note
7 – Goodwill and Intangible Assets
A
summary of the changes in the balance of goodwill is as follows:
Schedule
of Goodwill
|
|
Three months ended
September
30, 2021
|
|
Goodwill, balance at beginning of year
|
|
$
|
40,937,370
|
|
Acquisition of Bethard
|
|
|
11,924,685
|
|
Foreign currency translation
|
|
|
(534,034
|
)
|
Goodwill, balance at end of period
|
|
$
|
52,328,021
|
|
The
intangible amounts comprising the intangible asset balance are as follows:
Schedule
of Intangible Assets
|
|
September
30, 2021
|
|
June
30, 2021
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Tradename
|
|
$ 10,929,120
|
|
$ (524,752)
|
|
$10,404,368
|
|
$
|
7,396,804
|
|
|
$
|
(257,018
|
)
|
|
$
|
7,139,786
|
|
Developed technology and software
|
|
26,204,592
|
|
(2,531,938)
|
|
23,672,654
|
|
|
25,231,659
|
|
|
|
(1,242,605
|
)
|
|
|
23,989,054
|
|
Gaming licenses
|
|
2,397,035
|
|
(859,679)
|
|
1,537,356
|
|
|
1,752,612
|
|
|
|
(573,876
|
)
|
|
|
1,178,736
|
|
Player relationships
|
|
25,107,235
|
|
(2,478,505)
|
|
22,628,730
|
|
|
13,956,083
|
|
|
|
(1,253,135
|
)
|
|
|
12,702,948
|
|
Internal-use software
|
|
804,308
|
|
(17,226)
|
|
787,082
|
|
|
777,171
|
|
|
|
(15,140
|
)
|
|
|
762,031
|
|
Total
|
|
$ 65,442,290
|
|
$ (6,412,100)
|
|
$59,030,190
|
|
$
|
49,114,329
|
|
|
$
|
(3,341,774
|
)
|
|
$
|
45,772,555
|
|
During the three months ended September 30, 2021,
the Company recorded amortization expense for its intangible assets of $3,184,000.
The
estimated future amortization related to definite-lives of intangible assets, including amortization related to the preliminary allocation
of fair value to the intangible assets of Bethard, are as follows:
Schedule
of Future Amortization of Intangible Assets
|
|
|
2021
|
|
Fiscal 2022
|
|
$
|
9,535,009
|
|
Fiscal 2023
|
|
|
12,151,162
|
|
Fiscal 2024
|
|
|
11,512,694
|
|
Fiscal 2025
|
|
|
11,512,694
|
|
Fiscal 2026
|
|
|
9,067,502
|
|
Thereafter
|
|
|
5,251,129
|
|
Total
|
|
$
|
59,030,190
|
|
Note
8 – Other Non-Current Assets
The
components of other non-current assets are as follows:
Schedule
of Other Non-Current Assets
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
iGaming regulatory deposits
|
|
$
|
1,894,459
|
|
|
$
|
755,474
|
|
iGaming deposit with service providers
|
|
|
424,172
|
|
|
|
434,738
|
|
Rent deposit
|
|
|
89,036
|
|
|
|
91,253
|
|
Other
|
|
|
33,413
|
|
|
|
33,544
|
|
Other non-current assets
|
|
$
|
2,441,080
|
|
|
$
|
1,315,009
|
|
Note
9 – Account Payable and Accrued Expenses
The
components of account payable and accrued expenses are as follows:
Schedule
of Account Payable and Accrued Expenses
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
Trade accounts payable
|
|
$
|
4,121,839
|
|
|
$
|
2,609,212
|
|
Accrued marketing
|
|
|
458,553
|
|
|
|
1,582,470
|
|
Accrued payroll and benefits
|
|
|
1,145,570
|
|
|
|
1,093,263
|
|
Accrued professional and other expenses
|
|
|
5,437,602
|
|
|
|
2,451,366
|
|
Accrued jackpot liabilities
|
|
|
436,145
|
|
|
|
432,504
|
|
Accrued legal settlement (Note 13)
|
|
|
—
|
|
|
|
289,874
|
|
Total
|
|
$
|
11,599,709
|
|
|
$
|
8,458,689
|
|
Note
10 – Related Party Transactions
The
Company reimburses the Chief Executive Officer for office rent and related expenses. During the three months ended September 30, 2021
and 2020, the Company incurred charges of $1,200 and $1,200, respectively from the Chief Executive Officer for office expense reimbursement.
As of September 30, 2021 and 2020, there were no amounts payable to the Chief Executive Officer.
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 three months ended September 30, 2021 and 2020 the Company incurred
general and administrative expenses of $11,109 and $43,579, respectively, in accordance with these agreements. As of September 30, 2021
and 2020, there were no amounts payable to Contact Advisory Services Ltd.
The
Company has retained legal and corporate secretarial services from a member of its 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
($24,221
translated using the exchange rate in effect
at September 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
Chief Legal Officer and Company Secretary.
Note
11 – Leases
The
unaudited condensed consolidated balance sheet allocation of assets and liabilities related to operating and finance leases is as follow:
Schedule
of Assets and Liabilities Related to Operating Leases
|
|
Condensed Consolidated Balance
Sheet Caption
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
1,168,635
|
|
|
$
|
1,272,920
|
|
Finance lease assets
|
|
Equipment, net
|
|
|
104,086
|
|
|
|
114,540
|
|
Total lease assets
|
|
|
|
$
|
1,272,721
|
|
|
$
|
1,387,460
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Operating lease liability - current
|
|
$
|
375,628
|
|
|
$
|
414,215
|
|
Finance lease liabilities
|
|
Current portion of notes payable and other long-term debt
|
|
|
50,702
|
|
|
|
50,702
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Operating lease liability - non-current
|
|
|
820,082
|
|
|
|
878,809
|
|
Finance lease liabilities
|
|
Notes payable and other long-term debt
|
|
|
53,385
|
|
|
|
63,161
|
|
Total lease liabilities
|
|
|
|
$
|
1,299,797
|
|
|
$
|
1,406,887
|
|
The
operating lease expense and finance lease expense for the three months ended September 30, 2021 were $114,903 and $34,505, respectively.
The rent expense for short-term leases was not material to the unaudited condensed consolidated financial statements.
Weighted
average remaining lease terms and discount rates follow:
Schedule
of Weighted Average Remaining Lease Terms and Discount Rates
|
|
September 30, 2021
|
|
|
|
June 30, 2021
|
|
Weighted Average Remaining Lease Term (Years):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
3.96
|
|
|
|
4.11
|
|
Finance leases
|
|
|
2.25
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6.84
|
%
|
|
|
6.82
|
%
|
Finance leases
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
The
future minimum lease payments at September 30, 2021 follows:
Schedule
of Maturity of Operating Lease Liability
|
|
Operating Lease
|
|
|
Finance Lease
|
|
Fiscal 2022
|
|
$
|
352,031
|
|
|
$
|
38,027
|
|
Fiscal 2023
|
|
|
311,484
|
|
|
|
50,702
|
|
Fiscal 2024
|
|
|
321,421
|
|
|
|
25,352
|
|
Fiscal 2025
|
|
|
235,579
|
|
|
|
—
|
|
Fiscal 2026
|
|
|
74,109
|
|
|
|
—
|
|
Thereafter
|
|
|
71,526
|
|
|
|
—
|
|
Total lease payments
|
|
|
1,366,150
|
|
|
|
114,081
|
|
Less: imputed interest
|
|
|
170,440
|
|
|
|
9,994
|
|
Present value of lease liabilities
|
|
$
|
1,195,710
|
|
|
$
|
104,087
|
|
Note
12 – Long-Term Debt
Notes
payable and other long-term debt
The
components of notes payable and other long-term are as follows:
Schedule
of Long-term Debt
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
Notes payable
|
|
$
|
280,536
|
|
|
$
|
330,654
|
|
Finance lease obligation (See Note 11)
|
|
|
104,087
|
|
|
|
113,863
|
|
Total debt
|
|
|
384,623
|
|
|
|
444,517
|
|
Less current portion of notes payable and long-term debt
|
|
|
(219,024
|
)
|
|
|
(223,217
|
)
|
Notes payable and other long-term debt
|
|
$
|
165,599
|
|
|
$
|
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, 2020. 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 note payable commenced in June 2021 and continue for two years through May 2023.
The principal balance of the notes payable on September 30,
2021 was £208,333
($280,536
using exchange rates at September 30, 2021).
Interest expense on the note payable was $1,101
for the three months ended September 30, 2021.
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 amortized 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 unaudited condensed 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 nation 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 cash due upon 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, plus 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 the Company 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 the Company’s 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. The Company will 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 September 30, 2021 and the period from
October 1, 2021 through November 15, 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 dated October 13, 2021 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 placement of a lien on the outstanding share capital of Prozone Limited, the entity that holds the assets of
Bethard, through Additional Payment Due Date (see discussion of the Bethard acquisition in Note 3) and (iii) any known breach which would
result from the Company’s announcement that it would purchase an equity interest in Game Fund Partners Group LLC through the contribution
of up to 200,000
shares of common stock. 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 covenants of the agreement. The holder of the Senior Convertible Note has converted a principal amount of $468,500,
$403,500 and $806,500 on October 14, 2021, November 4, 2021 and November 9, 2021, respectively into 100,001, 100,023 and 200,007 shares
of common stock, respectively.
On
November 2, 2021, the Company obtained an additional waiver from the holder of the Senior Convertible Note in connection with its announcement
to commence an underwritten registered public offering of its 10.0%
Series A Preferred Stock (discussed in the Note 17). In consideration for this waiver, the Company
agreed to increase the cash price payable upon a redemption of the Senior Convertible Note by the Company to be equal to 110% of the
conversion amount, as defined in agreement as any unpaid principal, minimum return due to the holder, and unpaid interest due on such
redemption date. The Company also agreed to pay the holder of the Senior Convertible Note an amount payable in cash of up to $1.5 million under the terms of a registration rights
agreement. The Company recognized the amount payable to the holder of the Senior Convertible Note under the registration rights agreement
in other non-operating loss in the unaudited condensed consolidated statement of operations for the three months ended September
30, 2021.
Warrants
The
Company issued 2,000,000 Series A Warrants and 2,000,000 Series B Warrants to the holder of the Senior 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 Series 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 Warrants at fair value on the issuance date with subsequent changes
in fair value reflected in earnings. At June 30, 2021, the Company determined the total fair value of the Series A Warrants and Series
B Warrants to be $23,500,000, with a fair value of $13,600,000 determined for the Series A Warrants and a fair value of $9,900,000 determined
for the Series B Warrants. At September 30, 2021, the Company determined the total fair value of the Series A Warrants and Series B Warrants
to be $11,691,400 with a fair value of $7,851,400 determined for the Series A Warrants and a fair value of $3,840,000 determined for
the Series B Warrants. The change in fair value of warrant liability recorded in the consolidated statement of operations for the three
months ended September 30, 2021 was $11,808,600. Refer to Note 16 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 Warrants 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
$1,639,494 to interest expense for amortization of the debt discount on the Senior Convertible Note for the three months ended September
30, 2021. The Company recorded total interest expense of $2,339,494 on the Senior Convertible Note for the three months ended September
30, 2021.
The
maturities of long-term debt are as follows:
Schedule
of Future Payments of Long-term Debt
Fiscal 2022
|
|
$
|
219,024
|
|
Fiscal 2023
|
|
|
37,275,594
|
|
Total before unamortized discount
|
|
|
37,494,618
|
|
Less: unamortized discount and issuance costs
|
|
|
29,167,997
|
|
Total
|
|
$
|
8,326,621
|
|
The components of our long-term debt on the unaudited
condensed consolidated balance sheet at September 30, 2021 follows:
Schedule Components of Long-term Debt
|
|
|
|
|
Current portion of notes payable and long-term debt
|
|
$
|
219,024
|
|
Notes payable and long-term debt (non-current)
|
|
|
165,599
|
|
Senior convertible note, net of unamortized discount
|
|
|
7,941,998
|
|
Total
|
|
$
|
8,326,621
|
|
Note
13 – 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 $in cash and $in common stock during the period On August 6,
2020, the Company entered into an amended and restated sponsorship agreement (the “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 unaudited condensed consolidated statements of operations over the term
of the Amended Sponsorship Agreement. During the three months ended September 30, 2021, the Company has recorded $322,043
in sales and marketing expense related to the
Team sponsorship. There were no outstanding amounts payable to the Team at September 30, 2021. The remaining amounts payable under this
agreement are estimated at $for the year ended June 30, 2022, and $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 was March 31, 2021. The Company paid $1,550,000 on June
11, 2021 and issued 50,000 shares of common stock on July 1, 2021 in connection with the commencement of the arrangement. 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. During the three months ended September 30, 2021, the Company has recorded $342,333 in sales and
marketing expense for its arrangement with Bally’s Corporation. There were no outstanding amounts payable to Bally’s Corporation
at September 30, 2021. As of September 30, 2021, the annual commitments by the Company under this agreement are estimated at $1,250,000
and 10,000 shares of common stock payable each year through the year ended June 30, 2030.
The Company has signed a subscription and operating
agreement with Game Fund Partners LLC to support the development of a planned $300,000,000 game fund. Under the agreements, the Company
will initially invest approximately $2,000,000 of Company shares into 20% of the general partnership of the fund, and the Company 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 September 30, 2021, the Company has not contributed any shares of its common stock to the fund.
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 September 30, 2021, the commitments under these agreements are estimated
at $2,349,589
for the year ended June 30, 2022, $2,403,891
for the year ended June 30, 2023, $2,015,495
for year ended June 30, 2024, $1,126,153
for the year ended June 30, 2025 and $609,668
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. The Company paid $294,051 to settle the arbitration award, inclusive of accrued
interest, on August 24, 2021.
The
Company at times may be involved in litigation relating to claims arising from its operations in the normal course of business. The Company
is currently not involved in any litigation that it believes could have a material adverse effect on our financial condition or results
of operations.
Note
14 – 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, Helix and Bethard. The revenues and long-lived
assets of Argyll, EGL Lucky Dino and Bethard 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 three months
ended September 30, 2021 and 2020 is as follows:
Schedule
of Disaggregated by Revenue
|
|
Three months ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Online betting and casino revenues
|
|
$
|
14,662,588
|
|
|
$
|
183,410
|
|
Esport service revenues
|
|
|
1,745,704
|
|
|
|
38,982
|
|
Total
|
|
$
|
16,408,291
|
|
|
$
|
222,392
|
|
A
summary of revenue by geography for the three months ended September 30, 2021 and 2020 is as follows:
Schedule
of Revenues with Customers Disaggregated by Geographical Area
|
|
Three months ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$
|
1,520,266
|
|
|
$
|
38,982
|
|
International
|
|
|
14,888,026
|
|
|
|
183,410
|
|
Total
|
|
$
|
16,408,291
|
|
|
|
222,392
|
|
A
summary of long-lived assets by geography is as follows:
Schedule
of Long-Lived Assets by Geography
|
|
September 30, 2021
|
|
|
June 30, 2021
|
|
United States
|
|
$
|
45,939,270
|
|
|
$
|
48,081,926
|
|
International
|
|
|
69,818,293
|
|
|
|
41,942,870
|
|
Total
|
|
$
|
115,757,563
|
|
|
$
|
90,024,796
|
|
Note
15 – Equity
Preferred
Stock
The
Company has authorized 10,000,000 shares
of preferred stock with a par value of $0.001
per share. There were no
preferred shares issued and outstanding at September
30, 2021 and June 30, 2021.
On
November 10, 2021, the Company designated 1,725,000
shares of preferred stock as 10% Series A cumulative redeemable convertible preferred
stock, herein referred to as Series A
Preferred Stock, with a par value of $0.001
per share and liquidation value of $11.00.
On November 11, 2021, the Company announced that it priced an underwritten registered public offering to issue 800,000
shares of Series A Preferred Stock at a purchase price of $10.00
per share for total gross proceeds of $8.0
million, before deducting underwriting discounts and other estimated offering expenses. Each share of Series A Preferred Stock is convertible into one share of the Company’s common stock at a conversion price of $17.50
per common share. Subject to earlier conversion or redemption, the Series A Preferred Stock matures five years from
issuance, or November 15, 2026, at which point the Company must redeem the shares of Series A Preferred Stock
in cash. Dividends on the Series A Preferred Stock accrue daily and are cumulative from the date of issuance.
The dividends on the Series A Preferred Stock are payable monthly in arrears on the last day of each calendar
month, when, as and if declared by the Company’s Board of Directors, at the rate of 10.0%
per annum, which is equivalent to $1.00
per annum per share.
Common
Stock
The
following is a summary of common stock issuances for the three months ended September 30, 2021:
●
|
During
the three months ended September 30, 2021, the Company issued 78,527 shares of common stock for services with a weighted average
fair value of $7.31 per share.
|
|
|
●
|
During
the three months ended September 30, 2021, the Company issued 8,500 shares of common stock from the exercise of stock options with
a weighted average exercise price of $4.82 or $40,970 in the aggregate.
|
The
following is a summary of common stock issuances for the three months ended September 30, 2020:
●
|
During
the three months ended September 30, 2020, the Company issued 291,256 shares of its common stock for services rendered with a weighted
average fair value of $6.43 per share or $1,873,842 in the aggregate. Of the 291,256 shares of common stock issued, 117,450 shares
of common stock were related to services received in a previous period. The Company recorded these shares as liabilities to be settled
in stock at June 30, 2020 with a fair market value of $927,855 in the aggregate. For the period ended September 30, 2020, the Company
recorded $927,855 as a reduction of current liabilities and increase to additional paid-in capital.
|
|
|
●
|
On
September 14, 2020, the Company issued 93,808 shares of common stock in relation to the Flip acquisition. At September 30, 2020,
the Company recorded the estimated fair value on the shares issued in the amount of $500,000.
|
|
|
●
|
During
the three months ended September 30, 2020, the Company issued 275,463 shares of common stock for the exercise of warrants with a
weighted average exercise price of $3.72 per share or $1,024,924 in the aggregate. Of the 275,463 shares of common stock issued,
20,000 shares of common stock were related to an exercise in the previous period. The Company recorded these shares at June 30, 2020
with a fair market value of $4.25 per share or $85,000.
|
|
|
●
|
During
the three months ended September 30, 2020, the Company issued 650,000
shares of common stock for the Argyll acquisition
that was completed on July 31, 2020. The Company recorded these shares at fair value in the amount of $3,803,150.
Additionally, the Company issued 9,630
shares as a finder’s fee in relation
to the acquisition. The Company expensed these shares as general and administrative in the amount of $54,232.
|
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. There were no shares sold under the ATM during the three months ended September 30, 2021. The Company has
sold an aggregate of 1,250 shares through the ATM through November 12, 2021 for gross proceeds of $8,046. The Company had $19,991,954
of gross proceeds remaining under the ATM at November 12, 2021.
Common
Stock Warrants
On
April 16, 2020, the Company closed an offering, (the “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 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 on September 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 September 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 September 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 its acquisition of Argyll with an exercise price of $8.00. These
warrants were exercised during the year ended June 30, 2021. On June 2, 2021, the Company also 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 three months ended September 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 September 30, 2021.
A
summary of the warrant activity follows:
Schedule
of Warrant Activity
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
|
Intrinsic
Value
|
|
Outstanding, July 1, 2020
|
|
|
5,264,592
|
|
|
$
|
4.28
|
|
|
|
0.86
|
|
|
$
|
14,654,296
|
|
Issued
|
|
|
5,603,674
|
|
|
|
14.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,503,167
|
)
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
Exchanged
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(14,541
|
)
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2021
|
|
|
5,350,558
|
|
|
|
14.19
|
|
|
|
3.14
|
|
|
|
8,743,588
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2021
|
|
|
5,350,558
|
|
|
$
|
14.19
|
|
|
|
2.89
|
|
|
$
|
3,138,768
|
|
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 September 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 September 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:
Schedule
of Stock Option Activity
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, June 30, 2021
|
|
|
474,676
|
|
|
$
|
5.49
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
8,500
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding, September 30, 2021
|
|
|
466,176
|
|
|
$
|
5.41
|
|
As
of September 30, 2021, the weighted average remaining life of the options outstanding was 4.04 years.
Stock
Based Compensation
During
the three months ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense of $882,372
and $1,007,672,
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 unaudited
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.
Note
16 – Fair Value Measurements
The
following financials instruments were measured at fair value on a recurring basis:
Schedule
of Fair Value of Financial Instruments
|
|
September 30, 2021
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liability (Note 12)
|
|
$
|
11,691,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,691,400
|
|
|
|
June 30, 2021
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liability (Note 12)
|
|
$
|
23,500,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,500,000
|
|
A
summary of the changes in Level 3 financial instruments for the three months ended September 30, 2021 is as follows:
Summary
of the Changes in Level 3 Financial Instruments
Balance at June 30, 2021
|
|
$
|
23,500,000
|
|
Change in fair value of Series A and Series B Warrants issued with Senior
Convertible Note
(Note 12)
|
|
|
(11,808,600
|
)
|
Balance at September 30, 2021
|
|
$
|
11,691,400
|
|
The
warrants outstanding at September 30, 2021 issued with the Senior Convertible Note were valued using a Monte Carlo based valuation model
with the following assumptions:
Schedule
of Warrants Outstanding
|
|
September 30, 2021
|
|
|
|
June 30, 2021
|
|
Contractual term, in years
|
|
|
2.00
– 4.00
|
|
|
|
2.00 – 4.00
|
|
Expected volatility
|
|
|
110%
– 135
|
%
|
|
|
120% – 140
|
%
|
Risk-free interest rate
|
|
|
0.22%
– 0.68
|
%
|
|
|
0.24% – 0.65
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Conversion / exercise price
|
|
$
|
17.50
|
|
|
$
|
17.50
|
|
Argyll
Warrant Valuation
During
the year ended June 30, 2021, the Company issued 1,000,000 warrants in connection with its acquisition of Argyll. Each warrant entitled
the holder to purchase one share of common stock at exercise price of $8.00 per share. The Company initially estimated the fair value
of the warrants issued to be $5,488,171 as of the Argyll acquisition date of July 31, 2020. At September 30, 2020, the Company estimated
the fair value these warrants to be $3,387,218, resulting in a gain on the change in fair value of warrant liability in the amount of
$2,100,953. The Company valued the warrants using the Black-Scholes option pricing model with the following terms on July 31, 2020: (a)
exercise price of $8.00, (b) volatility rate of 187.40%, (c) discount rate of 0.48%, (d) term of three years, and (e) dividend rate of
0%. The Company valued the warrant using the Black-Scholes option pricing model with the following terms on September 30, 2020: (a) exercise
price of $8.00, (b) volatility rate of 183.25%, (c) discount rate of 0.28%, (d) term of 2 years and 10 months, and (e) dividend rate
of 0%.
Subsequent
to September 30, 2020, the holder of the warrants issued in the Argyll acquisition exercised the warrants resulting in the issuance of
1,000,000 shares of common stock by the Company. Prior to the exercises of the warrants, the Company recorded a measurement period adjustment
to reduce the acquisition date fair value of the warrant liability by $2,738,095 using a Monte Carlo simulation. The issuance of the
shares of common stock upon exercise of the warrants were recorded at their 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 totaling $7,480,000. The change in fair value of
the warrant liability between the acquisition date fair value of $2,750,076 and the settlement date fair value of $7,480,000 resulted
in a charge of $4,729,924 in the statement of operations for the year ended June 30, 2021.
Note
17– Subsequent Events
On
October 1, 2021, the Company issued a total of 1,121,150 stock options to employees and non- employee directors with an exercise price
of $6.71 under the 2020 Equity and Incentive Plan.
10%
Series A Cumulative Redeemable Convertible Preferred
Stock
On
November 11, 2021, the Company announced the pricing of an underwritten registered public offering to issue 800,000
shares of 10.0%
Series A Cumulative Redeemable Convertible Preferred Stock, herein referred to as Series A Preferred Stock, with a liquidation
preference of $11.00
per share, at a purchase price of $10.00
per share for total gross proceeds of $8.0
million before deducting underwriting discounts and other estimated offering expenses. The offering is expected to close on or about
November 16, 2021 subject to customary closing conditions. The
Company has filed an application to list the Series A Preferred Stock on the NASDAQ Capital Market under the symbol
“GMBLP.”
The
offering is being made pursuant to an effective shelf registration statement on Form S-3 (No. 333-252370) that the Company previously
filed with the Securities and Exchange Commission (the “SEC”), which became effective on February 5, 2021.
Metaverse
Partners
In
Note 19, Subsequent Events to the audited financial statements for the year ended June 30, 2021 that appeared in the Company’s
Annual Report on Form 10-K, filed with the SEC on October 13, 2021, the Company provided disclosure regarding a Services Agreement, Loan
Agreement and Put-Agreement with Metaverse Partners LP (“Metaverse”). To date, the Company has not received any funds from
Metaverse and, after consultation with the Company’s lender, the Company has decided not to move forward with the contemplated
Metaverse transaction at this time.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This
section of this report includes a number of forward-looking statements that reflect our current views with respect to future events and
financial performance. As the Company’s acquisition of Bethard took place during the three months ended September 30, 2021, this
Management Discussion and Analysis of Financial Condition and Results of Operations speaks only to the historical operations of the Company
during the 2022 fiscal year end and the Company’s historical business prior such acquisition. Forward looking statements are often
identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature,
refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of
this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from historical results or our predictions.
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 genres such as real-time strategy, fighting, first-person shooter and multiplayer online
battle arena games. As of September 30, 2021, the three most popular esports Strike: Global games were Dota 2, League of Legends (each
multiplayer online battle arena games) and Counter Offensive (a first-person shooter game). Other popular games include Fortnite,
StarCraft II, Call of Duty¸ Overwatch, Hearthstone and Apex Legends. 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 are focused on driving growth in two markets that
include iGaming (“EEG iGaming”) and esports (“EEG Games”).
While EEG is focused on driving customer growth,
revenues and brand recognition in both the iGaming and esports markets, it continues to operate as one reportable segment in the delivery
of entertainment to its customers through its wagering and esports platforms. 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.
EEG
iGaming:
EEG
iGaming includes the esports betting platform with full casino and sportsbook functionality and services for iGaming customers. 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 from our FLIP acquisition.
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:
|
●
|
Argyll
Entertainment’s flagship Sportnation.bet online sportsbook and casino brand, licensed in the UK and Ireland,
|
|
●
|
Lucky
Dino’s 5 online casino brands licensed by the MGA on its in-house built iDefix casino-platform, and
|
|
●
|
The
recently acquired Bethard online sportsbook and casino brands, operating under MGA, Spanish, Irish and Swedish licenses.
|
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. We intend to launch
this platform, which was previously licensed in Curacao, live in the state 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 a Sports Wagering License. In accordance
with standard practice, prior to our CSIE licensure, we submitted our transactional waiver to the New Jersey Division of Gaming Enforcement
(‘‘DGE’’) on October 28, 2021, the next step on the roadmap to going live. 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 section II- Item1A, Risk Factors.
In
total, we currently hold five Tier-1 gambling licenses (Malta, UK, Ireland, Spain and Sweden) and are in the process of acquiring one
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:
EEG
Games’ focus is on providing esports entertainment experiences to gamers through a combination of 1) in-person experiences (at
Helix Centers), 2) online tournaments (through our recently acquired EGL tournament platform), and 3) player-vs-player wagering (through
our soon-to-be-released LANDuel product). In order to provide exposure to our platforms, we have signed numerous exclusive marketing
relationships with professional sports organizations across the NFL, NBA, NHL and MLS.
Underpinning
our focus on esports and EEG Games customers, is our proprietary infrastructure software, ggCircuit. ggCircuit is the leading provider
of local area network (“LAN”) Center management software and services, enabling us to seamlessly manage mission critical
functions such as game licensing and payments.
We
believe that as the size of the market and the number of esports enthusiasts continues to grow, so will the number of esports enthusiasts
who gamble on events, which would likely increase the demand for our platform.
We
have financed operations primarily through the sale of equity securities and short-term debt. Until revenues are sufficient to meet our
needs, we will continue to attempt to secure financing through equity or debt securities.
Results
of Operations
Comparison
of the three months ended September 30, 2021 and 2020
Revenue
Revenue
for the three months ended September 30, 2021 and 2020 totaled $16.4 million and $0.2 million, respectively. The revenue for the three-month
ended September 30, 2021 is primarily attributable the iGaming operations of Bethard, Lucky Dino and Argyll.
Cost
of Revenue
Cost
of revenue for the three months ended September 30, 2021 and 2020 totaled $6.5 million and 0.4 million, respectively. The cost of revenue
for the three months ended September 30, 2021 primarily includes $4.2 million for payment processing fees, platform costs, gaming duties
and costs related to revenue sharing arrangements, $1.5 million for the game provider expenses and $0.8 million for other direct expenses
related to the delivery of services.
Sales
and Marketing
Sales and marketing expense for the three months
ended September 30, 2021 totaled $7.4 million, an increase of $6.8 million over the $0.6 million recorded for the three months ended
September 30, 2020. The increase was primarily attributable to $4.6 million for affiliate costs related to iGaming services,
$1.7 million for sponsorship agreements with professional sports clubs and our service partners and $0.4 million for other advertising
and promotion expenses including event promotion.
General
and Administrative
General and administrative expense for the three
months ended September 30, 2021 totaled $11.2 million, an increase of $8.1 million over the $3.1 million recorded for the
three months ended September 30, 2020. The increase was primarily attributable to increases in payroll costs of $4.0 million, depreciation
and acquisition related intangibles of $3.0 million, professional fees, including accounting and legal expenses of $0.8 million
and $0.3 million related to other general and administrative cost including incremental costs for information technology related
disbursements.
Other
Income
Other income increased $6.1 million from $2.0
million for the three in ended September 30, 2020 to $8.1 million for the three months ended September 30, 2021. The
increase in other income for the three months ended September 30, 2021 results primarily from a reduction in fair value of the warrant
liability established for warrants convertible into shares of common stock that had been issued to the holder of the Senior Convertible
Note. The fair value of the warrant liability. determined using a Monte Carlo based valuation model, decreased $11.8 million from $23.5
million at June 30, 2021 to $11.7 million at September 30, 2021. This was offset by interest expense primarily attributable to amortization
of the debt discount and cash interest payable on the Senior Convertible Note of $2.3 million, as well as recognition of an expense of
$1.5 million for the Company’s estimate of the amount payable to the holder of the Senior Convertible Note under the registration
rights agreement. During the three months ended September 30, 2020, the Company recorded a favorable change of $2.1 million to the preliminary
fair value of the warrant liability that was included in the preliminary purchase consideration for the Argyll acquisition. A preliminary
estimate of fair value of the warrant liability of $5.5 million had been included in the preliminary purchase consideration of Argyll
at the acquisition date of July 31, 2020. The calculation of the fair value of the warrant liability established for the Argyll acquisition
decreased to $3.4 million at September 30, 2020, resulting a benefit recognized in the unaudited condensed consolidated statement of
operations for three months ended September 30, 2020.
Capital
Resources and Liquidity
Liquidity
and Going Concern
The Company must evaluate whether there are conditions
or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern
for one year from the date the unaudited condensed consolidated financial statements included in this report are issued. 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 September 30, 2021, the Company had
approximately $2.8 million of available cash on-hand. On November 12, 2021, one business day preceding this filing, the Company had
approximately $1.3 million of available cash on-hand. The Company believes that its current level of cash and cash equivalents are not
sufficient to fund its operations and obligations for the next 12 months 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 the Company’s ability to continue as a going concern
for a period of at least one year from the date of issuance of these unaudited condensed 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 announcement on November 11, 2021 of the pricing of an underwritten registered public offering
by the Company to issue 800,000 shares of 10.0% Series A Cumulative Redeemable Convertible Preferred Stock, herein referred to as Series
A Preferred Stock, with a liquidation preference of $11.00 per share, and at a purchase price of $10.00 per share, for total gross proceeds
to be raised of $8.0 million before deducting underwriting discounts, other estimated offering expenses and the payment of €4,000,000
(approximately $4,721,852 using exchange rates in effect at the acquisition date) due for
the acquisition of the Bethard business (see Note 3 for discussion of the Bethard acquisition and Note 15 and Note 17 for further discussion
of the Series A Preferred Stock), (ii) the ability to access capital using the at-the-money (“ATM”) equity offering program
available to the Company whereby the Company has sold 1,250 shares to raise gross proceed of $8,046 and has $19,991,954 in gross proceeds
remaining under the ATM equity offering program (iii) 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
(iv) the ability to raise additional financing from other sources. These above plans are likely to require the Company to place reliance
on several factors, including favorable market conditions, to access additional capital in the future. These plans were therefore determined
not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern.
The
Company’s sources and (uses) of cash for the three months ended September 30, 2021 and 2020 are as follows:
|
|
2021
|
|
|
2020
|
|
Cash used in operating activities
|
|
$
|
(3,391,219
|
)
|
|
$
|
(3,263,843
|
)
|
Cash used in investing activities
|
|
$
|
(15,042,881
|
)
|
|
$
|
(1,120,647
|
)
|
Cash provided by (used in) financing activities
|
|
$
|
(899,362
|
)
|
|
$
|
1,024,924
|
|
At
September 30, 2021, we had total current assets of $13.0 million and total current liabilities of $26.4 million. Net cash used
in operating activities for the three months ended September 30, 2021 was $3.4 million, which includes a net loss of $0.6
million, offset by non-cash adjustments of $6.0 million.
Net
cash used in investing activities for the three months ended September 30, 2021 totaled $15.0 million principally related to the Bethard
acquisition.
Net
cash provided by financing activities for the three months ended September 30, 2021 totaled $0.9 million that related to the repayment
of notes payable and finance lease and contingent consideration of Bethard.
Off
Balance Sheet Arrangements
None.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Not
required.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, under the supervision of our Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this report. For the reasons set forth below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective. Disclosure controls and procedures include, without limitation, controls and procedures designed
to provide a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,
and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Previously
identified material weakness
During
fiscal 2021, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures
were not operating effectively at a reasonable assurance level. The material weaknesses identified during management’s assessment
included insufficient period-end financial reporting controls as it relates to segregation of duties, reviews of completed or non-recurring
transactions, and procedures for preparing the financial statements and disclosures, and insufficient controls as it relates to information
technology and evaluation of operating effectiveness of information technology controls.
During
fiscal 2022, and the three months ended September 30, 2021, we continue to implement remediation initiatives in response to the previously
identified material weakness, including, but not limited to, initiating the hiring of additional experienced accounting and compliance
personnel, and engaging with third party experts to strengthen the implementation of additional disclosure controls and procedures, including
those designed to strengthen our segregation of duties and review processes related to accounting and financial statement presentation
and disclosures. While we believe that these efforts have improved and will continue to improve our disclosure controls and procedures,
remediation of the material weakness will require validation and testing of the operating effectiveness of disclosure internal
controls over a sustained period of financial reporting cycles.
Our
remediation efforts activities are ongoing and are subject to continued management review supported by ongoing design and testing. Notwithstanding
the material weakness, our management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report
present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America.
Changes
in internal control over financial reporting
Other
than our ongoing remediation efforts with respect to our disclosure controls and procedures , which extend to our internal control over
financial reporting, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2021
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We intend to
continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements
will be sufficient to provide us with effective internal control over financial reporting.
Inherent
limitation on the effectiveness of internal control
The
effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including
the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate
misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any
system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable,
not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits
of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate
for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
1. 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.
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
1A. Risk Factors
There
are no changes to our risk factors that constitute material changes from the risk factors previously disclosed in our Form 10-K, filed
with the SEC on October 13, 2021.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the three months ended September 30, 2021, we issued 78,527 shares of common stock as compensation for services provided.
During
the three months ended September 30, 2021, we issued 8,500 shares of common stock upon the exercise of stock options.
Item
3. Defaults Upon Senior Securities
None
Item
4. Mine Safety Disclosure
Not
Applicable.
Item
5. Other Information
There
is no other information required to be disclosed under this item which was not previously disclosed.
Item
6. Exhibits.
Exhibit
No.
|
|
Description
|
1.1
|
|
Equity
Distribution Agreement, dated as of September 3, 2021, between Esports Entertainment Group, Inc. and Maxim Group LLC (incorporated
herein by reference to Exhibit 1.1 to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September
3, 2021)
|
10.1
|
|
Form
of Amendment Agreement, dated July 13, 2021, between the Company and Gameday Group Plc. (incorporated
herein by reference to Exhibit 10.1 to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July
15, 2021)
|
10.2
|
|
Form
of Pledge of Shares Agreement, dated July 13, 2021, between Esports Entertainment Group, Inc., Gameday Group Plc., and Prozone Limited
(incorporated herein by reference to Exhibit 10.2 to that Current Report on Form 8-K filed with the Securities and Exchange Commission
on July 15, 2021).
|
10.3
|
|
Form
of Side Letter dated July 13, 2021 (incorporated herein by reference to Exhibit 10.3 to that Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 15, 2021).
|
31.1*
|
|
Certification
by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
15d-14(a)).
|
31.2*
|
|
Certification
by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
15d-14(a)).
|
32.1**
|
|
Certification
by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2**
|
|
Certification
by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
101.INS*
|
|
XBRL
Instance Document
|
101.SCH*
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF*
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB*
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE*
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
104
|
|
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.
|
ESPORTS
ENTERTAINMENT GROUP, INC.
|
|
|
|
Date:
November 15, 2021
|
By:
|
/s/
Grant Johnson
|
|
|
Grant
Johnson
Chief
Executive Officer, and
Chairman
of the Board of Directors
(Principal
Executive Officer)
|
|
|
|
Date:
November 15, 2021
|
By:
|
/s/
Daniel Marks
|
|
|
Daniel
Marks
Chief
Financial Officer
(Principal
Accounting Officer and
Principal
Financial Officer)
|
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