NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION, NATURE OF OPERATIONS
AND GOING CONCERN
Organization
EBET, Inc. (“EBET” or “the Company”)
was formed on September 24, 2020 as a Nevada corporation. EBET is a technology company creating and operating platforms focused on esports
and competitive gaming. The Company operates under a Curacao gaming sublicense and can provide online betting services to various countries
around the world. On May 5, 2022, the Company changed its name to EBET, Inc. from Esports Technologies, Inc.
On September 24, 2020, ESEG Limited (“ESEG”)
was acquired by Global E-Sports Entertainment Group, LLC (“Global E-Sports”) in exchange for 50% of the membership interest
in Global E-Sports held by the former owners of ESEG. The remaining 50% interest of Global E-Sports is held by EBET. Prior to this transaction
both ESEG and Global E-Sports shared common ownership. This transaction was accounted for as a combination of entities under common control
and as such both operations have been combined from their inception. In addition, on September 24, 2020, EBET executed a Share Exchange
Agreement (“Share Exchange”) resulting in the acquisition of 100% of the membership interest of Global E-Sports in exchange
for the issuance of 7,340,421 shares of common stock.
Pursuant to the Share Exchange, the merger between
Global E-Sports and the Company was accounted for as a reverse merger. Under this method of accounting, EBET was treated as the “acquired”
company for financial reporting purposes. The net assets of Global E-Sports are stated at historical cost, with no goodwill or other intangible
assets recorded.
Acquisition of the B2C business of Aspire Global
plc
On October 1, 2021, the Company, and Esports Product
Technologies Malta Ltd. (“Esports Malta”) entered into a Share Purchase Agreement (the “Acquisition Agreement”)
with Aspire Global plc, (“Aspire”) and various Aspire group companies to acquire all of the issued and outstanding shares
of Karamba Limited. The total acquisition price was €65,000,000 paid as follows: (i) cash amount of €50,000,000; (ii) €10,000,000,
payable in accordance with the terms of an unsecured subordinated promissory note (the “Note”); and (iii) shares of Company
common stock, which are valued at €5,000,000 (based on the weighted-average per-share price of the ten days prior to the execution
date of the Acquisition Agreement (the “Exchange Shares”). See Notes 3, 4 and 5 for additional information.
Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. The Company has recurring losses and generated negative
cash flows from operations since inception. In April 2021, the Company completed its Initial Public Offering (“IPO”) and issued
2,400,000 shares of common stock for gross cash proceeds of $14,400,000, receiving net proceeds of $13,514,200. The Company's forecasts for 2022 and beyond indicate that it we will
need additional funding in order to have sufficient financial resources to continue to settle its debts as they fall due. In making this
assessment, the Directors considered the going concern status for a period of at least 12 months from the date of signing the financial
statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Impact of COVID-19
The outbreak of the 2019 novel coronavirus disease
(“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses
by public health and governmental authorities to contain and combat its outbreak and spread, has severely impacted the U.S. and world
economies. Economic recessions, including those brought on by the COVID-19 outbreak may have a negative effect on the demand for the Company’s
products and the Company’s operating results. The range of possible impacts on the Company’s business from the coronavirus
pandemic could include: (i) changing demand for the Company’s online betting products; and (ii) increasing contraction in the capital
markets.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The significant accounting policies followed in
the preparation of the consolidated financial statements are as follows:
Basis of Presentation
The accompanying unaudited financial statements
of the Company, include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared in accordance with generally
accepted accounting principles accepted in the United States (“U.S. GAAP”) for interim unaudited financial information. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management,
necessary in order to make the condensed financial statements not misleading. Operating results for the three months ended March 31, 2022,
are not necessarily indicative of the final results that may be expected for the year ended September 30, 2022. For more complete financial
information, these unaudited financial statements should be read in conjunction with the audited consolidated financial statements for
the year ended September 30, 2021 included in our Form 10-K filed with the SEC. Notes to the consolidated financial statements which would
substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal period,
as reported in the Form 10-K, have been omitted. All intercompany accounts, transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to prior
period amounts to conform to the current year presentation.
Business combinations
The Company accounts for business combinations under the acquisition
method of accounting, in accordance with ASC 805, which requires assets acquired and liabilities assumed to be recognized at their fair
values as of the acquisition date. Any fair value of purchase consideration in excess of the fair value of the assets acquired less liabilities
assumed is recorded as goodwill. The fair values of the assets acquired, and liabilities assumed are determined based upon the valuation
of the acquired business and involve management making significant estimates and assumptions.
Accounts Receivable
Accounts receivables are recorded at amortized
cost, less any allowance for doubtful accounts. Accounts receivable consists primarily of amounts due from our platform provider.
Intangible Assets
Other Intangible Assets
The Company’s other intangible assets consist
of customer relationships, trademarks and internet domain names. Certain intangible assets have a defined useful life and others
are classified as indefinite-lived intangible assets. Other intangible assets with a defined useful life are amortized over their estimated
useful economic lives on a straight-line basis. An intangible asset with an indefinite useful life is not amortized but assessed for impairment
annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived
asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option
to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise,
it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new
cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
See Note 3 for intangible assets acquired in a
business acquisition transaction.
Liabilities to Users
The Company records liabilities for user account
balances at a given reporting period based on deposits made by players either to the Company or the sales affiliate, less any losses on
wagers and payout made to players. Liabilities to users amounts are not required to be backed by cash reserves of the Company.
Impairment of Long-Lived Assets
Long-lived assets consist of software and equipment,
finite-lived acquired intangible assets, such as license agreements, and indefinite-lived assets such as internet domain names. Long-lived
assets are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the asset
may not be fully recoverable. Impairment expense is recognized to the extent an asset’s expected undiscounted future cash flows
are less than the asset’s carrying amount.
Leases
The Company accounts for leases under ASC 842.
The Company assesses whether a contract contains a lease on its execution date. If the contract contains a lease, lease classification
is assessed upon its commencement date under ASC 842. For leases that are determined to qualify for treatment as operating leases,
rent expense is recognized on a straight-line basis over the lease term. Leases that are determined to qualify for treatment as finance
leases recognize interest expense as determined using the effective interest method with corresponding amortization of the right-of-use
assets. For leases with terms of 12 months and greater, an asset and liability are initially recorded at an amount equal to the present
value of the unpaid lease payments over the lease term. In determining the lease term for each lease, the Company includes options
to extend the lease when it is reasonably certain that the option will be exercised. The Company uses the interest rate implicit
in the lease, when known, or its estimated incremental borrowing rate, which is derived from information available at the lease commencement
date including prevailing financial market conditions, in determining the present value of the unpaid lease payments.
Revenue Recognition
The Company recognizes revenue in accordance with
ASC Topic 606, Revenue From Contracts With Customers, which was adopted on October 1, 2018 using the modified retrospective method.
ASC Topic 606 requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition,
the standard requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. The adoption of ASC Topic 606 had no impact to the Company’s comparative consolidated financial statements. Revenue is
recognized based on the following five step model:
· |
Identification of the contract with a customer |
· |
Identification of the performance obligations in the contract |
· |
Determination of the transaction price |
· |
Allocation of the transaction price to the performance obligations in the contract |
· |
Recognition of revenue when, or as, the Company satisfies a performance obligation |
No single customer exceeded more than 10% of revenue
during the three months ended March 31, 2022 and 2020. In addition, no disaggregation of revenue is required because all current revenue
is generated from gaming revenue.
Performance Obligations
The Company operates an online betting platform
allowing users to place wagers on a variety of live sporting events and esports events. Each wager placed by users create a single performance
obligation for the Company to administer each event wagered. Gross gaming revenue is the aggregate of gaming wins and losses based on
results of each event that customers wager bets on. Variable commission fees are paid to sales affiliates based on a percentage of revenue
generated from the affiliate. The commissions rebated to affiliates are recorded as a reduction to gross gaming revenue.
Cost of Revenue
Cost of revenue consists of third-party costs
associated with the betting software platform and gaming taxes.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily
of expenses associated with customer related acquisition costs, advertising and related software, strategic league and team partnerships
and costs related to free to play contests, and the compensation of sales and marketing personnel, including stock-based compensation
expenses. Advertising costs are expensed as incurred. Advertising costs incurred was $434,465
and $0 for the six months ended March 31, 2022 and 2021, respectively.
Product and Technology Expenses
Product and technology expenses consist primarily
of expenses which are not subject to capitalization or otherwise classified within Cost of Revenue. Product and Technology expenses include
software licenses, depreciation of hardware and software and costs related to the compensation of product and technology personnel, including
stock-based compensation.
General and Administrative Expenses
General and administrative expenses include costs
related to the compensation of the Company’s administrative functions, insurance costs, professional fees and consulting expense.
Income Taxes
Deferred taxes are determined utilizing the "asset
and liability" method, whereby deferred tax asset and liability account balances are determined based on differences between financial
reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company provides a valuation allowance, when it's more likely than not that deferred tax
assets will not be realized in the foreseeable future. Deferred tax liabilities and assets are classified as current or non-current based
on the underlying asset or liability or if not directly related to and asset or liability based on the expected reversal dates of the
specific temporary differences.
Fair value of financial instruments
The Company discloses fair value measurements
for financial and non-financial assets and liabilities measured at fair value. Fair value is based on the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The accounting standard establishes a fair value
hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described
below:
Level 1: Quoted prices (unadjusted) in active
markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to
Level 1 inputs.
Level 2: Observable prices that are based on inputs
not quoted on active markets but are corroborated by market data.
Level 3: Unobservable inputs are used when little
or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Foreign Currency
The Company’s reporting currency is the
U.S. Dollar. Certain subsidiaries of the Company have a functional currency other than the U.S. Dollar, and are translated to the Company’s
reporting currency at each reporting date. Non-monetary items are translated at historical rates. Monetary assets and liabilities are
translated from British pounds and Euro into U.S. Dollars, at the period-end exchange rate, while foreign currency expenses are translated
at the exchange rate in effect on the date of the transaction. The net effect of translation is reflected as other comprehensive income.
The gains or losses on transactions denominated in currencies other than an entity’s functional currency are included in the consolidated
statement of operations.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of assets acquired and liabilities assumed. Goodwill is reviewed for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying amount may be impaired. When assessing goodwill for impairment, the Company
uses qualitative and if necessary, quantitative methods in accordance with FASB ASC Topic 350, Goodwill. The Company also considers
its enterprise value and if necessary, discounted cash flow model, which involves assumptions and estimates, including the Company’s
future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws.
Circumstances that could indicate impairment and
require the Company to perform a quantitative impairment test include a significant decline in the Company’s financial results,
a significant decline in the Company’s enterprise value relative to its book value, an unanticipated change in competition of the
Company’s market share and a significant change in the Company’s strategic plans.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standard Board (“FASB”) or other standard setting bodies that the Company adopts as
of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective
will have a material impact on the Company’s financial position or results of operations upon adoption.
NOTE 3 - BUSINESS COMBINATIONS
Acquisition of the B2C business of Aspire Global
plc
On October 1, 2021, in order to accelerate the
growth and expand market access for our esports product offerings, the Company and Esports Malta entered into the “Acquisition Agreement”
with Aspire, Aspire Global International Limited, AG Communications Limited, Aspire Global 7 Limited (collectively the “Aspire Related
Companies”), and Karamba Limited (“Karamba”) whereby Esports Malta acquired all of the issued and outstanding shares
of Karamba. The total acquisition price, paid at the closing of the acquisition of the Karamba shares, was €65,000,000 paid as follows:
(i) a cash amount of €50,000,000; (ii) €10,000,000, paid in accordance with the terms of an unsecured subordinated promissory
note (the “Note”); and (iii) shares of Company common stock, which were valued at €5,000,000 (based on the weighted-average
per-share price of the ten days prior to the execution date of the Acquisition Agreement). The transaction closed on November 29, 2021.
The Note provides for an interest rate of 10%
per annum. The maturity date of the Note is the earlier of that date which is four years from the issuance date or a liquidity event.
The Note requires repayment of the principal amount plus any accrued interest in three equal installments, payable annually starting on
the second anniversary after issuance. No interest payment shall be due until that date which is the last day of the end of the second
anniversary of issuance should the Note remain unpaid at such time. Should the Note remain unpaid at the second anniversary, the total
accrued interest due at that time shall be paid at the second-year anniversary for accrued interest for the period from the issuance date
through the second-year anniversary date. Thereafter, and on each anniversary date thereafter, the interest due for the prior annual period
shall be paid. Notwithstanding the foregoing, if the Company owes greater than $15.0 million under the credit agreement with CP BF Lending,
LLC entered into in connection with the acquisition (See Note 4 – Borrowings – Senior Notes, then then the parties agree that
the Company shall repay any principal amount plus any accrued interest due through the issuance of Company common stock in lieu of any
cash payment and the amount of said common stock shares to be issued by the Company shall be determined by using the Conversion Price
as defined below. Should an event of default occur on the Note, then at the election of Aspire, either (i) the Operator Services Agreement
will be amended such that the fees payable shall increase by 5% during the continuation of the event of default, or (ii) Aspire may elect
to convert the entire outstanding principal amount plus any accrued interest into fully-paid and non-assessable shares of common stock
of the Company at a price per share based on the weighted-average per-share price for the ten days prior to the date of the occurrence
of the event of default (“Conversion Price”). In no event shall the Conversion Price be lower than $18.00 per share (as adjusted
for stock splits, stock dividends, or similar events occurring after the date hereof) and the total maximum number of common stock shares
that may be issued to Aspire upon any such conversion in the aggregate shall be 650,000 shares (as adjusted for stock splits, stock dividends,
or similar events occurring after the date hereof).
The acquired assets were recorded at their estimated
fair values. The purchase price allocation is preliminary, and as additional information becomes available, the Company may further revise
the preliminary purchase price allocation, including the fair value of identified intangible assets, during the remainder of the measurement
period, which will not exceed 12 months from the closing of the acquisition. Measurement period adjustments will be recognized in the
reporting period in which the adjustment amounts are determined. Any such adjustments may be material.
The purchase price of this acquisition was allocated on a preliminary
basis as follows:
Schedule of allocation of purchase price | |
| | |
| |
| |
| |
Fair Value | |
Trademarks | |
$ | 21,836,528 | |
Customer relationships | |
| 16,162,202 | |
Goodwill | |
| 35,620,270 | |
Total | |
$ | 73,619,000 | |
Useful life is the period over which an asset
is expected to add to the future cash flows of an entity. Useful life for identifiable assets is generally estimated using a modified
straight-line method or a usage period. The Company has determined that the useful life of the trademarks vary from 5 years to an indefinite
life and determined that the useful life of the Customer Relationships was three years.
Goodwill represents the excess of the gross considerations
transferred over the fair value of the underlying net assets acquired and liabilities assumed. Goodwill recognized is not deductible for
local tax purposes.
Upon completing the acquisition of Aspire, the
company incurred the following costs:
Schedule of acquisition costs | |
| | |
| |
| |
Debt issuance costs | |
| 2,869,163 | |
Equity issuance costs | |
| 2,100,000 | |
Transaction expenses | |
| 2,615,098 | |
Total acquisition expenses | |
$ | 7,584,261 | |
Debt issuance costs relate to costs associated
with acquiring the loan from the CP BF Lending LLC. These have been recorded as reduction of the face value of the debt and are amortized
over the life of the loan. Equity issuance costs relate to the costs associated with the private placement. These have been recorded as
reduction of the equity proceeds. Transactions costs relate to all direct and indirect costs associated with the acquisition, and expensed
as incurred.
NOTE 4 – BORROWINGS
The following is a summary of borrowings outstanding
as at March 31, 2022 and September 30, 2021:
Schedule of borrowings outstanding | |
| |
| |
| | | |
| | | |
| | |
|
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| |
March 31, 2022 | | |
September 30, 2021 | |
| |
Contractual Interest | |
| |
Principal outstanding balance | | |
Principal outstanding balance | | |
Unamortized debt discount | |
|
Issuance costs | | |
Carrying amount | | |
Principal outstanding balance | | |
Unamortized debt discount | | |
Issuance costs | | |
Carrying amount | |
| |
rate | |
Cur | |
Local | | |
USD | | |
USD | |
|
USD | | |
USD | | |
USD | | |
USD | | |
USD | | |
USD | |
Senior notes | |
15% | |
USD | |
| 30,000,000 | | |
| 30,000,000 | | |
| (7,150,623 | ) |
|
| (1,750,134 | ) | |
| 21,099,243 | | |
| – | | |
| – | | |
| – | | |
| – | |
Note due to Aspire | |
10% | |
EUR | |
| 10,000,000 | | |
| 11,101,000 | | |
| – | |
|
| – | | |
| 11,101,000 | | |
| – | | |
| – | | |
| – | | |
| – | |
Convertible notes | |
10% | |
USD | |
| 1,906,894 | | |
| 1,906,894 | | |
| – | |
|
| – | | |
| 1,906,894 | | |
| 1,912,500 | | |
| (516,366 | ) | |
| – | | |
| 1,396,134 | |
Other | |
0% | |
USD | |
| 675,000 | | |
| 675,000 | | |
| (188,812 | ) |
|
| – | | |
| 486,188 | | |
| 675,000 | | |
| (211,076 | ) | |
| – | | |
| 463,924 | |
Total borrowings | |
| |
| |
| | | |
| 43,682,894 | | |
| (7,339,435 | ) |
|
| (1,750,134 | ) | |
| 34,593,325 | | |
| 2,587,500 | | |
| (727,442 | ) | |
| – | | |
| 1,860,058 | |
| |
| |
| |
| | | |
| | | |
| | |
|
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
| |
| |
| | | |
| | | |
| | |
|
| | | |
| 1,906,894 | | |
| | | |
| | | |
| | | |
| 1,396,133 | |
Long-term | |
| |
| |
| | | |
| | | |
| | |
|
| | | |
| 32,686,431 | | |
| | | |
| | | |
| | | |
| 463,925 | |
Total borrowings | |
| |
| |
| | | |
| | | |
| | |
|
| | | |
| 34,593,325 | | |
| | | |
| | | |
| | | |
| 1,860,058 | |
Senior Notes
On November 29, 2021, the Company entered into
a credit agreement (the “Credit Agreement”) with CP BF Lending, LLC (“Lender”), pursuant to which the Lender agreed
to make a single loan to the Company of $30,000,000 (the “Loan”). The Loan bears interest on the unpaid principal amount at
a rate per annum equal to 15.0% as follows: (1) cash interest on the unpaid principal amount of the Loan at a rate equal to 14.0% per
annum, plus (2) payable-in-kind interest (“PIK Interest”) on the unpaid principal amount of the Loan at a rate equal to 1.0%
per annum. The Company paid to Lender on the closing date a non-refundable origination fee in an amount equal to $750,000.
The Loan matures in 36 months, provided that the
Company may receive two 12-month extensions of the maturity date by paying to the Lender (1) an extension fee equal to 1.0% of the unpaid
principal balance of the Loan as of the date of such extension, and (2) all reasonable and documented out-of-pocket fees and expenses
paid or incurred by Lender, in each case in connection with the extension request, including but not limited to fees and expenses for
appraisals, collateral exams and audits, and legal counsel. The foregoing extension right is subject to, among other items, (i) the Loan
not being in default, (ii) the representations and warranties contained in Credit Agreement being true and correct; and (iii) the Lender
granting its written approval thereof in its sole discretion.
The Loan may be prepaid by the Company at any
time. In addition, the Credit Agreement provides that in the event there shall be excess cash flow from the Aspire Business (as such concept
is defined in the Credit Agreement) for any calendar month, commencing with the month ended December 31, 2022, the Company shall apply
such excess cash flow amount to prepay the outstanding principal balance of the Loan; provided that no such prepayment shall be required
once the unpaid principal balance of the Loan has been reduced to $15,000,000.
The Credit Agreement requires the Company to meet
certain financial covenants commencing March 31, 2022. The Loan is secured by all of the assets of the Company and its subsidiaries. The
Loan may be accelerated by the Lender upon an event of default, which in addition to customary events of default include: (i) if (1) any
of the Company or its subsidiaries shall fail to maintain in full force and effect any gaming approval (as defined in the Credit Agreement)
required for the operation of its business or (2) any gaming regulator shall impose any condition or limitation on any of the foregoing
entities that could be reasonably expected to have a material adverse effect; or (ii) the suspension from trading or failure of the Company’s
common stock to be trading or listed on the Nasdaq exchange for a period of three consecutive trading days.
As of March 31, 2022, the Company had not maintained
compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion of
an equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants,
the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average
share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common
equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million.
In connection with the Loan, the Company issued
the Lender a warrant (the “Lender Warrant”) to purchase 1,567,840 shares of Company common stock at an exercise price of $25.00
per share expiring on the earlier to occur of (i) five years following the issue date or (ii) the second anniversary of the satisfaction
of all obligations of the Company under the Credit Agreement. The exercise price is subject to appropriate adjustment in the event of
certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s
common stock. In addition, the exercise price of the Lender Warrant is subject to “weighted-average” anti-dilution protection
for issuances by the Company below the exercise price (other than certain defined exempt issuances), and, upon shareholder approval, which
was received on February 9, 2022, the number of shares underlying the Lender Warrant shall also be adjusted for issuances to which the
“weighted-average” anti-dilution protection applies. The Lender will not have the right to exercise any portion of the Lender
Warrant if the Lender (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Company common
stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms
of the Lender Warrant, which beneficial ownership amount, at the election of the Lender may be increased to any other percentage not in
excess of 19.99% as specified by the Lender. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted
for the Company, and will assume all of the Company’s obligations under the Lender Warrant with the same effect as if such successor
entity had been named in the Lender Warrant itself.
Note due to Aspire
The Note provides for an interest rate of 10%
per annum. The maturity date of the Note will be the earlier of that date which is four years from the issuance date or a liquidity event.
The Note will require repayment of the principal amount plus any accrued interest in three equal installments, payable annually starting
on the second anniversary after issuance. No interest payment shall be due until that date which is the last day of the end of the second-year
anniversary of issuance should the Note remain unpaid at such time. Should the Note remain unpaid at the second-year anniversary, the
total accrued interest due at that time shall be paid at the second year anniversary for accrued interest for the period from the issuance
date through the second year anniversary date. Thereafter, and on each annual anniversary date thereafter, the interest due for the prior
annual period shall be paid. Notwithstanding the foregoing, if the Company owes greater than $15,000,000 under the Credit Agreement, then
the parties agree that the Company shall repay any principal amount plus any accrued interest due through the issuance of Company common
stock in lieu of any cash payment and the amount of said common stock shares to be issued by the Company shall be determined by using
the Conversion Price as defined below. Should an event of default occur on the Note, then at the election of Aspire, either (i) the Operator
Services Agreement will be amended such that the fees payable shall increase by 5% during the continuation of the event of default, or
(ii) Aspire may elect to convert the entire outstanding principal amount plus any accrued interest into shares of common stock of the
Company at a price per share based on the weighted-average per-share price for the ten trading days prior to the date of the occurrence
of the event of default (“Conversion Price”). In no event shall the Conversion Price be lower than $18.00 per share (as adjusted
for stock splits, stock dividends, or similar events occurring after the date hereof) and the total maximum number of shares of common
stock that may be issued to Aspire upon any such conversion in the aggregate shall be 650,000 shares (as adjusted for stock splits, stock
dividends, or similar events occurring after the date hereof).
Convertible Notes and other
On September 1, 2020, ESEG entered into
three promissory notes, with a combined principal amount of $2,100,000.
The notes bore interest at the rate of 10%
per annum and matured on March
1, 2022 and are now convertible at the noteholder’s option. The Company also agreed to pay two of the lenders a total of
$675,000 on
September 1, 2025, bearing no interest. The Company issued each of the lenders a conversion option at a fixed price of $0.50 per
share and issued 2,015,000 warrants
to purchase shares of the Company’s common stock at an exercise price of $0.30 per share, each with a term of five years. The
convertible notes bear interest at 10% per annum and mature on March 1, 2022. The holder may convert the note into shares of common
stock at any time throughout the maturity date, to the extent and provided that no holder of the notes was or will be permitted to
convert such notes so long as it or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common
stock after such conversion. The Company determined that the assignment of the notes payable by the subsidiary to the parent company
was an extinguishment of the original notes payable due to the addition of a substantive conversion feature, and the Company
recognized a loss on extinguishment of $265,779 during
the year ended September 30, 2020.
The Company evaluated the conversion option and
concluded a beneficial conversion feature was present at issuance. The Company recognized the beneficial conversion feature and relative
fair value of the warrants as a debt discount and additional paid in capital. The fair value of the warrants at the grant date was estimated
using a Black-Scholes model and the following assumptions: 1) volatility of approximately 85%
based on a peer group of companies; 2) dividend yield of 0%;
3) risk-free rate of 0.26%;
and 4) an expected term of five
years. The $2,100,000
debt discount will be amortized through the maturity date of the convertible notes payable. During the three months ended December
31, 2020, a total of $187,500
of principal was converted into 375,000
shares of common stock. As of December 31, 2021, the balance due under these notes, net of unamortized discount of $826,189,
is $1,086,311,
with accrued interest of $116,774.
During the three months ended March 31, 2022, the Company recorded a charge of $1,187,913
in the accompanying consolidated statement of operations from the amortization of its debt discount related to the convertible
notes payable and other liabilities described above.
NOTE 5 – STOCKHOLDERS’ EQUITY
The Company is currently authorized to issue up
to 100,000,000 shares of common stock with a par value of $0.001. In addition, the Company is authorized to issue 10,000,000 shares of
preferred stock with a par value of $0.001. The specific rights of the preferred stock, when so designated, shall be determined by the
board of directors.
Acquisition of the B2C segment of Aspire Global
plc
On October 1, 2021, in connection with the Acquisition,
the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “Investors”).
Pursuant to the Subscription Agreements, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell
to such Investors, simultaneous with the closing of the Acquisition Agreement, an aggregate of 37,700 shares of Series A Convertible Preferred
Stock (the “Preferred Stock”) for a purchase price of $1,000.00 per share, for aggregate gross proceeds of $37,700,000 (the
“Private Placement”). For each share of Preferred Stock issued, the Company issued the Investor a warrant to purchase 150%
of the shares of Company common stock underlying the Preferred Stock (the “Warrants”).
Pursuant to the Subscription Agreement, the Company
has obtained shareholder approval of the conversion of the Preferred Stock and Warrants into Company common stock in compliance with the
rules and regulations of the Nasdaq Stock Market (“Shareholder Approval”).
The Preferred Stockholders are entitled to receive
dividends, at a rate of 14.0% per annum, which shall be payable quarterly in arrears on January 1, April 1, July 1 and October 1, beginning
on the first such date after the issuance date. With limited exceptions, the Preferred Stockholders will have no voting rights. The dividends
can be paid in either cash or in the issuance of additional preferred shares. Upon any liquidation, dissolution or winding-up of the Company,
the holders of the Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company available
to shareholders, an amount equal to the greater of: (i) the purchase price for each share of Preferred Stock then held, or (ii) the amount
the holders would have received had the holders fully converted the Preferred Stock to Company common stock, in each case, before any
distribution or payment shall be made to the holders of the Company’s common stock. The Preferred Stock is convertible into Company
common stock at an initial conversion price of $28.00 per share (“Conversion Price”); provided that the Conversion Price is
subject to anti-dilution protection upon any subsequent transaction at a price lower than the Conversion Price then in effect. In addition,
nine months from the issuance date (the “Adjustment Date”), the Conversion Price shall be adjusted to the lesser of: (i) the
Conversion Price in effect on the Adjustment Date, or (ii) 85% of the average closing price of the Company’s common stock for the
fifteen trading days prior to the Adjustment Date. If the Company’s EBITDA is equal to or greater than $2.0 million for the quarter
ending March 31, 2022, then no adjustment pursuant to the foregoing sentence will cause the Conversion Price to be less than $20.00.
The Warrants are exercisable and expire on the
fifth anniversary thereafter. The Warrants will initially be exercisable at an exercise price of $30.00 per share, provided that the exercise
price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the exercise price then in effect.
The Warrants can be exercised on a cashless basis if there is no effective registration statement registering, or no current prospectus
available for, the resale of the ordinary shares underlying the Warrants.
The holders of the Preferred Stock and Warrants
will not have the right to convert or exercise any portion of the Preferred Stock and Warrants to the extent that, after giving effect
to such conversion, such holder (together with certain related parties) would beneficially own in excess of 4.99% of the Company’s
common stock outstanding immediately after giving effect to such conversion or exercise.
Shares issued in the prior year
During the three months ended December 31, 2020,
the Company received gross cash proceeds of $4,000,000 in exchange for 2,000,000 shares of common stock. In conjunction with this fundraising,
broker commission and expenses of $351,929 were paid and 173,625 common stock warrants with an exercise price of $2.00 and a five-year
term were issued. The fair value of the warrants issued in connection with the financing was estimated to be $228,500 as discussed below.
In January 2021, the Company sold 250,014 shares
of common stock to investors for $3 per share, receiving gross proceeds of $750,042. The company paid $30,314 of broker fees and commissions
related to this fundraising and issued 8,750 warrants to purchase common stock with an exercise price of $3 per share and a term of 5
years. The fair value of the warrants issued in connection with the financing was estimated to be $228,500 as discussed below.
In April 2021, the Company completed its IPO
and issued 2,400,000 shares
of common stock for gross cash proceeds of $14,400,000 and
received net proceeds of $13,514,200 after
costs of $885,800 which
were recorded in shareholders’ equity. The Company also issued 168,000 common
stock warrants with a five-year
term and exercise price of $7.20 to
the underwriter. These warrants have an estimated fair value of $5,474,076.
2020 Stock Plan
In December 2020, the Company adopted the 2020
Stock Plan, or the 2020 Plan. The 2020 Plan is a stock-based compensation plan that provides for discretionary grants of stock options,
stock awards, stock unit awards and stock appreciation rights to key employees, non-employee directors and consultants.
Under the 2020 Plan, the aggregate value of all
compensation granted or paid to any individual for service as a non-employee director with respect to any calendar year, including awards
granted under the 2020 Plan and cash fees paid to such non-employee director, will not exceed $300,000 in total value. For purposes of
this limitation, the value of awards is calculated based on the grant date fair value of such awards for financial reporting purposes.
The number of shares of the common stock that
may be issued under the 2020 Plan is 4,000,000. As of December 31, 2021, the Company had awarded a total 3,868,098 shares under the 2020
Plan, with 131,902 remaining under the 2020 Plan.
Common Stock Awards
During the six months ended March 31, 2022, the
Company agreed to award a total of 381,100 restricted stock units that convert into common stock to various employees, consultants and
officers under the 2020 Plan. Of the restricted stock unit awarded, 281,100 will vest annually over a period of one to four years.
During the six months ended March 31, 2022, the
Company recognized a total of $2,281,520 of stock-based compensation expense related to common stock awards and expects to recognize additional
compensation cost of $9,981,520 upon vesting of all awards.
Warrants
As discussed above, the Company has issued common
stock warrants in connection with its fundraising activities to preference shareholders, its lender and convertible notes issued during
the six months ended March 31, 2022. The following table summarizes warrant activity during the six months ended March 31, 2022:
Schedule of warrant activity | |
| | | |
| | | |
| | |
| |
| | |
| | |
| |
| |
Common Stock Warrants | |
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted average Remaining Life in years | |
Outstanding at September 30, 2021 | |
| 2,199,541 | | |
$ | 0.93 | | |
| 4.04 | |
Granted | |
| 3,697,225 | | |
| 27.82 | | |
| 4.67 | |
Cancelled | |
| – | | |
| – | | |
| – | |
Expired | |
| – | | |
| – | | |
| – | |
Exercised | |
| (711,375 | ) | |
| (2.21 | ) | |
| (3.73 | ) |
Outstanding at March 31, 2022 | |
| 5,185,391 | | |
$ | 19.92 | | |
| 4.49 | |
Exercisable at March 31, 2022 | |
| 5,185,391 | | |
$ | 19.92 | | |
| 4.49 | |
At March 31, 2022, the outstanding and exercisable
common stock warrants had an estimated intrinsic value of $9,579,541. The Company estimated the fair value of the warrants using a Black-Scholes
option pricing model and the following assumptions: 1) stock price of $2 to $28.95 per share; 2) dividend yield of 0%; 3) risk-free rate
of between 0.18% and 1.18%; 4) expected term of between 2.5 and 5 years; 5) an exercise price of $0.25, $2 $3, $25, or $28 and 6) expected
volatility of 42.14% based on a peer group of public companies.
Options
The following table summarizes option activity during the three months
ended March 31, 2022:
Schedule of option activity | |
| | | |
| | | |
| | |
| |
| | |
| | |
| |
| |
Common Stock Options | |
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted average Remaining Life in years | |
Outstanding at September 30, 2021 | |
| 2,344,348 | | |
$ | 2.57 | | |
| 8.39 | |
Granted | |
| 154,000 | | |
| 11.78 | | |
| 9.20 | |
Cancelled | |
| (23,000 | ) | |
| (5.57 | ) | |
| 9.76 | |
Expired | |
| – | | |
| – | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | |
Outstanding at March 31, 2022 | |
| 2,475,348 | | |
$ | 3.12 | | |
| 8.34 | |
Exercisable at March 31, 2022 | |
| 1,143,348 | | |
$ | 0.93 | | |
| 8.45 | |
During the six months ended March 31, 2022, the
Company recognized stock-based compensation expense of $968,401 related to common stock options awarded. The exercisable common stock
options had an intrinsic value as of March 31, 2022, of $6,645,579. The Company expects to recognize an additional $4,996,713 of compensation
cost related to stock options expected to vest.
The Company estimated the fair value of the stock
options awarded using a Black-Scholes option pricing model and the following assumptions: 1) stock price of $3 to $31.33 per share; 2)
dividend yield of 0%; 3) risk-free rate of between 0.85% and 1.20%; 4) expected term of between 3.5 and 6.25 years; 5) an exercise price
between $0.25 and $31.33 and 6) expected volatility of 42.14% based on a peer group of public companies.
NOTE 6 – LONG-LIVED ASSETS
Fixed Assets
The Company’s fixed assets consisted of
the following as of March 31, 2022 and September 30, 2021:
Schedule of fixed assets | |
| | | |
| | |
| |
| | |
| |
| |
March 31, 2022 | | |
September 30, 2021 | |
Software | |
$ | 677,287 | | |
$ | 214,996 | |
Furniture and fixtures | |
| 418,976 | | |
| – | |
Total fixed assets | |
| 1,096,263 | | |
| 214,996 | |
Accumulated depreciation | |
| (171,571 | ) | |
| (129,662 | ) |
Fixed assets, net | |
$ | 924,692 | | |
$ | 85,334 | |
On November 5, 2020, the Company entered
into an asset purchase agreement with a third party to acquire certain proprietary technology data. The Company made a cash payment
of $61,425 and
granted warrants to purchase 32,000 shares
of common stock at an exercise price of $0.25 per
share for a period of five years.
The fair value of the warrants was estimated to be $57,252 as
of the grant date. The total consideration paid of $118,677 is
included as part of software costs within property and equipment on the Company’s consolidated balance sheet. The Company also
entered into an employment agreement with the seller, effective November 1, 2020. The employee will be compensated at a rate of
$110,000 per
year and will receive a common stock award of 100,000 shares,
which vest annually over four years.
The software costs above relate to acquired components
of the Company’s new platform which is being depreciated over an expected useful life.
Intangible Assets
On September 1, 2020, the Company’s wholly-owned
subsidiary, ESEG, entered into domain purchase agreements to acquire the rights to certain domain names from third parties. The cost to
acquire the domain names was $2,239,606, based on the estimated fair value of the consideration transferred to the sellers. ESEG issued
notes payable with a combined principal amount of $2,100,000, which were to mature on March 1, 2022, bearing interest at 10%. These notes
were exchanged for notes of the Company in September 2020. The Company also agreed to pay a total of $675,000 on September 1, 2025, with
no interest. The Company estimated discount of these liabilities totaling $535,394 at the date of the transaction, to be amortized over
the maturity period of the liabilities. The domain names were recorded as an intangible asset with an indefinite useful life. The
Company’s management evaluated the domain names at September 30, 2020 and determined no impairment was necessary.
License Agreement
On October 1, 2020, the Company entered into an
option agreement which gave the Company rights to acquire a license for proprietary technology related to online betting. The Company
paid $133,770 upon execution of the option agreement and paid an additional $286,328 in cash and agreed to issue 65,000 shares of common
stock upon exercise of the option on or about May 3, 2021. The shares were issued in July 2021 and had a fair value of $1,456,650 at the
date of exercise of the option and execution of the license agreement resulting in total value for the license agreement of $1,876,748.
During the three months ended March 31, 2022, the Company recognized amortization expense of $156,396 included in product and technology
expenses.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
On September 2, 2020, the Company entered into
a financial advisor agreement with Boustead Securities LLC, the representative of the underwriters in the Company’s initial public
offering, to provide services related to fundraising on the Company’s planned public listing. The Company agreed to pay the financial
advisor a success fee of 4% of any gross proceeds from any debt financing, and a 7% success fee related to any equity or convertible debt
financing, subject to customary approval by the regulatory authorities. In April 2021, the Company completed its IPO and issued 2,400,000
shares of common stock for gross cash proceeds of $14,400,000. The Company paid underwriting fees of $885,800 and issued 168,000 warrants
to purchase shares of common stock at a price of $7.20 per share for a period of five 5 years.
On September 26, 2020, the Company entered into
a consulting agreement with a registered foreign broker dealer for fundraising services and paid 10% of any gross proceeds through capital
raises from non-US investors introduced by the consultant, up to a maximum payment to the consultant of $200,000 and the consultant also
received warrants to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. These warrants were
exercised in April 2021 and were converted into 62,386 shares of the Company stock.
Financial Advisor’s Claims
Subsequent to quarter end, the Company’s
previous financial advisors (together, “Advisor”) have alleged a breach by the Company over the termination of the engagement
and timing of the payment and amount of the fees. The fees the Company expects to pay are accrued in the accompanying balance sheet.
The Company disputes the allegations of the Advisor. The Company and the Advisor are currently seeking a resolution to this dispute,
but there is no certainty that the parties will amicably resolve this matter.
NOTE 8 –LOSS PER COMMON SHARE
The basic net loss per common share is calculated
by dividing the Company's net loss available to common shareholders by the weighted average number of common shares during the year.
The diluted net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the diluted
weighted average number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding
is the basic weighted number of common shares adjusted for any potentially dilutive debt or equity. Common shares issuable under convertible
debt, stock options and common stock warrants were excluded from the calculation of diluted net loss per share due to their antidilutive
effect.
Schedule of earnings per share | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended | |
Six Months Ended | |
| |
March 31, 2022 | | |
March 31, 2021 | | |
March 31, 2022 | | |
March 31, 2021 | |
Numerator | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (11,841,071 | ) | |
$ | (2,375,660 | ) | |
$ | (20,722,109 | ) | |
$ | (5,126,391 | ) |
Preferred stock dividends | |
| (1,367,260 | ) | |
| – | | |
| (1,851,077 | ) | |
| – | |
Net income (loss) attributable to common stockholders | |
$ | (13,208,331 | ) | |
$ | (2,375,660 | ) | |
$ | (22,573,186 | ) | |
$ | (5,126,391 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator | |
| | | |
| | | |
| | | |
| | |
Basic and diluted weighted average common shares | |
| 14,236,755 | | |
| 10,587,654 | | |
| 13,980,720 | | |
| 9,878,185 | |
Basic and diluted net income (loss) per common share | |
$ | (0.93 | ) | |
$ | (0.22 | ) | |
$ | (1.61 | ) | |
$ | (0.52 | ) |
NOTE 9 –SUBSEQUENT
EVENT
As disclosed in Note 4, the Company had not maintained
compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion an
equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants,
the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average
share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common
equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million.
item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section of this report includes forward-looking statements
that reflect our current views with respect to future events and financial performance. 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
We develop products and operate platforms to provide
a real money online gambling experience focused on esports and competitive gaming. We operate licensed online gambling platforms which
are real money betting platforms. Our mission is to define, shape and drive growth of the current and future esports wagering ecosystem
by providing advanced product, platform and marketing solutions directly to service providers and customers. We accept wagers on major
esports titles including: Counter-Strike: GO, League of Legends, Dota 2, StarCraft 2, Rocket League, Rainbow Six, Warcraft 3, King
of Glory and FIFA; as well as professional sports including the National Football League, National Basketball Association,
Major League Baseball, soccer and more.
Acquisition of the B2C business of Aspire Global
plc (the “Acquisition”)
On October 1, 2021, the Company, and Esports Product
Technologies Malta Ltd. entered into a Share Purchase Agreement with Aspire Global plc, (“Aspire”) and various Aspire group
companies to acquire its business to consumer (“B2C”) business. The total acquisition price was €65,000,000 paid as follows:
(i) cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms of an unsecured subordinated promissory
note (the “Note”); and (iii) shares of Company common stock, which were valued at €5,000,000 (based on the weighted-average
per-share price of the ten days prior to the execution date of the Acquisition Agreement.
This acquisition expands our product offerings
and increases the number of markets in which we can operate. The B2C business offers a portfolio of distinctive proprietary brands to
a diverse customer base operating across regulated markets.
The acquisition of Aspire’s B2C business
provides the following strategic benefits:
|
· |
ownership of Aspire’s portfolio of B2C proprietary online casino and sportsbook brands consisting of Karamba, Hopa, Griffon Casino, BetTarget, Dansk777, and GenerationVIP; |
|
· |
market access for our esports products in key regulated markets including the United Kingdom, Germany, Ireland, Malta, and Denmark, among others, allowing us to cross-sell esports wagering opportunities; |
|
· |
Ability to launch additional esports focused online gaming websites that target these additional markets; and |
|
· |
enhanced strategic partnership with Aspire who will provide the on-line gaming platform and a managed services offering, including customer service, customer on-boarding and payment processing ensuring operational stability and continuity. |
Our gaming license from the Curacao Gaming Authority
and the licenses made available to us from the Acquisition of the Aspire B2C business allows us to accept esports and sports wagers from
residents of more than 160 jurisdictions.
Results of Operations
Results of operations in dollars and as a percentage of net revenue
were as follows:
| |
Three Months Ended March 31, | | |
Six Months Ended | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
$ | | |
% | | |
$ | | |
% | | |
$ | | |
% | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Revenue | |
| 19,002,588 | | |
| 100% | | |
| 33,834 | | |
| 100% | | |
| 26,142,515 | | |
| 100% | | |
| 44,628 | | |
| 100% | |
Cost of revenue | |
| 12,009,596 | | |
| 63% | | |
| 12,465 | | |
| 37% | | |
| 16,618,683 | | |
| 64% | | |
| 24,724 | | |
| 55% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 6,992,992 | | |
| 37% | | |
| 21,369 | | |
| 63% | | |
| 9,523,832 | | |
| 36% | | |
| 19,904 | | |
| 45% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales and marketing expenses | |
| 9,474,087 | | |
| 50% | | |
| 234,691 | | |
| 694% | | |
| 13,448,872 | | |
| 51% | | |
| 273,944 | | |
| 614% | |
Product and technology expenses | |
| 1,139,914 | | |
| 6% | | |
| 603,445 | | |
| 1,784% | | |
| 2,155,162 | | |
| 8% | | |
| 1,109,380 | | |
| 2,486% | |
Acquisition costs | |
| 1,190 | | |
| 0% | | |
| – | | |
| 0% | | |
| 2,240,147 | | |
| 9% | | |
| – | | |
| 0% | |
General and administrative expenses | |
| 5,446,776 | | |
| 29% | | |
| 1,189,409 | | |
| 3,516% | | |
| 8,591,195 | | |
| 33% | | |
| 2,783,121 | | |
| 6,236% | |
Total operating expenses | |
| 16,061,967 | | |
| 85% | | |
| 2,027,546 | | |
| 5,993% | | |
| 26,435,376 | | |
| 101% | | |
| 4,166,445 | | |
| 9,336% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (9,068,975 | ) | |
| (48)% | | |
| (2,006,177 | ) | |
| (5,930)% | | |
| (16,911,544 | ) | |
| (65)% | | |
| (4,146,541 | ) | |
| (9,291)% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (2,764,819 | ) | |
| (15)% | | |
| (367,214 | ) | |
| (1,085)% | | |
| (3,741,237 | ) | |
| (14)% | | |
| (967,620 | ) | |
| (2,168)% | |
Loss on derivatives | |
| (67,031 | ) | |
| (0)% | | |
| – | | |
| 0% | | |
| (73,083 | ) | |
| (0)% | | |
| – | | |
| 0% | |
Foreign currency gain/(loss) | |
| (59,754 | ) | |
| 0% | | |
| (2,269 | ) | |
| (7)% | | |
| 3,755 | | |
| 0% | | |
| (12,230 | ) | |
| (27)% | |
Total other expense | |
| (2,772,096 | ) | |
| (15)% | | |
| (369,483 | ) | |
| (1,092)% | | |
| (3,810,565 | ) | |
| (15)% | | |
| (979,850 | ) | |
| (2,196)% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before provision for income taxes | |
| (11,841,071 | ) | |
| (62)% | | |
| (2,375,660 | ) | |
| (7,022)% | | |
| (20,722,109 | ) | |
| (79)% | | |
| (5,126,391 | ) | |
| (11,487)% | |
Provision for income taxes | |
| – | | |
| 0% | | |
| – | | |
| 0% | | |
| – | | |
| 0% | | |
| – | | |
| 0% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (11,841,071 | ) | |
| (62)% | | |
| (2,375,660 | ) | |
| (7,022)% | | |
| (20,722,109 | ) | |
| (79)% | | |
| (5,126,391 | ) | |
| (11,487)% | |
Three Months Ended March 31, 2022 compared to March 31, 2021
Revenue
During the three months ended March 31, 2022, we
generated $19.0 million in revenue an increase from $0.033 million in the same period of the prior year. The increase in revenue was driven
by the Acquisition which continues to generate significant revenue in the UK, Germany, Denmark, Ireland, Austria and other regulated markets.
The acquisition of the Aspire B2C business accounted for substantially all of the increase in revenue for the three months ended March
31, 2022, as compared to the three months ended March 31, 2021.
Cost of Sales
During the three months ended March 31, 2022, cost
of sales was $12.0 million as compared with $0.012 million in the same period in the prior year. The increase in cost of sales is due
entirely to the Acquisition and is consistent with the increase in revenue and consists primarily of platform fees, which are charged
as a percentage of revenue and gaming taxes.
Sales and Marketing Expense
Sales and marketing expense was $9.5 million for
the three months ended March 31, 2022, an increase from $0.2 million in the same period in the prior year. The increase in sales and marketing
expense is driven by increase in revenue from the acquisition of the Aspire B2C business, increase in stock-based compensation and increased
levels of staff. Stock-based compensation was approximately $0.964million for three-month period ended March 31, 2022. We expect sales
and marketing expenses to increase in future periods as our marketing campaigns increase in both number and volume.
Product and Technology Expense
Product and technology expense increased to $1.1
million for the three months ended March 31, 2022, from $0.6 million for the three months ended March 31, 2021. The increase is a result
of increased hiring of both employees and consultants as we focus on expanding our product offerings. Product and technology expense,
for the three months ended March 31, 2022, included payroll-related costs of approximately $613,000 and stock-based compensation of $367,000.
General and Administrative Expense
General and administrative expense was $5.4 million
for the three months ended March 31, 2022, as compared to $1.2 million for the three months ended March 31, 2021. The increase in general
and administrative expense was mainly attributable to an increase in employee costs from adding new employees, $483,000 of stock-based
compensation cost, and professional fees including legal, accounting, investor relations and other professional fees, depreciation and
amortization of intangible assets.
Interest and Other Expenses
During the three months ended March 31, 2022, we
recognized interest expense of $2.7 million, which included amortization of debt discount of $0.8 million related to the convertible debt
issued to acquire certain intangible assets consisting of acquired domain names and our recent loan completed as part of the Acquisition.
We also incurred interest on the term loan completed on November 29, 2021 of $1.9 million.
Net Income/Loss
Net loss for the three months ended March 31, 2022,
was $11.8 million compared to a net loss of $2.4 million for the three months ended March 31, 2021. The increase in net loss was primarily
due to the significant in increase in cost of sales and sales and marketing costs to support the Acquisition as well as increased general
and administrative expenses product and technology expenses as a result of our efforts to develop our new products and services. Increased
interest expense from the issuance of the senior notes, also contributed to the increase in our net loss for the period.
Six Months Ended March 31, 2022 compared to March 31, 2021
Revenue
During the six months ended March 31, 2022, we
generated $26.1 million in revenue an increase from $0.045 million in the same period of the prior year. The increase in revenue was driven
by the Acquisition which continues to generate significant revenue in the UK, Germany, Denmark, Ireland, Austria and other regulated markets.
The acquisition of the Aspire B2C business accounted for substantially all of the increase in revenue for the six months ended March 31,
2022, as compared to the six months ended March 31, 2021.
Cost of Sales
During the six months ended March 31, 2022, cost
of sales was $16.6 million as compared with $0.025 million in the same period in the prior year. The increase in cost of sales is due
entirely to the Acquisition and is consistent with the increase in revenue and consists primarily of platform fees, which are charged
as a percentage of revenue and gaming taxes.
Sales and Marketing Expense
Sales and marketing expense was $13.4 million for
the six months ended March 31, 2022, an increase from $0.3 million in the same period in the prior year. The increase in sales and marketing
expense is driven by increase in revenue from the acquisition of the Aspire B2C business, increase in stock-based compensation and increased
levels of staff. Stock-based compensation was approximately $1.842 million for six-month period ended March 31, 2022. We expect sales
and marketing expenses to increase in future periods as our marketing campaigns increase in both number and volume.
Product and Technology Expense
Product and technology expense increased to $2.2
million for the six months ended March 31, 2022, from $1.1 million for the six months ended March 31, 2021. The increase is a result of
increased hiring of both employees and consultants as we focus on expanding our product offerings. Product and technology expense, for
the six months ended March 31, 2022, included payroll-related costs of approximately $955,000, stock-based compensation of $696,000.
Acquisition Costs
Acquisition costs was $2.2 million for the six
months ended March 31, 2022, as compared to zero for the six months ended March 31, 2021. Acquisition costs included a non cash hedging
loss of $1.570 million from executing a forward contract on the purchase price of the Acquisition. Acquisition costs also included various
legal and consultant fees associated with completing the Acquisition.
General and Administrative Expense
General and administrative expense was $8.6 million
for the six months ended March 31, 2022, as compared to $2.8 million for the six months ended March 31, 2021. The increase in general
and administrative expense was mainly attributable to an increase in employee costs from adding new employees, $711,000 of stock-based
compensation cost, and professional fees including legal, accounting, investor relations and other professional fees, depreciation and
amortization of intangible assets.
Interest and Other Expenses
During the six months ended March 31, 2022, we
recognized interest expense of $3.7 million, which included amortization of debt discount of $1.4 million related to the convertible debt
issued to acquire certain intangible assets consisting of acquired domain names and our recent loan completed as part of the Acquisition.
We also incurred interest on the term loan completed on November 29, 2021 of $2.3 million.
Net Income/Loss
Net loss for the six months ended March 31, 2022,
was $20.7 million compared to a net loss of $5.1 million for the six months ended March 31, 2021. The increase in net loss was primarily
due to the significant in increase in cost of sales and sales and marketing costs to support the Acquisition as well as increased general
and administrative expenses product and technology expenses as a result of our efforts to develop our new products and services. Increased
interest expense from the issuance of the senior notes, also contributed to the increase in our net loss for the period.
Liquidity and Capital Resources
On March 31, 2022, we had cash of $7.1 million,
and had working capital deficit of $0.82 million. We have historically funded our operations from proceeds from debt and equity sales,
and funds received from customers. The Company's forecasts for fiscal year 2022 indicate that it will need additional funding during such
period in order to have sufficient financial resources to continue to settle its debts as they fall due. The Company does not have any
commitments for such funding and there is no assurance that it will be able to raise additional financing on favorable terms, if at all.
Acquisition of Aspire Global Business to Consumer (“B2C”)
Business
In order to accelerate the growth and expand market
access for our esports product offerings, on November 29, 2021, we completed the acquisition of Aspire Global’s B2C business for
€65,000,000 payable as follows: (i) a cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms
of an unsecured subordinated promissory note; and (iii) 186,838 shares of our common stock, which were valued at €5,000,000.
On September 30, 2021, the Company entered into
subscription agreements (the “Subscription Agreements”) with certain investors (the “Investors”). Pursuant to
the Subscription Agreements, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to such Investors,
simultaneous with the closing of the Acquisition Agreement, shares of Series A Convertible Preferred Stock (the “Preferred Stock”)
for a purchase price of $1,000.00 per share (the “Private Placement”). For each share of Preferred Stock issued, the Company
issued the Investor a warrant to purchase 150% of the shares of Company common stock underlying the Preferred Stock (the “Warrants”).
The aggregate Private Placement, which was completed on the closing date of the Acquisition Agreement was $37.7 million.
On November 29, 2021, the Company entered a credit
agreement (the “Credit Agreement”) with CP BF Lending, LLC (“Lender”), pursuant to which the Lender agreed to
make a single loan to the Company of $30.0 million (the “Loan”). The Loan bears interest on the unpaid principal amount at
a rate per annum equal to 15.0% as follows: (1) cash interest on the unpaid principal amount of the Loan at a rate equal to 14.0% per
annum, plus (2) payable-in-kind interest (“PIK Interest”) on the unpaid principal amount of the Loan at a rate equal to 1.0%
per annum. The Company paid to Lender on the closing date a non-refundable origination fee in an amount equal to $750,000.
As of March 31, 2022, the Company had not maintained
compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion an
equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants,
the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average
share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common
equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million.
During fiscal year September 30, 2021, we completed
two private placements totaling 2,250,000 shares of our common stock for gross proceeds of $4.75 million.
In April 2021, the Company completed its IPO and
issued 2,400,000 shares of common stock for gross cash proceeds of $14,400,000. The Company paid underwriting fees and other expenses
of $885,800 and issued 168,000 warrants to purchase shares of common stock at a price of $7.20 per share for a period of five years.
As of March 31, 2021, we have incurred an accumulated
deficit of $39.9 million since inception and have not yet generated any meaningful income from operations.
Cash used in operating activities
Net cash used in operating activities was $7.6
million for the six months ended March 31, 2022, as compared to cash used in operating activities of $1.8 million for the six months ended
March 31, 2021. Net cash used in operating activities during the period were primarily impacted by the increase in Accounts Receivable
due to the growth in our business, which was collected in April 2022. Cash flow from operations also benefitted from deferred payments
for professional fees to our consultants, attorneys and accountants primarily required to complete the Acquisition.
Subsequent to quarter
end, the Company’s previous financial advisors (together, “Advisor”) have alleged a breach by the Company over the
termination of the engagement and timing of the payment and amount of the fees. The fees the Company expects to pay are accrued in the
accompanying balance sheet. The Company disputes the allegations of the Advisor. The Company and the Advisor are currently seeking a
resolution to this dispute, but there is no certainty that the parties will amicably resolve this matter.
Cash used in investing activities
Net cash used in investing activities was $57.1
million for the six months ended March 31, 2022, as compared to cash used in investing activities of $0.2 million for the six months ended
March 31, 2021. Net cash used in investing activities during the period related to the completion of the Acquisition. Also contributing
to the cash used in investing activities were purchase of fixed assets of $0.9 million due primarily to opening of our office in Malta
and purchase of software assets to support the new wagering platform.
Cash used provided by financing activities
Net cash provided by financing activities was
$62,7 million for the six months ended March 31, 2022 due to the issuance of Preferred Shares and Senior Notes of $37.7 million and $30.0
million, respectively. Offsetting these amounts were the direct issuance costs.
Off Balance Sheet Arrangements
None.