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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of Report (Date of earliest event reported): August 17, 2023
ESPORTS
ENTERTAINMENT GROUP, INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
001-39262 |
|
26-3062752 |
(State
or other jurisdiction of |
|
(Commission |
|
(IRS
Employer |
incorporation
or organization) |
|
File
Number) |
|
Identification
No.) |
BLOCK
6,
TRIQ
PACEVILLE,
ST.
JULIANS STJ 3109
MALTA
(Address
of principal executive offices)
356
2713 1276
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under
any of the following provisions:
☐ |
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|
|
☐ |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
|
|
☐ |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
|
|
☐ |
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
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 |
Common Stock
Purchase Warrants |
|
GMBLZ |
|
The Nasdaq
Stock Market LLC |
Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging
growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item
8.01 Other Events.
As
previously disclosed, effective February 22, 2023, Esports Entertainment Group, Inc. (the “Company”) completed a one-for-one-hundred
(1-for-100) reverse stock split of our issued and outstanding shares of common stock without a corresponding reduction in the total number
of authorized shares of our common stock (the “Reverse Stock Split”).
The
Company is filing this Current Report on Form 8-K (this “Report”) to include the Company’s Consolidated Financial
Statements and accompanying Notes for the Years Ended June 30, 2022 and 2021 and Management’s Discussion and Analysis of
Financial Condition and Results of Operations for the nine months ended March 31, 2023 and 2022, and the fiscal years ended June 30,
2022 and 2021, that were updated to reflect the Reverse Stock Split and were included within Amendment No. 3 to Form S-1/A filed
with the Securities and Exchange Commission on August 1, 2023, in Exhibit 99.1 and Exhibit 99.2, respectively. The information in
this Report is not an amendment to, or a restatement of, the Company’s Consolidated Financial Statements and accompanying
Notes for the years ended June 30, 2022 and 2021 included in that filing.
Item
9.01. Financial Statement and Exhibits.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Date:
August 17, 2023 |
|
|
|
|
|
|
ESPORTS
ENTERTAINMENT GROUP, INC. |
|
|
|
|
By: |
/s/
Michael Villani |
|
Name:
|
Michael
Villani |
|
Title: |
Interim
Chief Financial Officer and Controller |
Exhibit
23.1
Independent
Registered Public Accounting Firm’s Consent
We
consent to the inclusion in this Current Report on Form 8-K of Esports Entertainment Group, Inc. (the “Company”) of
our report dated April 21, 2023, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern,
and an emphasis of matter paragraph related to the adjustments for the reverse stock split, with respect to our audit of the consolidated
financial statements of the Company as of June 30, 2022 and for the year ended June 30, 2022.
/s/
Marcum llp
Marcum
llp
Marlton,
New Jersey
August
17, 2023
Exhibit
23.2
Independent
Registered Public Accounting Firm’s Consent
We
consent to the inclusion in this Current Report on Form 8-K (the “Form 8-K”) of Esports Entertainment Group, Inc.
(the “Company”) our report dated October 13, 2021, which includes an explanatory paragraph as to the Company’s ability
to continue as a going concern, with respect to our audit of the consolidated financial statements of the Company as of June 30,
2021 and for the year ended June 30, 2021. We were dismissed as auditors on October 25, 2022 and, accordingly, we have not performed
any audit or review procedures with respect to any financial statements included in the Form 8-K for the periods after the date
of our dismissal.
/s/
Friedman LLP
Friedman
LLP
Marlton,
New Jersey
August
17, 2023
Exhibit
99.1
ESPORTS
ENTERTAINMENT GROUP, INC.
INDEX
TO THE FINANCIAL STATEMENTS
TABLE
OF CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and Board of Directors of
Esports
Entertainment Group, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheet of Esports Entertainment Group, Inc. (the “Company”) as of June
30, 2022, the related consolidated statements of operations, comprehensive loss, changes in 10% series A cumulative redeemable convertible
preferred stock and stockholders’ equity (deficit) and cash flows for the year ended June 30, 2022, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of June 30, 2022, and the results of its operations and its cash flows
for the year ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Explanatory
Paragraph – Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more
fully described in Note 2 to the consolidated financial statements, the Company’s significant accumulated deficit as of June 30,
2022, and recurring losses from operations and negative cash flows from operating activities, as well as the Company’s noncompliance
with debt covenants of its senior convertible note at the balance sheet date, raise substantial doubt about its ability to continue as
a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audit provides a reasonable basis for our opinion.
Emphasis
of Matter - Adjustments for Reverse Stock Split
The
consolidated financial statements of the Company as of June 30, 2021 were audited by another auditor. As described in Note 2, the Company
adjusted all shares and per share data in the periods presented for the February 2023 reverse stock split (the “Reverse Stock Split”).
We audited the adjustments to retrospectively apply the effects of the Reverse Stock Split in the June 30, 2021 consolidated financial
statements. However, we were not engaged to audit, review, or apply any procedures to the June 30, 2021 consolidated financial statements
of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance
on the June 30, 2021 consolidated financial statements taken as a whole.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements
that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Fair
value measurement of contingent consideration and intangible assets acquired related to the acquisition of the business-to-consumer operations
of Bethard Group Limited (hereafter “Bethard”)
Description
of the Matter
As
described in Notes 2 and 3 to the consolidated financial statements, on July 13, 2021, the Company completed the acquisition of the business-to-consumer
operations of Bethard for total consideration of approximately $26.8 million, which included $6.7 million in contingent consideration,
and resulted in approximately $18.1 million of intangible assets being recorded. The Company accounts for business combinations using
the acquisition method, which requires recognition of assets acquired and liabilities assumed at their respective fair values at the
date of acquisition. The contingent consideration is estimated using an income approach, which is based on a contractual amount owed
based on projected revenues. The fair values of intangible assets acquired are typically estimated using an income approach, which is
based on the present value of future discounted cash flows or cost based methods based on estimated costs to construct an asset. Management
applied significant judgment in estimating the fair value of the contingent consideration and intangible assets acquired, which involved
the use of significant estimates and assumptions with respect to the rate of future revenue growth, profitability of the acquired business
and the discount rate, among other factors.
The
principal considerations for our determination that performing procedures relating to the fair value measurement of the contingent consideration
and intangible assets acquired related to the acquisition of Bethard is a critical audit matter are (i) the significant judgment by management,
including the use of specialists, when estimating the fair values of intangible assets acquired; (ii) a high degree of auditor judgment
and subjectivity in performing procedures relating to the fair value measurement of intangible assets acquired; (iii) the significant
audit effort in evaluating the reasonableness of the significant assumptions relating to the rate of future revenue growth and profitability
of the acquired business and the discount rate; and (iv) the audit effort involved the use of professionals with specialized skill and
knowledge.
How
We Addressed the Matter in Our Audit
Addressing
the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included identifying and evaluating the design of controls relating to the acquisition accounting,
including controls over management’s valuation of the intangible assets acquired and contingent consideration, and controls over
the development of the valuation models, as well as the significant assumptions related to the rate of future revenue growth and profitability
of the acquired business and the discount rate, and the costs to create an asset. These procedures also included, among others, (i) reading
the purchase agreement; and (ii) testing management’s process for estimating the fair values of the intangible assets acquired
and contingent consideration. Testing management’s process included evaluating the appropriateness of the valuation method, testing
the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to
the rate of future revenue growth, profitability of the acquired business and the discount rate, and the estimated costs to construct
the asset. Evaluating the reasonableness of the rate of future revenue growth and the profitability of the acquired business involved
considering the historical performance of the acquired businesses and market comparable information, as well as economic and industry
forecasts. The reasonableness of the discount rate was evaluated by considering the cost of capital of comparable businesses and other
industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of
the discounted cash flow models and the reasonableness of the discount rate.
Impairment
assessments of goodwill and long-lived assets
Description
of the Matter
As
described in Notes 2 and 7 to the consolidated financial statements, the Company reviews goodwill on an annual basis for impairment,
or when events and circumstances indicate that the asset might be impaired. Additionally, the Company reviews long-lived assets, such
as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company’s
evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value, and impairment
is recognized in the amount by which the carrying value exceeds the fair value. Recoverability of long-lived assets to be held and used
is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the
assets. If these assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount
of the assets exceeds their fair value. Fair value amounts are estimated by management using discounted cash flow models. Management’s
cash flow models included significant judgements and assumptions relating to future cash flows, growth rates and discount rates. The
Company’s consolidated goodwill and long-lived assets balances were approximately $22.3 million and $30.6 million respectively
at June 30, 2022. Based on the results of the impairment assessment, management recorded impairment of the Company’s goodwill and
long-lived assets of approximately $46.5 million for the year ended June 30, 2022.
The
principal considerations for our determination that performing procedures relating to the impairment assessments of goodwill and long-lived
assets is a critical audit matter are (i) the significant judgement required by management when developing the fair values of the reporting
units; and (ii) a high degree of auditor judgement, subjectivity and effort in performing procedures to evaluate management’s significant
assumptions, including future cash flows, growth rates and discount rates.
How
We Addressed the Matter in Our Audit
Addressing
the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the consolidated
financial statements. These procedures included evaluating the design effectiveness of controls relating to management’s goodwill
and long-lived asset impairment assessments, including controls over the determination of the fair values of the reporting units or assets,
and future undiscounted cash flows used to determine if long-lived assets are recoverable. These procedures also included, among others,
(i) testing management’s process for developing the fair value estimates of the reporting units or assets; (ii) evaluating the
appropriateness of the underlying discounted and undiscounted cash flow models; (iii) testing the completeness and accuracy of underlying
data used in the models; and (iv) evaluating the reasonableness of the significant assumptions used by management, including the future
cash flows, growth rates and discount rates. Evaluating management’s significant assumptions related to future cash flows, growth
rates and the discount rates involved, with the assistance of valuation specialists employed by us, evaluating whether the assumptions
used by management were reasonable considering (i) the historical performance of the reporting units; (ii) the consistency with external
market data and industry forecasts; and (iii) sensitivities over significant inputs and assumptions.
Fair
value of derivative and warrant liabilities
Description
of the Matter
As
described in Notes 2, 12 and 18 to the consolidated financial statements, the Company issued a convertible note with detachable warrants
that required management to assess whether the detachable warrants should be accounted for as a liability and whether the conversion
feature of the convertible debt required bifurcation and separate valuation as a derivative liability. These instruments were determined
to be liabilities and are classified as Level 3 as they contain one or more inputs to valuation which are unobservable and significant
to their fair value measurement. The Company utilized valuation specialists to develop the valuation models and unobservable inputs to
estimate fair value of these instruments. As of June 30, 2022, the fair values of the warrant and derivative liabilities were approximately
$0.1 million and $9.4 million respectively.
The
principal considerations for our determination that performing procedures relating to these instruments is a critical audit matter are
(i) the significant judgment and estimation by management in determining the inputs to estimate fair value, which in turn led to a high
degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence obtained related to the
fair value of these consolidated financial instruments, and (ii) the audit effort involved the use of professionals with specialized
skill and knowledge.
How
We Addressed the Matter in Our Audit
Addressing
the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included evaluating the design of controls relating to the Company’s determination of the
fair value. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist
in developing an independent estimate of fair value of these financial instruments and comparing management’s estimate to the independently
developed estimate of fair value. Developing the independent estimate involved testing the completeness and accuracy of data provided
by management, developing independent inputs and, as appropriate, evaluating and utilizing management’s aforementioned unobservable
inputs.
/s/
Marcum LLP
Marcum
LLP
We
have served as the Company’s auditor since 2020 (such date takes into account the acquisition of certain assets of Friedman LLP
by Marcum LLP effective September 1, 2022.)
Marlton,
New Jersey |
|
|
April
21, 2023 |
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders
of Esports Entertainment Group, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheet of Esports Entertainment Group, Inc. (the “Company”) as of June
30, 2021, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit),
and cash flows for the year ended June 30, 2021, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30,
2021, and the results of its operations and its cash flows for the year ended June 30, 2021, in conformity with accounting principles
generally accepted in the United States of America.
We
were not engaged to audit, review or apply any procedures to the adjustments to retrospectively apply the change in accounting related
to the reverse stock split as described in Note 2, accordingly, we do not express an opinion or any other form of assurance about whether
such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Substantial
Doubt about the Company’s Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company’s significant accumulated deficit as of June 30, 2021, and recurring losses from operations
and negative cash flows from operating activities, as well as the uncertainty related to the Company’s ability to comply with the
financial covenants of its senior convertible note, raise substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
/s/
Friedman LLP |
|
We
have served as the Company’s auditor from 2020 to 2022. |
|
|
Marlton,
New Jersey |
|
|
October
13, 2021 |
|
Esports
Entertainment Group, Inc.
Consolidated
Balance Sheets
| |
June
30, 2022 | | |
June
30, 2021 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Current
assets | |
| | | |
| | |
Cash | |
$ | 2,517,146 | | |
$ | 19,917,196 | |
Restricted
cash | |
| 2,292,662 | | |
| 3,443,172 | |
Accounts
receivable, net | |
| 304,959 | | |
| 136,681 | |
Receivables
reserved for users | |
| 2,941,882 | | |
| 2,290,105 | |
Other
receivables | |
| 372,283 | | |
| 658,745 | |
Prepaid
expenses and other current assets | |
| 1,543,053 | | |
| 3,264,344 | |
Total
current assets | |
| 9,971,985 | | |
| 29,710,243 | |
| |
| | | |
| | |
Equipment,
net | |
| 43,925 | | |
| 726,942 | |
Operating
lease right-of-use asset | |
| 164,288 | | |
| 1,272,920 | |
Intangible
assets, net | |
| 30,346,489 | | |
| 45,772,555 | |
Goodwill | |
| 22,275,313 | | |
| 40,937,370 | |
Other
non-current assets | |
| 2,062,176 | | |
| 1,315,009 | |
| |
| | | |
| | |
TOTAL
ASSETS | |
$ | 64,864,176 | | |
$ | 119,735,039 | |
| |
| | | |
| | |
LIABILITIES,
MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
| |
| | | |
| | |
Current
liabilities | |
| | | |
| | |
Accounts
payable and accrued expenses | |
$ | 12,344,052 | | |
$ | 8,458,689 | |
Liabilities
to customers | |
| 4,671,287 | | |
| 3,057,942 | |
Deferred
revenue | |
| 575,097 | | |
| 22,110 | |
Senior
convertible note | |
| 35,000,000 | | |
| - | |
Derivative
liability | |
| 9,399,620 | | |
| - | |
Current
portion of notes payable and other long-term debt | |
| 139,538 | | |
| 223,217 | |
Operating
lease liability – current | |
| 364,269 | | |
| 414,215 | |
Contingent
consideration | |
| 3,328,361 | | |
| - | |
Total
current liabilities | |
| 65,822,224 | | |
| 12,176,173 | |
| |
| | | |
| | |
Senior
convertible note, net of unamortized discount | |
| - | | |
| 6,302,504 | |
Notes
payable and other long-term debt | |
| - | | |
| 221,300 | |
Warrant
liability | |
| 2,192,730 | | |
| 23,500,000 | |
Deferred
income taxes | |
| - | | |
| 1,870,861 | |
Operating
lease liability – non-current | |
| 669,286 | | |
| 878,809 | |
| |
| | | |
| | |
Total
liabilities | |
| 68,684,240 | | |
| 44,949,647 | |
| |
| | | |
| | |
Commitments
and contingencies (Note 13) | |
| - | | |
| | |
| |
| | | |
| | |
Mezzanine
equity: | |
| | | |
| | |
10%
Series A cumulative redeemable convertible preferred stock, $0.001 par value, 1,725,000 authorized, 835,950 shares issued and outstanding,
aggregate liquidation preference $9,195,450 at June 30, 2022 | |
| 7,781,380 | | |
| - | |
| |
| | | |
| | |
Stockholders’
equity (deficit) | |
| | | |
| | |
Preferred
stock $0.001 par value; 10,000,000 shares authorized | |
| - | | |
| - | |
Common
stock $0.001 par value; 500,000,000 shares authorized, 409,229 and 218,961 shares issued and outstanding as of June 30, 2022 and
June 30, 2021, respectively | |
| 409 | | |
| 219 | |
Additional
paid-in capital | |
| 144,914,687 | | |
| 122,362,679 | |
Accumulated
deficit | |
| (149,140,426 | ) | |
| (46,908,336 | ) |
Accumulated
other comprehensive loss | |
| (7,376,114 | ) | |
| (669,170 | ) |
Total
stockholders’ equity (deficit) | |
| (11,601,444 | ) | |
| 74,785,392 | |
| |
| | | |
| | |
TOTAL
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
$ | 64,864,176 | | |
$ | 119,735,039 | |
The
accompanying notes are an integral part of these consolidated financial statements.
Esports
Entertainment Group, Inc.
Consolidated
Statements of Operations
| |
Year
Ended June 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Net
revenue | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
| |
| | | |
| | |
Operating
costs and expenses: | |
| | | |
| | |
Cost
of revenue | |
| 24,164,661 | | |
| 7,861,317 | |
Sales
and marketing | |
| 25,728,220 | | |
| 10,038,524 | |
General
and administrative | |
| 51,321,978 | | |
| 24,610,511 | |
Asset
impairment charges | |
| 46,498,689 | | |
| - | |
Total
operating expenses | |
| 147,713,548 | | |
| 42,510,352 | |
| |
| | | |
| | |
Operating
loss | |
| 89,361,898 | | |
| 25,726,438 | |
| |
| | | |
| | |
Other
income (expense): | |
| | | |
| | |
Interest
expense | |
| (6,423,039 | ) | |
| (698,973 | ) |
| |
| | | |
| | |
Loss
on conversion of senior convertible note | |
| (5,999,662 | ) | |
| - | |
Loss
on extinguishment of senior convertible note | |
| (28,478,804 | ) | |
| - | |
Change
in fair value of derivative liability on senior convertible note | |
| (10,882,241 | ) | |
| - | |
Change
in fair value of warrant liability | |
| 31,468,270 | | |
| (1,549,924 | ) |
Change
in fair value of contingent consideration | |
| 2,355,308 | | |
| (1,748,607 | ) |
Other
non-operating income (loss), net | |
| (584,466 | ) | |
| (460,328 | ) |
Total
other income (expense), net | |
| (18,544,634 | ) | |
| (4,457,832 | ) |
| |
| | | |
| | |
Loss
before income taxes | |
| 107,906,532 | | |
| 30,184,270 | |
| |
| | | |
| | |
Income
tax benefit (expense) | |
| 5,674,442 | | |
| 3,811,536 | |
| |
| | | |
| | |
Net
loss | |
$ | 102,232,090 | | |
$ | 26,372,734 | |
| |
| | | |
| | |
Dividend
on 10% Series A cumulative redeemable convertible preferred stock | |
| (501,570 | ) | |
| - | |
Accretion
of 10% Series A cumulative redeemable convertible preferred stock to redemption value | |
| (182,046 | ) | |
| - | |
| |
| | | |
| | |
Net
loss attributable to common stockholders | |
$ | 102,915,706 | | |
$ | 26,372,734 | |
| |
| | | |
| | |
Net
loss per common share | |
$ | (356.27 | ) | |
$ | (167.73 | ) |
Weighted
average number of common shares outstanding, basic and diluted | |
| 288,869 | | |
| 157,236 | |
The
accompanying notes are an integral part of these consolidated financial statements.
Esports
Entertainment Group, Inc.
Consolidated
Statements of Comprehensive Loss
| |
Year
Ended June 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Net
loss | |
$ | 102,232,090 | | |
$ | 26,372,734 | |
| |
| | | |
| | |
Other
comprehensive loss: | |
| | | |
| | |
Foreign
currency translation loss | |
| 6,706,944 | | |
| 669,170 | |
| |
| | | |
| | |
Total
comprehensive loss | |
$ | 108,939,034 | | |
$ | 27,041,904 | |
The
accompanying notes are an integral part of these consolidated financial statements.
Esports
Entertainment Group, Inc.
Consolidated
Statements of Changes in 10% Series A Cumulative Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
For
the Years Ended June 30, 2022 and 2021
| |
10%
Series A Cumulative Redeemable | | |
| | |
| | |
| | |
Accumulated | | |
Total | |
| |
Convertible
Preferred Stock | | |
Common
Stock* | | |
Additional
paid-in | | |
Accumulated | | |
other
comprehensive | | |
Stockholders’
Equity | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
capital | | |
Deficit | | |
loss | | |
(Deficit) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance
as at July 1, 2020 | |
| - | | |
$ | - | | |
| 112,332 | | |
$ | 112 | | |
$ | 31,929,612 | | |
$ | (20,535,602 | ) | |
$ | - | | |
$ | 11,394,122 | |
Stock
issued for Argyll acquisition | |
| - | | |
| - | | |
| 6,500 | | |
| 7 | | |
| 3,802,493 | | |
| - | | |
| - | | |
| 3,802,500 | |
Stock
issued for FLIP acquisition | |
| - | | |
| - | | |
| 1,876 | | |
| 2 | | |
| 2,217,619 | | |
| - | | |
| - | | |
| 2,217,621 | |
Stock
issued for EGL acquisition | |
| - | | |
| - | | |
| 3,556 | | |
| 4 | | |
| 2,791,479 | | |
| - | | |
| - | | |
| 2,791,483 | |
Stock
issued for ggCircuit acquisition | |
| - | | |
| - | | |
| 8,302 | | |
| 8 | | |
| 9,273,203 | | |
| - | | |
| - | | |
| 9,273,211 | |
Stock
issued for Helix acquisition | |
| - | | |
| - | | |
| 5,283 | | |
| 5 | | |
| 5,901,128 | | |
| - | | |
| - | | |
| 5,901,133 | |
Common
stock issued in equity financing, net of issuance costs | |
| - | | |
| - | | |
| 20,000 | | |
| 20 | | |
| 27,339,980 | | |
| - | | |
| - | | |
| 27,340,000 | |
Stock
options and warrant exercises | |
| - | | |
| - | | |
| 55,085 | | |
| 55 | | |
| 34,064,805 | | |
| - | | |
| - | | |
| 34,064,860 | |
Common
stock issued for services | |
| - | | |
| - | | |
| 6,027 | | |
| 6 | | |
| 4,024,740 | | |
| - | | |
| - | | |
| 4,024,746 | |
Stock
based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,017,620 | | |
| - | | |
| - | | |
| 1,017,620 | |
Foreign
exchange translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (669,170 | ) | |
| (669,170 | ) |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (26,372,734 | ) | |
| - | | |
| (26,372,734 | ) |
Balance
as at June 30, 2021 | |
| - | | |
$ | - | | |
| 218,961 | | |
$ | 219 | | |
$ | 122,362,679 | | |
$ | (46,908,336 | ) | |
$ | (669,170 | ) | |
$ | 74,785,392 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds
from issuance of 10% Series A cumulative redeemable convertible preferred stock | |
| 835,950 | | |
| 7,599,334 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Accretion
of redemption value and issuance costs | |
| - | | |
| 182,046 | | |
| - | | |
| - | | |
| (182,046 | ) | |
| - | | |
| - | | |
| (182,046 | ) |
10%
Series A cumulative redeemable convertible preferred stock cash dividend | |
| - | | |
| - | | |
| - | | |
| - | | |
| (501,570 | ) | |
| - | | |
| - | | |
| (501,570 | ) |
Common
stock and warrants issued in equity financing, net of issuance costs | |
| - | | |
| - | | |
| 150,000 | | |
| 150 | | |
| 3,464,775 | | |
| - | | |
| - | | |
| 3,464,925 | |
Conversion
of senior convertible note | |
| - | | |
| - | | |
| 25,145 | | |
| 25 | | |
| 10,652,623 | | |
| - | | |
| - | | |
| 10,652,648 | |
Issuance
of common stock under the ATM, net of issuance costs | |
| - | | |
| - | | |
| 11,658 | | |
| 12 | | |
| 3,885,097 | | |
| - | | |
| - | | |
| 3,885,109 | |
Common
stock issued upon the exercise of stock options | |
| - | | |
| - | | |
| 140 | | |
| - | | |
| 67,479 | | |
| - | | |
| - | | |
| 67,479 | |
Common
stock issued for services | |
| - | | |
| - | | |
| 3,325 | | |
| 3 | | |
| 748,146 | | |
| - | | |
| - | | |
| 748,149 | |
Stock
based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,417,504 | | |
| - | | |
| - | | |
| 4,417,504 | |
Foreign
exchange translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,706,944 | ) | |
| (6,706,944 | ) |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (102,232,090 | ) | |
| - | | |
| (102,232,090 | ) |
Balance
as at June 30, 2022 | |
| 835,950 | | |
$ | 7,781,380 | | |
| 409,229 | | |
$ | 409 | | |
$ | 144,914,687 | | |
$ | (149,140,426 | ) | |
$ | (7,376,114 | ) | |
$ | (11,601,444 | ) |
* |
Retrospectively
restated for effect of stock split. |
The
accompanying notes are an integral part of these consolidated financial statements.
Esports
Entertainment Group, Inc.
Consolidated
Statements of Cash Flows
| |
For
the Years Ended June 30, | |
| |
2022 | | |
2021 | |
Cash
flows from operating activities: | |
| | | |
| | |
Net
loss | |
$ | (102,232,090 | ) | |
$ | (26,372,734 | ) |
Adjustments
to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Amortization
and depreciation | |
| 12,026,581 | | |
| 3,416,252 | |
Asset
impairment charges | |
| 46,498,689 | | |
| - | |
Right-of-use
asset amortization | |
| 506,742 | | |
| 162,545 | |
Stock-based
compensation | |
| 5,165,653 | | |
| 4,129,726 | |
Deferred
income taxes | |
| (5,671,861 | ) | |
| (4,136,258 | ) |
Loss
on conversion of senior convertible note | |
| 5,999,662 | | |
| - | |
Loss
on extinguishment of senior convertible note | |
| 28,478,804 | | |
| - | |
Amortization
of debt discount and premium | |
| 3,389,055 | | |
| 467,504 | |
Change
in fair value of warrant liability | |
| (31,468,270 | ) | |
| 1,549,924 | |
Change
in fair value of contingent consideration | |
| (2,355,308 | ) | |
| 1,748,607 | |
Change
in the fair value of derivative liability | |
| 10,882,241 | | |
| - | |
Gain
on sale of business | |
| (1,069,262 | ) | |
| - | |
Other
non-cash charges, net | |
| - | | |
| 2,460 | |
Changes
in operating assets and liabilities: | |
| | | |
| | |
Accounts
receivable | |
| (133,968 | ) | |
| 76,040 | |
Receivables
reserved for users | |
| (624,803 | ) | |
| (2,260,031 | ) |
Other
receivables | |
| 193,224 | | |
| 10,477 | |
Prepaid
expenses and other current assets | |
| 1,530,812 | | |
| (2,246,119 | ) |
Other
non-current assets | |
| 161,645 | | |
| (220,329 | ) |
Accounts
payable and accrued expenses | |
| 5,029,309 | | |
| 4,312,871 | |
Liabilities
to customers | |
| 1,920,260 | | |
| 672,403 | |
Deferred
revenue | |
| 552,987 | | |
| (83,339 | ) |
Operating
lease liability | |
| 213,461 | | |
| (108,363 | ) |
Other,
net | |
| - | | |
| (4,642 | ) |
Net
cash used in operating activities | |
| (21,006,437 | ) | |
| (18,883,006 | ) |
| |
| | | |
| | |
Cash
flows from investing activities: | |
| | | |
| | |
Cash
consideration paid for Bethard acquisition, net of cash acquired | |
| (20,067,871 | ) | |
| - | |
Cash
consideration paid for Lucky Dino, net of cash acquired | |
| - | | |
| (28,930,540 | ) |
Cash
consideration paid for ggCircuit | |
| - | | |
| (14,993,977 | ) |
Cash
consideration paid for Helix | |
| - | | |
| (9,964,691 | ) |
Cash
consideration paid for Argyll, net of cash acquired | |
| - | | |
| (728,926 | ) |
Cash
consideration paid for EGL, net of cash acquired | |
| - | | |
| (622,503 | ) |
Cash
consideration paid for FLIP | |
| - | | |
| (100,000 | ) |
Proceeds
from sale of assets | |
| 159,872 | | |
| - | |
Purchase
of intangible assets | |
| (34,648 | ) | |
| (730,234 | ) |
Purchases
of equipment | |
| (137,729 | ) | |
| (62,385 | ) |
Net
cash used in investing activities | |
| (20,080,376 | ) | |
| (56,133,256 | ) |
Cash
flows from financing activities: | |
| | | |
| | |
Proceeds
from equity financing, net of issuance costs | |
| 13,625,925 | | |
| 27,340,000 | |
Proceeds
from issuance of 10% Series A cumulative redeemable convertible preferred stock, net of issuance costs | |
| 7,599,334 | | |
| - | |
Payment
of dividends on 10% Series A cumulative redeemable convertible preferred stock | |
| (501,570 | ) | |
| - | |
Issuance
of common stock under the ATM, net of issuance costs | |
| 3,885,109 | | |
| - | |
Payment
of Bethard contingent consideration | |
| (1,016,331 | ) | |
| - | |
Proceeds
from exercise of stock options and warrants, net of issuance costs | |
| 67,479 | | |
| 26,584,860 | |
Proceeds
from issuance of Senior Convertible Note | |
| - | | |
| 35,000,000 | |
Payment
of debt issuance costs | |
| - | | |
| (2,485,000 | ) |
Repayment
of notes payable and finance leases | |
| (171,661 | ) | |
| (83,659 | ) |
Net
cash provided by financing activities | |
| 23,488,285 | | |
| 86,356,201 | |
Effect
of exchange rate on changes in cash and restricted cash | |
| (952,032 | ) | |
| (332,879 | ) |
Net
increase (decrease) in cash and restricted cash | |
| (18,550,560 | ) | |
| 11,007,061 | |
Cash
and restricted cash, beginning of year | |
| 23,360,368 | | |
| 12,353,307 | |
Cash
and restricted cash, end of year | |
$ | 4,809,808 | | |
$ | 23,360,368 | |
A
reconciliation of cash and restricted cash to the consolidated balance sheets follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
Cash | |
$ | 2,517,146 | | |
$ | 19,917,196 | |
Restricted
cash | |
| 2,292,662 | | |
| 3,443,172 | |
Cash
and restricted cash | |
$ | 4,809,808 | | |
$ | 23,360,368 | |
| |
June
30, 2020 | |
Cash | |
$ | 12,353,307 | |
Restricted
cash | |
| - | |
Cash
and restricted cash | |
$ | 12,353,307 | |
SUPPLEMENTAL
CASH FLOW INFORMATION: | |
| | |
| |
CASH
PAID FOR: | |
| | | |
| | |
| |
| | | |
| | |
| |
| June
30, 2022 | | |
| June
30, 2021 | |
Interest | |
$ | 2,434,291 | | |
$ | 226,517 | |
Income
taxes | |
$ | (2,581 | ) | |
$ | 23,433 | |
| |
| | | |
| | |
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: | |
| | | |
| | |
Fair
value of contingent consideration payable in cash and common stock for Bethard acquisition | |
$ | 6,700,000 | | |
| - | |
Conversion
of senior convertible notes to common stock | |
$ | 10,652,648 | | |
| - | |
Accretion
of 10% Series A cumulative redeemable convertible preferred stock | |
$ | 182,046 | | |
| - | |
Right-of-use
asset obtained in exchange for operating lease obligation | |
$ | 1,112,960 | | |
| - | |
Finance
lease asset obtained in exchange for financing lease obligation | |
$ | 96,018 | | |
| - | |
Fair
value of warrants issued as debt discount on senior convertible note | |
$ | - | | |
$ | 26,680,000 | |
Common
stock issued for ggCircuit | |
$ | - | | |
$ | 9,273,211 | |
Common
stock issued for Helix | |
$ | - | | |
$ | 5,901,133 | |
Common
stock issued for Argyll | |
$ | - | | |
$ | 3,802,500 | |
Fair
value of warrants issued for Argyll acquisition | |
$ | - | | |
$ | 2,750,076 | |
Settlement
of Argyll acquisition warrant liability for common stock | |
$ | - | | |
$ | 7,480,000 | |
Common
stock issued for EGL at closing | |
$ | - | | |
$ | 2,193,833 | |
Settlement
of EGL contingent holdback consideration in common stock | |
$ | - | | |
$ | 597,650 | |
Common
stock issued for FLIP acquisition at closing | |
$ | - | | |
$ | 411,817 | |
Settlement
of FLIP contingent consideration in common stock | |
$ | - | | |
$ | 500,000 | |
Right-of-use
assets and liabilities acquired through operating leases | |
$ | - | | |
$ | 1,408,942 | |
Equipment
acquired through finance lease | |
$ | - | | |
$ | 117,979 | |
Share
settlement of liabilities to be settled in stock account | |
$ | - | | |
$ | 927,855 | |
The
accompanying notes are an integral part of these consolidated financial statements.
Esports
Entertainment Group, Inc.
Notes
to the Consolidated Financial Statements
June
30, 2022
Note
1 – Nature of Operations
Esports
Entertainment Group, Inc. (the “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 online tournaments and player-versus-player wagering. On July 31, 2020, the Company commenced revenue generating operations
with the acquisition of LHE Enterprises Limited, holding company for Argyll Entertainment (“Argyll”), an online sportsbook
and casino operator. On January 21, 2021, the Company completed its acquisition of Phoenix Games Network Limited, the holding company
for the Esports Gaming League (“EGL”), and provider of event management and team services, including live and online events
and tournaments. On March 1, 2021, 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 acquired ggCircuit, LLC (“GGC”) and Helix Holdings, LLC (“Helix”). 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. Helix operated esports centers that provided esports programming and gaming infrastructure. The Helix game center assets in
Foxboro, MA and North Bergen, NJ, herein referred to as the “Helix Game Centers” were sold on June 10, 2022. EEG Labs, the
analytics platform, and the yet to be released proprietary player-versus-player wagering platform Betground (previously referred to as
LanDuel) from the Helix acquisition were retained. On July 13, 2021, the Company completed its acquisition of the online casino and sports
book business operating under the brand of Bethard (referred to herein as “Bethard”). The acquisition of Bethard is discussed
further in Note 3, Business Combinations.
On
January 18, 2023, the Company closed the transaction and sold its Spanish iGaming operations, including its Spanish iGaming license.
This disposal is discussed further in Note 21, Subsequent Events.
On
February 24, 2023, the Company completed the divestiture of Prozone Limited, containing the Bethard online casino and sportsbook business
back to Gameday Group Plc. This disposal is discussed further in Note 21, Subsequent Events.
Note
2 – Summary of Significant Accounting Policies
Basis
of presentation and principles of consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Effective
February 22, 2023 the Company completed a one-for-one-hundred (1-for-100) reverse stock split of the Company’s issued and outstanding
common stock (the “Reverse Stock Split”). All references to shares of the Company’s common stock in the consolidated
financial statements and related notes refer to the number of shares of common stock after giving effect to the Reverse Stock Split and
are presented as if the Reverse Stock Split had occurred at the beginning of the earliest period presented (Note 21).
Reportable
Segments
The
Company operates two complementary business segments:
EEG
iGaming
EEG
iGaming includes the Company’s iGaming casino and sportsbook product offerings. Currently, the Company operates the business to
consumer segment primarily in Europe.
EEG
Games
EEG
Games delivers esports entertainment experiences to gamers through a combination of 1) the Company’s proprietary infrastructure
software, GGC, which underpins our focus on esports and is a 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, 2) online tournaments
(through the Company’s EGL tournament platform), and 3) player-vs-player wagering (through our yet to be released Betground our
proprietary wagering product). Currently, we operate our esports EEG Games business in the United States and Europe.
These
segments consider 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.
Use
of Estimates
The
preparation of 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 consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include
the valuation and accounting for equity awards related to warrants and stock-based compensation, determination of fair value for derivative
instruments, the valuation and recoverability of goodwill and intangible assets, the accounting for business combinations, including
estimating contingent consideration and allocating purchase price, estimating fair value of intangible assets, as well as the estimates
related to accruals and contingencies.
Liquidity
and Going Concern
The
accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern.
The going concern basis of presentation assumes that the Company will continue in operation one year after the date these consolidated
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
Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one
year from the date of issuance of these consolidated financial statements.
One
such factor considered by the Company is its compliance with certain debt covenants under the terms of the Senior Convertible Note, issued
by the Company on February 22, 2022 in the principal amount of $35,000,000 with an outstanding carrying value as of June 30, 2022. The
Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible
Note. The Company repaid principal of $2,778,427 during the six months ended December 31, 2022, using proceeds from the September 2022
equity financing (“September 2022 Offering”, see Note 21), reducing the outstanding carrying value to $32,221,573 as of the
December 31, 2022. On January 27, 2023, the Company received the written consent of the holder of the Senior Convertible Note (the “Holder”)
to lower the conversion price of the Senior Convertible Note to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of
the Common Stock for a trading day during the five (5) consecutive trading day period ending, and including, the applicable date that
the conversion price is lowered for purposes of a conversion (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations
and similar events during such measuring period) until further written notice to the holder from the Company (see Note 21). Subsequent
to December 31, 2022 and through April 20, 2023, one business day preceding this filing, the Company has converted $19,261,583 of the
Senior Convertible Note through the issuance of 2,242,143 shares of common stock. After including the impact of the conversions reducing
the debt by $19,261,583 and the Amendment and Waiver Agreement (“Amendment” see Note 21) increasing the debt by $2,950,010,
for fees of $450,010 and converted accrued liabilities of $2,500,000, the Company had reduced its outstanding debt on the Senior Convertible
Note to $15,910,000 as of February 21, 2023. On April 19, 2023, prior to entering the Note to Preferred Stock Exchange Agreement (see
Note 21), the Company redeemed $679,976 of the Senior Convertible Note using funds that were on deposit in favor of the Holder from the
Sale of the Bethard Business, further reducing the outstanding debt on the Senior Convertible Note to $15,230,024. Later, on April 19,
2023, the Company entered into the Note to Preferred Stock Exchange Agreement (see Note 21), with the Holder to convert the $15,230,024
in aggregate principal amount of the Senior Convertible Note outstanding into the new Series C Convertible Preferred Stock concurrently
with the closing of the potential offering that is part of the Company’s approved plan of compliance with the Listing Rules of
the Nasdaq Stock Market (the “Nasdaq Listing Rules”). The expected conversion of the Senior Convertible Note into the Series
C Convertible Preferred Stock will extinguish the Senior Convertible Note and eliminate the related derivative liability, that had a
fair value of $9,399,620 ($180,000,000 approximate cash liability calculated under the terms of the Senior Convertible Note), as of June
30, 2022.
Further,
on March 3, 2023, the Company’s Board determined that the Company’s wholly-owned subsidiary Argyll Entertainment, the Company’s
Swiss entity that is part of Argyll UK, would be liquidated. The Swiss courts declared Argyll Entertainment bankrupt on March 27, 2023,
at which point the Company lost control of Argyll Entertainment and, as a result, deconsolidated the entity. Argyll Entertainment had
net liabilities of approximately $1,640,000 as of December 31, 2022.
In
addition to above, the Company considered that it had an accumulated deficit of $149,140,426 as of June 30, 2022 and that it has had
a history of recurring losses from operations and recurring negative cash flows from operations as it has prepared to grow its esports
business through acquisition and new venture opportunities. At June 30, 2022, the Company had total current assets of $9,971,985 and
total current liabilities of $65,822,224. Net cash used in operating activities for the year ended June 30, 2022 was $21,006,437, which
includes a net loss of $102,232,090.
The
Company also considered its current liquidity as well as future market and economic conditions that may be deemed outside the control
of the Company as it relates to obtaining financing and generating future profits. As of June 30, 2022, the Company had $2,517,146 of
available cash on-hand and net current liabilities of $55,850,239. In addition to the Senior Convertible Note conversions that have reduced
the debt outstanding, on December 21, 2022, the Company closed an offering (the “Registered Direct Offering”) in which it
sold: (a) 70,650 shares of Common Stock to the Holder and (b) pre-funded warrants to purchase up to 178,500 at a price of $9.37 per warrant,
directly to the Holder, with all but $0.10 per warrant prepaid to the Company at the closing. The gross proceeds to us from the sale
of the shares of Common Stock and pre-funded warrants before deducting underwriting discounts and commissions and offering expenses payable
by the Company was $2,316,686. The Company remitted approximately $1,073,343 to the Holder to be applied to accrued interest and future
interest payments under the Senior Convertible Note. The net proceeds received by the Company, after deducting underwriting discounts
and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $1,073,343. On September 19, 2022
the Company closed the September 2022 Offering in which it sold: (a) 300,000 shares of Common Stock and (b) warrants to purchase up to
300,000 shares of Common Stock, at an exercise price of $25.00 per share (the “September 2022 Offering Warrants”), at an
aggregate price of $25.00 per share and accompanying September 2022 Offering Warrant. The gross proceeds to us from the sale of the shares
of Common Stock and Warrants before deducting underwriting discounts and commissions and offering expenses payable by the Company was
$7,500,000. On the issuance date, the Company also granted an overallotment option to the underwriters of the offering for 36,000 overallotment
warrants (“September 2022 Overallotment Warrants”), at a purchase price of $1.00 per warrant, with an exercise price of $25.00
per warrant (the September 2022 Offering Warrants and September 2022 Overallotment Warrants are collectively referred to as the “September
2022 Warrants”). Total proceeds from the September 2022 Overallotment Warrants were $36,000. The Company remitted to the Holder
an amount of $2,265,927 equal to fifty percent (50%) of all net proceeds above $2,000,000 following the payment of 7% in offering fees
including underwriting discounts and commissions. In addition, as part of the September 2022 Offering, the Holder purchased $0.5 million
of securities (20,500 shares of Common Stock and 20,500 September 2022 Warrants) and the Company paid the Holder an additional $512,500.
The proceeds remitted to the Holder of the Senior Convertible Note reduced the principal balance of the Senior Convertible Note on a
dollar-for-dollar basis. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering
expenses payable by the Company and amounts remitted to the Holder was $4,075,991. On March 2, 2022, the Company closed an offering (the
“March 2022 Offering”) in which it sold 150,000 units at $100.00 consisting of one share of Common Stock and one warrant
for a total of 150,000 warrants with an exercise price of $100.00 (the “March 2022 Offering Warrants”). There was also an
overallotment option exercised to purchase warrants to purchase an additional 22,500 shares of common stock (the “April 2022 Overallotment
Warrants”) with an exercise price of $100.00 issued to the underwriters of the offering on April 1, 2022 (the March 2022 Offering
Warrants and the April 2022 Overallotment Warrants are collectively referred to as the “March 2022 Warrants”). The March
2022 Offering provided net cash proceeds of $13,605,000.
The
amount of available cash on hand on April 20, 2023, one business day preceding this filing, was $1,097,586.
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. The combination of these conditions was 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 the Company can overcome the presumption of substantial doubt about its 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, depending on market conditions, may be available to fund its operations and drive future growth, which include (i)
the potential expected proceeds from the offering that is part of the Company’s approved plan of compliance with the Nasdaq Listing
Rules, where the amount of the offering has not yet been determined, (ii) the potential proceeds from the exercise of the 336,000 September
2022 Warrants, exercisable at $25.00, outstanding at December 31, 2022, (iii) the potential proceeds from the exercise of the 172,500
March 2022 Warrants, exercisable at $100.00, outstanding at December 31, 2022, (iv) the ability to sell shares of common stock of the
Company through various forms of offerings, (v) the ability to raise additional financing from other sources, and (vi) the completion
of the conversion of the $15,230,024 remaining Senior Convertible Note into the Series C Convertible Preferred Stock.
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 consolidated financial statements do not reflect any adjustments
that might result from the outcome of this uncertainty.
COVID-19
The
novel coronavirus (“COVID-19”) emerged in December 2019 and has since adversely impacted global commercial activity, disrupted
supply chains and contributed to significant volatility in financial markets. The ongoing impacts of the COVID-19 pandemic has introduced
material uncertainty and risk with respect to the Company and its performance, especially as it relates to in-person attendance at events
and game centers.
The
Company has previously indicated that a significant or prolonged decrease in consumer spending on entertainment or leisure activities
may have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers and tournaments,
reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations.
During the year ended June 30, 2022, the Company determined that in-person attendance at its Helix and customer game centers was not
expected to attain levels previously forecasted for such period. Additionally, projections for the Argyll business included continued
losses into fiscal 2023 due to high levels of competition in the UK market and high regulatory burdens placed on the iGaming businesses
in the UK market. Further, the levels of investment by the Company that are necessary to achieve the previous revenue projections impacted
a number of the Company’s businesses. As such, the Company recognized an impairment of long-lived assets held by its Argyll, GGC,
EGL, and Helix businesses and impairment of goodwill held by its Argyll, EGL, GGC and Helix businesses. On June 10, 2022, the Company
disposed of the assets and related liabilities of two Helix Game Centers located in New Jersey and Massachusetts. See Notes 6, 7 and
11 for discussion of the asset impairment charges.
The
ultimate impact of the COVID-19 pandemic on other areas of the business will depend on future developments, which are uncertain and may
result in an extended period of continued business disruption and reduced operations. A materially disruptive resurgence of COVID-19
cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on
where infection rates are highest. Any resulting financial impact cannot be reasonably estimated at this time but may have a material
adverse impact on the Company’s business, financial condition and results of operations. The Company will continue to monitor developments
relating to disruptions and uncertainties caused by COVID-19.
Compliance
with Nasdaq Listing Requirements
On
April 11, 2022, the Company received a deficiency notification letter from the Listing Qualifications Staff of Nasdaq (“Nasdaq”)
indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common
stock had closed below $1.00 per share for the previous thirty consecutive business days (the “Bid Price Rule”).
On
June 7, 2022, the Company received a further letter from Nasdaq notifying the Company that for the last 30 consecutive business days,
the Company’s minimum Market Value of Listed Securities (“MVLS”) was below the minimum of $35,000,000 required for
continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(b)(2) (the “MVLS Rule”).
On
October 11, 2022, the Company received a third letter from Nasdaq notifying the Company that the Company’s common stock will be
delisted, and the Company’s Common Stock warrants traded under the symbols GMBLW and GMBLZ and the Company’s 10% Series A
cumulative redeemable convertible preferred stock traded under symbol GMBLP will no longer qualify for listing, and in that regard trading
of the Company’s common stock, Common Stock warrants and 10% Series A cumulative redeemable convertible preferred stock will be
suspended. The Company requested an appeal with the Panel (the “Panel”) and the hearing was held on November 17, 2022.
On
November 30, 2022, the Company received a determination from the Panel granting the Company’s request for the continued listing
of its common stock on the Capital Market tier of Nasdaq, subject to the Company evidencing compliance with the Bid Price Rule, and the
minimum of $2,500,000 stockholders’ equity requirement (the “Equity Rule”), as set forth in Nasdaq Listing Rules 5550(a)(2)
and 5550(b)(1), respectively, on or before February 7, 2023 (which, as described below, was subsequently extended on February 8, 2023)
and March 31, 2023, respectively, and adhering to certain other conditions and requirements described below.
On
December 6, 2022, the Company received a fourth letter from Nasdaq notifying the Company that it has not regained compliance with the
MVLS Rule. This was addressed in the November 17, 2022, hearing before the Panel where the Company presented on its plan to comply with
the MVLS Rule or alternative criteria and was granted continued listing subject to the criteria noted above.
On
February 8, 2023 the Company received notice from the Panel updating its remaining conditions as follows:
|
1. |
On
February 20, 2023, the Company shall provide a written update to the Panel regarding the progress of its debt-to-equity conversion
plan and its impact on the Company’s equity; |
|
2. |
On
March 7, 2023, the Company shall have demonstrated compliance with the Bid Price Rule, by evidencing a closing bid price of $1.00
or more per share for a minimum of ten consecutive trading sessions; and |
|
3. |
On
March 31, 2023, the Company shall demonstrate compliance with the Equity Rule. |
The
Company provided an update on its progress to the Panel on February 20, 2023 and is working toward meeting the remaining milestones.
Additionally, the Panel reserved the right to reconsider the terms of this exception. As a result, any failure to regain and maintain
compliance with the continued listing requirements of Nasdaq could result in delisting of our common stock from Nasdaq and negatively
impact our company and holders of our common stock, including by reducing the willingness of investors to hold our common stock because
of the resulting decreased price, liquidity and trading of our common stock, limited availability of price quotations and reduced news
and analyst coverage. Delisting may adversely impact the perception of our financial condition, cause reputational harm with investors,
our employees and parties conducting business with us and limit our access to debt and equity financing.
On
March 9, 2023, the Company received a letter from the Panel indicating that the Company has regained compliance with the Bid Price Rule.
On
March 30, 2023, the Company submitted a written submission requesting an extension on the requirement to demonstrate compliance with
the Equity Rule and on April 6, 2023, the Panel granted an extension through April 30, 2023.
In
addition, as noted above, the Company and the Holder have exchanged a material amount of debt for equity under the Senior Convertible
Note as of the date hereof (see Note 21), which has contributed positively to its stockholders’ equity and increased its MVLS.
Furthermore, the transactions contemplated by the Note to Preferred Stock Exchange Agreement (see Note 21) are expected to enable the
Company to regain compliance with the Nasdaq Listing Rules by satisfying compliance with the Equity Rule.
The
Company has met certain conditions and is in the process of taking definitive steps to comply with all applicable remaining conditions
and criteria for continued listing on Nasdaq. There can be no assurances, however, that the Company will be able to do so. The Company
must satisfy the time frame granted by the Panel or Nasdaq will provide written notification that its securities will be delisted.
Cash
and Cash Equivalents
Cash
includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months
or less. As of June 30, 2022 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.
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.
Accounts
Receivable
Accounts
receivable is comprised of the amounts billed to customers principally for esports events and team management services. Accounts receivable
is recorded net of an allowance for credit losses. The Company performs ongoing credit evaluations for its customers and determines the
amount of the allowance for credit losses upon considering such factors as historical losses, known disputes or collectability issues,
the age of a receivable balance as well as current economic conditions. Bad debt expense is recorded to maintain the allowance for credit
losses at an appropriate level and changes in the allowance for credit losses are included in general and administrative expense in the
consolidated statements of operations. At June 30, 2022 and 2021, the allowance for credit losses was not material to the consolidated
financial statements of the Company.
Receivables
Reserved for Users
User
deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with
a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded
as a receivable reserved for users on the consolidated balance sheets. An allowance for doubtful accounts may be established if it is
determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance for doubtful accounts
is recognized as a loss within general and administrative expenses in the consolidated statements of operations. The allowance for doubtful
accounts is not material to the consolidated financial statements.
Equipment
Equipment
is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related
to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing
the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease
term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:
Computer
Equipment |
Up
to 5 years |
Furniture
and fixtures |
Up
to 7 years |
Leasehold
improvements |
Shorter
of the remaining lease term or estimated life of the improvement |
The
estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period.
The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the
resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the consolidated statements of operations.
Business
Combinations
The
Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities
assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase
price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust
the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the
acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at
the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition
date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Goodwill
Goodwill
represents the excess of fair value of consideration paid for an acquired entity over the fair value of the assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized but rather it is tested for impairment at the reporting unit level on an
annual basis on April 1 for each fiscal year, or more often if events or changes in circumstances indicate that more likely than not
the carrying amount of the asset may not be recoverable. A reporting unit represents an operating segment or a component of an operating
segment. In accordance with ASC Topic 350 Intangibles – Goodwill and Other, as of June 30, 2022 the Company’s business
is classified into four reporting units: iGaming Malta (including Bethard and Lucky Dino), iGaming Argyll UK, EGL, and GGC. The Helix
business was sold as of June 10, 2022 and was previously its own reporting unit.
In
testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step
0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its
carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry
and market considerations, cost factors, entity-specific financial performance and other events, including changes in the Company’s
management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting
unit is less than its carrying value, the Company then performs a quantitative goodwill impairment analysis by comparing the carrying
amount to the fair value of the reporting unit. If it is determined that the fair value is less than its carrying amount, the excess
of the goodwill carrying amount over the implied fair value is recognized as an impairment loss in accordance with Accounting Standards
Update (“ASU”) No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The
Company utilizes a discounted cash flow analysis, referred to as an income approach, and uses internal and market multiples, to assess
reasonableness of assumptions, to determine the estimated fair value of the reporting units. For the income approach, significant judgments
and assumptions including anticipated revenue growth rates, discount rates, gross margins, operating expenses, working capital needs
and capital expenditures are inherent in the fair value estimates, which are based on the Company’s operating and capital forecasts.
As a result, actual results may differ from the estimates utilized in the income approach. The use of alternate judgments and/or assumptions
could result in a fair value that differs from the Company’s estimate and could result in the recognition of additional impairment
charges in the financial statements. As a test for reasonableness, the Company also considers the combined fair values of the Company’s
reporting units to a reasonable market capitalization of the Company. The Company may elect not to perform the qualitative assessment
for some or all reporting units and perform a quantitative impairment test.
During
the quarter ended March 31, 2022, the Company’s share price had a significant decline and the Company’s ability to invest
in its businesses was impacted. This was determined to be a triggering event and the long-lived assets of the Company were quantitatively
tested for impairment. As of March 31, 2022, the Company recognized goodwill asset impairment charges of $23,119,755 to the goodwill
of the GGC, EGL and Helix reporting units, which are all part of the EEG Games segment. There was no further impairment identified as
of the annual testing date from that recognized as of March 31, 2022. During the last three months of the fiscal year, the Company’s
share price further declined and the macro environment was unstable, and the Company determined that a separate triggering event had
occurred as of June 30, 2022. The Company performed an additional quantitative analysis and recorded a further goodwill asset impairment
charge of $3,852,876 to the goodwill of the iGaming Argyll (UK) reporting unit, which is part of the EEG iGaming segment, for a total
of $26,972,631 for the year ended June 30, 2022 (see Note 7 for additional information regarding the goodwill impairment, and the effects
on the Company’s business, financial condition, and results of operations). There were no goodwill impairment charges recorded
during the year ended June 30, 2021. Further downturns in economic, regulatory and operating conditions and the continuing impact of
COVID-19 could result in additional goodwill impairment in future periods.
Intangible
assets
Intangible
assets with determinable lives consist of player relationships, developed technology and software, tradenames and gaming licenses. Intangible
assets with determinable lives are amortized on a straight-line basis over their estimated useful lives of 5 years for player relationships
and developed technology and software, 10 years for tradenames and 2 years for gaming licenses. The Company also capitalizes internal-use
software costs such as external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the
Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s
internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software
project and continues during the application development stage. Capitalization ceases when the software has been tested and is ready
for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life cycle
are expensed as incurred. The Company also holds indefinite-lived intangible assets in the form of digital assets as discussed above
in Digital Assets.
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 results 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.
During
the year ended June 30, 2022, the Company recognized a total impairment charge of $19,526,058 on its long-lived assets. This included
$3,972,022 for the impairment of the Argyll tradename, developed technology, gaming license and customer relationships from the EEG iGaming
segment, and $13,484,122 for the impairment of the EGL tradename, developed technology and software, GGC and Helix tradenames and developed
technology from the EEG Games segment (see Note 7), $653,107 for the total equipment, net impairment, including $44,481 for the Argyll
computer equipment and furniture and equipment from the EEG iGaming segment, and $608,626 for EGL computer equipment, Helix Game Centers
computer equipment, leasehold improvements and furniture and equipment from the EEG Games segment (see Note 6), and $1,416,807 for the
impairment of operating lease right-of-use assets for the Helix building rentals from the EEG Games segment (see Note 11). This was recognized
in asset impairment charges in the consolidated statements of operations. There were no impairment charges on long-lived assets identified
for the year ended June 30, 2021.
Liabilities
to Customers
The
Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at
a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings
and player losses. The Company maintains a restricted cash balance and player deposits held by third parties, recorded as receivables
reserved for users on the consolidated balance sheets, at levels equal to or exceeding its liabilities to customers.
Jackpot
Provision
The
jackpot provision liability is an estimate of the amount due to players for progressive jackpot winnings. The jackpot liability is accrued
monthly based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming
casino machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be
paid out randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount
that varies across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot
and therefore the winning of a jackpot affects other players on the network of participating iGaming casino machines.
Leases
The
Company leases for office space and game center space through operating lease agreements that were a result of its acquisitions of Argyll,
Lucky Dino and Helix. The Company also leased other property and equipment, acquired through Helix, that was subsequently sold as part
of the Helix sale transaction where the purchaser assumed the lease liabilities. The Company measures an operating lease right-of-use
(“ROU”) asset and liability, as well as a finance lease asset and liability, based on the present value of the future minimum
lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and non-lease components
of the agreement, as well as any variable rent payments that depend on an index, initially measured using the index at the lease commencement
date.
The
minimum payments under operating leases are recognized on a straight-line basis over the lease term in the consolidated statements of
operations. Operating lease expenses related to variable lease payments are recognized as operating expenses in a manner consistent with
the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of
less than 12 months (“short-term leases”) are not recognized on the consolidated balance sheets. The rent expense for short-term
leases is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated
statements of operations.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s
tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S. GAAP treatment and tax treatment
of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in
deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred
tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence,
that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established
through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback
years, existing taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.
The
Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to
determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will
be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained,
the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount
of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered
appropriate, as well as the related net interest and penalties.
Derivative
Instruments
The
Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of those
contracts qualify as derivatives (Note 12). 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 (Note 18) in the consolidated balance sheets. 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 (Note 18).
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 a 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 at each balance sheet date and records the change in the fair value of the remaining embedded derivative
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, derivative financial instruments and warrant liabilities to fair value on a recurring basis. Certain long-lived
assets may be periodically required to be measured at fair value on a nonrecurring basis, including long-lived assets that are impaired.
The fair value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other
receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been
determined to approximate carrying amounts due to the short maturities of these instruments. The fair value of the Senior Convertible
Note and lease liabilities approximate their carrying value based on current interest and discount rates.
Earnings
Per Share
Basic
income (loss) per share is calculated using the two-class method. Under the two-class method, basic income (loss) is computed by dividing
net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period excluding
the effects of any potentially dilutive securities. Diluted income (loss) per share is computed similar to basic income (loss) per share,
except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential
common shares had been issued if such additional common shares were dilutive. Diluted income (loss) per share includes the effect of
potential common shares, such as the Company’s preferred stock, notes, warrants and stock options, to the extent the effect is
dilutive. As the Company had net losses for all the periods presented, basic and diluted loss per share are the same, and additional
potential common shares have been excluded, as their effect would be anti-dilutive.
The
following securities were excluded from weighted average diluted common shares outstanding for the year ended June 30, 2022 and 2021
because their inclusion would have been antidilutive:
| |
2022 | | |
2021 | |
Common
stock options | |
$ | 11,105 | | |
$ | 4,747 | |
Common
stock warrants | |
| 226,006 | | |
| 53,506 | |
Common
stock issuable upon conversion of senior convertible note | |
| 160,315 | | |
| 21,200 | |
10%
Series A cumulative redeemable convertible preferred stock | |
| 835,950 | | |
| — | |
Total | |
$ | 1,233,376 | | |
$ | 79,453 | |
Comprehensive
Loss
Comprehensive
loss consists of the net loss for the year and foreign currency translation adjustments related to the effect of foreign exchange on
the value of assets and liabilities. The net translation loss for the year is included in the consolidated statements of comprehensive
loss.
Foreign
Currency
The
functional currencies of the Company include the U.S. dollar, British Pound and Euro. The reporting currency of the Company is the U.S.
dollar. Assets and liabilities of the Company’s foreign operations with functional currencies other than the U.S. dollar are translated
at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during
the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’
equity. Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency. The Company recorded a foreign exchange transaction loss for the years ended June 30, 2022 and 2021 of $149,573 and $440,452,
respectively. Transaction gains and losses are reported within other non-operating income (loss), net, on the consolidated statements
of operations.
Stock-based
Compensation
The
Company periodically issues stock-based compensation to employees, directors, contractors and consultants for services rendered. Stock-based
compensation granted to employees and non-employee directors includes grants of restricted stock and employee stock options that are
measured and recognized based on their fair values determined on the grant date. The award of restricted stock and stock options, which
are generally time vested, are measured at the grant date fair value and charged to earnings on a straight-line basis over the vesting
period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several
variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price
of the stock option as compared to the fair market value of the Common Stock on the grant date, and the estimated volatility of the Common
Stock over the term of the equity award. The fair value of restricted stock is determined by the closing market price of the Company’s
Common Stock on the date of grant. The compensation cost for service-based stock options granted to consultants is measured at the grant
date, based on the fair value of the award, and is expensed on a straight-line basis over the requisite service period (the vesting period
of the award).
Sales
and Marketing
Sales
and marketing expenses are comprised primarily of advertising costs that include online search advertising and placement, including advertising
with affiliates for the online betting and casino operations, as well as other promotional expenses paid to third parties, including
expenses related to sponsorship agreements. Sales and marketing expense for the years ended June 30, 2022 and 2021 was $25,728,220 and
$10,038,524, respectively.
Revenue
and Cost Recognition
The
revenue of the Company is currently generated from online casino and sports betting (referred to herein as “EEG iGaming revenue”),
and esports revenue (referred to herein as “EEG Games Revenue”), consisting of the sales of subscriptions to access cloud-based
software used by independent operators of game centers, from consulting and data analytic services provided to game operators (“EEG
Games Esports and Other Revenue”), and from the provision of esports event and team management services (“EEG Games Esports
Event Management and Team Service Revenue”). The Company recognizes revenue in accordance with Accounting Standards Codification
(“ASC”) Topic 606 – Revenue from Contracts with Customers (“ASC 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 may be subject to value added tax (“VAT”) in certain 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.
EEG
iGaming Revenue
EEG
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. Jackpots, other than the incremental progressive jackpots, are recognized at the time they are won by customers. 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 statements
of operations.
EEG
Games Revenue
EEG
Games Esports and Other Revenue
The
Company derives revenue from 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 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 revenue
from the operation of game centers by the Company is recognized when a customer purchased time to use the esports gaming equipment at
each center. The revenue from time purchased by a customer and from the sale of concessions is recognized at the point of sale.
The
Company further provides 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, and 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 has 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, considering 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.
EEG
Games 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 in person 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 Financial Accounting Standards Board (“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. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim
periods within those fiscal years. The Company adopted this standard as of July 1, 2021. The adoption of this guidance did not have a
material impact on the accompanying 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 fiscal years beginning after December 15, 2022. Early adoption
is permitted. The Company adopted this standard during the year ended June 30, 2022. See Note 7 for additional information regarding
the results of the impairment tests performed on its goodwill and intangible assets.
Recently
Issued Accounting Standards
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and
contract liabilities in accordance with Accounting Standards Codification Topic 606. The guidance is effective for fiscal years beginning
after December 15, 2022 and early adoption is permitted. The Company is currently evaluating the potential impact of this standard on
its consolidated financial statements and it does not expect the guidance to have a material effect on its consolidated financial statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40). The standard clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity
should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains
equity classified after modification or exchange as an exchange of the original instrument for a new instrument. The guidance is effective
for the fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact that
the adoption of this guidance will have on its consolidated financial statements.
In
June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion
accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that
are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular
convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business
entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using
the fully retrospective or modified retrospective method. The Company is currently evaluating the potential impact of this standard on
its consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held
at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new
standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most
other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees,
loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking
information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted,
although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends
the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU
2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB
issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842): Effective Dates, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years for smaller reporting companies. The Company is currently evaluating the impact that the adoption
of this guidance will have on its consolidated financial statements.
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the
specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have
a material impact on the Company’s financial position or results of operations upon adoption.
Note
3 – Business Acquisitions
Bethard
Acquisition
On
July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited (“Bethard”),
which provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain,
Malta and Ireland (the “Bethard Business”), from Gameday Group Plc, a limited liability company incorporated in Malta (the
“Seller”). The acquisition of Bethard expanded 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), including
€1,000,000 (equivalent to $1,180,463 using exchange rates in effect at the acquisition date) paid for a regulatory deposit with
the Spanish Gaming Authority. 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 was paid by the Company on
November 16, 2021 (the “Second Payment Due Date”), using the proceeds raised from the issuance of the 10% Series A Cumulative
Redeemable Convertible Preferred Stock (see Note 15 for discussion of the 10% Series A Cumulative Redeemable Convertible Preferred Stock).
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 date of the Second Payment, 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
purchase consideration, including the fair value of the contingent cash consideration, is as follows:
Cash
paid at closing | |
$ | 15,346,019 | |
Second
Payment | |
| 4,721,852 | |
Total
cash consideration paid for Bethard | |
| 20,067,871 | |
Contingent
cash consideration | |
| 6,700,000 | |
Total
purchase price consideration | |
$ | 26,767,871 | |
The
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 at acquisition, then reverting
to 12% thereafter for the remainder of a two-year period following the acquisition date. The estimated contingent cash consideration
of $6,700,000 is calculated using the applicable percentages applied to projected net gaming revenue of the Bethard Business at the date
of acquisition. Based on updated revenue projections as of June 30, 2022, the Company determined the fair value of the remaining contingent
consideration payable to be $3,328,361, net of the amount paid to the Seller through June 30, 2022 of $1,016,331. The decrease in the
contingent consideration liability resulted in the recognition of a benefit of $2,355,308, included as change in fair value of contingent
consideration in the consolidated statement of operations for the year ended June 30, 2022. Subsequent to year end, during October 2022,
the Company entered into an amendment to the Bethard SPA that impacted the contingent consideration as discussed further in Note 13.
The
purchase consideration excludes contingent share consideration payable to the Seller as there is no indication such contingent share
contingent consideration will become payable from a successful assignment of the specified ambassador agreement. The Seller of the Bethard
Business had up to 6 months to assign the ambassador agreement to receive the contingent share consideration. After the 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 October 12, 2022, one business
day preceding this filing, the ambassador agreement had not been assigned to the Company.
The
purchase price and purchase price allocation of the assets acquired and liabilities assumed is as follows:
Receivables
reserved for users | |
$ | 3,109,782 | |
Intangible
assets | |
| 18,100,000 | |
Goodwill | |
| 11,292,685 | |
Other
non-current assets | |
| 1,180,463 | |
Accrued
liabilities | |
| (5,634 | ) |
Player
liability | |
| (3,108,425 | ) |
Deferred
income taxes | |
| (3,801,000 | ) |
Total | |
$ | 26,767,871 | |
The
acquired intangible assets, useful lives and fair value at the acquisition date follows:
| |
Useful
Life (years) | |
Fair
Value | |
Tradename | |
10 | |
$ | 3,500,000 | |
Player
interface | |
5 | |
| 1,200,000 | |
Gaming
licenses | |
2 | |
| 700,000 | |
Player
relationships | |
5 | |
| 12,700,000 | |
Total | |
| |
$ | 18,100,000 | |
Qualitative
factors that contribute to the recognition of goodwill include certain intangible assets that are not being recognized as separate identifiable
intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of benefits from securing
buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, as well as acquiring
a talented workforce and cost savings opportunities. The goodwill of Bethard is not deductible for tax purposes. Transaction related
expenses incurred for the acquisition of the Bethard Business total $1,005,594, including $255,481 incurred for the year ended June 30,
2022 and $750,113 for the year ended June 30, 2021. Transaction related expenses are recorded in general and administrative expenses
in the consolidated statements of operations.
On
January 18, 2023, the Company closed the transaction and sold its Spanish iGaming operations, including its Spanish iGaming license.
This disposal is discussed further in Note 21, Subsequent Events.
On
February 24, 2023, the Company completed the divestiture of Prozone Limited, containing the Bethard online casino and sportsbook business
back to Gameday Group Plc. This disposal is discussed further in Note 21, Subsequent Events.
Acquisition
of GGC
On
June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of GGC. The total consideration paid
at closing was $24,273,211, with $14,100,000 paid in cash at closing and $900,000 paid through application of loans receivable from GGC,
inclusive of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advanced as loans
receivable was $14,993,977 after adjustment for cash acquired of $6,023). The Company also issued 8,302 shares common stock at closing
using a value per share $1,325.00 pursuant to the GGC Purchase Agreement. The fair value of the share consideration paid at closing was
determined to be $9,273,211 using the closing share price of the Company on the date of acquisition.
The
loans receivable applied toward the purchase consideration had originated during the negotiation to purchase GGC, whereby the Company
had advanced an aggregate of $600,000 to GGC during 2020 in the form of loans (“GGC Loans”). Upon execution of the purchase
agreement to acquire GGC, the Company paid GGC an additional $600,000 to be used for operating expenses pending the closing of the GGC
acquisition (“GGC Operating Expense Payments”). The Company had recorded these advances totaling $1,200,000 as loans receivable
at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase consideration for
the GGC Loans and GGC Operating Expense Payments if the acquisition of GGC were to close by April 30, 2021. If acquisition of GGC were
to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward the purchase price for
the GGC Loans, and a credit toward the purchase price equal to 60% of the GGC Operating Expense Payments. If the acquisition closed after
May 14, 2021, the Company was to receive full credit toward the purchase price for the GGC Loans, and a credit toward the purchase price
equal to 50% of the GGC Operating Expense Payments. The acquisition did not close by May 14, 2021, and therefore the Company had forgiven
50% of the GGC Operating Expense Payments or $300,000 and applied the remaining balance of the total loans receivable, or $900,000 toward
the purchase price of GGC.
A
summary of the purchase consideration follows:
Cash
paid at closing | |
$ | 14,100,000 | |
Loans
receivable applied toward purchase consideration | |
| 900,000 | |
Share
consideration issued at closing | |
| 9,273,211 | |
Total
purchase price consideration | |
$ | 24,273,211 | |
The
allocation of assets acquired and liabilities assumed follows:
Cash | |
$ | 6,023 | |
Accounts
receivable | |
| 102,701 | |
Prepaid
expenses and other current assets | |
| 97,083 | |
Equipment | |
| 7,704 | |
Intangible
assets | |
| 16,300,000 | |
Goodwill | |
| 11,445,832 | |
Accounts
payable and accrued expenses | |
| (263,132 | ) |
Deferred
tax liability | |
| (3,423,000 | ) |
Total | |
$ | 24,273,211 | |
The
acquired intangible assets, useful life and fair value determined at the acquisition date follows:
| |
Useful
Life (years) | |
Fair
Value | |
Tradename | |
10 | |
$ | 2,600,000 | |
Developed
technology | |
5 | |
| 13,300,000 | |
Customer
relationships | |
5 | |
| 400,000 | |
Total | |
| |
$ | 16,300,000 | |
The
results of operations of GGC are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the GGC acquisition is not deductible for tax purposes. Transaction related expenses
were $801,317 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated statements
of operations. The transaction expenses incurred for the GGC acquisition include a charge of $300,000 related to the forgiveness of the
GGC Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the GGC operations prior
to closing that were not eligible to be applied toward the purchase consideration.
Acquisition
of Helix
On
June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of Helix. The total consideration
paid at closing was $17,000,000, with $9,400,000 paid in cash and $600,000 paid through application of loans receivable from Helix, inclusive
of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advances as loans receivable
was $9,964,691 after adjustment for cash acquired of $35,309). The Company also issued 5,283 shares of common stock at closing using
a value per share of $1,325.00 pursuant to the Helix Purchase Agreement. The fair value of the share consideration paid at closing to
be $5,901,133 using the closing share price of the Company on the date of acquisition.
The
loans receivable applied toward the purchase consideration had originated during the negotiation to purchase Helix, whereby the Company
had advanced an aggregate of $400,000 to Helix during 2020 and 2021 in the form of loans (“Helix Loans”). Upon execution
of the purchase agreement to acquire Helix, the Company paid Helix an additional $400,000 to be used for operating expenses pending the
closing of the Helix acquisition (“Helix Operating Expense Payments”). The Company had recorded these advances totaling $800,000
as loans receivable at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase
consideration for the Helix Loans and Helix Operating Expense Payments if the acquisition of Helix were to close by April 30, 2021. If
acquisition of Helix were to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward
the purchase price for the Helix Loans, and a credit toward the purchase price equal to 60% of the Helix Operating Expense Payments.
If the acquisition closed after May 14, 2021, the Company was to receive full credit toward the purchase price for the Helix Loans, and
a credit toward the purchase price equal to 50% of the Helix Operating Expense Payments. The acquisition did not close by May 14, 2021,
and therefore the Company had forgiven 50% of the Helix Operating Expense Payments or $200,000 and applied the remaining balance of the
total loans receivable, or $600,000 toward the purchase price of Helix.
A
summary of the purchase consideration follows:
Cash
paid at closing | |
$ | 9,400,000 | |
Loans
receivable applied toward purchase consideration | |
| 600,000 | |
Share
consideration issued at closing | |
| 5,901,133 | |
Total
purchase price consideration | |
$ | 15,901,133 | |
The
allocation of assets acquired and liabilities assumed follows:
Cash | |
$ | 35,309 | |
Accounts
receivable | |
| 3,054 | |
Prepaid
expenses and other current assets | |
| 76,933 | |
Equipment | |
| 643,537 | |
Operating
lease right-of-use asset | |
| 803,503 | |
Intangible
assets | |
| 3,600,000 | |
Goodwill | |
| 12,393,591 | |
Other
non-current assets | |
| 31,015 | |
Deferred
revenue | |
| (9,036 | ) |
Deferred
income taxes | |
| (756,000 | ) |
Operating
lease liability | |
| (803,503 | ) |
Long-term
debt | |
| (117,270 | ) |
Total | |
$ | 15,901,133 | |
The
acquired intangible assets, useful lives fair value determined at the acquisition date follows:
| |
Useful
Life (years) | |
Fair
Value | |
Tradename | |
10 | |
$ | 800,000 | |
Developed
technology | |
5 | |
| 2,800,000 | |
Total | |
| |
$ | 3,600,000 | |
The
results of operations of Helix are in the consolidated financial statements of the Company for the year ended June 30, 2021 since the
date of acquisition. The goodwill recorded in the Helix acquisition is not deductible for tax purposes. Transaction related expenses
were $604,603 for the year ended June 30, 2021 are included in general and administrative expenses in the consolidated statements of
operations. The transaction expenses incurred for the Helix acquisition include a charge of $200,000 related to the forgiveness of Helix
Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the Helix operations prior
to closing that were not eligible to be applied toward the purchase consideration.
Acquisition
of Lucky Dino
On
March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming
casino operations of Lucky Dino for cash paid at closing €25,000,000 ($30,133,725 using exchange rates in effect at the acquisition
date), or with net cash paid being €24,001,795 ($28,930,540 using exchange rates in effect at the acquisition date) after adjustment
for cash acquired of €998,205 ($1,203,185 using exchange rates in effect at the acquisition date). The acquisition of Lucky Dino
was funded with available cash on hand.
The
allocation assets acquired and liabilities assumed follows:
Restricted
cash | |
$ | 1,203,185 | |
Other
receivables | |
| 131,111 | |
Equipment | |
| 13,765 | |
Operating
lease right-of-use asset | |
| 371,898 | |
Intangible
assets | |
| 19,100,000 | |
Goodwill | |
| 10,541,217 | |
Other
non-current assets | |
| 37,840 | |
Accounts
payable and accrued expenses | |
| (319,149 | ) |
Liabilities
to customers | |
| (574,244 | ) |
Operating
lease liability | |
| (371,898 | ) |
Total | |
$ | 30,133,725 | |
The
acquired intangible assets, useful lives and fair value determined at the acquisition date follows:
| |
Useful
Life (years) | |
Fair
Value | |
Tradename | |
10 | |
$ | 2,100,000 | |
Gaming
licenses | |
2 | |
| 800,000 | |
Developed
technology | |
5 | |
| 5,500,000 | |
Player
relationships | |
5 | |
| 10,700,000 | |
Total | |
| |
$ | 19,100,000 | |
The
results of operations of Lucky Dino are included in the consolidated financial statements of the Company for the year ended June 30,
2021 since the date of acquisition. The goodwill recorded in the Lucky Dino acquisition is deductible for tax purposes. Transaction related
expenses were $1,280,766 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated
statements of operations.
Acquisition
of EGL
On
January 21, 2021, the Company acquired all the issued and outstanding share capital of EGL for total purchase consideration of $2,975,219.
The total purchase consideration included $481,386 of cash paid at closing, (net cash paid at closing being $477,350 after adjustment
for cash acquired of $4,036), and the issuance of 2,925 shares of common stock with a fair value of $2,193,833 as determined using the
closing share price on the date of acquisition. The purchase consideration also included an estimate of $300,000 for contingent consideration
(“Holdback Consideration”) payable by the Company in cash and share consideration based on the progress of EGL towards the
achievement of certain revenue targets based on the ability of EGL to achieve certain revenue targets by May 16, 2021. The Holdback Consideration
was settled by the Company for $145,153 paid in cash, (increasing the total cash paid for EGL to $622,503), and through issuance of 631
shares of common stock with a fair value of $597,650, as determined using the closing price on the date of settlement. The incremental
consideration paid in excess of the amount estimated at Holdback Consideration of $442,803 was recorded to change in fair value of contingent
consideration within the statement of operations for the year ended June 30, 2021.
The
terms of the EGL purchase agreement may further require the Company to pay an additional $2,750,000 (equivalent to approximately £2,000,000
of purchase price using exchange rates at the acquisition date) in contingent earnout consideration (“Earnout Consideration”)
if EGL is to achieve an earnings benchmark on the 18-month anniversary of the closing date. On the date of acquisition, the Company determined
that the likelihood of a payout of the Earnout Consideration was remote and therefore did not assign a value to the Earnout Consideration
on the date of acquisition. This considers the Earnout Consideration benchmark increases during the earnout period for amounts invested
by the Company in the operations of EGL. The Earnout Consideration benchmark used to determine the minimum threshold for payment of additional
purchase consideration payable by the Company also increases should there be an increase in the value of the share consideration that
was issued by the Company on the date of acquisition.
A
summary of the purchase consideration follows:
Cash
paid at closing | |
$ | 481,386 | |
Share
consideration issued at closing | |
| 2,193,833 | |
Holdback
Consideration
| |
| 300,000 | |
Total
purchase price consideration | |
$ | 2,975,219 | |
The
allocation of assets acquired and liabilities assumed follows:
Cash | |
$ | 4,036 | |
Accounts
receivable | |
| 141,031 | |
Other
receivables | |
| 32,923 | |
Equipment | |
| 11,274 | |
Intangible
assets | |
| 1,371,789 | |
Goodwill | |
| 1,978,668 | |
Other
non-current assets | |
| 5,382 | |
Accounts
payable and accrued expenses | |
| (118,157 | ) |
Deferred
revenue | |
| (95,062 | ) |
Notes
payable | |
| (68,589 | ) |
Deferred
income taxes | |
| (288,076 | ) |
Total | |
$ | 2,975,219 | |
The
acquired intangible assets, useful lives and fair value at the acquisition date follows:
| |
Useful
Life (years) | |
Fair
Value | |
Tradename | |
10 | |
$ | 411,537 | |
Developed
technology | |
5 | |
| 823,073 | |
Customer
relationships | |
5 | |
| 137,179 | |
Total | |
| |
$ | 1,371,789 | |
The
following table summarizes the change in fair value of the Holdback Consideration that was settled by the Company through the payment
of cash and issuance of common stock:
Fair
value of contingent share consideration at January 21, 2021 | |
$ | 300,000 | |
Change
in fair value contingent consideration | |
| 442,803 | |
Payment
of Holdback Consideration in cash | |
| (145,153 | ) |
Stock
issued of Holdback Contingent in shares | |
| (597,650 | ) |
| |
| | |
Fair
value of contingent share consideration at June 30, 2021 | |
$ | — | |
The
results of operations of EGL are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the EGL acquisition is not deductible for tax purposes. Transaction related expenses
were immaterial for the year ended June 30, 2021.
Acquisition
of Argyll
On
July 31, 2020, the Company acquired Argyll, an online casino and sportsbook operator for total purchase consideration $7,802,576. The
purchase consideration includes $1,250,000 in cash comprised of a cash deposit of $500,000 that had been paid during the year ended June
30, 2020, as well as cash paid at closing of $750,000 (net cash paid being $728,926 in fiscal 2021 after adjustment for cash acquired
of $21,074). The purchase consideration also includes the issuance of 6,500 shares of common stock with a fair value of $3,802,500 and
the issuance of warrants to purchase up to 10,000 shares of common stock of the Company at an exercise price of $800.00 per share during
a term of three years.
A
summary of the purchase consideration follows:
Cash
paid | |
$ | 1,250,000 | |
Share
consideration issued at closing | |
| 3,802,500 | |
Fair
value of warrants issued at closing | |
| 2,750,076 | |
Total
purchase price consideration | |
$ | 7,802,576 | |
The
allocation of assets acquired and liabilities assumed follows:
Cash | |
$ | 21,074 | |
Receivables
reserved for users | |
| 27,777 | |
Other
receivables | |
| 605,898 | |
Prepaid
expenses and other current assets | |
| 413,441 | |
Equipment | |
| 70,712 | |
Operating
lease right-of-use asset | |
| 373,016 | |
Intangible
assets | |
| 7,333,536 | |
Goodwill | |
| 4,143,224 | |
Other
non-current assets | |
| 1,130,034 | |
Accounts
payable and accrued expenses | |
| (2,471,244 | ) |
Liabilities
to customers | |
| (1,737,106 | ) |
Notes
payable | |
| (327,390 | ) |
Operating
lease liability | |
| (240,353 | ) |
Deferred
income taxes | |
| (1,540,043 | ) |
Total | |
$ | 7,802,576 | |
The
acquired intangible assets, useful lives and a fair value at the acquisition date follows:
| |
Useful
Life (years) | |
Fair
Value | |
Tradename | |
10 | |
$ | 1,440,516 | |
Gaming
licenses | |
2 | |
| 916,692 | |
Player
interface | |
5 | |
| 2,226,252 | |
Player
relationships | |
5 | |
| 2,750,076 | |
Total | |
| |
$ | 7,333,536 | |
The
results of operations of Argyll are included in the consolidated financial statements of the Company for the year ended June 30, 2021
since the date of acquisition. During the year ended June 30, 2021, the Company recorded a measurement period adjustment to reduce the
preliminary purchase consideration by $2,738,095 as the Company updated the fair value of the warrants issued using a Monte Carlo simulation.
The Company also recorded a measurement period adjusted to update the preliminary purchase price allocation based on final allocation
of fair value to identifiable intangible assets. The goodwill is not deductible for tax purposes. Transaction related expenses were immaterial
for the year ended June 30, 2021.
On
March 3, 2023, the Company’s Board determined that the Company’s wholly-owned subsidiary Argyll Entertainment, the Company’s
Swiss entity that is part of Argyll UK, would be liquidated. The Swiss courts declared Argyll Entertainment bankrupt on March 27, 2023,
at which point the Company lost control of Argyll Entertainment and, as a result, deconsolidated the entity. Argyll Entertainment had
net liabilities of approximately $1,640,000 as of December 31, 2022. The Company fully impaired the goodwill, intangible assets and other
long-lived assets of Argyll UK in the year ended June 30, 2022. This is discussed further in Note 21, Subsequent Events.
Acquisition
of Flip
On
September 3, 2020 the Company acquired the software development operations of Flip Sports Limited (“FLIP”) for cash of $100,000,
share consideration of $411,817 resulting from the issuance 938 shares of common stock by the Company at the share price on the date
of acquisition, and contingent share consideration payable based on the retention of certain key FLIP employees and having an estimated
fair value of $500,000 on the date of acquisition. The contingent share consideration was settled on March 3, 2021 through the issuance
of 938 shares of common stock have a market value on the date of settlement of $1,805,804, resulting in the recognition of $1,305,804
as the change in fair value of contingent consideration in the consolidated statement of operations for the year ended June 30, 2021.
A
summary of the purchase consideration follows:
Cash | |
$ | 100,000 | |
Share
consideration issued at closing | |
| 411,817 | |
Contingent
share consideration | |
| 500,000 | |
Total
purchase price consideration | |
$ | 1,011,817 | |
The
allocation to the assets acquired follows:
Intangible
assets (developed software) | |
$ | 550,000 | |
Goodwill | |
| 461,817 | |
Total
purchase price consideration | |
$ | 1,011,817 | |
The
developed software was determined to have an estimated useful life of 5 years. During the year ended June 30, 2021, the Company recorded
a measurement period adjustment of $88,183 to reduce the amount of goodwill due to a decrease in the fair value of the purchase share
consideration issued at closing. The following table summarizes the change in fair value of the FLIP contingent share consideration that
was settled by the Company through the issuance of common stock:
Fair
value of contingent share consideration at September 3, 2020 | |
$ | 500,000 | |
Change
in fair value contingent consideration | |
| 1,305,804 | |
Stock
issued settlement of contingent share consideration (March 3, 2021) | |
| (1,805,804 | ) |
Fair
value of contingent share consideration at June 30, 2021 | |
$ | — | |
The
results of operations of FLIP are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the FLIP acquisition is deductible for tax purposes. Transaction related expenses for
FLIP were not material to the consolidated statement of operations.
Pro
Forma Operating Results
The
following table summarizes pro forma results of operations for the year ended June 30, 2021 as if Bethard, as well as the fiscal year
2021 acquisitions of the Company completed during the year ended June 30, 2021, namely Argyll, Lucky Dino, EGL, GGC 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 year ended June 30, 2021 due to immateriality. The results of operations of Bethard, as well as the previous acquisitions
identified above, are included in the consolidated statement of operations of the Company for the year ended June 30, 2022, with any
differences resulting from the acquisition of Bethard on July 13, 2021 assessed as immaterial.
The
pro forma results of operations for the year ended June 30, 2021 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:
| |
Unaudited Pro
Forma for
the year ended June
30, 2021 | |
Net
revenue | |
$ | 62,289,822 | |
Net
loss | |
$ | (41,054,763 | ) |
Net
loss per common share, basic and diluted | |
$ | (223.00 | ) |
The
pro forma operating results of operations for the year ended June 30, 2021 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 follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
Marketing
receivables from revenue partners | |
$ | - | | |
$ | 233,725 | |
Receivable
from revenue sharing arrangement | |
| - | | |
| 137,461 | |
Indirect
taxes | |
| 306,040 | | |
| 135,676 | |
Other | |
| 66,243 | | |
| 151,883 | |
Other
receivables | |
$ | 372,283 | | |
$ | 658,745 | |
Note
5 – Prepaid Expenses and Other Current Assets
The
components of prepaid expenses and other current assets follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
Prepaid
marketing costs | |
$ | 298,300 | | |
$ | 1,727,669 | |
Prepaid
insurance | |
| 230,404 | | |
| 175,620 | |
Prepaid
gaming costs | |
| 575,113 | | |
| 687,866 | |
Other | |
| 439,236 | | |
| 673,189 | |
Prepaid
expenses and other current assets | |
$ | 1,543,053 | | |
$ | 3,264,344 | |
Note
6 – Equipment
The
components of equipment follow:
| |
June
30, 2022 | | |
June
30, 2021 | |
Computer
equipment | |
$ | 35,911 | | |
$ | 258,049 | |
Furniture
and equipment | |
| 34,526 | | |
| 249,070 | |
Leasehold
improvements | |
| - | | |
| 221,787 | |
Finance
lease asset | |
| - | | |
| 117,979 | |
Equipment,
at cost | |
| 70,437 | | |
| 846,885 | |
Accumulated
depreciation and finance lease amortization | |
| (26,512 | ) | |
| (119,943 | ) |
Equipment,
net | |
$ | 43,925 | | |
$ | 726,942 | |
During
the years ended June 30, 2022 and 2021, the Company recorded total depreciation expense and finance lease amortization of $154,464 and
$111,380, respectively. Impairment of $653,107 for the Argyll computer equipment and furniture and equipment, EGL computer equipment
and the Helix Game Centers computer equipment, furniture and equipment, leasehold improvements and finance lease assets was recorded
in asset impairment charges in the consolidated statements of operations for the year ended June 30, 2022. There was no impairment in
the year ended June 30, 2021.
Note
7 – Goodwill and Intangible Assets
A
reconciliation of goodwill and accumulated goodwill impairment losses, by reportable segment, is as follows:
| |
|
EEG
iGaming | | |
EEG
Games | | |
Total | |
Balance
as of July 1, 2020 | |
|
| | | |
| | | |
| | |
Goodwill,
net (1) | |
(1) |
$ | - | | |
$ | - | | |
$ | - | |
Goodwill
acquired during the year | |
|
| 15,146,258 | | |
| 25,818,092 | | |
| 40,964,350 | |
Effects
of foreign currency exchange rates | |
|
| (37,246 | ) | |
| 10,266 | | |
| (26,980 | ) |
Balance
as of June 30, 2021 | |
|
| | | |
| | | |
| | |
Goodwill,
gross | |
|
| 15,109,012 | | |
| 25,828,358 | | |
| 40,937,370 | |
Accumulated
goodwill impairment charges | |
|
| - | | |
| - | | |
| - | |
Goodwill,
net | |
|
| 15,109,012 | | |
| 25,828,358 | | |
| 40,937,370 | |
Goodwill
acquired during the year | |
|
| 11,292,685 | | |
| - | | |
| 11,292,685 | |
Effects
of foreign currency exchange rates | |
|
| (2,888,340 | ) | |
| (93,771 | ) | |
| (2,982,111 | ) |
Impairment
charges | |
|
| (3,852,876 | ) | |
| (23,119,755 | ) | |
| (26,972,631 | ) |
Balance
as of June 30, 2022 | |
|
| | | |
| | | |
| | |
Goodwill,
gross | |
|
| 23,513,357 | | |
| 25,734,587 | | |
| 49,247,944 | |
Accumulated
goodwill impairment charges | |
|
| (3,852,876 | ) | |
| (23,119,755 | ) | |
| (26,972,631 | ) |
Goodwill,
net | |
|
$ | 19,660,481 | | |
$ | 2,614,832 | | |
$ | 22,275,313 | |
|
(1) |
As
of July 1, 2020 the Company had not yet acquired any goodwill. |
During
the third quarter, the Company concluded that goodwill impairment indicators existed based on the significant volatility in the Company’s
stock price where the Company experienced a sustained reduction from the middle of the quarter through March 31, 2022 and subsequently.
As of March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers was not expected to attain
levels previously forecasted and that under the current liquidity and investment constraints is the Company was less likely to reach
the previously forecasted revenue and profits for EGL and GGC. These factors and the continuing impacts of the COVID-19 pandemic, and
uncertainties caused by inflation and world stability, resulted in the Company evaluating its goodwill and long-lived assets, including
intangible assets, for impairment as of March 31, 2022. The Company tests its goodwill for impairment annually on April 1. There was
no further impairment identified as of the annual testing date from that recognized as of March 31, 2022. In the three months ending
June 30, 2022, while implementing cost saving initiatives, and with the continuing liquidity and investment restraints and further reduction
in the Company’s already deflated stock price, the Company again concluded that as of June 30, 2022, goodwill impairment indicators
existed, and the Company evaluated its goodwill and long-lived assets, including intangible assets, for further impairment as of the
end of the fiscal year.
The
Company performed its interim impairment tests on its long-lived assets, including its definite-lived intangible assets using an undiscounted
cash flow analysis to determine if the cash flows expected to be generated by the asset groups over the estimated remaining useful life
of the primary assets were sufficient to recover the carrying value of the asset groups, which were determined to be at the business
component level. Based on the circumstances described above as of March 31, 2022, the Company determined its EGL, Helix, and GGC asset
groups failed the undiscounted cash flow recoverability test and as of June 30, 2022 the Argyll asset group failed the undiscounted cash
flow recoverability test. Accordingly, the Company estimated the fair value of its individual long-lived assets to determine if any asset
impairment charges were present. The Company’s estimation of the fair value of the definite-lived intangible assets included the
use of discounted cash flow and cost analyses, reflecting estimates of future revenues, royalty rates, cash flows, discount rates, development
costs and obsolescence. Based on these analyses, the Company concluded the fair values of certain intangible assets were lower than their
current carrying values, and recognized impairment totaling $3,644,048 and $12,100,997 for the Argyll, EGL, GGC and Helix tradenames
and developed technology and software, respectively, $1,675,580 for the Argyll and EGL player relationships, and $35,519 for the Argyll
gaming licenses, totaling $17,456,144 for the year ended June 30, 2022 in asset impairment charges in the consolidated statements of
operations.
In
accordance with ASC 350, for goodwill, after considering the asset impairment charges to the asset groups, the Company performed its
interim and annual goodwill impairment tests, which compared the estimated fair value of each reporting unit to its respective carrying
values. The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flows analysis. The results
of the impairment tests performed indicated that the carrying value of the EGL, GGC and Helix reporting units exceeded their estimated
fair values determined by the Company. Based on the results of the goodwill impairment testing procedures, the Company recognized impairments
of goodwill of $1,895,164 for the EGL reporting unit, $8,831,000 for the GGC reporting unit, and $12,393,591 for the Helix reporting
unit, for a total of $23,119,755 for the EEG Games segment, and $3,852,876 for the iGaming Argyll (UK) reporting unit of the EEG iGaming
segment, totaling $26,972,631 for the year ended June 30, 2022 in asset impairment charges in the consolidated statements of operations.
As of June 30, 2022, the Company determined there was no impairment related to the remaining $19,660,481 of goodwill in the iGaming Malta
reporting unit and EEG iGaming segment and $2,614,832 of goodwill in the GGC reporting unit and EEG Games segment.
The
assumptions used in the cost and undiscounted and discounted cash flow analyses require significant judgment, including judgment about
appropriate growth rates, and the amount and timing of expected future cash flows. The Company’s forecasted cash flows were based
on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions
used in the cash flows were revenue growth rates, operating expenses and gross margins and the discount rates in the discounted cash
flows. The assumptions used consider the current early growth stage of the Company and the emergence from a period impacted by COVID-19.
The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its
procedures for estimating future cash flows for each reporting unit, asset group and intangible asset are reasonable and consistent with
current market conditions as of the testing date. If the markets that impact the Company’s business continue to deteriorate, the
Company could recognize further goodwill and long-lived asset impairment charges.
In
total, as described in detail above, the Company recorded $44,428,775 of goodwill and definite-lived intangible asset impairment charges
for the year ended June 30, 2022.
There
were no asset impairment charges for goodwill or long-lived assets, including definite-lived intangible assets, for the year ended June
30, 2021.
The
table below reflects the adjusted gross carrying amounts for these intangible assets. The intangible amounts comprising the intangible
asset balance are as follows:
| |
June
30, 2022 | |
| |
Gross
Carrying Amount | | |
Accumulated
Amortization | | |
Net
Carrying Amount | |
| |
| | |
| | |
| |
Tradenames | |
$ | 5,835,512 | | |
$ | (578,960 | ) | |
$ | 5,256,552 | |
Developed
technology and software | |
| 10,109,366 | | |
| (1,935,018 | ) | |
| 8,174,348 | |
Gaming
licenses | |
| 1,317,567 | | |
| (774,760 | ) | |
| 542,807 | |
Player
relationships | |
| 20,920,029 | | |
| (4,757,813 | ) | |
| 16,162,216 | |
Internal-use
software | |
| 225,086 | | |
| (14,520 | ) | |
| 210,566 | |
| |
| | | |
| | | |
| | |
Total | |
$ | 38,407,560 | | |
$ | (8,060,653 | ) | |
$ | 30,346,489 | |
| |
June
30, 2021 | |
| |
Gross
Carrying Amount | | |
Accumulated
Amortization | | |
Net
Carrying Amount | |
| |
| | |
| | |
| |
Tradename | |
$ | 7,396,804 | | |
$ | (257,018 | ) | |
$ | 7,139,786 | |
Developed
technology and software | |
| 25,231,659 | | |
| (1,242,605 | ) | |
| 23,989,054 | |
Gaming
licenses | |
| 1,752,612 | | |
| (573,876 | ) | |
| 1,178,736 | |
Player
relationships | |
| 13,956,083 | | |
| (1,253,135 | ) | |
| 12,702,948 | |
Internal-use
software | |
| 777,171 | | |
| (15,140 | ) | |
| 762,031 | |
| |
| | | |
| | | |
| | |
Total | |
$ | 49,114,329 | | |
$ | (3,341,774 | ) | |
$ | 45,772,555 | |
Amortization
expense was $11,872,117 and $3,304,872 for the years ended June 30, 2022 and 2021, respectively. The amortization for EEG iGaming segment
was $8,544,593 and $2,782,446, EEG Games segment was $3,192,236 and $421,593 and for the Other segment was $135,288 and $100,833, for
the years ended June 30, 2022 and 2021, respectively.
The
estimated future amortization related to definite-lived intangible assets is as follows:
Fiscal
2023 | |
$ | 7,533,227 | |
Fiscal
2024 | |
| 6,990,001 | |
Fiscal
2025 | |
| 6,990,001 | |
Fiscal
2026 | |
| 5,870,261 | |
Fiscal
2027 | |
| 665,547 | |
Thereafter | |
| 2,297,452 | |
Total | |
$ | 30,346,489 | |
Note
8 – Other Non-Current Assets
The
components of other non-current assets follow:
| |
June
30, 2022 | | |
June
30, 2021 | |
iGaming
regulatory deposits | |
$ | 1,715,053 | | |
$ | 755,474 | |
iGaming
deposits with service providers | |
| 261,825 | | |
| 434,738 | |
Rent
deposit | |
| 80,520 | | |
| 91,253 | |
Other | |
| 4,778 | | |
| 33,544 | |
Other
non-current assets | |
$ | 2,062,176 | | |
$ | 1,315,009 | |
Note
9 – Account Payable and Accrued Expenses
The
components of account payable and accrued expenses follow:
| |
June
30, 2022 | | |
June
30, 2021 | |
Trade
accounts payable | |
$ | 5,069,616 | | |
$ | 2,609,212 | |
Accrued
marketing | |
| 2,388,987 | | |
| 1,582,470 | |
Accrued
payroll and benefits | |
| 833,322 | | |
| 1,093,263 | |
Accrued
gaming liabilities | |
| 446,626 | | |
| 758,536 | |
Accrued
professional fees | |
| 555,967 | | |
| 704,748 | |
Accrued
jackpot liabilities | |
| 297,970 | | |
| 432,504 | |
Accrued
other liabilities | |
| 2,751,564 | | |
| 988,082 | |
Accrued
legal settlement (Note 13) | |
| - | | |
| 289,874 | |
Total | |
$ | 12,344,052 | | |
$ | 8,458,689 | |
Note
10 – Related Party Transactions
The
Company’s recently appointed CEO (Note 21) owns less than 5% of Oddin.gg, a vendor of the Company, that was owed $63,010 and $9,480
by the Company as of June 30, 2022 and 2021, respectively.
The
Company reimburses the Chief Executive Officer for office rent and related expenses. The Company incurred charges owed to the Chief Executive
Officer for office expense reimbursement of $4,800 for both years ended June 30, 2022 and 2021. As of June 30, 2022 and 2021, 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. The Company incurred general and administrative expenses of $26,148 and $96,020
for years ended June 30, 2022 and 2021, respectively, in accordance with these agreements. As of June 30, 2022 and 2021, there were no
amounts payable to Contact Advisory Services Ltd.
The
Company retained 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 consultancy agreement required payments of £18,000 ($21,920 translated using the exchange rate
in effect at June 30, 2022) per month to the firm that is controlled by this member of the Board of Directors. The individual also received
payroll of $500 per month through the employment agreement as Chief Operating Officer. The member resigned from the Board of Directors
and from his role as Chief Operating Officer on May 31, 2022 and the consultancy agreement and the employment agreement were terminated.
The member remained as an advisor to the Company with an annual fee of $60,000.
The
Company retained the services of its Chief Financial Officer through a consultancy agreement dated April 2, 2022 and an employment agreement
dated April 2, 2022. The Company remits monthly payments to its Chief Financial Officer of NZD 36,995 ($23,524 translated using the exchange
rate in effect at June 30, 2022) under the consultancy agreement and $500 per month under the employment agreement. In connection with
this appointment the Company provided a one-time issuance of 2,000 shares of Common Stock to the Chief Financial Officer.
During
the year ended June 30, 2022, the Company engaged in transactions with Tilt, LLC a game center operator controlled by the head of GGC.
This included net sales Tilt, LLC in the amount of $222,559 for game center equipment, and amounts paid to Tilt, LLC of $33,600 for equipment
leased, $16,589 for services, $20,128 for cryptocurrency mining and $140,000 for purchases of computer inventory.
Note
11 – Leases
The
Company leases office and building space and equipment under operating lease agreements and equipment under finance lease agreements.
The Company’s lease agreements have terms not exceeding five years. Certain leases contain options to extend that are assessed
by management at the commencement of the lease and are included in the lease term if the Company is reasonably certain of exercising.
In July 2021, the Company commenced a lease for office space of approximately 284 square meters in Saint Julians, Malta over a 3-year
lease term. The lease has an annual expense of €83,000, increasing 4% annually. At lease inception, the Company determined it was
not reasonably certain to exercise any of the options to extend. In October 2021, the Company commenced a lease for building space of
approximately 3,200 square feet at the University of California in Los Angeles over a 5-year lease term. The lease has an annual expense
of $17,500, increasing 3% annually. At lease inception, the Company determined it was not reasonably certain to exercise any of the options
to extend.
In
March 2022 the Company commenced a finance lease for computer equipment for one of its owned and operated game centers. The lease had
annual payments of $40,103 including 8% interest. The lease term was approximately 2.5 years. In June 2020 the Company commenced a finance
lease for computer equipment for one of its owned and operated game centers. The lease had annual payments of $50,702 including 8% interest.
The lease term was approximately 2.5 years. These game center computer equipment finance leases were disposed of during June 2022.
The
consolidated balance sheet allocation of assets and liabilities related to operating and finance leases is as follows:
| |
Consolidated
Balance Sheet Caption | |
June
30, 2022 | | |
June
30, 2021 | |
Assets: | |
| |
| | | |
| | |
Operating
lease assets | |
Operating
lease right-of-use assets | |
$ | 164,288 | | |
$ | 1,272,920 | |
Finance
lease assets | |
Equipment,
net | |
| - | | |
| 114,540 | |
Total
lease assets | |
| |
$ | 164,288 | | |
$ | 1,387,460 | |
Liabilities: | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating
lease liabilities | |
Operating
lease liability – current | |
$ | 364,269 | | |
$ | 414,215 | |
Finance
lease liabilities | |
Current
portion of notes payable and other long-term debt | |
| - | | |
| 50,702 | |
Long-term: | |
| |
| | | |
| | |
Operating
lease liabilities | |
Operating
lease liability – non-current | |
| 669,286 | | |
| 878,809 | |
| |
| |
| | | |
| | |
Finance
lease liabilities | |
Notes
payable and other long-term debt | |
| - | | |
| 63,161 | |
| |
| |
| | | |
| | |
Total
lease liabilities | |
| |
$ | 1,033,555 | | |
$ | 1,406,887 | |
The
Company recognized in asset impairment charges in the consolidated statements of operations, $1,416,807 for operating lease right-of-use
assets for the Helix Game Center building rentals and $175,858 for the Helix computer equipment finance leases. The operating lease expense
and finance lease expense, excluding asset impairment charges, for the year ended June 30, 2022 were $356,395 and $33,398, respectively.
The outstanding lease liabilities for the Helix equipment and finance leases were assumed by the purchaser in the Helix transaction on
June 10, 2022. The operating lease expense and finance lease expense for the year ended June 30, 2021 were $156,543 and $2,039, respectively.
The rent expense for short-term leases was not material to the consolidated financial statements.
Weighted
average remaining lease terms and discount rates follow:
| |
June
30, 2022 | | |
June
30, 2021 | |
Weighted
Average Remaining Lease Term (Years): | |
| | | |
| | |
Operating
leases | |
| 3.87 | | |
| 4.11 | |
Finance
leases | |
| - | | |
| 2.50 | |
| |
| | | |
| | |
Weighted
Average Discount Rate: | |
| | | |
| | |
Operating
leases | |
| 8.00 | % | |
| 6.82 | % |
Finance
leases | |
| - | % | |
| 8.00 | % |
The
future minimum lease payments at June 30, 2022 follow:
| |
Operating
Lease | |
Fiscal
2023 | |
$ | 364,269 | |
Fiscal
2024 | |
| 311,362 | |
Fiscal
2025 | |
| 221,167 | |
Fiscal
2026 | |
| 227,802 | |
Fiscal
2027 | |
| 57,368 | |
Thereafter | |
| - | |
Total
lease payments | |
| 1,181,968 | |
Less:
imputed interest | |
| (148,413 | ) |
Present
value of lease liabilities | |
$ | 1,033,555 | |
Note
12 – Long-term Debt
Notes
Payable and other long-term debt
The
components of notes payable and other long-term debt follows:
| |
Maturity | |
Interest
Rate
as of
June
30, 2022 | | |
June
30, 2022 | | |
June
30, 2021 | |
Notes
payable | |
April
30, 2023 | |
| 3.49 | % | |
$ | 139,538 | | |
$ | 330,654 | |
Finance
lease obligation (Note 11) | |
— | |
| — | | |
| - | | |
| 113,863 | |
Total | |
| |
| | | |
| 139,538 | | |
| 444,517 | |
Less
current portion of notes payable and long-term debt | |
| |
| | | |
| (139,538 | ) | |
| (223,217 | ) |
Notes
payable and other long-term debt | |
| |
| | | |
$ | - | | |
$ | 221,300 | |
The
Company assumed a note payable of £250,000 (equivalent to $327,390) in connection with its acquisition of Argyll on July 31, 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 through May 2023. The principal balance of the notes payable on June 30, 2022 was £114,583 ($139,538
using exchange rates at June 30, 2022). Interest expense on the note payable was $9,076 and $962 for the years ended June 30, 2022 and
2021, respectively. The finance lease obligations were assumed by the purchasers in the Helix transaction (see Note 11).
The
maturities of long-term debt are as follows:
Fiscal
2023 | |
$ | 139,538 | |
Total | |
$ | 139,538 | |
Senior
Convertible Note
On
June 2, 2021, the Company issued the existing senior convertible note (the “Old Senior Convertible Note”) before it was exchanged
for the new Senior Convertible Note (the “New Note”) on February 22, 2022. The Old Senior Convertible Note was issued to
the Holder in the principal amount of $35,000,000 with the Company receiving proceeds at issuance of $32,515,000, net of debt issuance
costs of $2,485,000. The Old Senior Convertible Note would have matured on June 2, 2023, at which time the Company would have been required
to repay the original principal balance and the Premium on Principal. The aggregate principal of the Old Senior Convertible Note repayable
at maturity was $37,100,000 and the Old Senior Convertible Note accrued interest at rate of 8% per annum payable in cash monthly. The
Old Senior Convertible Note was issued with 20,000 Series A Warrants and 20,000 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 Old Senior Convertible Note totaling $26,680,000.
The debt discount was being amortized to interest expense over the term of the Old Senior Convertible Note using the effective interest
method. The obligation resulting from the issuance of the Series A Warrants and Series B Warrants was determined to qualify for liability
classification on the consolidated balance sheet. See below for further discussion of the Series A Warrants and Series B Warrants.
The
Old Senior Convertible Note was convertible, at the option of the Holder, into shares of the Company’s Common Stock at a conversion
price of $1,750.00 per share. The conversion amounts were calculated as the principal balance identified for conversion plus the Premium
on Principal. At any time after issuance, the Company had 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 was outstanding.
On
February 22, 2022, the Company agreed to enter into an exchange agreement (the “Exchange Agreement”) with the Holder whereby
the Old Senior Convertible Note, with a remaining principal amount of $29,150,001, was exchanged for the New Note in the aggregate principal
amount of $35,000,000. The increase in the principal balance outstanding of $5,849,999 was recognized as a loss on extinguishment of
Senior Convertible Note in the second quarter ended December 31, 2021, and is included in the consolidated statements of operations for
the year ended June 30, 2022. The Company further accelerated the recognition of the remaining debt discount and Premium on Principal
in connection with the exchange and issuance of the New Note during the second quarter ended December 31, 2021, which is included in
the loss on extinguishment of the Old Senior Convertible Note of $22,628,805 for the year ended June 30, 2022 in the consolidated statements
of operations.
The
interest rate on the Old Senior Convertible Note from June 2, 2022 through February 22, 2022, was 8.0% per annum, and remained unchanged
in the New Note. From and after the occurrence and during the continuance of any Event of Default (as defined in the New Note), the interest
rate shall automatically be increased to 12.0% per annum. As further described below, the Company was not in compliance with certain
debt covenants under the Old Senior Convertible Note and New Note, but received a waiver from compliance through March 30, 2022. The
Company was subject to begin accruing interest expense at a rate of 12% beginning March 31, 2022, as compared to using the set rate of
8.0%, and has recorded the additional $350,000 interest expense for the difference in rates in accounts payable and accrued expenses
in the consolidated financial statements for the year ended June 30, 2022. The maturity date (the “Maturity Date”) of the
Exchange Agreement has remained unchanged in the Exchange Agreement and the New Note is due on June 2, 2023, subject to extension in
certain circumstances, including bankruptcy and outstanding events of default. The ability of the Company to redeem the principal balance
outstanding also remains unchanged. The Company may redeem the New Note, subject to certain conditions, at a price equal to 100% of the
outstanding principal balance outstanding, together with accrued and unpaid interest and unpaid late charges thereon.
The
New Note is convertible, at the option of the Holder, into shares of the Company’s Common Stock at a conversion price of $1,750.00
per share. The New Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock
dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue (or issues)
any variable rate securities, the Holder has the additional right to substitute such variable price (or formula) for the conversion price.
If
an Event of Default has occurred under the New Note, in addition to the default interest rate discussed above, the Holder may elect to
alternatively convert the New Note at the Alternate Conversion Price (as defined in the New Note). In connection with an Event of Default,
the Holder may require the Company to redeem in cash any or all of the New Note. The redemption price will equal 100% of the outstanding
principal of the New Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or an amount equal to market
value of the shares of the Company’s Common Stock underlying the New Note, as determined in accordance with the New Note, if greater.
The Holder will not have the right to convert any portion of a New 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 the Company’s 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. The Company is currently in default and the Holder has not yet elected to alternatively convert.
In
addition, unless approval of the Company’s stockholders as required by the Nasdaq is obtained, the Company is prohibited from issuing
any shares of Common Stock upon conversion of the New Note or otherwise pursuant to the terms of the New 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 its obligations under the rules and regulations of Nasdaq.
Should the Holder convert the principal balance outstanding at June 30, 2022 at the Alternate Conversion Price that is currently available
to the Holder, or a portion of the principal balance, the Company may be subject to remit amounts to the Holder materially in excess
of the principal balance outstanding through payment of cash. Refer to the Alternate Conversion discussion below for further information
of this settlement option available to the Holder.
In
connection with a Change of Control (as defined in the New Note), the Holder may require the Company to redeem all or any portion of
the New Note. The redemption price per share will equal the greatest of (i) 115% of the outstanding principal of the New Note to be redeemed,
and accrued and unpaid interest and unpaid late charges thereon, (ii) 115% of the market value of the shares of the Company’s Common
Stock underlying the New Note, as determined in accordance with the New 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 New Note, as determined in accordance
with the New Note.
At
any time after the date the Company provides notice to the Holder of the Company incurring additional debt, the Holder will have the
right to have the Company redeem all or a portion of the New Note at a redemption price of 100% of the portion of the New Note subject
to redemption.
Under
the New Note, and consistent with the Old 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 is also subject to certain financial
debt covenants relating to available cash, minimum annual revenues, ratio of debt to market capitalization and minimum cash flow.
The
New 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 New 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 $218.32 (“Conversion Floor Price”) 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 New Note 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 (“Incremental Premium”) in cash
due upon such an acceleration of the applicable principal, at a price (“Alternate Conversion Price”) equal to the greater
of the Conversion Floor Price of $218.32 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 Conversion Floor Price of $218.32 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. The Company is currently in default and the Holder has not yet elected to alternatively convert. See further discussion
in make-whole derivative liability below.
As
discussed above, during the three months ended December 31, 2021, the Company had not maintained compliance with the covenants of the
Senior Convertible Note, having identified non-compliance with the same financial debt covenants previously identified at September 30,
2021. The Company obtained a waiver from the compliance with certain covenants, as of December 31, 2021 and through March 30, 2022. The
Company further entered into a non-binding term sheet dated February 22, 2022, to restructure the New Note to mitigate the risk of default
on the covenants in future periods. This term sheet expired without a new debt facility being completed. Since the expiration of the
waiver on March 30, 2022, the Company is not in compliance with its covenants. At June 30, 2022, the Company is in default under the
terms of the Senior Convertible Note. The Senior Convertible Note matures in less than 12 months from June 30, 2022, and the Company
has continued to recognize its obligation under the Senior Convertible Note as a current liability in the consolidated balance sheet.
The Company has not remitted payment to the Holder of the Senior Convertible Note an amount equal to 30% of the gross proceeds from the
March 2022 Offering to be applied as a reduction of principal (see Note 16).
The
Company previously determined that it had not maintained compliance with its Senior Convertible Note covenants at September 30, 2021.
The Company therefore requested and received a waiver dated October 13, 2021 for (i) any known breaches or potential breaches of financial
debt 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 the Additional Payment Due Date (see Note 3 for discussion of the Bethard acquisition) 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 2,000 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 October 13, 2021 waiver, the Company agreed to permit the conversion of up to $7,500,000 of the original principal
balance of the Senior Convertible Note at the Alternate Conversion Price into shares of Common Stock, exclusive of the Premium on Principal
and Incremental Premium that applies to an Alternate Conversion. During the year ended June 30, 2022, the Holder of the Senior Convertible
Note had converted the full principal amount of $7,500,000 into 25,145 shares of Common Stock. As a result of these conversions of principal,
the Company recorded a loss on conversion of senior convertible note of $5,999,662 in the consolidated statement of operations for the
year ended June 30, 2022. The loss on conversion included accelerated amortization of the debt discount of $4,515,273, accelerated amortization
of the Premium on Principal of $288,300 and the Incremental Premium due on conversion of $1,196,089.
The
Company also previously obtained a waiver from the Holder of the Old Senior Convertible Note on November 2, 2021 in connection with its
announcement to commence an underwritten registered public offering of its 10.0% Series A Cumulative Redeemable Convertible Preferred
Stock (see Note 15). In consideration for this waiver, the Company agreed to increase the cash price payable upon a redemption of the
Old Senior Convertible Note by the Company to be equal to 10% of the conversion amount, as defined in Old Senior Convertible Note agreement
as any unpaid principal, minimum return due to the Holder, and unpaid interest due on such redemption date. The Company agreed to pay
the Holder of the Old Senior Convertible Note an amount of $1,500,000 under the terms of a registration rights agreement. The Company
recognized the amount payable to the Holder of the Old Senior Convertible Note under the registration rights agreement in other non-operating
income (loss), net, in the consolidated statement of operations for the year ended June 30, 2022 and in accounts payable and accrued
expenses at June 30, 2022 on the consolidated balance sheet.
The
Company repaid principal of $2,778,427 during the six months from June 30, 2022 to December 31, 2022, using proceeds from the September
2022 equity financing. Subsequent to December 31, 2022 and through April 20, 2023, one business day preceding this filing, the Company
has converted $19,261,583 of the Senior Convertible Note through the issuance of 2,242,143 shares of common stock. After including the
impact of the conversions reducing the debt by $19,261,583 and the Amendment increasing the debt by $2,950,010, for fees of $450,010
and converted accrued liabilities of $2,500,000, the Company had reduced its outstanding debt on the Senior Convertible Note to $15,910,000
as of February 21, 2023. On April 19, 2023, prior to entering the Note to Preferred Stock Exchange Agreement (see Note 21), the Company
redeemed $679,976 of the Senior Convertible Note using funds that were on deposit in favor of the Holder from the Sale of the Bethard
Business, further reducing the outstanding debt on the Senior Convertible Note to $15,230,024. Later, on April 19, 2023, the Company
entered into the Note to Preferred Stock Exchange Agreement with the Holder to convert the $15,230,024 in aggregate principal amount
of the Senior Convertible Note outstanding into the new Series C Convertible Preferred Stock concurrently with the closing of the potential
offering that is part of the Company’s approved plan of compliance with the Nasdaq Listing Rules. See further discussion in Note
21, Subsequent Events.
Make-Whole
Derivative Liability
The
New Note agreement includes provision that should both the Company be in breach of its debt covenants and its price per common share
trade below the Conversion Floor Price of $218.32, the Holder may elect the Alternate Conversion option that includes a make-whole provision
payable to the Holder in cash. At June 30, 2022, both the Company was in breach of its debt covenants and the price per share of its
Common Stock had declined below the Conversion Floor Price. While the Company previously obtained waivers from the Holder of the Old
Senior Convertible Note for breach of covenants, as well as a waiver for breach of covenants through March 30, 2022 under the New Note,
the Company was unable to comply with the debt covenants under the New Note or otherwise obtain a debt waiver from March 31, 2022 through
the year ended June 30, 2022 and subsequent to year end. As a result, the make-whole provision in the New Note agreement was determined
to represent an obligation of the Company at June 30, 2022 under the terms of the New Note.
The
make-whole provision in the New Note is a derivative liability. The Company’s obligation to make a payment under the make-whole
provision was previously assessed as remote with an immaterial fair value. This considered that the Company had obtained debt waivers
from the Holder for its breaches of debt covenants. The Company’s historical stock price had also traded at levels significantly
in excess of the Conversion Floor Price. Further, the Company had further signed a non-binding term sheet on February 22, 2022 (in combination
with entering into the New Note) for the purpose of revising the debt covenants that were to be included in a revised or amended note
agreement. At June 30, 2022, the Company has been unable to complete an agreement to restructure the terms and covenants of the New Note.
The stock price further continued to trade materially below the Conversion Floor Price and the Company has also been unable to secure
a debt waiver. The fair value of the derivative liability at June 30, 2022 was determined using a Monte Carlo valuation model. See Note
18 for further discussion of the fair value determined for the derivative liability.
At
June 30, 2022, the Company estimates that it would be required to issue up to 160,315 shares of Common Stock under the Alternate Conversion
provisions of the New Note. The Company further estimated the derivative liability to the holder to be $9,399,620 which is included in
the derivative liability in the consolidated balance sheets and the expense was recorded in the change in fair value of derivative liability
in the consolidated statements of operations. The make-whole cash liability calculated under the terms of the note of approximately $180,000,000
was materially higher than the fair value of $9,399,620 determined at June 30, 2022 and considers the difference in the market price
of the Company’s shares and a floor price of $218.32 multiplied by a number of shares that is based on the outstanding principal
and the market price of the Company’s Common Stock at June 30, 2022. The calculated make-whole cash liability may differ materially
from the amount at which the Company may be required to pay under the New Note. The Company has held non-binding discussions with the
Holder to restructure its obligation under the New Note. However, there can be no guarantee that the Company will be able to reach an
agreement to restructure the New Note.
The
expected conversion of the Senior Convertible Note to the Series C Convertible Preferred Stock, that will occur concurrently with the
closing of the potential offering that is part of the Company’s approved plan of compliance with the Nasdaq Listing Rules, will
extinguish the Senior Convertible Note and the remaining related debt outstanding of $15,230,024, as of one business day preceding this
filing, and will further eliminate the related derivative liability that had a fair value of $9,399,620 ($180,000,000 approximate cash
liability calculated under the terms of the Senior Convertible Note), as of June 30, 2022. See further discussion in Note 21, Subsequent
Events.
Warrants
March
2022 Warrants and April 2022 Overallotment Warrants
On
March 2, 2022, the Company completed the March 2022 Offering, an equity offering in which it sold 150,000 units at $100.00 consisting
of one share of Common Stock and one warrant for a total of 150,000 March 2022 Warrants with an exercise price of $100.00. The Company
also sold a further 22,500 April 2022 Overallotment Warrants with an exercise price of $100.00 issued to the underwriters of the offering
on April 1, 2022.
The
March 2022 Warrants and April 2022 Overallotment Warrants may be exercised at any time after issuance for one share of Common Stock of
the Company at an exercise price of $100.00. The March 2022 Warrants and April 2022 Overallotment Warrants are callable by the Company
should the volume weighted average share price of the Company exceed $300.00 for each of 20 consecutive trading days following the date
such warrants become eligible for exercise. The March 2022 Warrants and April 2022 Overallotment Warrants also contain a beneficial ownership
limitation of 4.99% which may be increased up 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.
The
Company determined the March 2022 Warrants and April 2022 Overallotment 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 Common Stock Purchase Warrant Agreement pursuant
to which the March 2022 Warrants and April 2022 Overallotment Warrants were purchased, which includes a change in control. The Company
has recorded a liability for the March 2022 Warrants at fair value on the issuance date with subsequent changes in fair value reflected
in earnings. At March 2, 2022, the date of the Common Stock issuance, the Company determined the total fair value of the March 2022 Warrants
to be $9,553,500 and on the date of the Common Stock issuance, the Company determined the total fair value of the April 2022 Overallotment
Warrants to be $607,500. At June 30, 2022, the Company determined the total fair value of the March 2022 Warrants and April 2022 Overallotment
Warrants to be $2,070,000. The change in fair value of the March 2022 Warrants and April 2022 Overallotment Warrants liability recorded
in the consolidated statement of operations for the year ended June 30, 2022 was $8,091,000. See Note 18 for additional disclosures related
to the change in the fair value of the warrant liabilities.
Series
A and Series B Warrants
The
Company issued 20,000 Series A Warrants and 20,000 Series B Warrants to the holder of the Old Senior Convertible Note. The Exchange Agreement
did not impact the Series A Warrants and Series B Warrants previously issued and outstanding. 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 $1,750.00. The Series B Warrants may
only be exercised to the extent that the indebtedness owing under the Senior 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 $1,750.00. The Series A Warrants and Series B Warrants are callable by the Company
should the volume weighted average share price of the Company exceed $3,250.00 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 up 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.
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, 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 June 30, 2022, the Company determined the total fair value of the Series A Warrants and Series B Warrants to
be $122,730 with a fair value of $117,340 determined for the Series A Warrants and a fair value of $5,390 determined for the Series B
Warrants. The change in fair value of the Series A Warrants and Series B Warrants liability recorded in the consolidated statements of
operations for the year ended June 30, 2022 and 2021 were a decrease of $23,377,270 and an increase of $1,549,924, respectively. See
Note 18 for additional disclosures related to the change in the fair value of the warrant liabilities.
The
proceeds from the issuance of the Old 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 Old 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 Old Senior Convertible Note. The debt discount on the Old Senior Convertible Note was being amortized over its term of two years.
The Company accelerated the amortization of the debt discount on the Old Senior Convertible Note during the second quarter resulting
in the Company recording of a loss on extinguishment of $22,628,805 for the year ended June 30, 2022, as further described above. Prior
to accelerating the amortization of debt discount in the second quarter, the Company recorded the remaining amortization of the debt
discount of $2,262,112 as interest expense on the consolidated statement of operations for the year ended June 30, 2022.
Components
of Long-Term Debt, including Senior Convertible Note
The
components of the Company’s long-term debt including the Senior Convertible Note on the consolidated balance sheets follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
Current
portion of notes payable and long-term debt including the senior convertible note | |
$ | 35,139,538 | | |
$ | 223,217 | |
Notes
payable and long-term debt including the senior convertible note | |
| - | | |
| 6,523,804 | |
Total | |
| 35,139,538 | | |
| 6,747,021 | |
Note
13 – Commitments and contingencies
Commitments
On
October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (the “Team”) to obtain certain sponsorship-related
rights and benefits that include the ability to access commercial opportunities. The Company had agreed to initially pay the Team $516,000
in cash and $230,000 in Common Stock during the period from October 1, 2019 to June 30, 2022. On August 6, 2020, the Company entered
into an amended and restated sponsorship agreement (the “Amended Sponsorship Agreement”) with the Team that included cash
payments totaling $2,545,000 and the issuance of Common Stock totaling $825,000 for the term of the agreement ending January 31, 2023.
On December 31, 2021, the Amended Sponsorship Agreement terminated, and no cash or Common Stock was paid subsequently during the six
months ended June 30, 2022. For the year ended June 30, 2022, the Company recorded $444,304 in sales and marketing expense related to
the Team sponsorship. There were no outstanding amounts payable to the Team as of June 30, 2022.
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 and issued
500 shares of Common Stock in connection with the commencement of the arrangement. The Bally’s agreement extends for 10 years from
July 1, 2021, the date of commencement, requiring the Company to pay $1,250,000 and issue 100 shares of Common Stock on each annual anniversary
date. As of June 30, 2022, the future annual commitments by the Company under this agreement are estimated at $1,250,000 and 100 shares
of Common Stock payable each year through the year ended June 30, 2030. During the year ended June 30, 2022 and 2021, the Company has
recorded $1,358,168 and $357,167, respectively, in sales and marketing expense for its arrangement with Bally’s Corporation. There
were no outstanding amounts payable to Bally’s Corporation as of June 30, 2022 or June 30, 2021.
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 1,000 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 1,000 shares to the fund during the period in which the
fund reaches total capital commitments of $200,000,000. As of June 30, 2022, 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. As of June 30, 2022, the commitments under these agreements are estimated
at $2,319,014 for the year ended June 30, 2023, $1,363,797 for the year ended June 30, 2024, $494,980 for year ended June 30, 2025, and
$290,663 for the year ended June 30, 2026.
Contingencies
On
January 6, 2023, Mr. Johnson, filed a lawsuit in the United States District Court for the Southern District of New York against the Company.
The claim alleges breach by the Company of Mr. Johnson’s employment agreement when it terminated him for “Cause” as
defined in the agreement on December 3, 2022. Mr. Johnson seeks in excess of $1.0 million as well as 2,000 shares of our common stock,
plus attorney’s fees. On February 28, 2023, Mr. Johnson filed an amended complaint to amend his original claim and to add an alleged
defamation claim. On March 14, 2023, the Company filed its Pre-Motion Letter requesting that the claim be dismissed and on March 15,
2023 Mr. Johnson filed a letter to the Court requesting that the claim not be dismissed. The Company believes the claims are without
merit and intends to defend against the claims vigorously. The case is captioned Grant Johnson v. Esports Entertainment Group, Inc. 1:22-cv-10861
(SDNY).
During
October 2022, the Company entered into an amendment to the Bethard SPA where it agreed to pay €6,535,753 (equivalent to $7,010,732
using exchange rates at December 31, 2022) through installments equal to 12% of net gaming revenue until the Company has paid the balance
or the Company spends €13,120,000 in marketing costs (equivalent to $14,073,483 using exchange rates at December 31, 2022). Due
to this amendment, as of December 31, 2022 and June 30, 2022 the Company has estimated the present value of the amount owed to be $6,192,912
and $3,328,361, respectively.
Since
the acquisition of the Argyll UK EEG iGaming business on July 31, 2020, the Company has responded to periodic requests for information
from the UK Gambling Commission (the “UKGC”) in relation to information required to maintain its UK license following the
change of corporate control. There have been no adverse judgments imposed by the UKGC against the Company. On November 10, 2022, the
Company determined that it would close down its licensed remote gambling operation in the UK market. On November 15, 2022, as part of
the winding down of the Argyll UK iGaming operations, players were informed that they would no longer be able to place bets from November
30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8, 2022 Argyll UK surrendered its UK license
and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022 and December 14, 2022 Argyll UK attempted to
refund customer accounts that still had remaining balances. On March 3, 2023, the Company’s Board determined that the Company’s
wholly-owned subsidiary Argyll Entertainment, the Company’s Swiss entity that is part of Argyll UK, would be liquidated. The Swiss
courts declared Argyll Entertainment bankrupt on March 27, 2023, at which point the Company lost control of Argyll Entertainment and,
as a result, deconsolidated the entity. Argyll Entertainment had net liabilities of approximately $1,640,000 as of December 31, 2022.
The Company fully impaired the goodwill, intangible assets and other long-lived assets of Argyll UK during year ended June 30, 2022 (see
Note 21).
On
January 1, 2022, amendments to the Finnish Lotteries Act came into effect, further restricting marketing opportunities and enhancing
the enforcement powers of the Finnish regulator. Prior to these amendments coming into effect, in the fiscal quarter ended December 31,
2021, the Company has received communications from the Finnish regulator requesting clarification on its marketing and gaming practices
related to its Finnish EEG iGaming operations. The Company responded to the initial communication in third quarter of fiscal year 2022
and received a second request for further clarification. On November 28, 2022, the Company provided its response, further addressing
its business and marketing operations in Finland. Further powers allowing the Finnish regulator to require blocking by payment service
providers of overseas operators who are targeting their marketing activities towards Finnish customers are also due to come into effect
in 2023. Operations in Finland run under the MGA license on the Lucky Dino in-house built iDefix casino-platform. On January 5, 2023,
the Company received a communication that the Finnish regulator was satisfied with the Company’s response and no adverse judgments
were imposed by the Finnish regulator against the Company.
The
Company at times may be involved in pending or threatened litigation relating to claims arising from its operations in the normal course
of business. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some
future time.
In
determining the appropriate level of specific liabilities, if any, the Company considers a case-by-case evaluation of the underlying
data and updates the Company’s evaluation as further information becomes known. Specific liabilities are provided for loss contingencies
to the extent the Company concludes that a loss is both probable and estimable. The Company did not have any liabilities recorded as
of June 30, 2022. However, the results of litigation are inherently unpredictable, and the possibility exists that the ultimate resolution
of one or more of these matters could result in a material effect on the Company’s financial position, results of operations or
liquidity.
In
September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that it was owed $192,664, as well
as warrants to purchase 1,417,909 shares of the Company’s Common Stock as compensation for Boustead 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 $289,874 in damages and allowable costs (excluding attorneys’ fees) with
interest accruing approximately $21 per day. At June 30, 2021, the Company had recorded a liability for the amount awarded in arbitration
in accounts payable and accrued expenses in the consolidated balance sheet. The Company paid $294,051 to settle the arbitration award,
inclusive of accrued interest, on August 24, 2021.
On
August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit against the Company alleging that it had breached its obligations
related to an 8% convertible promissory note dated June 3, 2016 and common stock purchase warrants of the same date. On April 30, 2021,
a Settlement Agreement was entered into with Tangiers for an undisclosed amount. The Company has settled and paid the liability and the
amount of the settlement was not material to the consolidated financial statements of the Company.
Other
than discussed above, the Company is currently not involved in any other litigation that it believes could have a material adverse effect
on the Company’s 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 and Helix. The Company acquired Bethard in July
2021 adding to its revenue generating operations. The revenues and long-lived assets of Argyll, EGL Lucky Dino and Bethard have been
identified as the 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 (until June 10, 2022 when the Helix Game Centers were disposed) principally service customers
in the United States.
A
disaggregation of revenue by type of service for the year ended June 30, 2022 and 2021 is as follows:
| |
Year
ended June 30, | |
| |
2022 | | |
2021 | |
Online
betting and casino revenues | |
$ | 53,104,795 | | |
$ | 16,231,028 | |
Esports
and other revenues | |
| 5,246,855 | | |
| 552,886 | |
Total | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
A
summary of revenue by geography follows for the year ended June 30, 2022 and 2021 is as follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
United
States | |
$ | 4,799,084 | | |
$ | 671,519 | |
International | |
| 53,552,566 | | |
| 16,112,395 | |
Total | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
A
summary of long-lived assets by geography as at June 30, 2022 and 2021 follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
United
States | |
$ | 8,271,360 | | |
$ | 48,081,926 | |
International | |
| 46,620,831 | | |
| 41,942,870 | |
Total | |
$ | 54,892,191 | | |
$ | 90,024,796 | |
Note
15 – 10% Series A Cumulative Redeemable Convertible Preferred Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock. On November 10, 2021, the Company designated 1,725,000 shares of
preferred stock as 10% Series A Cumulative Redeemable Convertible Preferred Stock (“10% Series A Cumulative Redeemable Convertible
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 public offering of preferred stock as 10% Series A Cumulative Redeemable Convertible Preferred Stock in
the first series issuance of preferred stock, of which 800,000 shares were issued at $10 a share on November 16, 2021 for total gross
proceeds of $8,000,000, before deducting underwriting discounts and other estimated offering expenses. Net proceeds from the sale, after
deducting issuance costs totaled $7,265,000.
In
addition, under the terms of the underwriting agreement for the public offering of the 10% Series A Cumulative Redeemable Convertible
Preferred Stock, the Company granted the underwriters a 45-day option to purchase up to an additional 120,000 shares. On December 10,
2021, there was a partial exercise to purchase 35,950 shares. Net proceeds from the additional sale, after deducting issuance costs,
totaled $334,335.
Conversion
Each
share of 10% Series A Cumulative Redeemable Convertible 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 10% Series A Cumulative Redeemable
Convertible Preferred Stock matures five years from issuance, or November 15, 2026, at which point the Company must redeem the shares
of 10% Series A Cumulative Redeemable Convertible Preferred Stock in cash.
Dividends
Dividends
on the 10% Series A Cumulative Redeemable Convertible Preferred Stock accrue daily and are cumulative from the date of issuance. The
dividends on the 10% Series A Cumulative Redeemable Convertible 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. In the event the
dividends are not paid in cash, the dividends shall continue to accrue at a dividend rate of 10.0%.
Redemption
and Liquidation
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is also redeemable, at the option of the Board of Directors, in whole
or in part, at any time on or after January 1, 2023.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock includes a change of control put option which allows the holders of the
10% Series A Cumulative Redeemable Convertible Preferred Stock to require the Company to repurchase such holders’ shares in cash
in an amount equal to the initial purchase price plus accrued dividends.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable upon certain deemed liquidation events, such
as a change in control. Because a deemed liquidation event could constitute a redemption event outside of the Company’s control,
all shares of preferred stock have been presented outside of permanent equity in mezzanine equity on the consolidated balance sheets.
The instrument is initially recognized at fair value net of issuance costs. The Company reassesses whether the 10% Series A Cumulative
Redeemable Convertible Preferred Stock is currently redeemable, or probable to become redeemable in the future, as of each reporting
date. If the instrument meets either of these criteria, the Company will accrete the carrying value to the redemption value. The 10%
Series A Cumulative Redeemable Convertible Preferred Stock has not been adjusted to its redemption amount as of June 30, 2022 because
a deemed liquidation event is not considered probable.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable,
and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the 10% Series
A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares
of 10% Series A Cumulative Redeemable Convertible Preferred Stock have been presented outside of permanent equity in mezzanine equity
on the consolidated balance sheets.
Voting
Rights
The
holders of the 10% Series A Cumulative Redeemable Convertible Preferred Stock will not have any voting rights, except whenever dividends
on any share of any series of preferred stock (“Applicable Preferred Stock”) have not been paid in an aggregate amount equal
to four monthly dividends on the shares, the holders of the Applicable Preferred Stock will have the exclusive and special right, voting
separately as a class and without regard to series, to elect at an annual meeting of shareholders or special meeting held in place of
it one member of the Board of Directors, until all arrearages in dividends and dividends in full for the current monthly period have
been paid.
Note
16 – Equity
Common
Stock
The
authorized capital stock of the Company consists of 500,000,000 shares of Common Stock at a par value of $0.001 per share.
Dividend
Rights
Subject
to the prior or equal rights of holders of all classes of stock at the time outstanding having prior or equal rights as to dividends,
the holders of the Company’s Common Stock may receive dividends out of funds legally available if the Board of Directors, in its
discretion, determines to issue dividends and then only at the times and in the amounts that the Board of Directors may determine. The
Company has not paid any dividends on the Company’s Common Stock and do not contemplate doing so in the foreseeable future.
Voting
Rights
Each
holder of the Common Stock is entitled to one vote for each share of Common Stock held by such stockholder.
No
Preemptive or Similar Rights
The
Company’s Common Stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.
Liquidation
In
the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets
that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the Common Stock.
The
following is a summary of Common Stock issuances for the year ended June 30, 2022:
● |
During
the year ended June 30, 2022, as part of the March 2022 Offering, the Company sold 150,000 units at $100.00, consisting of one share
of Common Stock and one warrant with an exercise price of $100.00, for gross proceeds of $15,020,925. The Company recorded the issuance
of these shares at a fair value of $3,449,925 comprised of $13,625,925 of cash received from the offering equal to the gross proceeds,
net of $1,395,000 issuance costs, and net of the fair value of the March 2022 Warrant liability of $9,553,500 and the April 2022
Overallotment Warrants liability of $607,500, respectively, calculated on issuance. The proceeds from the offering were designated
for general working capital and to pay to the Holder of the Senior Convertible Note an amount equal to 30% of the gross proceeds
to be applied as a reduction of principal (see Note 12). At June 30, 2022 the Company has not remitted payment to the Holder and
principal remains at $35,000,000. |
● |
During
the year ended June 30, 2022, the Company issued 3,325 shares of Common Stock for services with a weighted average fair value of
$224.84 per share or $748,149 in the aggregate. |
|
|
● |
During
the year ended June 30, 2022, the Company issued 140 shares of Common Stock from the exercise of stock options with a weighted average
exercise price of $481.95 per share or $67,479 in the aggregate. |
|
|
● |
During
the year ended June 30, 2022, the Company issued 11,658 shares of Common Stock, with aggregate proceeds of $4,005,267, or $3,885,109
net of issuance costs, and a weighted average exercise price of $343.56, under its ATM program (see below). |
|
|
● |
During
the year ended June 30, 2022, the holder of the Senior Convertible Note converted an aggregate conversion value of $10,652,648 into
25,145 shares of Common Stock, with a weighted average conversion price of $423.57. |
The
following is a summary of Common Stock issuances for the year ended June 30, 2021:
● |
On
February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors
resulting in the raise of $30,000,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement, the Company
agreed to sell, in a registered direct offering, an aggregate of 20,000 shares (the “Shares”) of the Company’s
Common Stock, par value $0.001 per share at a price of $1,500.00 per Share. The offering was consummated on February 16, 2021, at
which time the Company received net proceeds of $27,340,000. |
|
|
● |
On
July 31, 2020, the Company issued 6,500 shares of Common Stock as a component of the purchase consideration for Argyll. The Company
recorded the issuance of these shares at fair value in the amount of $3,802,500. During the year ended June 30, 2021, the Company
also issued 10,000 shares of Common Stock in connection with the exercise of warrants that were included as a component of the purchase
consideration paid for Argyll. The warrants entitled the holder to purchase one share of Common Stock at $800.00 per share. The Company
recorded the issuance of these shares at the settlement date fair value of $15,480,000 comprised of $8,000,000 of cash received from
the exercise, and non-cash settlement of the warrant liability totaling $7,480,000. The warrant liability established on the date
of acquisition of Argyll was $2,750,076 and subsequently increased to the settlement date fair value by recording a charge of $4,729,924
in the statement of operations for the year ended June 30, 2021. Refer to discussion of the Argyll acquisition at Note 3. |
|
|
● |
During
the year ended June 30, 2021, the Company issued a total of 1,876 shares of Common Stock as a component of the purchase consideration
for FLIP, inclusive of share consideration paid to settle a portion of the purchase consideration that was recorded as a contingent
consideration liability. The Company recorded the issuances of these shares at a total fair value of $2,217,621, which includes the
initial issuance of 938 shares of Common Stock at a fair value of $411,817 on September 3, 2020, and the subsequent issuance of 938
shares of Common Stock on March 3, 2021 at a fair value of $1,805,804 in settlement of contingent purchase consideration. Refer to
discussion of the FLIP acquisition at Note 3. |
|
|
● |
On
January 21, 2021, the Company issued 2,925 shares of Common Stock as a component of the purchase consideration for EGL. The Company
recorded the issuance of these shares at fair value in the amount of $2,193,833. On May 21, 2021, the Company issued an additional
631 shares of Common Stock with a fair value of $597,650 to settle contingent holdback purchase consideration for the EGL acquisition.
Refer to discussion of the EGL acquisition at Note 3. |
|
|
● |
On
June 1, 2021, the Company issued 8,302 shares of Common Stock with a fair value of $9,273,211 in connection with the acquisition
of GGC. |
|
|
● |
On
June 1, 2021, the Company issued 5,283 shares of Common Stock with a fair value of $5,901,133 in connection with the acquisition
of Helix Holdings, LLC. |
|
|
● |
During
the year ended June 30, 2021, the Company issued 55,032 shares of Common Stock for the exercise of warrants with a weighted average
exercise price of $485.86 per share or $26,737,849 in the aggregate. The warrants issued for shares of Common Stock in the statement
of stockholders’ equity (deficit) also includes the cash received of $8,000,000 from the exercise of warrants issued in the
acquisition of Argyll, and the non-cash settlement of the related warrant liability of $7,480,000, discussed above. The Company recorded
issuance costs of $197,627 related to the issuance of warrants during the year ended June 30, 2021. |
● |
During
the year ended June 30, 2021, the Company issued 53 shares of Common Stock from the exercise of stock options with a weighted average
exercise price of $836.99 per share or $44,637 in the aggregate. |
|
|
● |
During
the year ended June 30, 2021, the Company issued 6,027 shares of its Common Stock for services rendered with a weighted average fair
value of $4,024,746 per share or $667.79 in the aggregate. |
At-the
Market Equity Offering Program
On
September 3, 2021, the Company entered “at the market” equity offering program 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 11,658 shares sold under the ATM during the year ended June
30, 2022 for gross proceeds of $4,005,267. The agreement between the Company and Maxim Group LLC governing the ATM expired on September
3, 2022. At this time, the Company does not plan on signing a new ATM agreement.
Common
Stock Warrants
On
March 2, 2022, the Company closed the March 2022 Offering, in which it sold 150,000 units at $100.00 consisting of one share of Common
Stock and one March 2022 Warrant exercisable at any time after issuance for one share of Common Stock of the Company for a total of 150,000
March 2022 Warrants at an exercise price of $100.00. On April 1, 2022 the underwriters of the March 2022 Offering exercised the over-allotment
option to purchase 22,500 additional March 2022 Warrants to purchase shares at a price of $1.00 per warrant. The Company received net
proceeds of $20,925. There were no March 2022 Warrants or April 2022 Overallotment Warrants exercised during the year ended June 30,
2022 and all March 2022 Warrants and April 2022 Overallotment Warrants were outstanding as of June 30, 2022.
On
July 31, 2020, the Company issued 10,000 warrants in connection with its acquisition of Argyll with an exercise price of $800.00. These
warrants were exercised during the year ended June 30, 2021. On June 2, 2021, the Company also issued 20,000 Series A Warrants and 20,000
Series B Warrants with an exercise price of $1,750.00 per share to the Holder of the Senior Convertible Note. There were no Series A
Warrants exercised during the year ended June 30, 2022. The Series B Warrants may not be exercised until there is a redemption of principal
under the Senior Convertible Note. The Series B Warrants were not exercisable at June 30, 2022.
On
April 16, 2020, the Company closed an offering, (the “April 2020 Offering”), in which it sold 19,800 units consisting of
one share of Common Stock and one Unit A Warrant and one Unit B Warrant, for a total of 39,600 warrants, with each warrant entitling
the holder to purchase one share of Common Stock priced at $425.00 per share. The Company issued an additional 2,094 Unit A Warrants
and 2,094 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 $1.00 per share. There were 11,367 of Unit A Warrants outstanding on June 30, 2022. The Unit B Warrants expired
one year from the date of issuance on April 19, 2021 and there were no Unit B Warrants outstanding at June 30, 2022.
In
connection with the April 2020 Offering the Company also issued 12,172 shares of Common Stock and 24,345 warrants (“Conversion
Warrants”) to purchase one share of Common Stock at $425.00 per share upon the conversion of $4,138,585 of the Company’s
convertible debt and accrued interest. There were 406 Unit A Conversion Warrants outstanding at June 30, 2022. The Unit B Conversion
Warrants have been fully exercised for shares of Common Stock.
A
summary of the warrant activity follows:
| |
Number
of Warrants | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Life
(Years) | | |
Intrinsic Value | |
Outstanding,
July 1, 2020 | |
| 52,646 | | |
$ | 428.00 | | |
| 0.86 | | |
$ | 14,654,296 | |
Issued | |
| 56,037 | | |
| 1,437.89 | | |
| | | |
| | |
Exercised | |
| (55,032 | ) | |
| 487.63 | | |
| | | |
| | |
Forfeited
or cancelled | |
| (145 | ) | |
| 425.00 | | |
| | | |
| | |
Outstanding,
June 30, 2021 | |
| 53,506 | | |
| 1,418.98 | | |
| 3.14 | | |
| 8,743,588 | |
Issued | |
| 172,500 | | |
| 100.00 | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Forfeited
or cancelled | |
| — | | |
| — | | |
| | | |
| | |
Outstanding
June 30, 2022 | |
| 226,006 | | |
| 412.26 | | |
| 4.07 | | |
| — | |
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 15,000 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 Plan is automatically increased by 2,340 shares. At June 30, 2022, there was a maximum of 19,679
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 Stock Incentive Plan were transferred to the 2020 Plan. As of June 30, 2022, there were 8,574 shares of Common Stock available for
future issuance under the 2020 Plan.
A
summary of the Company’s stock option activity is as follows:
| |
Number
of Options | | |
Weighted
Average Exercise
Price | |
Outstanding,
June 30, 2020 | |
| 519 | | |
$ | 1,050.00 | |
Granted | |
| 4,364 | | |
| 496.27 | |
Exercised | |
| (53 | ) | |
| 836.99 | |
Cancelled | |
| (83 | ) | |
| 409.00 | |
Outstanding,
June 30, 2021 | |
| 4,747 | | |
| 549.29 | |
Granted | |
| 11,202 | | |
| 671.00 | |
Exercised | |
| (140 | ) | |
| 482.00 | |
Cancelled | |
| (4,704 | ) | |
| 653.64 | |
Outstanding,
June 30, 2022 | |
| 11,105 | | |
$ | 628.71 | |
As
of June 30, 2022, the weighted average remaining life of the options outstanding was 4.10 years. There are 10,694 options exercisable
at June 30, 2022, with a weighted average exercise price of $627.09.
Stock
Based Compensation
During
the year ended June 30, 2022 and 2021, the Company recorded stock-based compensation expense of $5,165,653 and $4,129,726, 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 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 1,175 shares of Common Stock for services rendered, comprised of 13 shares granted to management, 170 shares granted to employees,
and 992 shares granted to consultants. At June 30, 2020, the Company recorded the fair value of these shares issued as liabilities to
be settled in stock. During the first quarter of the Company’s fiscal year ended June 30, 2021, the Company settled the balance
of the liabilities to be settled in stock through the issuance of Common Stock in a non-cash transaction.
As
of June 30, 2022, unamortized stock compensation for stock options was $1,074,485 with a weighted-average recognition period of 0.25
years. The options granted during the year ended June 30, 2022 were valued using the Black-Scholes option pricing model using the following
weighted average assumptions:
| |
Year
ended June 30, 2022 | |
Expected
term, in years | |
| 2.81 | |
Expected
volatility | |
| 150.82 | % |
Risk-free
interest rate | |
| 0.45 | % |
Dividend
yield | |
| — | |
Grant
date fair value | |
$ | 534.00 | |
As
of June 30, 2021, unamortized stock compensation for stock options was $598,105 with a weighted-average recognition period of 0.60 years.
The options granted during the year ended June 30, 2021 were valued using the Black-Scholes option pricing model using the following
weighted average assumptions:
| |
Year
ended June 30, 2021 | |
Expected
term, in years | |
| 2.76 | |
Expected
volatility | |
| 132.60 | % |
Risk-free
interest rate | |
| 0.32 | % |
Dividend
yield | |
| — | |
Grant
date fair value | |
$ | 341.00 | |
Note
17 – Other Non-Operating Income (Loss), Net
Other
non-operating income (loss), net, for the years ended June 30, 2022 and 2021 was as follows:
| |
June
30, 2022 | | |
June
30, 2021 | |
Foreign
exchange loss | |
$ | (149,573 | ) | |
$ | (440,452 | ) |
Gain
on sale of business | |
| 1,069,262 | | |
| - | |
Other
non-operating loss | |
| (1,504,155 | ) | |
| (19,876 | ) |
Total | |
$ | (584,466 | ) | |
$ | (460,328 | ) |
On
June 10, 2022, the Company entered into and consummated the transaction contemplated by that certain asset purchase agreement by and
between the Company and SCV CAPITAL, LLC (the “Buyer”) pursuant to which the Buyer agreed to acquire from the Company the
Helix assets related to the Company’s ownership and operation of Helix Game Centers. The total purchase price for the Helix Game
Centers was approximately $1,200,000, with the purchase price being primarily attributable to the Buyer’s assumption of certain
liabilities related to the Helix Game Centers, including leases and sponsorship liabilities. The gain on sale of $1,069,262 was driven
by the amounts of liabilities assumed by the Buyer. Other non-operating loss for the year ended June 30, 2022 includes the amount the
Company agreed to pay the Holder of the Old Senior Convertible Note of $1,500,000 under the terms of a registration rights agreement
(see Note 12).
Note
18 – Fair Value Measurements
The
following financial instruments were measured at fair value on a recurring basis:
| |
June
30, 2022 | |
| |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Contingent
consideration (Note 3) | |
$ | 3,328,361 | | |
$ | — | | |
$ | — | | |
$ | 3,328,361 | |
Liability
for the March 2022 Warrants and April 2022 Overallotment Warrants (Note 12) | |
$ | 2,070,000 | | |
$ | 2,070,000 | | |
$ | — | | |
$ | — | |
Liability
for the Series A and Series B Warrants (Note 12) | |
$ | 122,730 | | |
$ | — | | |
$ | — | | |
$ | 122,730 | |
Derivative
liability on Senior Convertible Note (Note 12) | |
$ | 9,399,620 | | |
$ | — | | |
$ | — | | |
$ | 9,399,620 | |
| |
June
30, 2021 | |
| |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Liability
for the Series A and Series B Warrants (Note 12) | |
$ | 23,500,000 | | |
$ | — | | |
$ | — | | |
$ | 23,500,000 | |
A
summary of the changes in Level 3 financial instruments for the years ended June 30, 2022 and 2021 is as follows:
| |
Warrant Liability | | |
Contingent
Consideration | | |
Derivative
liability on Senior Convertible Note | |
Balance
at June 30, 2020 | |
$ | — | | |
$ | — | | |
$ | — | |
Fair
value of warrants issued for Argyll acquisition (“Argyll Warrant Liability”) (Note 3) | |
| 2,750,076 | | |
| — | | |
| — | |
Revaluation
of Argyll warrant liability for warrants issued in Argyll Acquisition (Note 16) | |
| 4,729,924 | | |
| — | | |
| — | |
Settlement
of Argyll warrant liability (Note 16) | |
| (7,480,000 | ) | |
| — | | |
| — | |
Issuance
of Series A and Series B warrants with Senior Convertible Note (Note 12) | |
| 26,680,000 | | |
| — | | |
| — | |
Revaluation
of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | |
| (3,180,000 | ) | |
| — | | |
| — | |
Balance
at June 30, 2021 | |
| 23,500,000 | | |
| | | |
| — | |
Change
in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | |
| (23,377,270 | ) | |
| — | | |
| — | |
Fair
value of contingent consideration for Bethard at acquisition (Note 3) | |
| — | | |
| 6,700,000 | | |
| — | |
Payments
of Bethard contingent consideration | |
| — | | |
| (1,016,331 | ) | |
| — | |
Change
in fair value of Bethard contingent consideration liability (Note 3) | |
| — | | |
| (2,355,308 | ) | |
| — | |
Fair
value of derivative liability on Senior Convertible Note (Note 12) | |
| — | | |
| — | | |
| 20,281,861 | |
Change
in the fair value of the derivative liability on Senior Convertible Note (Note 12) | |
| — | | |
| — | | |
| (10,882,241 | ) |
Balance
at June 30, 2022 | |
$ | 122,730 | | |
$ | 3,328,361 | | |
$ | 9,399,620 | |
The
Series A and Series B Warrants outstanding at June 30, 2022 were valued using a Monte Carlo valuation model with the following assumptions:
| |
June
30, 2022 | |
|
June
30, 2021 | |
Contractual
term, in years | |
| 2.00
– 4.00 | |
|
| 2.00
– 4.00 | |
Expected
volatility | |
| 125%
– 133 | % |
|
| 120%
– 140 | % |
Risk-free
interest rate | |
| 2.75%
– 2.98 | % |
|
| 0.24%
– 0.65 | % |
Dividend
yield | |
| — | |
|
| — | |
Conversion
/ exercise price | |
$ | 1,750.00 | |
|
$ | 1,750.00 | |
The
value of the March 2022 Warrants issuance at March 2, 2022 were valued using a Monte Carlo valuation model with the following assumptions:
| |
March
2, 2022 | |
Contractual
term, in years | |
| 5.00 | |
Expected
volatility | |
| 139 | % |
Risk-free
interest rate | |
| 1.74 | % |
Dividend
yield | |
| — | |
Conversion
/ exercise price | |
$ | 100.00 | |
On
issuance, the March 2022 Warrants were classified as a Level 3 instrument and were subsequently transferred out of Level 3 and classified
as a Level 1, as subsequent valuations were based upon the market price of the warrants. On issuance, the April 2022 Overallotment Warrants
were classified as Level 1 using the market price. At June 30, 2022 the March 2022 Warrants and the April 2022 Overallotment Warrants
were valued using the market price.
The
value of the derivative liability on the Senior Convertible Note at June 30, 2022 was valued using a nonperformance risk adjusted Monte
Carlo valuation model with the following assumptions:
| |
June
30, 2022 | |
Contractual
term, in years | |
| 0.92 | |
Expected
volatility | |
| 137.11 | % |
De-leveraged
volatility | |
| 62.88 | % |
Risk-free
interest rate | |
| 2.72 | % |
Dividend
yield | |
| — | |
Conversion
/ exercise price | |
$ | 218.32 | |
The
fair value of a derivative instrument in a liability position includes measures of the Company’s nonperformance risk. Significant
changes in nonperformance risk used in the fair value measurement of the derivative liability may result in significant changes to the
fair value measurement. The cash liability calculated under the terms of the New Note of approximately $180,000,000 is materially higher
than the fair value of the derivative liability of $9,399,620 calculated at June 30, 2022. The calculated make-whole cash liability may
differ materially from the amount the Company may be required to pay under the New Note. The Company has held non-binding discussions
with the Holder to restructure its obligation under the New Note. However, there can be no guarantee that the Company will be able to
reach an agreement to restructure the New Note.
The
following is information relative to the Company’s derivative instruments in the consolidated balance sheets as of June 30, 2022
and 2021:
Derivatives
Not Designated
as Hedging Instruments | |
Balance
Sheet Location | |
June
30, 2022 | | |
June
30, 2021 | |
Derivative
liability on Senior Convertible Note (Note 12) | |
Derivative
liability | |
$ | 9,399,620 | | |
$ | - | |
The
effect of the derivative instruments on the consolidated statements of operations is as follows:
| |
Location
of Gain or (Loss) | |
Amount
of Gain (Loss) Recognized in Income on Derivatives | |
Derivatives
Not Designated | |
Recognized
in Income on | |
Year
ended June 30, | |
as
Hedging Instruments | |
Derivatives | |
2022 | | |
2021 | |
Derivative
liability on Senior Convertible Note (Note 12) | |
Change
in fair value of derivative liability on Senior Convertible Note | |
$ | (10,882,241 | ) | |
$ | - | |
Argyll
Warrant Valuation
During
the year ended June 30, 2021, the Company issued 10,000 warrants in connection with its acquisition of Argyll. Each warrant entitled
the holder to purchase one share of Common Stock at exercise price of $800.00 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 of 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 $800.00, (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 $800.00, (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
10,000 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.
Assets
Measured on a Nonrecurring Basis
Assets
that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. This includes the evaluation
of long-lived assets, goodwill and other intangible assets for impairment. The Company’s estimates of fair value required it to
use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to
future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain.
The carrying value of the assets after any impairment approximates fair value.
The
Company assesses the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the fair value of goodwill using the income approach. Inputs
used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that
approximates the cost of capital of a market participant.
The
Company uses undiscounted future cash flows of the asset or asset group for equipment and intangible assets. During the year ended June
30, 2022, the Company wrote down certain long-lived assets other than goodwill related to the same reporting unit to fair value. The
Company estimated the fair value when conducting the long-lived asset impairment tests primarily using an income approach and used a
variety of unobservable inputs and underlying assumptions consistent with those discussed above for purposes of the Company’s goodwill
impairment test.
During
the year ended June 30, 2022, the Company recognized asset impairment charges to the goodwill and long-lived assets of the iGaming Argyll
(UK) reporting unit in the EEG iGaming segment, and EGL, GGC and Helix reporting units in the EEG Games segment (See Notes 6, 7 and 11).
Note
19 – Income Taxes
The
income (loss) before income taxes follows:
| |
Fiscal
2022 | | |
Fiscal
2021 | |
United
States | |
$ | (87,679,037 | ) | |
$ | (19,987,348 | ) |
International | |
| (20,227,495 | ) | |
| (10,196,922 | ) |
Total
loss before income taxes | |
$ | (107,906,532 | ) | |
$ | (30,184,270 | ) |
The
provision (benefit) from income taxes follows:
| |
Fiscal
2022 | | |
Fiscal
2021 | |
Current: | |
| | | |
| | |
Federal | |
$ | — | | |
$ | 300,000 | |
State | |
| — | | |
| — | |
Foreign | |
| (2,581 | ) | |
| 24,722 | |
Total
current | |
| (2,581 | ) | |
| 324,722 | |
Deferred: | |
| | | |
| | |
Federal | |
| (5,671,861 | ) | |
| (4,136,258 | ) |
State | |
| — | | |
| — | |
Foreign | |
| — | | |
| — | |
Total
deferred | |
| (5,671,861 | ) | |
| (4,136,258 | ) |
Income
tax provision (benefit) | |
$ | (5,674,442 | ) | |
$ | (3,811,536 | ) |
During
the year ended June 30, 2022, the Company recorded a deferred tax liability in connection with its acquisition of Bethard. This acquisition
impacted the Company’s estimate of realizability of its deferred tax assets and resulted in a reduction of the Company’s
valuation allowance of $5,671,861 during the year ended June 30, 2022. During the year ended June 30, 2021, the Company recorded a deferred
tax liability in connection with its acquisitions of Argyll, EGL, Helix and ggCircuit. These acquisitions impacted the Company’s
estimate of realizability of its deferred tax assets and resulted in a reduction to the valuation allowance of $4,136,258 during the
year ended June 30, 2021.
The
reconciliation of the expected tax expense (benefit) based on U.S. federal statutory rate of 21% with the actual expense follows:
| |
Fiscal
2022 | | |
Fiscal
2021 | |
U.S.
federal statutory rate | |
$ | (22,660,372 | ) | |
$ | (6,338,697 | ) |
Change
in valuation allowance | |
| 17,373,839 | | |
| 1,133,233 | |
Foreign
tax rate and other foreign tax | |
| (1,171,464 | ) | |
| (150,274 | ) |
Extinguishment
of senior convertible note | |
| 5,544,743 | | |
| - | |
Non-deductible
warrant revaluations | |
| (6,608,337 | ) | |
| 325,484 | |
Non-deductible
revaluation of contingent consideration | |
| 1,790,656 | | |
| 367,207 | |
Acquisition
costs | |
| 56,493 | | |
| 521,235 | |
Other | |
| — | | |
| 330,276 | |
Income
tax provision (benefit) | |
$ | (5,674,442 | ) | |
$ | (3,811,536 | ) |
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.
The CARES Act, among other things, permits Net Operating Liabilities (“NOLs”) carryovers and carrybacks to offset 100% of
taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be
carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently
evaluating the impact of the CARES Act, but due to sustained losses, the NOL carryback provision of the CARES Act is not expected to
yield a benefit to us.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities
consist of the following:
| |
Fiscal
2022 | | |
Fiscal
2021 | |
Assets: | |
| | | |
| | |
Net
operating losses | |
$ | 29,509,842 | | |
$ | 9,728,136 | |
Nonqualified
stock options | |
| 1,307,113 | | |
| 382,974 | |
Depreciation
and amortization | |
| 473,380 | | |
| 452,388 | |
Other | |
| 26,265 | | |
| 26,264 | |
Gross
deferred tax assets | |
| 31,316,600 | | |
| 10,589,762 | |
Deferred
tax liabilities | |
| | | |
| | |
Acquired
intangible assets | |
| (3,269,763 | ) | |
| (5,593,787 | ) |
Net
deferred tax assets | |
| 28,046,837 | | |
| 4,995,975 | |
Valuation
allowance | |
| (28,046,837 | ) | |
| (6,866,836 | ) |
Deferred
tax liabilities, net | |
$ | — | | |
$ | (1,870,861 | ) |
The
Company had net deferred tax assets of $28,046,837 at June 30, 2022 for which there is a full valuation allowance. The Company determined
that it would not be able to realize the remaining deferred tax assets in the future. The need to maintain a valuation allowance against
the Company’s deferred tax assets may cause greater volatility to the Company’s effective tax rate.
At
June 30, 2022, the Company had estimated federal net operating loss carry forwards of $95,096,045, which may be offset against future
taxable income subject to limitation under IRC Section 382. At June 30, 2022, the Company had net operating loss carryforwards related
to its foreign operations in Malta of $13,233,576 and the UK of $1,314,884 that do not expire, as well as net operating loss carryforwards
related to its foreign operations in Switzerland of $24,985,656 that can be carried forward for 7 years. On March 27, 2020, the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things,
permits net operating loss carryovers and carrybacks to offset taxable income for taxable years beginning before 2021. In addition, the
CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund
of previously paid income taxes. Due to historical losses, the net operating loss carryback provision of the CARES Act is would not yield
a material benefit to the Company. The Company determined that a full valuation allowance will be recorded against the net operating
loss deferred tax assets.
The
Company applied the “more-likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a
tax return, which resulted in no unrecognized tax benefits as of June 30, 2022 or June 30, 2021, respectively.
During
the years ended June 30, 2022 and 2021, the Company recorded income tax benefits of $5,674,442 and $3,811,536, respectively, which is
attributable primarily to non-recurring partial releases of the Company’s U.S. valuation allowance as a result of purchase price
accounting. The Company regularly evaluates the realizability of its deferred tax assets and establishes a valuation allowance if it
is more likely than not that some or all of the deferred tax assets will not be realized.
Note
20—Segment Information
During
the fourth quarter of fiscal 2022, the Company evaluated its reportable segments and changed them to: EEG iGaming and EEG Games. This
change reflects management’s organizational structure and financial information available to and evaluated regularly by the chief
operating decision maker (“CODM”), who is the Company’s Chief Executive Officer.
As
a result of the change in reportable segments described above, the Company has recast previously reported information to conform to the
current management view for all prior periods presented. The changes to reportable segments had no impact to the Company’s consolidated
financial statements.
The
Company utilizes Adjusted EBITDA (as defined below) as its measure of segment profit or loss. The following table highlights the Company’s
revenues and Adjusted EBITDA for each reportable segment and reconciles Adjusted EBITDA on a consolidated basis to net loss. Total capital
expenditures for the Company were not material to the consolidated financial statements.
A
measure of segment assets and liabilities has not been currently provided to the Company’s CODM and therefore is not shown below.
The following tables present the Company’s segment information:
| |
For
the year ended June 30, | |
| |
2022 | | |
2021 | |
Revenues: | |
| | | |
| | |
EEG
iGaming segment | |
| 53,104,795 | | |
| 16,231,028 | |
EEG
Games segment | |
| 5,246,855 | | |
| 552,886 | |
| |
| | | |
| | |
Total | |
| 58,351,650 | | |
| 16,783,914 | |
| |
| | | |
| | |
Adjusted
EBITDA | |
| | | |
| | |
EEG
iGaming segment | |
| (7,526,205 | ) | |
| (6,740,890 | ) |
EEG
Games segment | |
| (4,915,549 | ) | |
| (454,467 | ) |
Other(1) | |
| (12,960,209 | ) | |
| (7,475,738 | ) |
Total
Adjusted EBITDA | |
| (25,401,963 | ) | |
| (14,671,095 | ) |
| |
| | | |
| | |
Adjusted
for: | |
| | | |
| | |
Interest
expense | |
| (6,423,039 | ) | |
| (698,973 | ) |
Loss
on conversion of senior convertible note | |
| (5,999,662 | ) | |
| - | |
Loss
on extinguishment of senior convertible note | |
| (28,478,804 | ) | |
| - | |
Change
in fair value of derivative liability | |
| (10,882,241 | ) | |
| - | |
Change
in fair value of warrant liability | |
| 31,468,270 | | |
| (1,549,924 | ) |
Change
in fair value of contingent consideration | |
| 2,355,308 | | |
| (1,748,607 | ) |
Other
non-operating income (loss), net | |
| (584,466 | ) | |
| (460,328 | ) |
Income
tax benefit (expense) | |
| 5,674,442 | | |
| 3,811,536 | |
Depreciation
and amortization | |
| (12,026,581 | ) | |
| (3,416,252 | ) |
Asset
impairment charges | |
| (46,498,689 | ) | |
| - | |
Stock-based
Compensation | |
| (5,165,653 | ) | |
| (4,129,726 | ) |
Cost
of acquisition | |
| (269,012 | ) | |
| (3,509,365 | ) |
Net
loss | |
| (102,232,090 | ) | |
| (26,372,734 | ) |
(1)
Other comprises of corporate and overhead costs.
(2)
The Company has no intersegment revenues or costs and thus no eliminations required.
(3)
The Company defines Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense, net; income
taxes; depreciation and amortization; stock-based compensation; cost of acquisition; asset impairment charges; loss on extinguishment
of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair
value of warrant liability; change in fair value of contingent consideration; and other income (loss), and certain other non-recurring,
non-cash or non-core items (included in table above).
Note
21 – Subsequent Events
September
2022 Financing
On
September 15, 2022, the Company entered into a underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC
and Joseph Gunnar & Co., LLC, as representative of the several underwriters identified therein (collectively, the “Underwriters”),
relating to a firm commitment public offering of (a) 300,000 shares of the Company’s Common Stock and (b) Warrants (“September
2022 Warrants”) to purchase up to 300,000 shares of Common Stock, at an exercise price of $25.00 per share, at an aggregate price
of $25.00 per share and accompanying Warrant (the “September 2022 Offering”). Under the terms of the Underwriting Agreement,
the Company granted the Underwriters a 45-day option an option to purchase up to an additional 45,000 of Common Stock (the “September
2022 Overallotment Common Stock”) and/or Warrants (the “September 2022 Overallotment Warrants”) (collectively, the
“September 2022 Overallotment”). The closing of the offering took place on September 19, 2022.
The
gross proceeds received from the sale of the shares of the Common Stock and September 2022 Warrants in the September 2022 Offering, before
deducting underwriting discounts and commissions and estimated offering expenses payable by the Company and before any overallotment,
was $7,500,000.
The
underwriters exercised their option for 36,000 September Overallotment Warrants, at a purchase price of $1.00 per warrant, with an exercise
price of $25.00 per warrant. Total proceeds from the September 2022 Overallotment Warrants was $36,000.
The
Company remitted to the Holder of the Senior Convertible Note an amount of $2,265,928 equal to fifty percent (50%) of all net proceeds
above $2,000,000 following the payment of 7% in offering fees including Underwriting discounts and commissions. In addition, as part
of the September 2022 Offering, the Holder purchased $512,500 of securities (20,500 shares of Common Stock and 20,500 Warrants) and the
Company paid the Holder an additional $512,500. The proceeds remitted to the Holder reduced the principal balance of the Senior Convertible
Note on a dollar-for-dollar basis.
The
net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company
and amounts remitted to the Holder was $4,080,990.
The
shares of Common Stock and the September 2022 Warrants, including the 2022 Overallotment Warrants, sold by the Company have been registered
pursuant to a registration statement on Form S-3 (File No. 333-252370), which the SEC declared effective on February 5, 2021. A final
prospectus supplement and accompanying base prospectus relating to the offering were filed with the SEC on September 19, 2022.
The
Company does not intend to list the September 2022 Warrants, including the 2022 Overallotment Warrants, sold in the offering on any securities
exchange or other trading market.
On
September 19, 2022, prior to the closing of the offering, the Company entered into a warrant agency agreement (the “Warrant Agency
Agreement”) with VStock Transfer, LLC (“VStock”), to serve as the Company’s warrant agent for the September 2022
Warrants, including September 2022 Overallotment Warrants. Upon the closing of the offering. The September 2022 Warrants, including September
2022 Overallotment Warrants are exercisable upon issuance and expire five years from the date they first became exercisable.
Asset
Impairment Charges
During
the three months ended December 31, 2022, the Company’s initiated a process to evaluate the strategic options for the EEG iGaming
business, including exploring a sale of EEG iGaming assets due to increasing regulatory burdens and competition. In December 2022, the
Company closed down its licensed remote gambling operation in the UK market and on December 9, 2022 surrendered its UK license, as part
of the winding down of the Argyll UK iGaming operations. Subsequent to the period end, the Company appointed a new CEO and a new interim
CFO and on January 18, 2023 sold its EEG iGaming Spanish license. As part of these changes the Company has been focused on reducing costs
in its businesses as it has seen the EEG iGaming revenues decline significantly from levels seen in the previous year and previous quarters.
This and uncertainties caused by inflation and world stability were determined to be a triggering event and the long-lived assets of
the Company were quantitatively tested for impairment. For the three and six months ended December 31, 2022, the Company recognized total
goodwill asset impairment charges of $16,135,000 (unaudited), with asset impairment charges to the goodwill to the iGaming reporting
unit of $14,500,000 (unaudited), which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1,635,000
(unaudited), which is part of the EEG Games segment. Further downturns in economic, regulatory and operating conditions could result
in additional goodwill impairment in future periods.
Reverse
Stock Split
On
January 26, 2023, the Company’s shareholders approved the Reverse Stock Split and granted the Company’s board of directors
discretionary authority to select the ratio for the Reverse Stock Split ranging from one-for-twenty (1-for-20) to one-for-one-hundred
(1-for-100). Prior to effecting the Reverse Stock Split, the Company’s Board of directors selected the Reverse Stock Split ratio
of one-for-one-hundred (1-for-100). On February 22, 2023, the Company completed the Reverse Stock Split (all references to shares of
the Company’s common stock in the consolidated financial statements and related notes refer to the number of shares of common stock
after giving effect to the Reverse Stock Split and are presented as if the Reverse Stock Split had occurred at the beginning of the earliest
period presented). The Company’s board of directors approved the Reverse Stock Split with the objective of regaining compliance
with the Nasdaq Stock Exchange’s $1.00 minimum bid price requirement. As a result of the Reverse Stock Split, every 100 shares
of common stock issued and outstanding as of the effective date were automatically combined into one share of common stock. The Reverse
Stock Split did not change the terms of the common stock. Outstanding warrants, equity-based awards and other outstanding equity rights
were proportionately adjusted by dividing the shares of common stock underlying the securities by 100 and multiplying the exercise/conversion
price, as the case may be, by 100. The Reverse Stock Split also applied to common stock issuable upon the conversion of the Company’s
Senior Convertible Note dated February 22, 2022 (the “Senior Convertible Note”), with the Conversion Price, as defined in
the Senior Convertible Note, being subject to adjustment under the terms of the Senior Convertible Note and the Amendment (as defined
below). The Company’s 10% outstanding Series A Cumulative Redeemable Convertible Preferred Stock was not affected by the Reverse
Stock Split.
On
March 9, 2023, the Company received a letter from the Panel indicating that the Company has regained compliance with Nasdaq’s $1.00
minimum bid price.
Sale
of Bethard Business and Amendment and Waiver to Senior Convertible Note
On
February 24, 2023, (the “Closing Date”), the Company, pursuant to a stock purchase agreement (the “Purchase Agreement”)
dated February 14, 2023 with Gameday Group PLC, a Malta company (“Purchaser”), completed the divestiture of Prozone Limited,
a Malta company containing the online casino and sportsbook business, including the Bethard brand (the “Bethard Business”),
that is licensed in Malta and Sweden (together, the sale of Prozone Limited with the Bethard Business herein referred to as the “Sale
of the Bethard Business”). The purchase consideration was determined by the Company to be $8,090,965 comprised of cash received
on the Closing date of €1,650,000 ($1,739,882 using exchange rates in effect on the Closing Date), holdback consideration, of €150,000
($158,171 using exchange rates in effect on the Closing Date) and the Company’s settlement of its contingent consideration liability
of €5,872,989 ($6,192,912 using exchange rates in effect on the Closing Date) that had originated from its acquisition of the Bethard
Business on July 13, 2021. The Purchaser further assumed net working capital of the Bethard Business consisting primarily of accounts
payable and accrued liabilities estimated to be €1,238,552 ($1,306,021 using exchange rates at the Closing Date).
On
February 16, 2023, the Company entered into the Amendment with the Holder of the Senior Convertible Note as a condition to the closing
of the sale of the Bethard Business. The Amendment required the Company to deposit 50% of the proceeds from the sale of the Bethard Business
in a bank account in favor of the Holder. The Amendment also requires the Company to deposit 50% of the proceeds of any permitted future
sale of assets or any subsequent debt or equity offer or sale (a “Securities Transaction”) and 100% of the proceeds of any
additional indebtedness incurred in the future, into such bank account in favor of the Holder, or, at the option of the Holder, redeem
amounts under the Senior Convertible Note using such proceeds.
The
Amendment also modified the Senior Convertible Note to increase the principal balance by $2.95 million for additional interest and other
amounts previously recorded by the Company as liabilities to the Holder, as well as for fees for the Amendment. The Amendment further
provides for a voluntary reduction in the Conversion Price (as defined in the Senior Convertible Note) when, among other things, the
Company issues or is deemed to issue common stock in a future registered offering at a price below the Conversion Price then in effect,
to the lower issuance price in such offering, subject to certain exceptions. The Amendment also provides rights to the Holder to participate
in future Securities Transactions for a period of two years from the later of the date of the Amendment and the date that no payment
amounts due to the Holder remain outstanding.
Senior
Convertible Note and Debt for Equity Conversions
As
discussed in Note 12, on February 22, 2022, the Company exchanged the existing senior convertible note (the “Old Senior Convertible
Note”) with a remaining principal of $29,150,001, with the Senior Convertible Note in the aggregate principal of $35,000,000. Subsequently,
on September 19, 2022 as part of the Company’s September 2022 Offering of shares of common stock and warrants to purchase common
stock, the Company remitted to the Holder an amount of $2,778,427 from the proceeds therefrom, reducing the Senior Convertible Note principal
balance to $32,221,573. As part of the registered direct offering of 70,650 shares of common stock and pre-funded warrants to purchase
178,500 shares of common stock that we completed with the Holder on December 22, 2022 (the “December 2022 Registered Direct Offering”),
the Company paid the Holder an amount equal to $1,073,343 for interest due and interest prepaid through February 28, 2023.
The
Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible
Note.
On
January 27, 2023, the Company received the written consent of the Holder to lower the conversion price of the Senior Convertible Note
to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of the Common Stock for a trading day during the five (5) consecutive
trading day period ending, and including, the applicable date that the conversion price is lowered for purposes of a conversion (as adjusted
for stock splits, stock dividends, stock combinations, recapitalizations and similar events during such measuring period) until further
written notice to the holder from the Company.
From
January 27, 2023 through April 20, 2023, one day preceding this filing, we and the Holder of our Senior Convertible Note effected debt
for equity exchanges under the Senior Convertible Note. Pursuant to the debt for equity exchanges, and after increasing the Senior Convertible
Note by $2,950,010, for fees of $450,010 and converted accrued liabilities of $2,500,000 pursuant to the Amendment, the Holder exchanged
$19,261,583 in aggregate principal amount of the Senior Convertible Note for an aggregate of 2,242,143 shares of our common stock, at
conversion prices equal to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of our common stock for a trading day during
the five (5) consecutive trading day period ending, and including, the applicable date that the conversion price was lowered for purposes
of a conversion, in accordance with Section 7(g) of the Senior Convertible Note (the “Exchanges”).
Following
the Exchanges and the impact of the Amendment, our indebtedness pursuant to the Senior Convertible Note was reduced by $16,311,573, and
$15,910,000 in aggregate principal amount of the Senior Convertible Note remained outstanding prior to the redemption of an additional
$679,976 discussed below.
On
April 19, 2023, the Company entered into an agreement with the Holder to convert the $15,230,024 into the Series C Convertible Preferred
Stock. The material terms and provisions of the Series C Convertible Preferred Stock are described below.
The
expected conversion of the Senior Convertible Note to the Series C Convertible Preferred Stock, that will occur concurrently with the
closing of the potential offering that is part of the Company’s approved plan of compliance with the Nasdaq Listing Rules, will
extinguish the Senior Convertible Note and the remaining related debt outstanding of $15,230,024 and will further eliminate the related
derivative liability that had a fair value of $9,399,620 as of June 30, 2022 ($180,000,000 approximate cash liability, as of June 30,
2022, calculated under the terms of the Senior Convertible Note).
Series
C Convertible Preferred Stock
On
April 19, 2023, the Company entered into an agreement with the Holder (the “Note to Preferred Stock Exchange Agreement”)
to convert the $15,230,024 in aggregate principal amount of the Senior Convertible Note outstanding into the new Series C Convertible
Preferred Stock immediately after the closing of the Company’s next capital raise, as part of the Company’s approved plan
of compliance with the Nasdaq Listing Rules.
Prior
to the conversion into the new Series C Convertible Preferred Stock, the Company redeemed $679,976 of the $15,910,000 previously outstanding
on the Senior Convertible Note following the Exchanges and the impact of the Amendment and conversions, using funds from the Sale of
the Bethard Business deposited in a bank account in favor of the Holder. On April 19, 2023, using these funds, the Company paid $750,000
to the Holder to redeem the $679,976 and settle the related redemption premium of $51,450 and accrued interest of $168,574, with the
additional $150,000 due immediately after the closing of this public offering. Any remaining funds from the Sale of the Bethard Business
that were on deposit have been released to the Company.
The
terms and provisions of the Series C Convertible Preferred Stock will be set forth in a Series C Convertible Preferred Stock Certificate
of Designation (the “Series C Certificate of Designation”), to be filed and effective with the Secretary of State of the
State of Nevada in connection with the closing of the Company’s next capital raise. The transactions contemplated by the Note to
Preferred Stock Exchange Agreement and the Series C Certificate of Designation have been approved by our Board of Directors.
The
exchange of the Senior Convertible Note into the Series C Convertible Preferred Stock, that is anticipated to occur immediately after
the closing of the Company’s next capital raise, will extinguish the Senior Convertible Note and the related debt liability outstanding
of $15,230,024 and will further eliminate the related derivative liability that had a fair value of $799,954 ($933,000,000 approximate
cash liability, as of December 31, 2022, calculated under the terms of the Senior Convertible Note), as of December 31, 2022.
The
Series C Certificate of Designations contemplates that the Series C Convertible Preferred Stock will be convertible into common stock
(the “Conversion Shares”) at the option of the holder of Series C Convertible Preferred Stock at any time from time to time
after the date of issuance thereof. The number of Conversion Shares issuable upon conversion of any share of Series C Convertible Preferred
Stock shall be determined by dividing (x) the Conversion Amount (as defined below) of a share of Series C Convertible Preferred Stock
by (y) the lower of (i) the Conversion Price (as defined below); and (ii) the Alternate Conversion Price (as defined below), subject
to the Floor Price (as defined below). “Conversion Amount” shall mean, with respect to each share of Series C Convertible
Preferred Stock, the sum of (A) $1,000 (such amount, subject to adjustment, the “Stated Value”) and (B) all declared and
unpaid dividends with respect to such Stated Value and any other amounts owed under the Series C Certificate of Designations. “Conversion
Price” shall mean 105% of the share price at which the common stock is offered in the Company’s next capital raise. “Alternate
Conversion Price” shall mean with respect to any Alternate Conversion that price which shall be the lowest of (i) the applicable
Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) the greater of (x) the
Floor Price and (y) 90% of the lowest VWAP of the Common Stock during the ten (10) consecutive Trading Day period ending and including
the Trading Day of the applicable Conversion Notice (such period, the “Alternate Conversion Measuring Period”). All such
determinations to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction
that proportionately decreases or increases the Common Stock during such Alternate Conversion Measuring Period. “Floor Price”
shall mean $0.44.
The
Company shall not be allowed to effect the conversion of any of the Series C Convertible Preferred Stock held by the holder of Series
C Convertible Preferred Stock, and such holder of Series C Convertible Preferred Stock shall not have the right to convert any of the
Series C Convertible Preferred Stock held by such holder of Series C Convertible Preferred Stock pursuant to the terms and conditions
of the Series C Certificate of Designations to the extent that after giving effect to such conversion, such holder of Series C Convertible
Preferred Stock together with its affiliates and certain related parties collectively would beneficially own in excess of 9.99% of the
shares of common stock outstanding immediately after giving effect to such conversion.
Dividends
on the Series C Convertible Preferred Stock will accrue daily at a rate equal to 8.0% per annum, increasing 0.50% each 135 day anniversary
from the date of issuance and be payable by way of inclusion of the Dividends in the Conversion Amount on each Conversion Date in accordance
with an optional conversion or upon any redemption hereunder (including, without limitation, upon any required payment upon any Bankruptcy
Triggering Event).
The
closing of the transactions contemplated by the Note to Preferred Stock Exchange Agreement is subject to the Company’s closing
of the Company’s next capital raise, which is anticipated to allow it to demonstrate compliance with the minimum of $2,500,000
stockholders’ equity requirement outlined in the Nasdaq Listing Rules.
Other
Sales and Restructurings in the iGaming business
Sale
of Spanish iGaming Operations
On
January 18, 2023, the Company closed the transaction and sold its Spanish iGaming operations, including its Spanish iGaming license.
The Company received approximately $1,200,000 in proceeds and $1,000,000 in cash from the return of a deposit held with the Spanish regulator.
Sixty-five percent (65%) of the proceeds and cash received were remitted to the Holder as required.
Closure
of Argyll and vie.gg
On
November 10, 2022, the Company determined that it would close down its licensed remote gambling operation in the UK market. On November
15, 2022, as part of the winding down of the Argyll UK iGaming operations, players were informed that they would no longer be able to
place bets from November 30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8, 2022 Argyll UK
surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022 and December 14,
2022 Argyll UK attempted to refund customer accounts that still had remaining balances. On March 3, 2023, the Company’s Board determined
that the Company’s wholly-owned subsidiary Argyll Entertainment, the Company’s Swiss entity that is part of Argyll UK, would
be liquidated. The Swiss courts declared Argyll Entertainment bankrupt on March 27, 2023, at which point the Company lost control of
Argyll Entertainment and, as a result, deconsolidated the entity. Argyll Entertainment had net liabilities of approximately $1,640,000
as of December 31, 2022. The Company fully impaired the goodwill, intangible assets and other long-lived assets of Argyll UK during year
ended June 30, 2022.
On
October 28, 2022, the Company determined that it would close down its vie.gg New Jersey operations and exit its transactional waiver
from the New Jersey Division of Gaming Enforcement. The closure of our New Jersey operations is not expected to have a material adverse
effect on the Company’s results of operations.
Leadership
changes
Appointment
of Alex Igelman as Chief Executive Officer
On
December 22, 2022, the Board of the Company appointed Alex Igelman as CEO, effective January 3, 2023.
Appointment
of Michael Villani as Interim Chief Financial Officer
Effective
January 6, 2023, the Company announced the appointment of Michael Villani as the Interim Chief Financial Officer, in addition to his
current role as the Financial Controller. Mr. Villani serves as the Company’s Principal Financial Officer.
Departure
of John Brackens as Chief Technology Officer/Chief Information Officer
John
Brackens, the Chief Technology Officer/Chief Information Officer, will be departing from the Company on May 14, 2023.
Termination
of Grant Johnson as Chairman and Chief Executive Officer
On
December 23, 2022, Grant Johnson resigned from the Board. Mr. Johnson resigned following his termination for cause, by the Board, from
his position as Chairman and CEO of the Company, effective December 3, 2022. As a result, Mr. Johnson is no longer an officer or director
of the Company.
On
January 6, 2023, Mr. Johnson, filed a lawsuit in the United States District Court for the Southern District of New York against the Company.
The claim alleges breach by the Company of Mr. Johnson’s employment agreement when it terminated him for “Cause” as
defined in the agreement on December 3, 2022. Mr. Johnson seeks in excess of $1.0 million as well as 2,000 shares of our common stock,
plus attorney’s fees.
On
February 28, 2023, Mr. Johnson filed an amended complaint to amend his original claim and to add an alleged defamation claim. On March
14, 2023, the Company filed its Pre-Motion Letter requesting that the claim be dismissed and on March 15, 2023 Mr. Johnson filed a letter
to the Court requesting that the claim not be dismissed.
The
Company believes the claims are without merit and intends to defend against the claims vigorously. The case is captioned Grant Johnson
v. Esports Entertainment Group, Inc. 1:22-cv-10861 (SDNY).
Exhibit
99.2
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition,
results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read
in conjunction with the consolidated financial statements for the years ended June 30, 2022 and 2021, and related notes included in
Exhibit 99.1 and the unaudited condensed consolidated financial statements for the nine months Ended March 31, 2023 and
2022, and related notes included Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 22, 2023.
Cautionary
Statement Regarding Forward-Looking Statements
Our
MD&A contains forward-looking statements that discuss, among other things, future expectations and projections regarding future
developments, operations and financial condition. All forward-looking statements are based on management’s existing beliefs
about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any
underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or
intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes
in expectations or events or circumstances after August 1, 2023, the date the Registration Statement on Amendment No. 3 to
Form S-1/A was filed with the Securities and Exchange Commission.
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. 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 a skill-based, competitive, and organized form of video gaming by professional players, playing individually or as teams. 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. 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. The Company is developing a wagering platform where players
and fans alike may engage in peer-to-peer skill-based betting, gamers can bet on their ability to beat other gamers in a betting exchange
environment and fans and spectators have the ability to bet on their favorite gamers to win real cash and prizes.
Esports
Entertainment Group, Inc. (the “Company” or “EEG”) is an esports-focused iGaming and entertainment company with
a global footprint. EEG’s strategy is to build and acquire betting and related platforms, and lever them into the rapidly growing
esports vertical. We operate the business in two verticals, EEG iGaming and EEG Games.
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.
Basis
of Presentation
We
operate two complementary business segments: Our EEG iGaming business and our EEG Games business.
EEG
iGaming
EEG
iGaming includes the esports betting platform with full casino and other functionality and services for iGaming customers. iDefix, proprietary
technology acquired in connection with the acquisition of Lucky Dino, is an MGA licensed iGaming platform with payments, payment automation
manager, bonusing, loyalty, compliance and casino integrations that services all Lucky Dino.
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
approved esports events in a licensed and secure environment. From February 2021, under the terms of our MGA license, we are now able
to accept wagers from residents of over 180 jurisdictions including countries within the EU, Canada, New Zealand and South Africa, on
our platform.
Alongside
the esports focused platform, EEG owns and operates five online casino brands of Lucky Dino Gaming Limited and Hiidenkivi Estonia OU,
its wholly-owned subsidiary (collectively referred to as “Lucky Dino”), licensed by the MGA on its in-house built iDefix
casino-platform. We currently hold one Tier-1 gambling licenses in Malta. Our Lucky Dino business provides 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) our proprietary infrastructure
software, GGC, which underpins our focus on esports and is a leading provider of LAN center management software and services, enabling
us to seamlessly manage mission critical functions such as game licensing and payments, (2) online tournaments (through our Esports Gaming
League tournament platform), and (3) the creation of esports content for distribution to the betting industry. Currently, we operate
our esports EEG Games business in the United States and Europe.
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.
Key
Performance Indicators
In
the esports and gaming industry, revenue is driven by discretionary consumer spending. We have no way of determining why customers spend
more or less money; therefore, we are unable to quantify a dollar amount for each factor that impacts our customers’ spending behaviors.
However, some insight into the factors that we believe are likely to account for such changes and which factors may have a greater impact
than others, include decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions,
such as lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness
in the housing market and high fuel or other transportation costs. Such insights are based solely on our judgment and professional experience,
and no assurance can be given as to the accuracy of our judgments. The vast majority of our revenues is EEG iGaming revenue, which is
highly dependent upon the number and volume and spending levels of customers.
Reportable
Segments
At
March 31, 2023, the Company has two reportable segments: EEG iGaming and EEG Games, consistent with June 30, 2022. Prior periods presented
have been recast to reflect any change in reportable segments from the corresponding period.
Financial
Highlights
The
following tables set forth a summary of our financial results for the periods indicated and are derived from our unaudited condensed
consolidated financial statements for the nine months ended March 31, 2023 and 2022, and years ended June 30, 2022 and 2021, respectively:
| |
Nine Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Net revenue | |
$ | 20,190,663 | | |
$ | 46,638,925 | |
Total operating costs and expenses (excluding Loss on disposal of businesses, net and Asset impairment charges) | |
$ | 37,032,286 | | |
$ | 79,267,237 | |
Loss on disposal of businesses, net | |
$ | 4,198,362 | | |
$ | - | |
Asset impairment charges | |
$ | 16,135,000 | | |
$ | 38,629,310 | |
Total other income (expense), net | |
$ | 5,680,113 | | |
$ | (32,702,313 | ) |
Income tax expense (benefit) | |
$ | (376 | ) | |
$ | 5,503,430 | |
Net loss | |
$ | 31,495,248 | | |
$ | 98,456,505 | |
Net loss attributable to common stockholders | |
$ | 32,322,914 | | |
$ | 98,865,656 | |
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Net revenue | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
Total operating expenses excluding asset impairment charges | |
$ | 101,214,859 | | |
$ | 42,510,352 | |
Asset impairment charges | |
$ | 46,498,689 | | |
$ | - | |
Total other income (expense), net | |
$ | (18,544,634 | ) | |
$ | (4,457,832 | ) |
Income tax benefit | |
$ | 5,674,442 | | |
$ | 3,811,536 | |
Net loss | |
$ | 102,232,090 | | |
$ | 26,372,734 | |
Net loss attributable to common stockholders | |
$ | 102,915,706 | | |
$ | 26,372,734 | |
Non-GAAP
Information
This
report includes Adjusted EBITDA, which is a non-U.S. GAAP (“U.S. GAAP” is defined as accounting principles generally accepted
in the United States of America) financial performance measure that we use to supplement our results presented in accordance with U.S.
GAAP. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior
to, the financial information prepared and presented in accordance with U.S. GAAP. The Company uses this non-U.S. GAAP financial measure
for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that it provides
useful information about operating results, enhances the overall understanding of past financial performance and future prospects, and
allows for greater transparency with respect to key metrics used by management in its financial and operational decision making. Adjusted
EBITDA, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries
or within the same industry. We define Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense,
net; income taxes; depreciation and amortization; stock-based compensation; cost of acquisition; asset impairment charges; loss on extinguishment
of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair
value of warrant liability; change in fair value of contingent consideration; and other non-operating income (loss), net, and certain
other non-recurring, non-cash or non-core items, as described in the reconciliation below, if not covered above.
Adjusted
EBITDA excludes certain expenses that are required in accordance with U.S. GAAP because they are non-recurring items (for example, in
the case of transaction-related costs), non-cash expenditures (for example, in the case of depreciation and amortization, stock-based
compensation, asset impairment charges, change in fair value of derivative liability and change in fair value of warrant liability),
or are not related to our underlying business performance (for example, in the case of interest income and expense and litigation settlement
and related costs).
Segment
Revenues and Adjusted EBITDA
The
table below presents our Segment Revenues and Adjusted EBITDA reconciled to our net loss, for the periods indicated:
| |
For the nine months ended March 31, | |
| |
2023 | | |
2022 | |
Net Revenue: | |
| | | |
| | |
EEG iGaming segment | |
$ | 17,571,219 | | |
| 41,692,731 | |
EEG Games segment | |
$ | 2,619,444 | | |
| 4,946,194 | |
| |
| | | |
| | |
Total | |
$ | 20,190,663 | | |
| 46,638,925 | |
| |
| | | |
| | |
Net loss: | |
$ | (31,495,248 | ) | |
| (98,456,505 | ) |
| |
| | | |
| | |
Adjusted for: | |
| | | |
| | |
Interest expense | |
$ | 2,490,696 | | |
$ | 5,368,933 | |
Asset impairment charges | |
$ | 16,135,000 | | |
$ | 38,629,310 | |
Loss on disposal of businesses, net | |
$ | 4,198,362 | | |
$ | - | |
Gain on termination of lease | |
$ | (799,901 | ) | |
$ | - | |
Loss on conversion of senior convertible note | |
$ | - | | |
$ | 5,999,662 | |
Loss on extinguishment of senior convertible note | |
$ | 3,616,372 | | |
$ | 28,478,804 | |
Change in fair value of derivative liability | |
$ | (7,435,687 | ) | |
$ | 22,055,672 | |
Change in fair value of warrant liability | |
$ | (6,435,229 | ) | |
$ | (28,641,920 | ) |
Change in fair value of contingent consideration | |
$ | 2,864,551 | | |
$ | (1,950,693 | ) |
Other non-operating (income) loss, net | |
$ | 19,085 | | |
$ | 1,391,855 | |
Depreciation and amortization | |
$ | 5,408,467 | | |
$ | 9,555,184 | |
Right of use asset amortization | |
$ | 69,597 | | |
$ | 471,007 | |
Stock-based compensation | |
$ | 1,127,070 | | |
$ | 3,958,275 | |
Cost of acquisition | |
$ | 35,930 | | |
$ | 269,013 | |
Income tax benefit | |
$ | 376 | | |
$ | (5,503,430 | ) |
Total Adjusted EBITDA | |
$ | (10,200,559 | ) | |
$ | (18,374,833 | ) |
| |
| | | |
| | |
Adjusted EBITDA | |
| | | |
| | |
EEG iGaming segment | |
$ | (2,566,714 | ) | |
$ | (5,590,343 | ) |
EEG Games segment | |
$ | (1,810,305 | ) | |
$ | (3,487,751 | ) |
Other(1) | |
$ | (5,823,540 | ) | |
$ | (9,296,739 | ) |
Total Adjusted EBITDA | |
$ | (10,200,559 | ) | |
$ | (18,374,833 | ) |
(1)
Other comprises corporate and overhead costs.
(2)
We have no intersegment revenues or costs and thus no eliminations were required.
(3)
We define Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense; income taxes; depreciation
and amortization including right of use asset amortization; stock-based compensation; cost of acquisition; asset impairment charges;
loss on extinguishment of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative
liability; change in fair value of warrant liability; change in fair value of contingent consideration; and other non-operating income
(loss), net and certain other non-recurring, non-cash or non-core items (included in table above).
Results
of Operations
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited
condensed consolidated financial statements for the nine months ended March 31, 2023 and 2022, and related notes included Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on May 22, 2023. The financial data is at the
consolidated and reporting segment levels and reported in U.S. Dollars ($).
Comparison
on the nine months ended March 31, 2023 and 2022
Net
Revenue
Net
revenue totaled $20.2 million in the nine months ended March 31, 2023, a decrease of $26.4 million, or 57%, from the $46.6 million recorded
in the nine months ended March 31, 2022. The decrease is primarily attributable to the sale of the Bethard Business on February 24, 2023
and the decrease in the iGaming operations of Lucky Dino, Bethard and Argyll that were impacted by regulatory changes in the Netherlands,
Finland and the UK, and the worsening investment and market conditions. Argyll Entertainment was further declared bankrupt by the Swiss
court on March 27, 2023, at which point the Company lost control of Argyll Entertainment and as a result, the entity was deconsolidated.
The decrease in the iGaming segment revenue was $24.1 million falling from $41.7 million to $17.6 million. Revenue in the EEG Games segment
also decreased $2.3 million from $4.9 million to $2.6 million due to the disposal of the Helix Holdings, LLC game center assets in Foxboro,
MA and North Bergen, NJ that occurred in June 2022 and lower other revenues.
Cost
of Revenue
Cost
of revenue totaled $7.4 million in the nine months ended March 31, 2023, a decrease of $11.8 million, or 61%, from the $19.2 million
recorded in the nine months ended March 31, 2022. The decrease is primarily attributable to the Sale of the Bethard Business on February
24, 2023 and the decrease in the iGaming operations of Lucky Dino, Bethard and Argyll in the EEG iGaming segment and includes corresponding
EEG iGaming decreases in line with revenue. This includes decreases of $6.5 million for payment processing fees, platform costs, gaming
duties and costs related to revenue sharing arrangements, $2.1 million for the game provider expenses and $1.1 million for lower other
direct expenses related to the delivery of services. EEG Games also had a reduction in costs with $2.0 million lower platform costs,
game provider costs and other direct expenses.
Sales
and Marketing
Sales
and marketing expense totaled $5.2 million in the nine months ended March 31, 2023, a decrease of $16.1 million, or 76%, compared to
the $21.3 million recorded for the nine months ended March 31, 2022. The decrease was primarily attributable to a $1.7 million reduction
in marketing, $10.9 million lower affiliate costs and $0.2 million lower sponsorship costs related to the EEG iGaming segment and a $3.2
million reduction in corporate expense driven by $2.9 million less incurred for sponsorship agreements with professional sports clubs
and our service partners, and $0.3 million less other sales and marketing costs.
General
and Administrative
General
and administrative expense totaled $24.4 million for the nine months ended March 31, 2023, a decrease of $14.3 million, or 37%, compared
to the $38.7 million recorded for the nine months ended March 31, 2022. The decrease was primarily attributable to decreases of $3.5
million in payroll costs, $1.9 million depreciation and amortization, and $1.1 million decrease related to other general and administrative
cost primarily including incremental costs for information technology related disbursements from the EEG iGaming segment, and further
decreases of $0.6 million in payroll costs, $2.4 million depreciation and amortization, and $0.8 million related to other general and
administrative costs from the EEG Games segment. Corporate general and administrative costs decreased $3.5 million with $0.1 million
lower payroll costs, $2.3 million lower share based compensation expense and $1.2 million less other general and administrative cost
primarily including lower professional fees and legal expenses.
Loss
on disposal of businesses, net
During
the nine months ended March 31, 2023, the Company recorded a loss on disposal of businesses, net of $4.2 million.
On
January 18, 2023, the Company sold its Spanish iGaming operations, including its Spanish iGaming license, and received approximately
$1,200,000 in proceeds and $1,000,000 in cash from the return of a deposit held with the Spanish regulator. The Company recognized a
gain on disposal of the Spanish iGaming operations of $1,114,992.
On
February 24, 2023, the Company sold its Bethard Business for purchase consideration determined by the Company to be $8,090,965 comprised
of cash received on the Bethard Closing Date of €1,650,000 ($1,739,882 using exchange rates in effect on the Bethard Closing Date),
holdback consideration of €150,000 ($158,171 using exchange rates in effect on the Bethard Closing Date) and the Company’s
settlement of its contingent consideration liability of €5,872,989 ($6,192,912 using exchange rates in effect on the Bethard Closing
Date) that had originated from its acquisition of the Bethard Business on July 13, 2021 and other liabilities. The Company recognized
a loss on disposal of the Bethard Business of $8,601,414 in Loss on disposal of businesses, net.
On
November 10, 2022, the Company determined that it would close down its licensed remote gambling operation in the UK market. On December
8, 2022, Argyll UK surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. The Swiss courts declared
Argyll Entertainment bankrupt on March 27, 2023, at which point the Company lost control of Argyll Entertainment and, as a result, deconsolidated
the entity. The Company had previously fully impaired the goodwill, intangible assets and other long-lived assets of Argyll UK in the
fiscal year ended June 30, 2022. The Company recognized a gain on disposal of Argyll Entertainment of $3,288,060.
There
was no loss on disposal of businesses, net in the nine months ended March 31, 2022.
Asset
Impairment Charges
During
the nine months ended March 31, 2023, the Company initiated a process to evaluate the strategic options for the EEG iGaming business,
including exploring a sale of EEG iGaming assets due to increasing regulatory burdens and competition. In December 2022, the Company
closed down its licensed remote gambling operation in the UK market and on December 9, 2022, surrendered its UK license, as part of the
winding down of the Argyll UK iGaming operations. The Company appointed a new Chief Executive Officer and a new interim Chief Financial
Officer and on January 18, 2023, sold its EEG iGaming Spanish license. As part of these changes, the Company has been focused on reducing
costs in its businesses as it has seen the EEG iGaming revenues decline significantly from levels seen in the previous year and previous
quarters. This and uncertainties caused by inflation and world stability were determined to be a triggering event and the long-lived
assets of the Company were quantitatively tested for impairment at December 31, 2022. For nine months ended March 31, 2023, the Company
recognized total goodwill asset impairment charges of $16.1 million, with asset impairment charges to the goodwill of the iGaming reporting
unit of $14.5 million, which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1.6 million, which
is part of the EEG Games segment. Further downturns in economic, regulatory and operating conditions could result in additional goodwill
impairment in future periods.
As
of March 31, 2022 and for the nine months ended March 31, 2022, the Company determined that in-person attendance at its Helix and customer
game centers is not expected to attain levels previously forecasted and that under the current liquidity and investment constraints it
is less likely to reach the previously forecasted revenue and profits in EGL and GGC. For the nine months ended March 31, 2022, the Company
recognized $38.6 million of asset impairment charges of long-lived assets, including $23.1 million of goodwill and $15.5 million of long-lived
assets in the EGL, GGC and Helix reporting units.
Other
Income (expense)
Other
income (expense), net changed $38.4 million from a loss of $32.7 million for the nine months ended March 31, 2022 to income of $5.7 million
for the nine months ended March 31, 2023. The other expense for the nine months ended March 31, 2023 resulted primarily from $2.5 million
of interest expense related to the Senior Convertible Note, $3.6 million for the loss on extinguishment of the Senior Convertible Note
related to the conversion of $19.3 million of the Senior Convertible note into 2,242,143 shares of our common stock and an increase of
$2.9 million for the change in the fair value of the contingent consideration for Bethard, offset by other income primarily made up of
$7.4 million for the change in the fair value of the derivative liability on Senior Convertible Note and $6.4 million from the reduction
in fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $4.6 million for the
September 2022 Warrants issued as part of the September 2022 Offering that decreased from the $5.3 million valued on issuance at September
19, 2022 to $0.7 million at March 31, 2023 and a decrease of $1.8 million for the March 2022 Warrants from $2.1 million at June 30, 2022
to $0.3 million at March 31, 2022. Other warrants also decreased $0.1 million for the nine months ended March 31, 2023.
Income
Tax benefit (expense)
The
income tax benefit for the nine months ended March 31, 2022 was $5.5 million that results primarily from the release of valuation allowance
of $5.5 million that followed an assessment of the realizability of our deferred tax assets subsequent to the completion of the Bethard
acquisition.
Comparison
of Year ended June 30, 2022 and 2021
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this report. The financial data is at the consolidated level and reported in U.S.
Dollar ($).
Revenue
Revenue
totaled $58.4 million in the year ended June 30, 2022, an increase of $41.6 million, or 248%, from the $16.8 million recorded in the
year ended June 30, 2021. The increase is primarily attributable to the iGaming operations of Lucky Dino and Argyll that were acquired
during the fiscal year ended June 30, 2021 and Bethard that was acquired in July 2021 of fiscal year ended June 30, 2022, increasing
the iGaming segment revenue by $36.9 million from $16.2 million to $53.1 million and GGC that was also acquired during the fiscal year
ended June 30, 2021 and was the primary factor in the increase in EEG Games revenue of $4.7 million from $0.6 million to $5.3 million.
Cost
of Revenue
Cost
of revenue totaled $24.2 million in the year ended June 30, 2022, an increase of $16.3 million, or 206%, from the $7.9 million recorded
in the year ended June 30, 2021. The increase is primarily attributable to the EEG iGaming segment of Lucky Dino, Argyll and Bethard
acquisitions and includes $9.2 million for additional payment processing fees, platform costs, gaming duties and costs related to revenue
sharing arrangements, $3.0 million additional for the game provider expenses and $1.3 million higher other direct expenses related to
the delivery of services. EEG Games incurred $1.6 million higher platform costs, $1.1 million higher game provider costs and $0.1 million
other direct expenses across the segment.
Sales
and Marketing
Sales
and marketing expense totaled $25.7 million in the year ended June 30, 2022, an increase of $15.7 million, or 157%, over the $10.0 million
recorded for the year ended June 30, 2021. The increase was primarily attributable to $12.0 million higher marketing and $0.9 million
higher affiliate costs related to EEG iGaming segment and $2.8 million in additional Corporate expense for sponsorship agreements with
professional sports clubs and our service partners.
General
and Administrative
General
and administrative expense totaled $51.3 million for the year ended June 30, 2022, an increase of $26.7 million, or 109%, over the $24.6
million recorded for the year ended June 30, 2021. The increase was primarily attributable to increases of $8.7 million in payroll costs,
$5.8 million depreciation and amortization, $2.5 million related to other general and administrative cost primarily including incremental
costs for information technology related disbursements from the EEG iGaming segment, and $4.6 million in payroll costs, $2.9 million
depreciation and amortization, and $1.5 million related to other general and administrative cost including professional fees from the
EEG Games segment. Corporate general and administrative costs increased $0.7 million with $2.0 million in higher payroll costs, $1.1
million higher stock based compensation, and $0.8 million increase in other general and administrative cost including other, professional
fees and legal fees, offset by $3.2 million less in acquisition related costs due to Bethard being the sole acquisition at the beginning
of the year ended June 30, 2022 compared to the multiple acquisitions in the year ended June 30, 2021.
Impairment
During
the third quarter, the Company concluded that goodwill impairment indicators existed based on the significant volatility in the Company’s
stock price where the Company experienced a sustained reduction from the middle of the third quarter through March 31, 2022 and subsequently.
As of March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers was not expected to attain
levels previously forecasted and that under the current liquidity and investment constraints is the Company was less likely to reach
the previously forecasted revenue and profits for EGL and GGC. These factors and the continuing impacts of the COVID-19 pandemic, uncertainties
caused by inflation and world stability, resulted in the Company evaluating its goodwill and long-lived assets, including intangible
assets, for impairment as of March 31, 2022. During the third quarter, the Company recognized $38.6 million of asset impairment charges,
including $23.1 million of goodwill and $15.5 million of other long-lived assets in the EGL, GGC and Helix reporting units from the EEG
Games segment. The Company tests its goodwill for impairment annually on April 1. There was no further impairment identified as of the
annual testing date from that recognized as of March 31, 2022. In the three months ending June 30, 2022, while implementing cost saving
initiatives, and with the continuing liquidity and investment restraints and further reduction in the Company’s already deflated
stock price, the Company again concluded that as of June 30, 2022, goodwill impairment indicators existed, and the Company evaluated
its goodwill and long-lived assets, including intangible assets, for further impairment. The Company identified that with the additional
regulation and expected costs of continuing in the UK market that the iGaming Argyll (UK) goodwill and asset group intangible assets
and equipment were impaired resulting in additional asset impairment charges of $7.9 million, including $3.9 million of goodwill and
$4.0 million of other long-lived assets in the iGaming Argyll reporting unit from the EEG iGaming segment, for a total for the year ended
June 30, 2022 of $46.5 million. There were no impairment charges for the year ended June 30, 2021.
Other
Income (expense)
Other
income (expense), net changed $14.0 million from an expense of $4.5 million for the year ended June 30, 2021 to an expense of $18.5 million
for the year ended June, 2022. The other expense for the year ended June 30, 2022 results primarily from the $10.9 million expense for
derivative liabilities on senior convertible note, $28.5 million of loss on extinguishment primarily attributable to amortization of
the debt discount, $6.0 million loss on the conversion of the Senior Convertible Note, driven by the conversion of a principal provided
to the Senior Convertible Note holder as part of the October 13, 2021 waiver provided on the covenants related to the Senior Convertible
Note and $6.4 million in interest expense. These expenses were offset by other income primarily made up of $2.4 million for the change
in the fair value of the contingent consideration due as part of the Bethard transaction and $31.5 million from the reduction in fair
value of the warrant liability. The Series A and Series B Warrants fair value decreased from $23.5 million as of June 30, 2021 to $0.1
million and the March 2022 Warrants and the April 2022 Overallotment Warrants decreased from initial fair value of $10.2 million to $2.1
million as of June 30, 2022, resulting in a total gain of $31.5 million. The other expense for the year ended June 30, 2021 primarily
included a charge of $4.7 million related to the revaluation of the warrant liability recorded in connection with the acquisition of
Argyll through issuance of common stock, a charge of $1.7 million related to the settlement of the contingent consideration liability
for the FLIP and EGL acquisitions through the issuance of common stock, and interest expense of $0.7 million related primarily to the
Senior Convertible Note. This was partially offset by a benefit of $3.2 million related to the revaluation of Series A and Series B warrants
issued in connection with the Senior Convertible Note dated June 2, 2021.
Income
Tax
The
income tax benefit for the year ended June 30, 2022 and 2021 was $5.7 million and $3.8 million, respectively. The income tax benefit
recorded for the year ended June 30, 2022 results primarily from the release of valuation allowance of $5.7 million that followed an
assessment of the realizability of our deferred tax assets subsequent to the completion of the Bethard acquisitions. The income tax benefit
recorded for the year ended June 30, 2021 results primarily from the release of valuation allowance of $4.1 million that followed an
assessment of the realizability of our deferred tax assets subsequent to the completion of the Argyll, EGL, GGC and Helix acquisitions.
It is anticipated that our deferred tax assets will be realized through future reversal of deferred tax liabilities. The income tax benefit
was offset by income tax expense related to one of our foreign subsidiaries as well as the estimated exposure for accrued interest and
penalties that may be imposed related to tax filings.
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 August 1, 2023, the date the unaudited condensed
consolidated financial statements included in the Registration Statement on Amendment No. 3 to Form S-1/A was filed with the
Securities and Exchange Commission. The evaluation of going concern under the accounting guidance requires significant
judgment.
The
Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one
year from the date of issuance of these unaudited condensed consolidated financial statements included in the Registration Statement
on Amendment No. 3 to Form S-1/A was filed with the Securities and Exchange Commission.
One
such factor considered by the Company was its Senior Convertible Note, on which the Company had not maintained compliance with certain
debt covenants and was in default under the terms of the Senior Convertible Note and that had a March 31, 2023 outstanding balance of
$15.9 million. The Senior Convertible Note outstanding was further reduced to $15.2 million on April 19, 2023, when the Company redeemed
$0.68 million of the Senior Convertible Note using funds that were on deposit in favor of the Holder from the Sale of the Bethard Business.
Subsequent to this, on April 19, 2023, the Company entered into the Note to Preferred Stock Exchange Agreement with the Holder to convert
the remaining $15.2 million in aggregate principal amount of the Senior Convertible Note outstanding into the new Series C Preferred
Stock and the Company closed and completed the exchange on April 28, 2023, extinguishing the Senior Convertible Note and eliminating
the related derivative liability that had a fair value of $2.0 million as of March 31, 2023.
In
addition to the above, the Company considered that it had an accumulated deficit of $180.6 million as of March 31, 2023 and that it has
had a history of recurring losses from operations and recurring negative cash flows from operations as it has prepared to grow its esports
business through acquisition and new venture opportunities. At March 31, 2023, the Company had total current assets of $5.4 million and
total current liabilities of $29.0 million. Net cash used in operating activities for the nine months ended March 31, 2023 was $11.5
million which includes a net loss of $31.5 million. The Company also considered 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 March 31, 2023, the Company had $1.9 million of available cash on-hand and net current liabilities of $23.5 million. On May 22,
2023 the Company closed the issuance of a new Series D Preferred Stock, that includes the issuance of (i) 4,300 shares of Series D Preferred
Stock for a price of $1,000 per share, (ii) Common Warrants to purchase 1,433,333 shares of our common stock at a price of $1.96 per
share, and (iii) preferred warrants to purchase 4,300 shares of our Series D Preferred Stock at a price of $1,000 per share, for a total
gross proceeds to the Company of $4.3 million before deducting underwriting discounts and commissions.
The
amount of available cash on hand on July 31, 2023, one business day preceding the filing of the Registration Statement
on Amendment No. 3 to Form S-1/A with the Securities and Exchange Commission, was $1.0 million.
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. The combination of these conditions was 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 August 1, 2023, the date the
Registration Statement on Amendment No. 3 to Form S-1/A was filed with the Securities and Exchange Commission.
In
determining whether the Company can overcome the presumption of substantial doubt about its 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, depending on market conditions, may be available to fund its operations and drive future growth, which include (i)
the potential expected proceeds from future offerings, where the amount of the offering has not yet been determined, and (ii) the ability
to raise additional financing from other sources.
The
Company’s sources and (uses) of cash for the nine months ended March 31, 2023 and 2022 are shown below:
| |
March 31, 2023 | | |
March 31, 2022 | |
Cash used in operating activities | |
$ | (11,526,050 | ) | |
$ | (14,100,783 | ) |
Cash provided by (used in) investing activities | |
$ | 2,936,561 | | |
$ | (20,189,188 | ) |
Cash provided by financing activities | |
$ | 5,601,492 | | |
$ | 23,681,839 | |
Net
cash used in operating activities for the nine months ended March 31, 2023 was $11.5 million, which includes a net loss of $31.5 million,
offset by net non-cash and balance sheet adjustments of $18.7 million.
There
was $2.9 million net cash provided by investing activities for the nine months ended March 31, 2023, which includes $1.7 million proceeds
from the sale of the Bethard Business and $1.2 million from the sale of the Spanish operations.
Net
cash provided by financing activities for the nine months ended March 31, 2023 totaled $5.6 million, which related to $9.0 million net
proceeds from the December 2022 Registered Direct Offering and the September 2022 Offering, offset by the repayments of part of the Senior
Convertible Note principal of $2.8 million, repayments of notes payable and a finance lease for less than $0.1 million and the payments
of the dividends on the 10% Series A cumulative redeemable convertible preferred stock of $0.6 million.
The
Company’s sources and (uses) of cash for the year ended June 30, 2022 and 2021 are shown below:
| |
2022 | | |
2021 | |
Cash used in operating activities | |
$ | 21,006,437 | | |
$ | 18,883,006 | |
Cash used in investing activities | |
$ | 20,080,376 | | |
$ | 56,133,256 | |
Cash provided by financing activities | |
$ | 23,488,285 | | |
$ | 86,356,201 | |
At
June 30, 2022, we had total current assets of $10.0 million and total current liabilities of $65.8 million. Net cash used in operating
activities for the year ended June 30, 2022 was $21.0 million, which includes a net loss of $102.2 million, offset by net non-cash adjustments
of $72.4 million.
Net
cash used in investing activities for the year ended June 30, 2022 totaled $20.1 million principally related to the Bethard acquisition.
Net
cash provided by financing activities for the year ended June 30, 2022 totaled $23.5 million, which related to proceeds from the issuance
of 150,000 units, each consisting of one share of common stock and one March 2022 Warrant, as part of the March 2022 Offering, the issuance
of the shares of the 10% Series A cumulative redeemable convertible preferred stock and the issuance of common stock of 11,658 shares
through the at-the-money, partially offset by the payment of the dividends on the 10% Series A cumulative redeemable convertible preferred
stock, the contingent consideration of Bethard and repayments of notes payable and finance lease.
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.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires our management to
make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on management’s historical
and industry experience and on various other assumptions that are believed to be reasonable under the circumstances. On a regular basis,
we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly
and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results
may differ from our estimates, and such differences could be material.
A
full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, for the fiscal
year ended June 30, 2022.
We
believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our financial results.
These estimates require our most difficult, subjective or complex judgments because they relate to matters that are inherently uncertain.
We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.
Revenue
recognition
Revenue
and Cost Recognition
The
revenue of the Company is currently generated from online casino and sports betting (referred to herein as “EEG iGaming Revenue”),
and esports revenue (referred to herein as “EEG Games Revenue”), consisting of the sales of subscriptions to access cloud-based
software used by independent operators of game centers, from consulting and data analytic services provided to game operators (“EEG
Games Esports and Other Revenue”), and from the provision of esports event and team management services (“EEG Games Esports
Event Management and Team Service Revenue”). The Company recognizes revenue in accordance with Accounting Standards Codification
(“ASC”) Topic 606 – Revenue from Contracts with Customers (“ASC 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 may be subject to value added tax (“VAT”) in certain 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.
EEG
iGaming Revenue
EEG
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 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. Jackpots, other than the incremental progressive jackpots, are recognized at the time they are won by customers. 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 statements
of operations.
EEG
Games Revenue
EEG
Games Esports and Other Revenue
The
Company derives revenue 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 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 revenue
from the operation of game centers by the Company was recognized when a customer purchased time to use the esports gaming equipment at
each center. The revenue from time purchased by a customer and from the sale of concessions was recognized at the point of sale.
The
Company further provides 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 has 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, considering 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.
EEG
Games 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 in person or online. The revenue generated from esports event management services is currently generally
earned on a fixed fee basis per event but future plans call for other revenue streams arising from the content generated by tournaments.
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.
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 Goodwill and long-lived assets
Goodwill
represents the excess of fair value of consideration paid for an acquired entity over the fair value of the assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized but rather it is tested for impairment at the reporting unit level on an
annual basis on April 1 of each fiscal year, or more often if events or changes in circumstances indicate that more likely than not the
carrying amount of the asset may not be recoverable. A reporting unit represents an operating segment or a component of an operating
segment. In accordance with ASC Topic 350 Intangibles – Goodwill and Other, our business is classified into four reporting
units: iGaming Malta, Argyll UK, EGL, and GGC.
In
testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0,”
to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying
value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and
market considerations, cost factors, entity-specific financial performance and other events, including changes in our management, strategy
and primary user base. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying
value, we then perform a quantitative goodwill impairment analysis by comparing the carrying amount to the fair value of the reporting
unit. If it is determined that the fair value is less than its carrying amount, the excess of the goodwill carrying amount over the implied
fair value is recognized as an impairment loss in accordance with Accounting Standards Update (“ASU”) No. 2017-04, Goodwill
and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The Company utilizes a discounted cash flow analysis,
referred to as an income approach, and uses internal and market multiples, to assess reasonableness of assumptions, to determine the
estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including anticipated revenue
growth rates, discount rates, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair
value estimates, which are based on our operating and capital forecasts. As a result, actual results may differ from the estimates utilized
in our income approach. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate
and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, the Company
also considers the combined fair values of our reporting units to a reasonable market capitalization of the Company. The Company may
elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test.
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 results 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.
Derivative
financial instruments
The
Company evaluates its convertible notes, equity instruments 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 balance sheet. 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 a 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 at each balance sheet date and records the change in the fair value of the remaining embedded derivative
as other income or expense in the consolidated statements of operations.
Off
Balance Sheet Arrangements
None.
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