Esports Entertainment Group, Inc 8-K/A, filed Aug 12, 2021
Esports Entertainment Group, Inc. (GMBL)
About this 8-K/A
Esports Entertainment Group, Inc filed this 8-K/A on August 12, 2021, reporting on events of June 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 1, 2021
ESPORTS ENTERTAINMENT GROUP, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 001-39262 | 26-3062752 | ||
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(IRS Employer Identification No.) |
13/14 Penthouse Office, Mannarino Road
Birkirkara, Malta, BKR 9080
(Address of principal executive offices)
356 2713 1276
(Registrant’s telephone number, including area code)
(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 |
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. [ ]
Explanatory Note
On June 7, 2021, Esports Entertainment Group, Inc. (the “Company”), filed a Current Report on Form 8-K (the “Initial Report”) to report the closing on June 1, 2021 of (i) an equity purchase agreement dated January 22, 2021, as amended on May 21, 2021 (the “Helix Purchase Agreement”), by and among the Company, Helix Holdings, LLC, a limited liability company incorporated under the laws of Delaware (“Helix”), and the equity holders of Helix (the “Helix Equity Holders”), whereby the Company would acquire from the Helix Equity Holders, all of the issued and outstanding membership units of Helix, making Helix a wholly owned subsidiary of the Company and (ii) an equity purchase agreement dated January 22, 2021, as amended on May 21, 2021 (the “GGC Purchase Agreement” together with the Helix Purchase Agreement the “Purchase Agreements”), by and among the Company, ggCIRCUIT LLC, an Indiana limited liability company (“GGC”), and the equity holders of GGC (the “GGC Equity Holders”), whereby the Company would acquire from the GGC Equity Holders all of the issued and outstanding membership units of GGC, making GGC a wholly owned subsidiary of the Company.
This Current Report on Form 8-K/A (this “Amendment”) amends and supplements the Initial Report to provide financial statements of Helix and GGC, and the pro forma financial statements of the Company required by Item 9.01 of Form 8-K. No other modifications to the Initial Report are being made by this Amendment. This Amendment should be read in connection with the Initial Report, which provides a more complete description of the Purchase Agreements and transactions contemplated thereby.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Helix and GGC.
The audited consolidated financial statements of each of Helix and GGC as of and for the years ended December 31, 2020 and 2019, together with the related notes to the consolidated financial statements, are included as Exhibit 99.1 and 99.2, respectively, to this Current Report.
The unaudited condensed consolidated financial statements of the Helix and GGC as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020, together with the related unaudited notes to the condensed consolidated financial statements, are included as Exhibit 99.3 and 99.4, respectively, to this Current Report and are incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma combined financial statements of the Company as of March 31, 2021 and for the year ended June 30, 2020 and nine months ended March 31, 2021, together with the related unaudited notes to the combined financial statements, are included as Exhibit 99.5 to this Current Report and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| ESPORTS ENTERTAINMENT GROUP, INC. | ||
| Dated: August 12, 2021 | By: | /s/ Grant Johnson |
| Grant Johnson | ||
| Chief Executive Officer | ||
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Form 8-K/A of Esports Entertainment Group, Inc. of our report dated April 21, 2021, which includes an explanatory paragraph as to Helix Holdings, LLC’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of Helix Holdings, LLC as of December 31, 2020 and 2019, and for the years then ended.
We also hereby consent to the inclusion in this Form 8-K/A of Esports Entertainment Group, Inc. of our review report dated August 12, 2021, which includes an explanatory paragraph as to Helix Holdings, LLC’s condensed consolidated balance sheet as of December 31, 2020, with respect to our reviews of the condensed consolidated financial statements of Helix Holdings, LLC, which comprise the condensed consolidated balance sheet as of March 31, 2021, and the related condensed consolidated statements of operations and members’ equity (deficit) and cash flows for the three-month periods ended March 31, 2021 and 2020, and the related notes.
| /s/ Friedman LLP |
| Marlton, New Jersey |
| August 12, 2021 |
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Form 8-K/A of Esports Entertainment Group, Inc. of our report dated April 21, 2021, which includes an explanatory paragraph as to ggCircuit, LLC’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of ggCircuit, LLC as of December 31, 2020 and 2019, and for the years then ended.
We also hereby consent to the inclusion in this Form 8-K/A of Esports Entertainment Group, Inc. of our review report dated August 4, 2021, which includes an explanatory paragraph as to ggCircuit, LLC’s condensed consolidated balance sheet as of December 31, 2020, with respect to our reviews of the condensed consolidated financial statements of ggCircuit, LLC, which comprise the condensed consolidated balance sheet as of March 31, 2021, and the related condensed consolidated statements of operations and comprehensive loss, changes in members’ deficit and cash flows for the three-month periods ended March 31, 2021 and 2020, and the related notes.
| /s/ Friedman LLP |
| Marlton, New Jersey |
| August 12, 2021 |
Exhibit 99.1
Helix Holdings, LLC
Consolidated Financial Statements
and Independent Auditors’ Report
December 31, 2020 and 2019
CONTENTS PAGE
| Independent Auditors’ Report | 1 |
| 2 | |
| 3 | |
| Consolidated Statements of Cash Flows | 4 |
| Notes to Consolidated Financial Statements | 5 – 25 |
To the Members
of Helix Holdings, LLC
We have audited the accompanying consolidated financial statements of Helix Holdings, LLC and Subsidiaries (a Delaware corporation) (collectively, the “Company”), which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations and members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Helix Holdings, LLC and Subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
| /s/ Friedman LLP | |
| Marlton, New Jersey | |
| April 21, 2021 |
Helix Holdings, LLC
As of December 31,
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 57,577 | $ | 356,579 | ||||
| Accounts receivable, net | 98,805 | 83,145 | ||||||
| Advance to an affiliate | 76,905 | - | ||||||
| Prepaid expenses and other current assets | 19,707 | 60,846 | ||||||
| Total Current Assets | 252,994 | 500,570 | ||||||
| Property and equipment, net | 578,684 | 387,359 | ||||||
| Finance lease right of use assets | 99,928 | - | ||||||
| Operating lease right of use assets | 776,232 | 963,696 | ||||||
| Investment in GG Circuit LLC | 1,460,325 | 1,788,813 | ||||||
| Investment in Helix eSports Academy, LLC | 50,000 | - | ||||||
| Other assets | 65,765 | 7,412 | ||||||
| Total Assets | $ | 3,283,928 | $ | 3,647,850 | ||||
| LIABILITIES AND MEMBERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 20,447 | $ | 60,940 | ||||
| Accrued expenses and other current liabilities | 365,555 | 34,807 | ||||||
| Accrued payroll | 85,896 | 5,576 | ||||||
| Loans payable, current portion | 61,243 | 9,088 | ||||||
| Loans payable to affiliate, current portion | 430,105 | - | ||||||
| Working capital advance | 400,000 | - | ||||||
| Loan payable to member, current portion | 175,792 | - | ||||||
| Operating lease liability, current portion | 225,939 | 60,278 | ||||||
| Finance lease liability, current portion | 41,032 | - | ||||||
| Total Current Liabilities | 1,806,009 | 170,689 | ||||||
| Loans payable, noncurrent portion | 72,609 | - | ||||||
| Loans payable to affiliate, noncurrent portion | - | 120,384 | ||||||
| Loan payable to member, noncurrent portion | - | 64,792 | ||||||
| Operating lease liability, noncurrent | 740,578 | 921,286 | ||||||
| Finance lease liability, noncurrent | 92,936 | - | ||||||
| Total Liabilities | 2,712,132 | 1,277,151 | ||||||
| Total Members’ Equity | 571,796 | 2,370,699 | ||||||
| Total Liabilities and Members’ Equity | $ | 3,283,928 | $ | 3,647,850 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
Helix Holdings, LLC
Consolidated Statements of Operations and Members’ Equity
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues, net | ||||||||
| Sales, net | $ | 324,400 | $ | 596,490 | ||||
| Analytics income | 185,000 | 150,000 | ||||||
| Rental income and other income | 75,303 | 30,712 | ||||||
| Total Revenues, net | 584,703 | 777,202 | ||||||
| Costs and Expenses | ||||||||
| Cost of sales | 43,806 | - | ||||||
| Operating expenses | 1,629,667 | 897,401 | ||||||
| General and administrative expenses | 740,908 | 224,290 | ||||||
| Research and development expenses | 77,201 | 189,776 | ||||||
| Total Costs and Expenses | 2,491,582 | 1,311,467 | ||||||
| Loss from Operations | (1,906,879 | ) | (534,265 | ) | ||||
| Other Income (Expense) | ||||||||
| Loss from equity investment | (328,488 | ) | (413,785 | ) | ||||
| Other income | 21,056 | - | ||||||
| Total Other Income (Expense), Net | (307,432 | ) | (413,785 | ) | ||||
| Loss from Continuing Operations Before | (2,214,311 | ) | (948,050 | ) | ||||
| Income Taxes | ||||||||
| Income Tax Expense | - | - | ||||||
| Loss from Continuing Operations | (2,214,311 | ) | (948,050 | ) | ||||
| Discontinued Operations | ||||||||
| Loss from operations of discontinued Pro E-Sports Teams | ||||||||
| (including loss on disposal of $9,936 in 2020) | (345,767 | ) | (200,251 | ) | ||||
| Net Loss | (2,560,078 | ) | (1,148,301 | ) | ||||
| MEMBERS’ EQUITY | ||||||||
| Beginning of year (Units issued and outstanding 17,000,000) | |
|
2,370,699 |
|
|
|
1,211,450 |
|
| Members’ capital contributions | 844,999 | 2,438,945 | ||||||
| Members’ distributions | (83,824 | ) | (131,395 | ) | ||||
| End of year (Units issued and outstanding 17,000,000) | |
$ |
571,796 |
|
|
$ |
2,370,699 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Helix Holdings, LLC
Consolidated Statements of Cash Flows
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (2,560,078 | ) | $ | (1,148,301 | ) | ||
| Discontinued operations loss | 345,767 | 200,251 | ||||||
| Net loss from continuing operations | (2,214,311 | ) | (948,050 | ) | ||||
| Adjustments to reconcile net loss to net cash flows used in operating activities | ||||||||
| Depreciation and amortization expense | 127,189 | 50,912 | ||||||
| Loss in equity investment | 328,488 | 413,785 | ||||||
| Gain on sale of assets | (21 | ) | - | |||||
| Amortization of right of use asset | 209,896 | 17,868 | ||||||
| Accrued interest on finance lease with affiliate | 11,607 | - | ||||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | (15,660 | ) | (60,525 | ) | ||||
| Prepaid expenses and other current assets | 41,139 | (60,846 | ) | |||||
| Other assets | (58,353 | ) | (1,000 | ) | ||||
| Accounts payable | (40,493 | ) | 60,940 | |||||
| Accrued expenses and other current liabilities | 330,748 | 19,450 | ||||||
| Accrued payroll | 80,320 | 430 | ||||||
| Operating lease liability | (15,047 | ) | - | |||||
| Net Cash Used in Operating Activities from Continuing Operations | (1,214,498 | ) | (507,036 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Advance to an affiliate | (76,905 | ) | - | |||||
| Purchase of property and equipment | (302,976 | ) | (105,575 | ) | ||||
| Proceeds from the disposal of property and equipment | 18,000 | - | ||||||
| Investment in GG Circuit | - | (1,100,000 | ) | |||||
| Investment in Helix eSports Academy | (50,000 | ) | - | |||||
| Net Cash Used in Investing Activities from Continuing Operations | (411,881 | ) | (1,205,575 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Members’ capital contributions | 811,483 | 2,359,445 | ||||||
| Members’ distributions | (83,824 | ) | (131,395 | ) | ||||
| Proceeds from loans payable | 124,764 | 8,319 | ||||||
| Proceeds from loan payable from an affiliate | 309,721 | 23,200 | ||||||
| Proceeds from loan payable from member | 111,000 | - | ||||||
| Proceeds from working capital advance | 400,000 | - | ||||||
| Principal payments of loan payable | - | (30,037 | ) | |||||
| Net Cash Provided by Financing Activities from Continuing Operations | 1,673,144 | 2,229,532 | ||||||
| CASH FLOWS FROM DISCONTINUED OPERATIONS | ||||||||
| Net Cash Used in Operating Activities from Discontinued Operations | (331,154 | ) | (200,251 | ) | ||||
| Net Cash Used in Investing Activities from Discontinued Operations | (14,613 | ) | - | |||||
| Net Cash Flows Used in Discontinued Operations | (345,767 | ) | (200,251 | ) | ||||
| Net Change in Cash | (299,002 | ) | 316,670 | |||||
| CASH | ||||||||
| Beginning of year | 356,579 | 39,909 | ||||||
| End of year | $ | 57,577 | $ | 356,579 | ||||
| Supplementary Cash Flow Information | ||||||||
| Cash paid for interest | $ | 9,117 | $ | 17,636 | ||||
| Supplemental Non-Cash Investing and Financing Activities | ||||||||
| Conversion of loan payable from member to equity | $ | - | $ | 79,500 | ||||
| Noncash acquisition of equipment from affiliates | $ | - | $ | 97,184 | ||||
| Noncash contribution of equipment from members | $ | 33,516 | $ | - | ||||
| Recognition of operating right of use assets and liabilities | $ | 5,407 | $ | 981,564 | ||||
| Recognition of financing right of use assets and liabilities | $ | 122,361 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS |
Helix Holdings, LLC and its subsidiaries (herein collectively referred to as the “Company”) are engaged in e-sports industry, providing gaming centers, developing software for gaming companies and developing an online application for sport wagering on e-sports. The Company operates three gaming centers located in Freehold, New Jersey, North Bergen, New Jersey and Foxboro, Massachusetts.
On January 8, 2021, the members and shareholders of Helix E-Sports LLC, Helix Opportunity Zone Fund I, LLC, Team Genji, Inc., Saber VR LLC, LANduel, LLC, and other subsidiaries (collectively, referred to as the “Helix Group”) agreed to form Helix Holdings, LLC, through membership/stock swap transactions, (herein referred to as the “Merger”). The Merger was accounted for as a reverse recapitalization. Under reverse capitalization accounting, the Helix Group is recognized as the accounting acquirer, and Helix Holdings, LLC is the legal acquirer or accounting acquiree. As such, following the Merger, the historical financial statements of the Helix Group are treated as the historical financial statements of the combined company.
Helix Holdings, LLC (the “Helix Holding”), is a limited liability company established under the laws of the State of Delaware on May 18, 2020. Helix Holding is the parent holding company with no operations. Management has authorized and issued 17,000,000 membership units as of December 31, 2020 and 2019. Members’ liability is limited to their share of equity plus any debt for which a personal guarantee has been given. Under the terms of the Helix Holdings, LLC operating agreement, its existence is perpetual.
Helix E-Sports LLC (“Helix eSports”) is a limited liability company established under the laws of the State of Delaware on May 31, 2018 and is wholly owned subsidiary of Helix Holding. Helix eSports is principally engaged in the e-sport industry, providing gaming center in North Bergen, New Jersey where users will pay for time to play video games on state-of-the art equipment. On November 10, 2020 Helix eSports transferred their ownership in their e-sports team to new formed company, Team Oxygen LLC (“Oxygen”), an affiliate, discussed further in Note 4 discontinued operations and Note 12 related party transactions.
Helix Opportunity Zone Fund I LLC, (the “HOZF”) is a limited liability company established under the laws of the State of Delaware on February 7, 2019. HOZF is a wholly owned subsidiary of Helix eSports and has no operations during calendar year 2020 and 2019.
Helix Foxboro LLC (“Helix Foxboro”) is a limited liability company established under the laws of the State of Delaware on November 12, 2019 and is a wholly owned subsidiary of Helix eSports. Helix Foxboro is principally engaged in the e-sport industry, providing gaming center in Foxboro, Massachusetts where users will pay for time to play video games on state-of-the art equipment. Helix Foxboro opened on February 28, 2020.
SPJ Foxboro LLC (“SPJ Foxboro”) is a limited liability company established under the laws of the State of Delaware on November 12, 2019 and is a wholly owned subsidiary Helix eSports. SPJ Foxboro is principally engaged in the restaurant industry, serving food and beverages for players playing games in the Helix Foxboro gaming center. SPJ Foxboro opened on February 28, 2020.
| 5 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS (continued) |
Team Genji, Inc.(“Genji”) is a corporation under the laws of the State of Delaware on April 26, 2018 and is a wholly owned subsidiary of Helix Holding. Genji is principally engaged in data analytics, developing software and applications for tournaments hosted by large video game software companies. Genji also has an e-sports pro team that competes in e-sports tournaments. On November 10, 2020, Genji transferred their ownership in their e-sports team to Oxygen, an affiliate, discussed further in Note 4 discontinued operations and Note 12 related party transactions.
Saber VR LLC (“Saber”) is a limited liability company established under the laws of the State of New Jersey on April 20, 2018 and is a wholly owned subsidiary of Helix Holding. Saber is principally engaged in the e-sport industry, providing gaming center in Freehold, New Jersey where users will pay for time to play video games on state-of-the art equipment. Saber opened a new facility in Lakewood, New Jersey in January 2021.
LANDduel LLC (“LANduel”), is a limited liability company established under the laws of the State of Delaware on October 25, 2019 and is a wholly owned subsidiary of Helix Holding. LANduel is developing an online application for sport wagering on e-sports.
On January 22, 2021, the Company entered into an equity purchase agreement (the “Helix Purchase Agreement”), by and among the Company, and Esports Entertainment Group, Inc. corporation incorporated under the laws of Nevada (“EEG”), whereby the Company will be acquired by EEG for all of the issued and outstanding membership units of the Company, making Helix Holding a wholly owned subsidiary of the EEG.
As consideration for the Company’s Units, EEG agreed to pay the Company’s Equity Members $17,000,000 (the “Helix Purchase Price”), to be paid fifty percent (50%) in shares of common stock of EEG, par value $0.001 per share (the “Common Stock”) (the “Helix Share Consideration”), and fifty percent (50%) in cash (the “Helix Cash Consideration”). The per share price of the Common Stock issuable as Helix Share Consideration shall be the Closing Base Price minus the Discount. “Closing Base Price” means the volume weighted average price (“VWAP”) of the Common Stock during the thirty (30) trading days immediately preceding the date of the closing under the Helix Purchase Agreement (the “Closing”). “Discount” equals the greater of (A) and (B) minus the lesser of (A) and (B) multiplied by 0.25 where (A) is the VWAP of the common stock during the thirty (30) trading days immediately preceding October 26, 2020 (which was $4.54 per share) multiplied by 1.25 (which is $5.675); and (B) is the Closing Base Price.
The Closing under the Helix Purchase Agreement is subject to the simultaneous closing under an equity purchase agreement (the “GGC Purchase Agreement”) among the Company, ggCircuit LLC, an Indiana limited liability company (“GGC”) and the equity holders of GGC (the “GGC Equity Holders”). The Closing is also subject to (i) the completion of an opinion (the “Fairness Opinion”) respecting the fairness of the consideration to be paid by EEG and received by the Helix Holding’s Equity Holders and the GGC Equity Holders pursuant to the Helix Purchase Agreement and the GGC Purchase Agreement from a financial point of view; (ii) an audit, as of and for the two years ending December 31, 2020 and 2019, of the Company; and (iii) the approval of EEG’s shareholders to the issuance of the Helix Share
| 6 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS (continued) |
Consideration in satisfaction of NASDAQ Rule 5635(a).
The parties to the Helix Purchase Agreement may terminate the Helix Purchase Agreement, among other reasons, if (i) the Fairness Opinion does not support an aggregate purchase price for Helix Holding and GGC of $43,000,000 and, based thereon, EEG is no longer willing to pay the Helix Purchase Price, or (ii) the Closing has not occurred on or before May 14, 2021 or such later date as may be mutually agreed to by the parties. EEG can also terminate the Helix Purchase Agreement if (i) upon completion of its legal, financial, tax and commercial due diligence of the Company, it is not satisfied, with the results thereof; (ii) the audit and/or review of Helix and affiliated entities cannot be completed due to fraud, material accounting errors or otherwise or if the results of the audit or the review are materially and adversely different from the financial information provided by the Company and the Helix Holding Equity Holders to EEG prior to the execution of the Helix Purchase Agreement.
In connection with the negotiation of the Helix Purchase Agreement, the EEG advanced an aggregate of $400,000 (see Note 9) to Helix during 2020 in the form of loans (the “Helix Loans”). Upon execution of the Helix Purchase Agreement, EEG paid Helix an additional $400,000 to be used for operating expenses pending the Closing (the “Operating Expense Payments”). If the Closing takes place on or prior to May 14, 2021, EEG will receive a full credit against the Helix Purchase Price for the Helix Loans and if the Closing takes place prior to April 30, 2021 EEG will receive a full credit against the Helix Purchase Price for the Operating Expense Payments. If Closing takes place after April 30, 2021, but on or prior to May 14, 2021, EEG shall receive a credit against the Helix Purchase Price for 60% of the Operating Expense Payments. If the transaction does not close, depending on the reason, a portion of the Helix Loans and the Operating Expense Payments may be forgiven.
The Helix Purchase Agreement contains customary representations, warranties, covenants, indemnification, and other terms for transactions of a similar nature.
| 2. | LIQUIDITY AND GOING CONCERN |
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern. The Company has incurred losses since inception. For the year ended December 31, 2020, the Company had a net loss of $2,560,078 and net cash used in operations from continuing operations of $1,214,498. As of December 31, 2020, the Company had $57,577 in cash, which won’t be sufficient to fund the operations and strategic objectives of the Company over the next twelve months from the date of issuance of these consolidated financial statements. Management has entered into a Purchase Agreement with EEG (see Note 1); whereby, the Company will become EEG’s wholly owned subsidiary. In January 2021, the Company received another $400,000 working capital advance (see Note 1 and Note 14) from EEG. EEG is expected to provide the necessary liquidity required to pay for operating costs and continue to finance business activities; however, management cannot provide assurance that the transaction will close and as a result of these conditions, there is substantial doubt that the company can continue as a going concern for the next twelve months from the date of the issuance of the report.
| 7 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 2. | LIQUIDITY AND GOING CONCERN (continued) |
COVID-19
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S., accelerating during the first half of March, as federal, state, and local governments react to the public health crisis, creating significant uncertainties in the U.S. economy. The Company had to close their gaming centers starting in March 2020 through June 2020. As a result of these developments, the Company had a material adverse impact on its sales, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The ultimate impact of the pandemic on the Company’s results of operations, financial position, liquidity, or capital resources cannot be reasonably estimated at this time.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principals of Consolidation
The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP. The consolidated financial statements include the financial statements of Helix Holding and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Variable Interest Entities
In accordance with Accounting Standards Codification 810, the Company considers certain affiliates to be Variable Interest Entities (“VIE”). Generally, a VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
In October 2018, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). ASU 2018-17 permits a private company (the reporting entity) to elect an alternative not to apply variable interest entity (“VIE”) guidance if (a) the reporting entity and the legal entity are under common control; (b) the reporting entity and the legal entity are not under common control of a public business entity; ( c) the legal entity under common control is not a public business entity; and ( d) the reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsection of Topic 810. The Company determined certain affiliates
| 8 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Variable Interest Entities (continued)
meet all the criteria of ASU 2018-17 and have elected not to evaluate these entities for potential consolidation. As December 31, 2020 and 2019 the Company’s loss exposure is $76,905 and $0, respectively.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates.
Cash
The Company considers all highly liquid investment instruments with an original maturity of three months or less from the original date of purchase to be cash equivalents. As of December 31, 2020 and 2019, the Company had no cash equivalents. The Company maintains its checking accounts with a major financial institution. The balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) and may, at times, exceed the federal insurance limits. As of December 31, 2020 and 2019, there were no balance in excess of the FDIC limits.
Accounts Receivable
Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually grants credit to customers with good credit standing with a maximum of 90 days and determines the adequacy of the allowance for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures. The provision is recorded against accounts receivable balances, with a corresponding charge recorded in the consolidated statements of operations and members’ equity. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. No allowance was considered necessary as of December 31, 2020 and 2019.
Property and Equipment
Property and equipment are recorded at cost, reduced by accumulated depreciation and amortization. Depreciation and amortization expense related to property and equipment is computed using the straight-line method based on estimated useful lives of the assets, or in the case of leasehold improvements, the shorter of the initial lease term or the estimated useful life of the improvements. The useful life and depreciation method are reviewed periodically to
| 9 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Property and Equipment (continued)
ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment. The estimated useful lives of depreciation and amortization of the principal classes of assets are as follows:
| Useful life | ||
| Computers | 3 - 5 years | |
| Equipment and furniture | 5 - 7 years | |
| Leasehold improvements | Lesser of useful life and lease term |
Impairment of Long-Lived Assets
The Company assesses its long-lived assets, including property, equipment, and right of use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Factors which may indicate potential impairment include a significant underperformance relative to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by that asset. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset. The fair value is estimated based on the discounted future cash flows or comparable market values, if available. The Company did not record any impairment loss during December 31, 2020 and 2019.
Revenue Recognition for Contracts with Customers
The Company has multiple sources of revenue streams. The company operates three e-sport gaming centers, provides software development and data analytics, mobile application development, e-sport gaming room rentals, and had owned and operated professional e-sports teams.
The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
| 10 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Sales, Net
E-Sport Gaming Centers - The Company operates three e-sport gaming centers, providing customers the ability to play video games on state-of-the-art equipment, and purchase food and beverages. Customers purchase time to play on the state-of-the-art equipment. Revenue for the game time and sale of the food and beverages are recognized at the point of sale using their point of sale system (“POS”). Total e-sports gaming centers revenue reported on the consolidated statements of operations and members’ equity for the years ended December 31, 2020 and 2019 totaled $324,400 and $596,490, respectively. The Company also sells gift certificates to be used at a later time. The revenue is not recognized until the gift card is redeemed. Gift certificates liability is reported on the consolidated balance sheets in the accrued expenses and other current liabilities totaling $608 and $247, as of December 31, 2020 and 2019, respectively.
Analytics Income
Software Development and Data Analytics - The Company 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 can recognize revenue over the life of the contract, utilizing the Output Method, as defined in ASC 606, which recognizes revenue on the basis of direct measurements 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. Total software development and data analytics income reported on the consolidated statements of operations and members’ equity for the years ended December 31, 2020 and 2019 totaled $185,000 and $80,000, respectively.
Mobile Application Development - The Company entered a contract to develop a mobile application. The contract requires the approval of the design mockups, prototype version, and beta version. The Company elected to use the right to invoice practical expedient and recognize revenue based on the amounts invoiced, as performance obligations are met. 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. Total mobile application development revenue included in analytics income on the consolidated statements of operations and members’ equity for the years ended December 31, 2020 and 2019 totaled $0 and $70,000, respectively.
| 11 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
E-Gaming Room Rental
During 2020 and 2019, Helix eSports rented a room and equipment at the North Bergen, NJ location to visiting e-sports teams to participate in tournaments. The rental is short-term room rental, and included within the rental income and other income on the consolidated statements of operations and members’ equity for the years ended December 31, 2020 and 2019 was $42,102 and $30,712, respectively. The company recognizes revenue when the customer uses the facility per the contract. 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.
Professional E-Sports Team (Discontinued Operations)
During 2020 and 2019 the Company owned and operated a professional e-sports teams that competed in tournaments for cash prizes. The Company had agreements with some of their players where the Company is to receive a 10% of the players’ winnings from each tournament. The Company also had contracts with their players stating that the players’ prize belongs to the Company. Revenue was recognized after the tournament was over and the player was in a cash prize standing. The payment terms and conditions vary by tournament; however, the terms generally require payment within 30 to 60 days from the end of the tournament date. Total revenue and expenses for the professional e-sports is reported in the discontinued operations section on the consolidated statements of operations.
Practical Expedients
The Company has elected the significant financing component practical expedients in applying ASC 606. Accordingly, the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Using the practical expedient under ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining a contract as an expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. The Company also elected the practical expedient for the portfolio approach, allowing contracts with similar characteristics and impacts to the consolidated financial statements to be evaluated together.
Sales Tax
The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
| 12 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Equity Method Investment
When the Company can exert significant influence over, but does not control, the investee’s operations, through voting rights or representation on the investee’s board of directors, the Company accounts for the investment using the equity method of accounting. The Company records its share in the investee’s earnings and losses in the consolidated statement of operations and members’ equity. The Company assesses its investment for other-than-temporary impairment when events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable and recognize an impairment loss to adjust the investment to its then-current fair value. The Company has not recognized any impairment during the years ended December 31, 2020 and 2019.
Advertising Costs
Advertising costs are expensed as incurred, reported on the consolidated statements of operations and members’ equity within the operating expenses totaling $91,791 and $52,936 for the years ended December 31, 2020 and 2019, respectively.
Income Taxes
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled. Helix Holdings, LLC, Helix eSports, HOZF, Saber, LANduel, Helix Foxboro, and SPJ Foxboro are all taxed as partnerships under the provision of the Internal Revenue Code. Under those provisions, these companies do not pay federal corporate income taxes on its taxable income. Instead, the members are liable for individual federal and state income taxes on their respective ownership percentage. Team Genji is taxed as a corporation under the provision of the Internal Revenue Code. Under this provision, Team Genji is subjected to the maximum federal corporate tax rate of 21% for tax years 2020 and 2019, respectively.
As of December 31, 2020, Team Genji had net operating loss carryforwards totaling approximately $885,000 for Federal Income Tax purposes. The Company experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the 1st quarter of 2021. The ownership change has and will continue to subject the Company’s pre-ownership change net operating loss carryforwards to an annual limitation, which will significantly restrict its ability to use them to offset taxable income in periods following the ownership change.
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes,” which requires the Company to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. As
| 13 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Income Taxes (continued)
of December 31, 2020 and 2019, the Company had deferred tax assets totaling approximately $186,000 and $105,000, respectively, and a deferred tax asset valuation allowance of approximately $186,000 and $105,000, respectively.
U.S. GAAP requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.
The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes. The Company’s tax returns since 2018 to 2020 are still subject for examination by taxing authorities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believes have high credit quality and are not exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships, and has not experienced any losses on such accounts. At December 31, 2020 and 2019, all of the Company’s cash was held at four accredited financial institutions.
During 2020 the Company received 11% of the revenue reported on the consolidated statement of operations from one customer. There were no customers whose revenues exceeded 10% in 2019.
Research and Development Expenses
Research and development costs consist primarily of costs incurred in connection with the development of LANduel sport wagering online application. Research and development costs are expensed as incurred.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on their balance sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. The Company adopted the following practical expedients and elected the following accounting policies related to this standard update:
| ● | Short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less. |
| 14 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recently Adopted Accounting Pronouncements (continued)
| ● | The option to not separate lease and non-lease components for certain equipment lease asset categories. | |
| ● | The package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii) not reassessing initial direct costs for any existing leases. |
The Helix Foxboro and SPJ operating lease did not go into effect and was not brought onto the consolidated balance sheet until November 6, 2019 when a right-of-use asset and lease liability of $981,564 was added. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 10.
Recently issued accounting standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU addresses the measurement of credit losses on financial statements in response to the global financial crisis in 2008 and requires issuers to realize current expected credit losses on assets not accounted for at fair value through net income. This can affect financial instruments such as loans, off-balance-sheet credit exposures, and reinsurance receivables. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s consolidated financial statements.
| 15 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recently issued accounting standards (continued)
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies the accounting for income taxes by removing exceptions regarding intra-period tax allocation of losses and recognition of deferred tax liabilities for equity method investments of a foreign subsidiary. The update aims to put out black and white requirements regarding franchise tax, step up in basis of goodwill, allocation of deferred tax expenses to legal entities in separate financial statements, and the reflection of change in tax laws or rates in annual effective tax rate computation. This update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
| 4. | DISCONTINUED OPERATIONS |
On November 10, 2020, Team Genji and Helix eSports entered into an asset transfer agreement to sell their e-sports pro teams to Oxygen, a related party, for $100. Team Genji and Helix eSports collected all of the e-sports teams’ revenue and paid expenses after the asset transfer on behalf of Oxygen from November 11, 2020 through December 31, 2020. As discussed in Note 12 related party transactions, the Company has an advance to an affiliate with Oxygen.
The following table contains additional information concerning the Company’s e-sports pro teams’ operations.
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues, net | $ | 150,723 | $ | 29,623 | ||||
| Total Revenues, net | 150,723 | 29,623 | ||||||
| Costs and Expenses | ||||||||
| Operating expenses | 483,924 | 213,326 | ||||||
| General and administrative expenses | 2,630 | 16,548 | ||||||
| Total Costs and Expenses | 486,554 | 229,874 | ||||||
| Total Discontinued Operations | (335,831 | ) | (200,251 | ) | ||||
| Loss on the sale of discontinued operations | (9,936 | ) | - | |||||
| Net Loss | $ | (345,767 | ) | $ | (200,251 | ) | ||
There are no assets and liabilities related to the discontinued operations.
| 16 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 5. | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net consisted of the following:
| As of December 31, | ||||||||
| 2020 | 2019 | |||||||
| Computers | $ | 294,475 | $ | 278,631 | ||||
| Equipment and furniture | 187,212 | 103,889 | ||||||
| Leasehold improvements | 272,038 | - | ||||||
| Subtotal | 753,725 | 382,520 | ||||||
| Construction in progress | 3,040 | 63,467 | ||||||
| Less: Accumulated depreciation and amortization | (178,081 | ) | (58,628 | ) | ||||
| Property and Equipment, Net | $ | 578,684 | $ | 387,359 | ||||
Depreciation and amortization expense was $127,189 and $50,912 for the years ended December 31, 2020 and 2019.
As of December 31, 2019, construction in progress represents cost of construction for the new e-gaming center for Helix Foxboro and SPJ Foxboro in Foxboro, MA.
As of December 31, 2020, construction in progress represents cost of construction for the new space for Saber, which is expected to be completed in early 2021.
| 6. | EQUITY METHOD INVESTMENTS |
GG CIRCUIT LLC
During 2018 Helix eSports invested $1,250,000 into GG Circuit LLC (“GG Circuit”) 20% ownership. GG Circuit is a progressive e-sport services company that helps e-sport centers around the globe successfully run their businesses. With next-generation, cloud-based management software solution, ggLeap, centers are able to run games, as well as run their own local tournaments. They also offer a year-round schedule of official ggChampions managed events and tournaments for the most popular esports games of today principally engaged in the e-sports industry. During 2019 Helix eSports invested $1,100,000 to increase their ownership to 28%. Helix eSports’ share of the net loss from GG Circuit is reported in the consolidated statements of operations and members’ equity as loss from equity investment reporting ($328,488) and ($413,785) in 2020 and 2019, respectively.
| 7. | JOINT VENTURE |
HELIX ESPORTS ACADEMY, LLC
In November 2020, Helix eSports and Rhombus Group, LLC (“Rhombus”) entered into an operating agreement (“Academy Operating Agreement”) to form a joint venture, Helix eSports Academy, LLC (“Helix Academy”), for the purpose to develop and operate e-sports centers,
| 17 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 7. | JOINT VENTURE (continued) |
HELIX ESPORTS ACADEMY, LLC (continued)
establish and operate e-sports academies. As of December 31, 2020, Helix Academy had no business.
On February 18, 2021, Helix eSports entered into a trademark license agreement with Helix eSports Academy, LLC (the “Academy”). In the agreement Helix eSports is granting the Academy exclusive right to use the Helix eSports trademark in connection with the ordinary course of business. The Academy agrees to pay Helix eSports an annual license fee equal to 2% of the Academy’s gross revenue.
| 8. | LOANS PAYABLE |
During 2020, 2019, and 2018 Saber had a revolving six-month loan with Square Inc. The loan had a variable interest rate between 12% - 17% annually. Payments were deducted monthly from the merchant credit card sales processed through Square’s point of sale application. As of December 31, 2020 and 2019, Saber had a principal balance of $23,560 and $9,088, respectively. The Square loans as of December 31, 2020 and 2019 mature on August 3, 2021 and February 5, 2020, respectively.
During 2020 Saber received a lease incentive for signing a new lease to be used to build out a new gaming center (see Note 10). The lease incentive is non-interesting bearing and payable on demand if not used for the build out. As of December 31, 2020 and 2019, Saber had a principal balance of $13,400 and $0, respectively.
During 2018 Saber received a loan for from an independent third party for $19,037 which was used for start-up cost and to purchase equipment. The loan was non-interesting bearing. This loan was paid during 2019.
New Jersey Economic Development Authority Loan Payable
During 2020, Helix eSports and Saber received proceeds of from the New Jersey Economic Development Authority (“NJEDA”) Small Business Emergency Assistance Loan Program. This program provided working capital loans of up to $100,000 to businesses with less than $5 million in revenues. Loans made through the program will have ten-year terms with zero percent for the first five years, then resetting to the EDA’s prevailing floor rate (capped at 3.00%) for the remaining five years. The funds have restrictions related to their use in certain types of activities. As of December 31, 2020, the outstanding principal balance for Helix eSports and Saber is $15,000 and $9,000, respectively. As mentioned in Note 1, the Company’s Equity Holders are selling their membership interest in the Company to EEG, this transaction would cause the Company to be in default of the loan. The Company expects to pay this balance prior to closing with EEG.
| 18 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 8. | LOANS PAYABLE (continued) |
Paycheck Protection Program Loans
On April 21, 2020, Helix eSports, entered into an original loan agreement with Old Dominion Bank as the lender (“Lender”) for a loan in an aggregate principal amount of $42,339 (the “loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and implemented by the U.S. Small Business Administration (the “SBA”). The Lender has security interest in all assets of Helix eSports. As of March 26, 2021, Helix eSports applied for loan forgiveness.
On May 1, 2020 Saber, entered into an original loan agreement with Chase Bank as the lender for a loan in an aggregate principal amount of $15,553 pursuant to the PPP under the CARES Act and by the SBA.
The loans mature in two years and bears interest at a rate of 1% per year, with all payments deferred through the six-month anniversary of the date of the loan. Principal and interest are payable monthly commencing on October 21, 2020 and November 1, 2020 and may be prepaid by the Company at any time prior to maturity without penalty. The Company may apply for forgiveness of amounts due under the loan, with the amount of potential loan forgiveness to be calculated in accordance with the requirements of the PPP based on payroll costs, any mortgage interest payments, any covered rent payments and any covered utilities payments during the 8-24 week period after the origination date of the loan. The Company utilized the proceeds of the loans for payroll and other qualifying expenses, but there can be no assurances that any portion of the loan will be forgiven. As mentioned in Note 1, the Company’s Equity Holders are selling their membership interest in the Company to EEG, this transaction would cause the Company to be in default of the loan. The Company expects to pay this balance prior to closing with EEG.
Economic Injury Disaster Loans
On April 14, 2020, Helix Foxboro entered into a promissory note agreement with the SBA as the lender (“Lender”) for a loan in an aggregate principal amount of $15,000 (the “loan”) pursuant to its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business.
Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan is up to $150,000, with proceeds to be used for working capital purposes. Payments to the loan will begin twelve (12) months from the date of the promissory notes. The balance of principal and interest will be payable thirty (30) years from the date of the promissory note. Interest will accrue at the rate of 3.75% per annum and will accrue only on funds advanced from date(s) of each advance. As mentioned in Note 1, the Company’s Equity Holders are selling their membership interest in the Company to EEG, this transaction would cause the Company to be in default of the loan. The Company expects to pay this balance prior to closing with EEG.
| 19 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 8. | LOANS PAYABLE (continued) |
The chart below is the summary of the loans payable reported on the consolidated balance sheets as of December 31:
| 2020 | 2019 | |||||||
| Square loan payable | $ | 23,560 | $ | 9,088 | ||||
| NJEDA payable | 24,000 | - | ||||||
| PPP loan payable | 57,892 | - | ||||||
| EIDL payable | 15,000 | - | ||||||
| Lease incentive payable | 13,400 | - | ||||||
| $ | 133,852 | $ | 9,088 | |||||
The chart below is the aggregate maturities of the loans payable for the next five years and thereafter are payable as follows:
| 2021 | $ | 61,243 | ||
| 2022 | 33,268 | |||
| 2023 | 7,831 | |||
| 2024 | 2,716 | |||
| 2025 | 2,729 | |||
| Thereafter | 26,065 | |||
| 133,852 | ||||
| Less: current portion | (61,243 | ) | ||
| Total | $ | 72,609 |
| 9. | WORKING CAPITAL ADVANCE |
As discussed in Note 1, the Company signed a purchase agreement to sell to EEG for $17 million in cash and stock. Pursuant to this transaction, EEG advance $400,000 to the Company as working capital and an initial deposit on the sale. During 2020, the Company received $400,000 in advance proceeds. The advance shall be evidenced by a zero-interest Promissory Note, in a form to be mutually agreed upon by the Company and EEG. See Note 1 for the terms of the working capital advance.
| 10. | LEASING ACTIVITIES |
The Company adopted ASC Topic 842-Leases as of January 1, 2019. The Company determines if a contract contains a lease at inception. U.S. GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease terms used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the
| 20 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 10. | LEASING ACTIVITIES (continued) |
renewal option is reasonable certain and failure to exercise such operations which result in an economic penalty. The operating and financing leases are guaranteed by Helix eSports.
The Company has operating leases for gaming center facilities. Leases with an initial term of 12 months or less are not recognized in the consolidated balance sheets, the leases are recognized on the consolidated statements of operations in the general and administrative expenses totaling $37,131 and $79,416 , for the years ended December 31, 2020 and 2019, respectively. The variable rate lease that was not recognized on the consolidated balance sheets is still subject to the qualitative and quantitative disclosures from ASC 842-20-50-3 and 842-20-50-4. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.
ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the comment date in determining the present value of future lease payments.
The Company has financing leases with an affiliate (see Note 12) for gaming equipment, located in Foxboro, Massachusetts. The leases have remaining lease terms of 4 years, some of which include options to extend the leases for up to 3 years to 5 years.
The following summarizes the line items in the consolidated balance sheets which include amounts for operating and finance leases as of December 31:
| 2020 | 2019 | |||||||
| Operating Leases | ||||||||
| Right of use asset | $ | 776,232 | $ | 963,696 | ||||
| Total right of use asset | 776,232 | 963,696 | ||||||
| Operating lease liability, current portion | 252,745 | 60,278 | ||||||
| Operating lease liability, noncurrent | 713,772 | 921,286 | ||||||
| Total operating lease liabilities | $ | 966,517 | $ | 981,564 | ||||
| Finance Leases | ||||||||
| Finance lease right of use assets | $ | 122,361 | $ | - | ||||
| Amortization of right of use assets | (22,433 | ) | - | |||||
| Finance lease right of use assets, net | 99,928 | - | ||||||
| Finance lease liability, current portion | 41,032 | - | ||||||
| Finance lease liability, noncurrent | 92,936 | - | ||||||
| Total finance lease liabilities | $ | 133,968 | $ | - | ||||
| 21 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 10. | LEASING ACTIVITIES (continued) |
The following summarizes the weighted average remaining lease term and discount rate as of December 31:
| 2020 | 2019 | |||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | 4 years | 5 years | ||||||
| Finance leases | 4 years | - | ||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | 3.31 | % | 3.65 | % | ||||
| Finance leases | 11.34 | % | 0.00 | % | ||||
The maturities of lease liabilities as of December 31, 2020 were as follows:
| Year Ending December 31: | Operating | Finance | ||||||
| 2021 | $ | 234,744 | $ | 50,703 | ||||
| 2022 | 241,786 | 50,702 | ||||||
| 2023 | 249,040 | 50,702 | ||||||
| 2024 | 256,511 | - | ||||||
| 2025 | 36,000 | - | ||||||
| Total lease payments | 1,018,081 | 152,107 | ||||||
| Less: Interest | (51,564 | ) | (18,139 | ) | ||||
| Present value of lease liabilities | $ | 966,517 | $ | 133,968 | ||||
The following summarizes the line items in the consolidated statements of operations and members’ equity which include the components of lease expense for the year ended December 31:
| 2020 | 2019 | |||||||
| Operating lease expense included in general and administrative expenses | $ | 209,896 | $ | 17,868 | ||||
| Finance lease cost: | ||||||||
| Amortization
of lease assets included in depreciation and amortization expense |
|
$ |
22,433 |
|
|
$ |
- |
|
| Interest on leases liabilities included in interest expense | 11,607 | - | ||||||
| Total finance costs | $ | 34,040 | $ | - | ||||
| 22 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 10. | LEASING ACTIVITIES (continued) |
The following summarizes cash flow information related to leases for the year ended December 31:
| 2020 | 2019 | |||||||
| Cash
paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
| Operating cash flows from operating leases | $ | 224,943 | $ | 17,868 | ||||
| Operating cash flows from finance leases | 11,607 | - | ||||||
| Financing cash flows from finance leases | - | - | ||||||
| Lease assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | 5,407 | 981,564 | ||||||
| Finance leases | 122,361 | - | ||||||
On September 1, 2020 Saber entered into a two year lease agreement for space to construct a gaming center located in New Jersey, for no base rent payment but for 50% of Saber’s net profits from the gaming center, this is a variable lease payment. Per ASC 842 variable lease payments are defined as, payments by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstance occurring after the commencement date, other than passage of time. Variable lease payments other than those that depend on an index or a rate should not be included in lease payments for purposes of classification and measurement of the lease (unless those payments are in substance fixed lease payments). With no base rent and a variable lease payment that is highly unpredictable month to month it would not qualify as a fixed lease payment in substance. As such, the lease payments cannot be valued accurately to create the right-of-use asset and lease liability. As of December 31, 2020, the lease has not commenced.
The Lessor awarded Saber with a lease incentive of $13,400 to be used towards leasehold improvements. The current award is reported on the consolidated balance sheets on the loan payable line item. As of December 31, 2020, Saber incurred $3,040 in the construction of the new gaming facility. This amount is reported as part of the property and equipment, net on the consolidated balance sheets as of December 31, 2020.
| 11. | EQUITY INCENTIVE PLAN |
On February 11, 2019, the stockholders of Team Genji approved the Team Genji, Inc. 2019 Equity Incentive Plan (the “2019 Plan”). The executive officers, employees, consultants, and directors of Team Genji, including its affiliated companies are eligible to participate in the 2019 Plan. The 2019 Plan is administered by the Board of Directors (the “Board”). The 2019 Plan provides for the grant of equity-based compensation in the form of incentive stock options, non-qualified stock options, restricted stock, or any combination thereof.
The 2019 Plan also permits the grant of awards that qualify for “performance-based compensation” within the meaning of Section 162(m) of the U.S. Internal Revenue Code. The Board has the authority to determine the type of award, as well as the amount, terms and conditions of each award, under the 2019 Plan subject to the limitations and other provisions of the 2019 Plan. . An aggregate of 80,000 shares of Team Genji’s common stock are authorized for issuance under the 2019 Plan, subject to adjustment as provided in the 2019 Plan for stock
| 23 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 11. | EQUITY INCENTIVE PLAN (continued) |
splits, dividends, distributions, recapitalizations and other similar transactions or events. If any shares subject to an award are forfeited, expire, lapse or otherwise terminate without issuance of such shares, such shares shall, to the extent of such forfeiture, expiration, lapse or termination, again be available for issuance under the 2019 Plan. As of December 31, 2020 and 2019 no shares have been granted or exercised, respectively.
| 12. | RELATED PARTY TRANSACTIONS |
During 2020 and 2019, Saber received computers in exchange for a loan from an affiliate, LanLease, LLC, valued at $0 and $66,846, respectively. The loan is a zero interest, unsecured, and is payable on demand.
During 2020 and 2019, Helix eSports and Saber received computers and operating funds in exchange for a loan from an affiliate, Winding River LLC, valued at $102,000 and, $53,538, respectively. As of December 31, 2020, the total outstanding balance is $155,538 and $53,538, respectively. These funds were used to support the operations of Helix eSports and Saber. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, an affiliate, SCV LLC, provided loan proceeds to Helix eSports, SPJ Foxboro, and Helix Foxboro. As of December 31, 2020, the total outstanding balance is $46,000, $13,000, and $70,686, respectively. There were no funds received in 2019 from SCV LLC. These funds were used to support the operations of Helix eSports, SPJ Foxboro, and Helix Foxboro. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, Helix eSports and SPJ Foxboro received operating funds in exchange for a loan from an affiliate, LanLease LLC, valued at $63,600 and $4,738, respectively. LanLease did not provide any loan proceeds during 2019. The loan is a zero interest, unsecured, and is payable on demand.
During 2020 and 2019, Helix eSports received loan proceeds from an affiliate, Blue Guitar LLC, of $15,000 and $0, respectively. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, LanLease LLC and Helix Foxboro entered into a lease agreement for gaming equipment (see Note 10). The leased equipment was capitalized as a finance lease, the asset and liability are valued at $99,928 and $133,968, respectively on the consolidated balance sheets as of December 31, 2020. There were no similar transactions during 2019.
On April 10, 2020, the Company purchased the two-pro e-sports team in the Rocket League and Rainbow Six: Siege (the “Teams”) for $14,713. The purchase included the two team’s player contracts, commercial sponsorships, publisher relationships, all merchandise and products applicable to the teams, all league standings and participation slots for the team, all revenues related to the teams arising after April 1, 2020. As mentioned in Note 4 discontinued operations, on November 10, 2020 the Company entered into an asset transfer agreement for their pro e-sports teams with an affiliate, Oxygen, for $100. The Company continued to collect all prizes and paid the expenses for the pro e-sports team after November 10, 2020 through December 31, 2020. As of December 31, 2020, the Company has an advance to an affiliate of
| 24 |
Helix Holdings, LLC Notes to Consolidated Financial Statements
December 31, 2020 and 2019 |
| 12. | RELATED PARTY TRANSACTIONS (continued) |
$76,905 reported on the consolidated balance sheets resulting from expenses paid for prior to the transfer. The advance to affiliate is zero interest and is payable on demand.
Loan from Member
During 2018 the majority member of Helix Holding loaned Helix eSport $144,292 for operating capital. During 2019, $79,500 was converted from a loan to member equity. During 2020, the member loaned the Company another $95,000 to support the operations of Helix eSports. As of December 31, 2020 the balance due to the member is $159,792. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, the majority member of Helix Holding loaned SPJ Foxboro and Helix Foxboro $6,000 and $10,000, respectively, to support the operations of both companies. The loan is a zero interest, unsecured, and is payable on demand.
| 13. | OTHER INCOME |
Economic Injury Disaster Loan/Grant
On April 14, 2020, Helix eSports and Saber executed the standard loan documents required for securing a loan from the SBA under its EIDL assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. In connection with the EIDL Loan, Helix eSports, and Saber each received a $10,000 advance, which does not have to be repaid.
| 14. | SUBSEQUENT EVENTS |
Management has evaluated, for potential recognition and disclosure, events subsequent to the balance sheet date through April 21, 2021, the date the consolidated financial statements were available to be issued.
On January 26, 2021, the Company received another working capital advance from EEG totaling $400,000. See Note 1 for the terms of the second working capital advance.
On February 19, 2021, Helix eSports entered into an original loan agreement with Old Dominion Bank as the lender (“Lender”) for a loan in an aggregate principal amount of $107,756 (the “loan”) pursuant to the PPP round 2 under the Consolidated Appropriations Act, 2021 and implemented by the U.S. Small Business Administration (the “SBA”). The Lender has security interest in all assets of Helix eSports. The PPP round 2 has the same terms as the PPP under the CARES act.
| 25 |
Exhibit 99.2
ggCircuit, LLC
Consolidated Financial Statements
and Independent Auditors’ Report
December 31, 2020 and 2019
ggCircuit, LLC
Contents
INDEPENDENT AUDITORS’ REPORT
To the Members
of ggCircuit, LLC
We have audited the accompanying consolidated financial statements of ggCircuit, LLC (an Indiana Corporation) and Subsidiary (collectively, the “Company”), which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations and changes in members’ equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ggCircuit, LLC and Subsidiary as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
/s/ Friedman LLP
Marlton, New Jersey
April 21, 2021
ggCircuit, LLC
December 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 56,915 | $ | 246,736 | ||||
| Accounts receivable, net | 158,416 | 86,563 | ||||||
| Prepaid expenses | 21,892 | 10,632 | ||||||
| Total current assets | 237,223 | 343,931 | ||||||
| Equipment, net | 8,860 | 13,483 | ||||||
| Other assets: | ||||||||
| Due from related party | - | 55,000 | ||||||
| Software development costs, net | 171,126 | 194,405 | ||||||
| Total assets | $ | 417,209 | $ | 606,819 | ||||
| Liabilities and Members’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Revolving credit facility | $ | 600,000 | $ | - | ||||
| Paycheck protection program loan | 10,000 | - | ||||||
| Note payable, member | 200,000 | - | ||||||
| Accounts payable and other liabilities | 250,023 | 280,887 | ||||||
| Accounts payable - related party | 4,550 | 4,875 | ||||||
| Deferred revenue | 235,770 | 180,982 | ||||||
| Total current liabilities | 1,300,343 | 466,744 | ||||||
| Noncurrent liabilities: | ||||||||
| Long-term debt - EIDL | 150,000 | - | ||||||
| Total liabilities | 1,450,343 | 466,744 | ||||||
| Contingencies | ||||||||
| Members’ equity (deficit) | (1,033,134 | ) | 140,075 | |||||
| Total liabilities and members’ equity (deficit) | $ | 417,209 | $ | 606,819 | ||||
See accompanying notes to the consolidated financial statements.
| 2 |
ggCircuit, LLC
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Revenue, net: | ||||||||
| Subscriptions, net | $ | 667,767 | $ | 541,628 | ||||
| Subscriptions, net - related party | 4,904 | 66,300 | ||||||
| Consulting | 668,253 | 783,685 | ||||||
| Consulting - related party | 9,600 | 27,000 | ||||||
| Strategic partnership | 632,100 | 369,990 | ||||||
| Event management | - | 31,535 | ||||||
| Total revenue, net | 1,982,624 | 1,820,138 | ||||||
| Cost of revenue: | ||||||||
| Support and maintenance | 290,835 | 241,789 | ||||||
| Support and maintenance - related party | - | 57,600 | ||||||
| Professional services | 301,148 | 295,699 | ||||||
| Professional services - related party | - | 52,594 | ||||||
| Web hosting | 229,168 | 247,078 | ||||||
| Event expense | - | 11,366 | ||||||
| Total cost of revenue | 821,151 | 906,126 | ||||||
| Gross profit | 1,161,473 | 914,012 | ||||||
| Operating expenses: | ||||||||
| Sales, general, and administrative | 805,422 | 555,380 | ||||||
| Sales, general, and administrative - related party | 187,500 | 535,197 | ||||||
| Product research and development | 917,402 | 960,854 | ||||||
| Product research and development - related party | 238,369 | 248,695 | ||||||
| Depreciation and amortization | 130,183 | 98,240 | ||||||
| Total operating expenses | 2,278,876 | 2,398,366 | ||||||
| Other income (expense): | ||||||||
| Gain on extinguishment of debt | 75,750 | - | ||||||
| Loss on write-off of advances to affiliate | (75,000 | ) | - | |||||
| Grant income | 10,000 | - | ||||||
| Interest expense - related party | (13,542 | ) | - | |||||
| Other expenses | (55,248 | ) | - | |||||
| Total other expense, net | (58,040 | ) | - | |||||
| Net loss | (1,175,443 | ) | (1,484,354 | ) | ||||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustment | 2,234 | 6,499 | ||||||
| Comprehensive loss | $ | (1,173,209 | ) | $ | (1,477,855 | ) | ||
See accompanying notes to the consolidated financial statements.
| 3 |
ggCircuit, LLC
Consolidated Statements of Changes in Members’ Equity (Deficit)
Years Ended December 31, 2020 and 2019
| Balance, January 1, 2019 - 100,001 units issued and outstanding | $ | 517,930 | ||
| Contributions - 11,110 units issued | 1,100,000 | |||
| Net loss | (1,484,354 | ) | ||
| Foreign currency translation adjustment | 6,499 | |||
| Balance, December 31, 2019 - 111,111 units issued and outstanding | 140,075 | |||
| Net loss | (1,175,443 | ) | ||
| Foreign currency translation adjustment | 2,234 | |||
| Balance, December 31, 2020 - 111,111 units issued and outstanding | $ | (1,033,134 | ) |
See accompanying notes to the consolidated financial statements.
| 4 |
ggCircuit, LLC
Consolidated Statements of Cash Flows
Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,175,443 | ) | $ | (1,484,354 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Bad debt | 29,400 | 22,890 | ||||||
| Depreciation and amortization | 130,183 | 98,240 | ||||||
| Gain on extinguishment of debt | (75,750 | ) | - | |||||
| Write-off of advances to affiliate | 75,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable | (101,253 | ) | (75,911 | ) | ||||
| Accounts receivable - related party | - | 11,000 | ||||||
| Prepaid expenses | (11,260 | ) | (294 | ) | ||||
| Increase (decrease) in: | ||||||||
| Accounts payable and other liabilities | (28,630 | ) | 274,693 | |||||
| Accounts payable - related party | (325 | ) | (24,767 | ) | ||||
| Deferred revenue | 54,788 | 91,992 | ||||||
| Net cash used in operating activities | (1,103,290 | ) | (1,086,511 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Due from related party | (20,000 | ) | (49,022 | ) | ||||
| Purchase of equipment | - | (13,868 | ) | |||||
| Payment of software development costs | (102,281 | ) | (16,285 | ) | ||||
| Net cash used in investing activities | (122,281 | ) | (79,175 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Borrowings from revolving credit facility | 600,000 | - | ||||||
| Proceeds from paycheck protection program loan | 85,750 | - | ||||||
| Borrowings from note payable, member | 200,000 | - | ||||||
| Borrowings on long-term debt | 150,000 | - | ||||||
| Member contributions | - | 1,100,000 | ||||||
| Net cash provided by financing activities | 1,035,750 | 1,100,000 | ||||||
| Net decrease in cash | (189,821 | ) | (65,686 | ) | ||||
| Cash, beginning of year | 246,736 | 312,422 | ||||||
| Cash, end of year | $ | 56,915 | $ | 246,736 | ||||
| Supplementary disclosure of cashflow information: | ||||||||
| Interest paid | $ | 13,542 | $ | - | ||||
| Noncash investing and financing activities: | ||||||||
| Principal of paycheck protection program loan forgiven | $ | 75,750 | $ | - | ||||
See accompanying notes to the consolidated financial statements.
| 5 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
| 1. | Description of Business |
ggCircuit, LLC (ggCircuit) was organized as an Indiana limited liability company in March 2018 to provide software as a service (SaaS) and leading-edge solutions for the esports industry. ggCircuit offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers and product manufacturers. The Company’s Limited Liability Company Agreement (Operating Agreement) provides for two classes of common units (Units). The Company has authorization under the Operating Agreement to issue one million Units. As of December 31, 2020 and 2019, the Company had 111,111 Class A Units issued and outstanding. There were no Class B Units issued as of December 31, 2020 and 2019. Under the terms of the Operating Agreement, the term of the Company will continue perpetually unless sooner terminated as provided in the Operating Agreement. Under the terms of the Operating Agreement, a Member’s liability is limited to capital contributions previously made by such member and shall have no personal liabilities for the Company or each other.
ggCircuit Limited (GG Limited) is a private limited company under the registered office in Northern Ireland incorporated in July 2015. GG Limited provides SaaS services to esport centers worldwide. GG Limited is wholly-owned by ggCircuit.
In January 2021, the Company entered into a purchase agreement with Esports Entertainment Group, Inc. (Esports) whereby Esports can acquire all of the issued and outstanding membership units of the Company, making the Company a wholly owned subsidiary of Esports (see note 13).
| 2. | Liquidity and Going Concern |
The Company has incurred substantial losses and cash used in operating activities since inception. For the year ended December 31, 2020 and 2019, the Company had a net loss of $1,175,443 and $1,484,354, respectively, and net cash used in operations of $1,103,290 and $1,086,511, respectively. As of December 31, 2020, the Company had a members’ deficit of $1,033,134. Management has entered into a Purchase Agreement with Esports (see Note 13). Esports is expected to provide the necessary liquidity required to pay for operating costs and continue to finance business activities. Additionally, the Esports advanced an aggregate of $600,000 (see note 7) for the year ended December 31, 2020, and an additional $600,000 upon execution of the purchase agreement (see note 13). Based on the cash generated from operations, available cash, and liquidity expected to be provided by Esports, the Company expects to have available funds to satisfy its current obligations to continue operations. However, management can not provide assurance that the transaction will close and as a result of these conditions (i.e., recurring operating losses), there is a substantial doubt of the Company’s ability to continue as a going concern for the next twelve months from the date of issuance of this report.
The outbreak of the 2019 coronavirus disease (COVID-19), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, adversely affected workforces, economies, and financial markets globally. Due to outbreak of COVID-19, esports gaming centers have experienced negative effects and noticeable disruptions from COVID-19 related restrictions. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and new information may emerge concerning the COVID-19 pandemic which may result in continued negative effects to the esports industry.
| 6 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
| 3. | Summary of Significant Accounting Policies |
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of ggCircuit and GG Limited (collectively, the Company) and are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany transactions and balances have been eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Occasionally, balances may exceed the FDIC deposit insurance amount; that excess is uninsured. The Company did not have cash equivalents at December 31, 2020 and 2019.
Accounts Receivables
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within a set time period from the invoice date. Accounts receivable are stated at the amount management expects to collect on outstanding balances from customers.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. If actual collections experience changes, revision to the allowance may be required. Accounts are written off against the allowance when they are determined to be uncollectible based on management’s assessment of individual accounts. The allowance for doubtful accounts was $15,600 and $32,210 at December 31, 2020 and 2019, respectively. Bad debt expense was $29,400 and $22,890 for the years ended December 31, 2020 and 2019, respectively.
Prepaid Expenses
Prepaid expenses represent goods or services for which payment has been made but the goods have not been received or services have not been rendered.
Equipment
Equipment is recorded at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Repair and maintenance costs are expensed as incurred. Estimated useful life for equipment was three years.
| 7 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Software Development Costs
Costs incurred to develop software for internal-use are capitalized and amortized over the useful life of the software. Amortization of capitalized software development costs begins when the application is substantially complete and ready for its intended use. Amortization is computed using the straight-line method over the estimated economic life of the product which is estimated to be three years. Costs related to design or maintenance of internal-use software are expensed as incurred.
Long-lived Assets
Long-lived assets, including definite-life intangible assets, are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount to future undiscounted cash flows expected to be generated by the related asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the estimated fair value of the asset. No impairment was recognized for long-lived assets for the years ended December 31, 2020 and 2019. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Income Taxes
ggCircuit is a limited liability company and has elected to be taxed as a partnership in accordance with provisions of the Internal Revenue Code. The members report their share of ggCircuit’s income or loss on their individual income tax return. Accordingly, ggCircuit does not provide for income taxes in the consolidated financial statements.
GG
Limited is a private limited company subject to the tax jurisdiction of Northern Ireland. Under statutory requirements of Northern Ireland,
GG Limited is subject to business tax on its profits. GG Limited provides for current and deferred tax liabilities and assets using an
asset and liability approach, along with a valuation allowance as appropriate. Deferred income taxes arise from
temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective
tax basis, and operating loss and tax credit carryforwards, if any. Deferred income taxes are measured using enacted tax rates in effect
for the year in which the temporary differences are expected to be recovered or settled.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.
The Company reviews its tax positions for uncertainty and records a provision for tax positions which may not be sustained based on their technical merits if examined by the taxing authorities. At December 31, 2020 and 2019, there were no matters requiring a provision for uncertain tax positions. The tax years 2018-2020 remain open to examination by the taxing jurisdictions to which the Company is subject.
| 8 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Revenue Recognition
The Company determines revenue recognition by:
| ● | Identifying the contract, or contracts, with a customer; | |
| ● | Identifying the performance obligations in each contract; | |
| ● | Determining the transaction price; | |
| ● | Allocating the transaction price to the performance obligations in each contract; and | |
| ● | Recognizing revenue when, or as, performance obligations are satisfied by transferring the promised goods or services. |
Subscription Revenue, Net – revenue generated by subscription services through the Company’s cloud-based esport management platform provided to customers net of discounts and coupons. The Company’s primary performance obligation is to provide the customer access to the hosted platform. The Company recognizes subscription revenue ratably over the term of the contract, which 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.
Consulting Revenue - revenue generated by services provided to customers to provide hardware and equipment, sourcing, training, planning, and technology implementation services. The Company considers hardware and equipment, and implementation services (sourcing, training, planning, and technology implementation services), and design of user interface 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.
Strategic Partnership Revenue - revenue generated from partnership contracts with strategic customers. 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.
Event Revenue - revenue generated from organized events are recognized over time as the events occur. Organized events are typically less then 30 days in length.
Contracts with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the SaaS sold, customer demographics, geographic locations, and the number and types of users within our contracts.
| 9 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Deferred Revenue
Deferred revenue primarily consists of customer payments received in advance of revenues being recognized from our subscription and strategic partnership contracts.
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Beginning of the year | $ | 180,982 | $ | 88,990 | ||||
| Additions | 1,115,774 | 780,792 | ||||||
| Revenue recognized | (1,060,986 | ) | (688,800 | ) | ||||
| End of the year | $ | 235,770 | $ | 180,982 | ||||
Practical Expedients
As permitted under ASU 2014-09 (and related ASUs), the Company has elected to use the following practical expedients that are available under Topic 606:
| ● | To recognize commission expense, an incremental cost of obtaining a contract, as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less; and | |
| ● | To apply the revenue standard to a portfolio of contracts (or performance obligations) with similar characteristics, as it expects that the effects on the consolidated financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts. | |
| ● | The Company has elected the significant financing component practical expedients in applying Topic 606. Accordingly, the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. |
Sales Tax
The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of accounts receivable.
| 10 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Concentrations of Business and Credit Risk
The Company reviews the credit history of customers before extending credit, monitors receivable balances closely, and establishes allowances for doubtful accounts based on specific customer risk, industry risks, historical trends, and other information. The Company does not require collateral for accounts receivables.
One customer accounted for 16% and 19% of the Company’s consolidated revenue in 2020 and 2019, respectively. Two customers accounted for 14% and 13% of the Company’s consolidated revenue in 2020. Two customers accounted for 18% and 27% of the Company’s consolidated accounts receivable at December 31, 2020, and 13% and 13% of the Company’s consolidated accounts receivable at December 31, 2019. One customer accounted for 21% of the Company’s consolidated accounts receivable at December 31, 2020. Three customers accounted for 18%, 14%, and 20% of the Company’s consolidated accounts receivable at December 31, 2019.
One related party vendor, Velocity 42 (see note 10), represented approximately 14% and 13% of total expenditures for the years ended December 31, 2020 and 2019, respectively.
Foreign Currency Translation
The British pound is the functional currency of GG Limited. The Company translates the functional currency into US dollars based on the current exchange rate at the end of the year for the balance sheet, and a weighted average rate for the year in the consolidated statements of operations and comprehensive loss. Translation adjustments of $4,603 and $2,370 are reflected as accumulated other comprehensive income in members’ equity (deficit) at December 31, 2020 and 2019, respectively.
Advertising Costs
The Company incurs advertising costs in the normal course of business, which are expensed as incurred. Advertising costs were $27,985 and $143,633 for the years ended December 31, 2020 and 2019, respectively and are included in sales, general, and administrative expense in the consolidated statements of operations.
Research and Development Costs
Expenditures for research and development activities relating to software development are expensed as incurred. Research and development costs were $1,155,771 and $1,209,549 for the years ended December 31, 2020 and 2019, respectively.
Variable Interest Entity
In accordance with Accounting Standards Codification 810, the Company considers entities affiliated with the Company through common ownership to be Variable Interest Entities (“VIE”). Under the consolidation guidance, the Company must make an evaluation of the entity to determine if they are required to be consolidated.
Generally,
a VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit
the entity to finance its activities without additional
| 11 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Variable Interest Entity (continued)
subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i)the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
In October 2018, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17).
ASU 2018-17 permits a private company (the reporting entity) to elect an alternative not to apply variable interest entity (VIE) guidance if (a) the reporting entity and the legal entity are under common control; (b) the reporting entity and the legal entity are not under common control of a public business entity; (c) the legal entity under common control is not a public business entity: and (d) the reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsection of Topic 810.
The Company determined that Tilt, LLC, Velocity 42, iGames, and Helix eSports LLC met all of the criteria of the private company alternative and has elected not to evaluate the entity for potential consolidation.
Recently Issued Accounting Guidance
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company’s accounts receivables, certain financial instruments, and contract assets. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022, and requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 will become effective for the Company on January 1, 2023. The Company is evaluating the new guidance and its impact, if any, on the accompanying consolidated financial statements.
| 4. | Accounts Receivable |
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Accounts receivable | $ | 174,016 | $ | 118,773 | ||||
| Allowance for doubtful accounts | (15,600 | ) | (32,210 | ) | ||||
| $ | 158,416 | $ | 86,563 | |||||
| 12 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
| 5. | Software Development Costs |
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Software development costs | $ | 410,775 | $ | 308,494 | ||||
| Less accumulated amortization | (239,649 | ) | (114,089 | ) | ||||
| $ | 171,126 | $ | 194,405 | |||||
Amortization expense was $125,560 and $97,855 for the years ended December 31, 2020 and 2019, respectively.
Estimated amortization expense in each of the succeeding years is as follows:
| Years ending December 31, | ||||
| 2021 | $ | 120,692 | ||
| 2022 | 39,069 | |||
| 2023 | 11,365 | |||
| $ | 171,126 | |||
| 6. | Equipment |
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Equipment | $ | 13,868 | $ | 13,868 | ||||
| Less accumulated depreciation | (5,008 | ) | (385 | ) | ||||
| $ | 8,860 | $ | 13,483 | |||||
Depreciation expense was $4,623 and $385 in 2020 and 2019, respectively.
| 7. | Revolving Credit Facility |
In
September 2020, the Company entered into a letter of intent with a third-party (Esports) for the sale of all the stock and assets of
the Company (see note 13). In conjunction with the acquisition, on September 22, 2020 (the effective date), the Company entered into
an agreement with the acquirer of the Company for a revolving credit facility with maximum availability of
| 13 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Revolving Credit Facility (continued)
$600,000 with interest rate of 0%. The credit facility matures the earlier of 12 months following the effective date or the date the transaction is completed or terminated. At December 31, 2020, the outstanding balance of the revolving credit facility was as $600,000.
| 8. | Long-term debt |
In May 2020, ggCircuit entered into an Economic Injury Disaster Loan (EIDL) under the U.S. Small Business Administration (SBA) with a principal amount of $150,000. Interest on the loan accrues at 3.75% per annum. Commencing in June 2021, the loan is payable in monthly installments of $731 including principal and interest through May 2050. The loan is secured by substantially all of the Company’s assets and is guaranteed by the Company’s majority members. Proceeds of EIDL can only be used by the Company as working capital to alleviate economic injury in accordance with the terms of the EIDL agreement. Under the terms of the loan, if the Company changes ownership without SBA’s prior written consent, the loan will be considered to be in default and the SBA may a) require immediate payment of all amounts owing under this Note; b) have recourse to collect all amounts owing from any Borrower or Guarantor (if any); c) file suit and obtain judgment; d) take possession of any Collateral; or e) Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.
In April 2020, in conjunction with the Program above, the Company was advanced $10,000 through the SBA’s COVID-19 EIDL program. The advance is a grant that provides emergency working capital to small businesses and does not require repayment.
Long-term debt matures as follows:
| Years ending December 31, | ||||
| 2021 | $ | - | ||
| 2022 | - | |||
| 2023 | 2,550 | |||
| 2024 | 3,299 | |||
| 2025 | 3,425 | |||
| Thereafter | 140,726 | |||
| Total | $ | 150,000 | ||
| 9. | Paycheck Protection Program |
In
April 2020, the Company received funding pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Paycheck Protection
Program (the Program) in the amount of $85,750. Under the terms of the Program, recipients may be granted forgiveness for all or a portion
of the funding if that amount is used for qualifying expenses as described in the CARES Act. The Company used the entire amount for qualifying
expenses and met all other eligibility criteria for forgiveness
| 14 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Paycheck Protection Program (continued)
in the Program. A portion of the loan in the amount of $75,750 was forgiven in November 2020. As such, the forgiveness was recognized as gain on extinguishment of debt in 2020. At December 31, 2020 the outstanding balance was $10,000 and was forgiven in 2021.
| 10. | Related Party Transactions |
Related parties are entities affiliated with the Company through common ownership.
Tilt
In 2020 and 2019, the Company made $20,000 and $55,000, respectively, in advances to Tilt, LLC (Tilt), an entity owned by a member of the Company, primarily to accommodate financing needs of this related entity. The advance bears no interest. The balance receivable at December 31, 2019 was $55,000. In 2020, the $75,000 in advances to Tilt were written off. For the years ended December 31, 2020 and 2019, the Company incurred $37,500 and $221,710, respectively, in management fees from Tilt. In 2019, the Company incurred $83,194 in expenses for cost of sales services provided by Tilt.
Velocity 42
For the years ended December 31, 2020 and 2019, the Company incurred $238,369 and $248,695, respectively in product research and development expenses provided by Velocity 42, an entity with common ownership. For the years ended December 31, 2020 and 2019, the Company incurred $150,000 and $155,360, respectively, in management fees from Velocity 42. At December 31, 2020 and 2019, the Company had $4,550 and $4,875, respectively, due to Velocity 42.
iGames
The Company receives revenue for services provided to certain affiliates. Revenue is based on contractually agreed-upon rates and charged to affiliates based on services provided. For the year ended December 31, 2019, the Company provided services to iGames, a related party under common ownership, for services related to subscription and consulting services of $93,300. There were no related party revenues in 2020. In 2019, the Company incurred $75,000 in management fees provided by iGames. In 2019, the Company incurred $83,127 in sales, general, and administrative expenses provided by iGames. There were no management fees or sales, general, and administrative expenses provided by iGames in 2020.
Helix eSports LLC
The Company receives revenue for services provided to certain affiliates. Revenue is based on contractually agreed-upon rates and charged to affiliates based on services provided. For the year ended December 31, 2020, the Company provided services to Helix eSports LLC (Helix eSports), a related party under common ownership, for services related to subscription and consulting services of $14,504. There were no related party revenues from Helix eSports in 2019. For the year ended December 31, 2019, the Company incurred $27,000 in expenses for cost of sales provided by Helix eSports. There were no expenses incurred from Helix eSports for the year ended December 31, 2020.
| 15 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Note Payable, Member
In April 2020, a member of the Company loaned funds to the Company. As of December 31, 2020, the outstanding balance was $200,000. The note accrues interest at 6.5% per annum and is payable at maturity on March 31, 2021. Upon maturity, if principal and interest are not paid in full, the loan is deemed to be in default and converts to a term loan with monthly payments of principal and interest through June 1, 2022. Interest on the term loan would be 10.5% per annum. Interest incurred during the year ended December 31, 2020 was $13,542. In March 2021, the loan was amended to extend the maturity date to July 1, 2021.
| 11. | Income Tax |
Deferred tax assets were comprised of the following temporary differences at December 31:
| 2020 | 2019 | |||||||
| Net operating loss carryforwards | $ | 32,991 | $ | 32,070 | ||||
| Less valuation allowance | (32,991 | ) | (32,070 | ) | ||||
| $ | - | $ | - | |||||
A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company is in a cumulative loss position, which represents significant negative evidence for the Company to determine that a full valuation allowance be established against its deferred tax assets in its non-U.S. jurisdiction. The valuation allowance will offset assets associated with future tax deductions and carryforward items. Until an appropriate level of profitability is attained, a valuation allowance will be maintained on non-U.S. deferred tax assets. At December 31, 2020 and 2019, the Company had unused non-U.S. net operating loss carryforwards of approximately $170,000 which have indefinite carryforward periods.
| 12. | Contingencies |
The Company is a party to various actions and claims arising in the ordinary course of business. In the opinion of management and legal counsel, these claims and actions, both individually and in the aggregate, can be resolved in a manner which will not result in a material liability.
| 13. | Subsequent Events |
Subsequent events were evaluated through April 21, 2021, the date the consolidated financial statements were available to be issued.
In
February 2021, the Company entered into a bank loan pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s
Paycheck Protection Program (the Program) with principal
| 16 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
Subsequent Events (continued)
amounts of $85,750. Interest on the loan accrues at 1.0% per annum. The Company can apply for forgiveness of this loan. Under the terms of this loan, the borrower is in default if the Company changes ownership without prior consent of the lender. If there is a default, the lender may a) require immediate payment of all amounts owing under this Note; b) collect all amounts owing from any Borrower or Guarantor; c) file suit and obtain judgment; d) take possession of any Collateral; or e) sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement. Commencing in November 2021, the loan is payable in monthly installments of principal plus interest through February 2026. However, no assurance can be provided that the Company will in fact obtain forgiveness of the loan in whole or in part.
ggCircuit, LLC Purchase Agreement
On January 22, 2021, the Company entered into a purchase agreement whereby Esports can acquire from the members of the Company all of the issued and outstanding membership units of the Company (“GGC Units”), making the Company a wholly owned subsidiary of Esports (referred to as the “GGC Purchase Agreement”).
As consideration for the GGC Units, Esports agreed to pay the members of the Company $26,000,000 to be paid fifty percent (50%) in shares of Common Stock (the “GGC Share Consideration”) of Esports, and fifty percent (50%) in cash. The Closing under the GGC Purchase Agreement is subject to the simultaneous closing under a similar Purchase Agreement with Helix Holdings, LLC (Helix). The Closing is also subject to (i) the completion of the Fairness Opinion; (ii) an audit as of and for the two years ended December 31, 2020 of the Company; and (iii) the approval of Esports’ shareholders to the issuance of the GGC Share Consideration and Helix Share Consideration in satisfaction of NASDAQ Rule 5635(a).
The parties to the GGC Purchase Agreement may terminate the GGC Purchase Agreement, among other reasons, if (i) the Fairness Opinion does not support an aggregate purchase price for Helix and the Company of $43,000,000 and, based thereon, Esports is no longer willing to pay the GGC Purchase Price, or (ii) the Closing has not occurred on or before May 14, 2021 or such later date as may be mutually agreed to by the parties. Esports can also terminate the GGC Purchase Agreement if (i) upon completion of its legal, financial, tax and commercial due diligence of the Company, it is not satisfied, with the results thereof; (ii) the audit of the Company cannot be completed due to fraud, material accounting errors or otherwise or if the results of the audit is materially and adversely different from the financial information provided by the Company and the members of the Company to Esports prior to the execution of the GGC Purchase Agreement.
In connection with the negotiation of the GGC Purchase Agreement, Esports advanced an aggregate of $600,000 to the Company during 2020 (Esports Loan) (see Note 7). If the closing takes place on or prior to May 14, 2021, Esports will receive a full credit against the purchase price for the Esports Loan.
Upon
execution of the GGC Purchase Agreement, Esports paid the Company an additional $600,000 to be used for operating expenses pending the
Closing (the “Operating Expense Payments”). If the Closing takes place on or prior to April 30, 2021, Esports will receive
a full credit against the GGC Purchase Price for the Operating Expense Payments. If the Closing takes place after April 30, 2021
| 17 |
ggCircuit, LLC
Notes to Consolidated Financial Statements
ggCircuit, LLC Purchase Agreement (continued)
but prior to May 14, 2021, Esports will receive a 60% credit against the GGC Purchase Price for the Operating Expense Payments and the remaining 40% of the Operating Expense Payments will be forgiven. If Closing takes place after May 14, 2021, 50% of the Operating Expense Payments will be repayable to Esports and the remaining 50% of the Operating Expense Payments will be forgiven. If the transaction does not close, depending on the reason, a portion of the Esports Loan and the Operating Expense Payments may be forgiven.
The GGC Purchase Agreement contains customary representations, warranties, covenants, indemnification, and other terms for transactions of a similar nature.
| 18 |
Exhibit 99.3
Helix Holdings, LLC
Unaudited Condensed Consolidated Financial Statements
and Independent Auditors’ Review Report
March 31, 2021 and 2020
Helix Holdings, LLC
Condensed Consolidated Financial Statements
(Unaudited)
CONTENTS PAGE
INDEPENDENT AUDITORS’ REVIEW REPORT
To the Members
of Helix Holdings, LLC
We have reviewed the accompanying condensed consolidated financial statements of Helix Holdings, LLC (a Delaware corporation) and Subsidiaries (collectively, the “Company”), which comprise the condensed consolidated balance sheet of as of March 31, 2021, and the related condensed consolidated statements of operations and members’ equity (deficit), and cash flows for the three-month periods ended March 31, 2021 and 2020, and the related notes.
Management’s Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of the condensed interim financial information in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America.
Auditors’ Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information as a whole. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America.
Report on Condensed Consolidated Balance Sheet as of December 31, 2020
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations and members’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 21, 2021, we expressed an unmodified audit opinion on those audited consolidated financial statements. In our opinion, the accompanying condensed consolidated balance sheet of the Company as of December 31, 2020, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
/s/ Friedman LLP
Marlton, New Jersey
August 12, 2021
| 1 |
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 134,119 | $ | 57,577 | ||||
| Accounts receivable, net | 65,154 | 98,805 | ||||||
| Advance to an affiliate | - | 76,905 | ||||||
| Prepaid expenses and other current assets | 37,083 | 19,707 | ||||||
| Total Current Assets | 236,356 | 252,994 | ||||||
| Property and equipment, net | 546,374 | 578,684 | ||||||
| Finance lease right of use assets | 93,810 | 99,928 | ||||||
| Operating lease right of use assets | 729,909 | 776,232 | ||||||
| Investment in GG Circuit LLC | 1,340,728 | 1,460,325 | ||||||
| Investment in Helix eSports Academy, LLC | 39,253 | 50,000 | ||||||
| Other assets | 65,740 | 65,765 | ||||||
| Total Assets | $ | 3,052,170 | $ | 3,283,928 | ||||
| LIABILITIES AND MEMBERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 22,983 | $ | 20,447 | ||||
| Accrued expenses and other current liabilities | 362,785 | 365,555 | ||||||
| Accrued payroll | 68,718 | 85,896 | ||||||
| Loans payable, current portion | 81,390 | 61,243 | ||||||
| Loans payable to affiliate, current portion | 341,335 | 430,105 | ||||||
| Working capital advance | 800,000 | 400,000 | ||||||
| Loan payable to member, current portion | 242,792 | 175,792 | ||||||
| Operating lease liability, current portion | 229,256 | 225,939 | ||||||
| Finance lease liability, current portion | 41,867 | 41,032 | ||||||
| Total Current Liabilities | 2,191,126 | 1,806,009 | ||||||
| Loans payable, noncurrent portion | 160,111 | 72,609 | ||||||
| Operating lease liability, noncurrent | 685,856 | 740,578 | ||||||
| Finance lease liability, noncurrent | 82,149 | 92,936 | ||||||
| Total Liabilities | 3,119,242 | 2,712,132 | ||||||
| Total Members’ Equity (Deficit) | (67,072 | ) | 571,796 | |||||
| Total Liabilities and Members’ Equity (Deficit) | $ | 3,052,170 | $ | 3,283,928 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
Condensed Consolidated Statements of Operations and Members’ Equity (Deficit)
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues, net | ||||||||
| Sales, net | $ | 78,748 | $ | 130,976 | ||||
| Analytics income | 65,000 | 80,000 | ||||||
| Rental income and other income | 154 | 22,405 | ||||||
| Total Revenues, net | 143,902 | 233,381 | ||||||
| Costs and Expenses | ||||||||
| Cost of sales | 14,862 | - | ||||||
| Operating expenses | 467,046 | 350,300 | ||||||
| General and administrative expenses | 282,686 | 114,714 | ||||||
| Research and development expenses | 20,000 | - | ||||||
| Total Costs and Expenses | 784,594 | 465,014 | ||||||
| Loss from Operations | (640,692 | ) | (231,633 | ) | ||||
| Other Income (Expense) | ||||||||
| Loss from equity investment | (130,344 | ) | (166,413 | ) | ||||
| Gain on extinguishment of debt | 15,553 | - | ||||||
| Other income | 61,779 | - | ||||||
| Total Other Income (Expense), Net | (53,012 | ) | (166,413 | ) | ||||
| Loss from Continuing Operations Before | (693,704 | ) | (398,046 | ) | ||||
| Income Taxes | ||||||||
| Income Tax Expense | - | - | ||||||
| Loss from Continuing Operations | (693,704 | ) | (398,046 | ) | ||||
| Discontinued Operations | ||||||||
| Loss from operations of discontinued Pro E-Sports Teams | - | (83,219 | ) | |||||
| Net Loss | (693,704 | ) | (481,265 | ) | ||||
| MEMBERS’ EQUITY (DEFICIT) | ||||||||
| Beginning of period (Units issued and | ||||||||
| outstanding 17,000,000) | 571,796 | 2,370,699 | ||||||
| Members’ capital contributions | 80,080 | 173,817 | ||||||
| Members’ distributions | (25,244 | ) | (13,418 | ) | ||||
| End of period (Units issued and outstanding 17,000,000) | $ | (67,072 | ) | $ | 2,049,833 | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (693,704 | ) | $ | (481,265 | ) | ||
| Discontinued operations loss | - | 83,219 | ||||||
| Net loss from continuing operations | (693,704 | ) | (398,046 | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash flows used in operating activities | ||||||||
| Depreciation and amortization expense | 36,006 | 28,610 | ||||||
| Loss in equity investment | 130,344 | 166,413 | ||||||
| Amortization of right of use asset | 52,441 | 47,240 | ||||||
| Accrued interest on finance lease with affiliate | 2,723 | 2,293 | ||||||
| Gain on extinguishment of debt | (15,553 | ) | - | |||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | 33,651 | 39,084 | ||||||
| Prepaid expenses and other current assets | (17,376 | ) | 54,373 | |||||
| Other assets | - | (58,686 | ) | |||||
| Accounts payable | 2,536 | (21,840 | ) | |||||
| Accrued expenses and other current liabilities | (2,770 | ) | 82,263 | |||||
| Accrued payroll | (17,178 | ) | 1,933 | |||||
| Operating lease liability | (54,128 | ) | 364 | |||||
| Net Cash Used in Operating Activities from Continuing Operations | (543,008 | ) | (55,999 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from repayment of an advance to an affiliate | 76,905 | - | ||||||
| Purchase of property and equipment | (3,670 | ) | (226,087 | ) | ||||
| Net Cash Provided by (Used in) Investing Activities from Continuing Operations | 73,235 | (226,087 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Members’ capital contributions | 13,234 | 140,301 | ||||||
| Members’ distributions | (25,244 | ) | (13,418 | ) | ||||
| Proceeds from loans payable | 123,202 | 14,472 | ||||||
| Proceeds from loans payable from an affiliate | - | 176,663 | ||||||
| Principal payments of loans payable from affiliates, net | (21,924 | ) | - | |||||
| Payment of finance lease liability | (9,953 | ) | - | |||||
| Proceeds from loan payable from member | 67,000 | 10,000 | ||||||
| Proceeds from working capital advance | 400,000 | - | ||||||
| Net Cash Provided by Financing Activities from Continuing Operations | 546,315 | 328,018 | ||||||
| CASH FLOWS FROM DISCONTINUED OPERATIONS | ||||||||
| Net Cash Used in Operating Activities from Discontinued Operations | - | (83,219 | ) | |||||
| Net Cash Flows Used in Discontinued Operations | - | (83,219 | ) | |||||
| Net Change in Cash | 76,542 | (37,287 | ) | |||||
| CASH | ||||||||
| Beginning of period | 57,577 | 356,579 | ||||||
| End of period | $ | 134,119 | $ | 319,292 | ||||
| Supplementary Cash Flow Information | ||||||||
| Cash paid for interest | $ | 10,004 | $ | 10,950 | ||||
| Supplemental Non-Cash Investing and Financing Activities | ||||||||
| Noncash contribution of equipment from members | $ | - | $ | 33,516 | ||||
| Conversion of loan payable from affiliate to equity | $ | 66,846 | $ | - | ||||
| Recognition of financing right of use assets and liabilities | $ | - | $ | 122,361 | ||||
| Paycheck Protection Program loan forgiveness | $ | 15,553 | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS |
| Helix Holdings, LLC and its subsidiaries (herein collectively referred to as the “Company”) are engaged in e-sports industry, providing gaming centers, developing software for gaming companies and developing an online application for sport wagering on e-sports. The Company operates three gaming centers located in Freehold, New Jersey, North Bergen, New Jersey and Foxboro, Massachusetts. | |
| On January 8, 2021, the members and shareholders of Helix E-Sports LLC, Helix Opportunity Zone Fund I, LLC, Team Genji, Inc., Saber VR LLC, LANduel, LLC, and other subsidiaries (collectively, referred to as the “Helix Group”) agreed to form Helix Holdings, LLC, through membership/stock swap transactions, (herein referred to as the “Merger”). The Merger was accounted for as a reverse recapitalization. Under reverse capitalization accounting, the Helix Group is recognized as the accounting acquirer, and Helix Holdings, LLC is the legal acquirer or accounting acquiree. As such, following the Merger, the historical financial statements of the Helix Group are treated as the historical financial statements of the combined company. | |
| Helix Holdings, LLC (the “Helix Holding”), is a limited liability company established under the laws of the State of Delaware on May 18, 2020. Helix Holding is the parent holding company with no operations. Management has authorized and issued 17,000,000 membership units as of March 31, 2021 and December 31, 2020. Members’ liability is limited to their share of equity plus any debt for which a personal guarantee has been given. Under the terms of the Helix Holdings, LLC operating agreement, its existence is perpetual. | |
| Helix E-Sports LLC (“Helix eSports”) is a limited liability company established under the laws of the State of Delaware on May 31, 2018 and is wholly owned subsidiary of Helix Holding. Helix eSports is principally engaged in the e-sport industry, providing gaming center in North Bergen, New Jersey where users will pay for time to play video games on state-of-the art equipment. On November 10, 2020 Helix eSports transferred their ownership in their e-sports team to new formed company, Team Oxygen LLC (“Oxygen”), an affiliate, discussed further in Note 4 discontinued operations and Note 12 related party transactions. | |
| Helix Opportunity Zone Fund I LLC, (the “HOZF”) is a limited liability company established under the laws of the State of Delaware on February 7, 2019. HOZF is a wholly owned subsidiary of Helix eSports and has no operations during the three months ended March 31, 2021 and 2020. | |
| Helix Foxboro LLC (“Helix Foxboro”) is a limited liability company established under the laws of the State of Delaware on November 12, 2019 and is a wholly owned subsidiary of Helix eSports. Helix Foxboro is principally engaged in the e-sport industry, providing gaming center in Foxboro, Massachusetts where users will pay for time to play video games on state-of-the art equipment. Helix Foxboro opened on February 28, 2020. | |
| SPJ Foxboro LLC (“SPJ Foxboro”) is a limited liability company established under the laws of the State of Delaware on November 12, 2019 and is a wholly owned subsidiary Helix eSports. SPJ Foxboro is principally engaged in the restaurant industry, serving food and beverages for players playing games in the Helix Foxboro gaming center. SPJ Foxboro opened on February 28, 2020. |
| 5 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS (continued) |
| Team Genji, Inc.(“Genji”) is a corporation under the laws of the State of Delaware on April 26, 2018 and is a wholly owned subsidiary of Helix Holding. Genji is principally engaged in data analytics, developing software and applications for tournaments hosted by large video game software companies. Genji also has an e-sports pro team that competes in e-sports tournaments. On November 10, 2020, Genji transferred their ownership in their e-sports team to Oxygen, an affiliate, discussed further in Note 4 discontinued operations and Note 12 related party transactions. | |
| Saber VR LLC (“Saber”) is a limited liability company established under the laws of the State of New Jersey on April 20, 2018 and is a wholly owned subsidiary of Helix Holding. Saber is principally engaged in the e-sport industry, providing gaming center in Freehold, New Jersey where users will pay for time to play video games on state-of-the art equipment. Saber opened a new facility in Lakewood, New Jersey in January 2021. | |
| LANduel LLC (“LANduel”), is a limited liability company established under the laws of the State of Delaware on October 25, 2019 and is a wholly owned subsidiary of Helix Holding. LANduel is developing an online application for sport wagering on e-sports. | |
| Helix Holdings, LLC Purchase Agreement | |
| On January 22, 2021, the Company entered into an equity purchase agreement (the “Helix Purchase Agreement”), by and among the equity holders of the Company, and Esports Entertainment Group, Inc. corporation incorporated under the laws of Nevada (“EEG”), whereby the Company will be acquired by EEG for all of the issued and outstanding membership units of the Company, making Helix Holding a wholly owned subsidiary of EEG. | |
As consideration for the Company’s Units, EEG agreed to pay the Company’s Equity Members $17,000,000 (the “Helix Purchase Price”), to be paid fifty percent (50%) in shares of common stock of EEG, par value $0.001 per share (the “Common Stock”) (the “Helix Share Consideration”), and fifty percent (50%) in cash (the “Helix Cash Consideration”). The Closing under the Helix Purchase Agreement was subject to the simultaneous closing under an equity purchase agreement (the “GGC Purchase Agreement”) among the Company, ggCircuit LLC, an Indiana limited liability (“GGC”) and the equity holders of GGC (the “GGC Equity Holders”). The Closing was also subject to (i) the completion of an opinion (the “Fairness Opinion”) respecting the fairness of the consideration to be paid by EEG an received by the Helix Holdings’ Equity Holders and the GGC Equity Holders pursuant to the Helix Purchase Agreement and the GGC Purchase Agreement from a financial point of view; (ii) an audit, as of and for the two years ending December 31, 2020 and 2019, of the Company; and (iii) the approval of EEG’s shareholders to the issuance of the Helix Share Consideration in satisfaction of NASDAQ Rule5635(a).
In connection with the negotiation of the Helix Purchase Agreement, EEG advanced an aggregate of $400,000 (see Note 9) to Helix during 2020 in the form of loans (the “Helix Loans”). Upon execution of the Helix Purchase Agreement, EEG paid Helix an additional $400,000 to be used for operating expenses pending the Closing (the “Operating Expense Payments”). If the Closing took place on or prior to May 14, 2021, EEG would receive a full credit against the Helix Purchase Price for the Helix Loans and if the Closing took place prior to April 30, 2021 EEG would receive a full credit against the Helix Purchase Price for the Operating Expense Payments. If Closing took place after April 30, 2021, but on or prior to May 14, 2021, EEG would receive a credit against the Helix Purchase Price for 60% of the Operating Expense Payments. If the transaction did not close, depending on the reason, a portion of the Helix Loans and the Operating Expense Payments would have been forgiven.
The Helix Purchase Agreement contains customary representations, warranties, covenants, indemnification, and other terms for transactions of a similar nature. |
| 6 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS (continued) |
Amendment to Helix Purchase Agreement
On May 21, 2021, the Company and EEG amended the Helix Purchase Agreement pursuant to Amendment No. 1 to the Equity Purchase Agreement (the “Helix Amendment”) to, among other things, (A) update Exhibit A thereto, (B) provide for an additional indemnifiable event by the Helix Equity Holders under Section 10.02 of the Helix Purchase Agreement with respect to post-closing pre-mature departures of certain key employees of Helix, (C) extend the End Date (as defined in the Helix Purchase Agreement) to June 3, 2021, (D) provide for a non-refundable operating expense payment to Helix in the amount of $100,000; provided, however, that if the transaction does not close on or before June 1, 2021, EEG is required to make an additional non-refundable payment in the amount of $100,000 to the Company, (E) increase the amount of the Purchase Price (as defined in the Helix Purchase Agreement) to be paid in cash from $8,500,000 to $10,000,000 and reduce the amount of the Purchase Price to be paid in stock from $8,500,000 to $7,000,000, and (F) change the Stock Payment (as defined in the Helix Purchase Agreement) calculation from a variable formula to a fixed price formula, resulting in $7,000,000 of the Purchase Price being payable to the Helix Equity Holders in shares of the Company’s common stock contractually valued at $13.25 per share (528,302 shares). | |
| Helix Holdings, LLC Purchase Agreement Closing | |
| On June 1, 2021, EEG, the Company and the Company Equity Holders, having met all conditions precedent in the Helix Purchase Agreement, consummated the closing for the Helix Units (the “Helix Closing”). Pursuant to the Helix Purchase Agreement, as consideration for the Helix Units, EEG paid the Company Equity Holders at the Helix Closing: (i) $10,000,000 in cash (the Helix Cash Consideration) and $7,000,000 in stock (the Helix Stock Consideration) through the issuance of 528,302 shares of the EEG’s common stock, par value $0.0001 per share. In connection with the Helix Cash Consideration, EEG received credit for certain loans and operating expense payments made by EEG to the Company during 2020 and 2021 (see Note 9). | |
| 2. | LIQUIDITY AND GOING CONCERN |
| The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern. The Company has incurred losses since inception. For the three months ended March 31, 2021 and 2020, the Company had a net loss of $693,704 and $481,265, and net cash used in operations from continuing operations of $543,008 and $55,999, respectively. As of March 31, 2021 and December 31, 2020, the Company had members’ equity (deficit) of $(67,072) and $571,796, respectively. The Company was acquired by EEG on June 1, 2021 (see Note 1). EEG is expected to provide the necessary liquidity required to pay for operating costs and continue to finance business activities. Based on the cash generated from operations, available cash, and liquidity expected to be provided by EEG, the Company expects to have available funds to satisfy its current obligations to continue operations. The going concern as of December 31, 2020 has been alleviated due to the acquisition by EEG. |
| 7 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 2. | LIQUIDITY AND GOING CONCERN (continued) |
| COVID-19 | |
| The outbreak of the 2019 coronavirus disease (COVID-19), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, adversely affected workforces, economies, and financial markets globally. Due to outbreak of COVID-19, esports gaming centers have experienced negative effects and noticeable disruptions from COVID-19 related restrictions. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and new information may emerge concerning the COVID-19 pandemic which may result in continued negative effects to the esports industry. | |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| Basis of Presentation and Principals of Consolidation | |
| The Company’s unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The unaudited condensed consolidated financial statements include the financial statements of Helix Holding and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. | |
| Unaudited Interim Condensed Consolidated Financial Statements | |
| The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements, and, in the opinion of management, include all adjustments consisting of only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of March 31, 2021 and its results of operations and cash flows for the three months ended March 31, 2021 and 2020. The financial data and other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full fiscal year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes as of and for the year ended December 31, 2020. | |
| Variable Interest Entities | |
| In accordance with Accounting Standards Codification 810, the Company considers certain affiliates to be Variable Interest Entities (“VIE”). Generally, a VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. |
| 8 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Variable Interest Entities (continued)
In October 2018, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). ASU 2018-17 permits a private company (the reporting entity) to elect an alternative not to apply variable interest entity (“VIE”) guidance if (a) the reporting entity and the legal entity are under common control; (b) the reporting entity and the legal entity are not under common control of a public business entity; ( c) the legal entity under common control is not a public business entity; and ( d) the reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsection of Topic 810. The Company determined certain affiliates meet all the criteria of ASU 2018-17 and have elected not to evaluate these entities for potential consolidation. As March 31, 2021 and December 31, 2020 the Company’s loss exposure is $0 and $76,905, respectively.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited condensed consolidated financial statements, actual results may materially vary from these estimates.
Cash
The Company considers all highly liquid investment instruments with an original maturity of three months or less from the original date of purchase to be cash equivalents. As of March 31, 2021 and December 31, 2020, the Company had no cash equivalents. The Company maintains its checking accounts with a major financial institution. The balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) and may, at times, exceed the federal insurance limits. As of March 31, 2021 and December 31, 2020, there was no balance in excess of the FDIC limits.
Accounts Receivable
Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually grants credit to customers with good credit standing with a maximum of 90 days and determines the adequacy of the allowance for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures. The provision is recorded against accounts receivable balances, with a corresponding charge recorded in the unaudited condensed consolidated statements of operations and members’ equity. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. No allowance was considered necessary as of March 31, 2021 and December 31, 2020.
| 9 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Property and Equipment
Property and equipment are recorded at cost, reduced by accumulated depreciation and amortization. Depreciation and amortization expense related to property and equipment is computed using the straight-line method based on estimated useful lives of the assets, or in the case of leasehold improvements, the shorter of the initial lease term or the estimated useful life of the improvements. The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment. The estimated useful lives of depreciation and amortization of the principal classes of assets are as follows:
| Useful life | |||||
| Computers | 3 - 5 years | ||||
| Equipment and furniture | 5 - 7 years | ||||
| Leasehold improvements | Lesser of useful life and lease term | ||||
Leases
The Company has entered into leases for gaming centers in November 2019 and gaming equipment in February 2020 resulting in the recognition of an operating lease right-of-use asset and operating lease liability, and financing lease right-use-asset and financing lease liability, respectively. The Company measures the ROU assets and liabilities 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 unaudited condensed consolidated statements of operations and members’ equity (deficit). 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 unaudited condensed 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 unaudited condensed consolidated statements of operations and comprehensive loss.
The accounting for leases requires management to exercise judgment and make estimates in determining the applicable discount rate, lease term and payments due under a lease. If a lease does not provide an implicit rate, the Company uses the incremental borrowing rate to determine the present value of future lease payments. The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not terminate) that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) a lease controlled by the lessor. Lease payments are generally comprised of fixed payments.
| 10 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Impairment of Long-Lived Assets
The Company assesses its long-lived assets, including property, equipment, and right of use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Factors which may indicate potential impairment include a significant underperformance relative to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by that asset. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset. The fair value is estimated based on the discounted future cash flows or comparable market values, if available. The Company did not record any impairment loss during March 31, 2021 and December 31, 2020.
Revenue Recognition for Contracts with Customers
The Company has multiple sources of revenue streams. The company operates three e-sport gaming centers, provides software development and data analytics, mobile application development, e-sport gaming room rentals, and had owned and operated professional e-sports teams.
The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
Sales, Net
E-Sport Gaming Centers - The Company operates three e-sport gaming centers, providing customers the ability to play video games on state-of-the-art equipment, and purchase food and beverages. Customers purchase time to play on the state-of-the-art equipment. Revenue for the game time and sale of the food and beverages are recognized at the point of sale using their point of sale system (“POS”). Total e-sports gaming centers revenue reported on the unaudited condensed consolidated statements of operations and members’ equity for the three months ended March 31, 2021 and 2020 totaled $78,748 and $130,976, respectively. The Company also sells gift certificates to be used at a later time. The revenue is not recognized until the gift card is redeemed. Gift certificates liability is reported on the unaudited condensed consolidated balance sheets in the accrued expenses and other current liabilities totaling $578 and $608, as of March 31, 2021 and December 31, 2020, respectively.
Analytics Income
Software Development and Data Analytics - The Company 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 can recognize
| 11 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Analytics Income (continued)
revenue over the life of the contract, utilizing the Output Method, as defined in ASC 606, which recognizes revenue on the basis of direct measurements 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. Total software development and data analytics income reported on the unaudited condensed consolidated statements of operations and members’ equity (deficit) for three months ended March 31, 2021 and 2020 totaled $65,000 and $80,000, respectively.
E-Gaming Room Rental
For the three months ended March 31, 2021 and 2020, Helix eSports rented a room and equipment at the North Bergen, NJ location to visiting e-sports teams to participate in tournaments. The rental is short-term room rental, and included within the rental income and other income on the unaudited condensed consolidated statements of operations and members’ equity for the three months ended March 31, 2021 and 2020 was $0 and $22,405, respectively. The company recognizes revenue when the customer uses the facility per the contract. 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.
Professional E-Sports Team (Discontinued Operations)
For the three months ended March 31, 2020, the Company owned and operated a professional e-sports teams that competed in tournaments for cash prizes. The Company had agreements with some of their players where the Company is to receive a 10% of the players’ winnings from each tournament. The Company also had contracts with their players stating that the players’ prize belongs to the Company. Revenue was recognized after the tournament was over and the player was in a cash prize standing. The payment terms and conditions vary by tournament; however, the terms generally require payment within 30 to 60 days from the end of the tournament date. Total revenue and expenses for the professional e-sports teams is reported in the discontinued operations section on the unaudited condensed consolidated statements of operations.
Practical Expedients
The Company has elected the significant financing component practical expedients in applying ASC 606. Accordingly, the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Using the practical expedient under ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining a contract as an expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. The Company also elected the practical expedient for the portfolio approach, allowing contracts with similar characteristics and impacts to the unaudited condensed consolidated financial statements to be evaluated together.
| 12 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Sales Tax
The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
Equity Method Investment
When the Company can exert significant influence over, but does not control, the investee’s operations, through voting rights or representation on the investee’s board of directors, the Company accounts for the investment using the equity method of accounting. The Company records its share in the investee’s earnings and losses in the unaudited condensed consolidated statements of operations and members’ equity (deficit). The Company assesses its investment for other-than-temporary impairment when events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable and recognize an impairment loss to adjust the investment to its then-current fair value. The Company has not recognized any impairment during the three months ended March 31, 2021 and 2020.
Advertising Costs
Advertising costs are expensed as incurred, reported on the unaudited condensed consolidated statements of operations and members’ equity within the operating expenses totaling $2,318 and $38,469 for the three months ended March 31, 2021 and 2020, respectively.
Income Taxes
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled. Helix Holdings, LLC, Helix eSports, HOZF, Saber, LANduel, Helix Foxboro, and SPJ Foxboro are all taxed as partnerships under the provision of the Internal Revenue Code. Under those provisions, these companies do not pay federal corporate income taxes on its taxable income. Instead, the members are liable for individual federal and state income taxes on their respective ownership percentage. Team Genji is taxed as a corporation under the provision of the Internal Revenue Code. Under this provision, Team Genji is subjected to the maximum federal corporate tax rate of 21% for tax years 2021 and 2020, respectively.
As of March 31, 2021 and December 31, 2020, Team Genji had net operating loss carryforwards totaling approximately $866,000 and $885,000, respectively, for Federal Income Tax purposes. The Company experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the 1st quarter of 2021. The ownership change has and will continue to subject the Company’s pre-ownership change net operating loss carryforwards to an annual limitation, which will significantly restrict its ability to use them to offset taxable income in periods following the ownership change.
| 13 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Income Taxes (continued)
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes,” which requires the Company to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. As of March 31, 2021 and December 31, 2020, the Company had deferred tax assets totaling approximately $182,000 and $186,000, respectively, and a deferred tax asset valuation allowance of approximately $182,000 and $186,000, respectively.
U.S. GAAP requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.
The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes.
The Company’s tax returns since 2018 to 2020 are still subject for examination by taxing authorities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believes have high credit quality and are not exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships, and has not experienced any losses on such accounts. At March 31, 2021 and December 31, 2020, all of the Company’s cash was held at four accredited financial institutions.
For the three months ended March 31, 2021 and 2020, the Company received 45% and 34%, respectively, of the revenue reported on the unaudited condensed consolidated statements of operations and members’ equity (deficit) from one customer.
Research and Development Expenses
Research and development costs consist primarily of costs incurred in connection with the development of LANduel sport wagering online application. Research and development costs are expensed as incurred.
| 14 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recently issued accounting standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU addresses the measurement of credit losses on financial statements in response to the global financial crisis in 2008 and requires issuers to realize current expected credit losses on assets not accounted for at fair value through net income. This can affect financial instruments such as loans, off-balance-sheet credit exposures, and reinsurance receivables. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s consolidated financial statements.
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies the accounting for income taxes by removing exceptions regarding intra-period tax allocation of losses and recognition of deferred tax liabilities for equity method investments of a foreign subsidiary. The update aims to put out black and white requirements regarding franchise tax, step up in basis of goodwill, allocation of deferred tax expenses to legal entities in separate financial statements, and the reflection of change in tax laws or rates in annual effective tax rate computation. This update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
| 4. | DISCONTINUED OPERATIONS |
On November 10, 2020, Team Genji and Helix eSports entered into an asset transfer agreement to sell their e-sports pro teams to Oxygen, a related party, for $100. Team Genji and Helix eSports collected all of the e-sports teams’ revenue and paid expenses after the asset transfer on behalf of Oxygen from November 11, 2020 through March 31, 2021. As discussed in Note 12 related party transactions, the Company has a payable to an affiliate as of March 31, 2021 and an advance to an affiliate as of December 31, 2020, with Oxygen.
| 15 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 4. | DISCONTINUED OPERATIONS (continued) |
The following table contains additional information concerning the Company’s e-sports pro teams’ operations.
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues, net | $ | - | $ | 11,704 | ||||
| Total Revenues, net | - | 11,704 | ||||||
| Costs and Expenses | ||||||||
| Operating expenses | - | 94,923 | ||||||
| Total Costs and Expenses | - | 94,923 | ||||||
| Net Loss | $ | - | $ | (83,219 | ) | |||
There are no assets and liabilities related to the discontinued operations.
| 5. | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net consisted of the following:
| As of | As of | |||||||
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Computers | $ | 294,475 | $ | 294,475 | ||||
| Equipment and furniture | 190,882 | 187,212 | ||||||
| Leasehold improvements | 275,079 | 272,038 | ||||||
| Subtotal | 760,436 | 753,725 | ||||||
| Construction in progress | - | 3,040 | ||||||
| Less: Accumulated depreciation and amortization | (214,062 | ) | (178,081 | ) | ||||
| Property and Equipment, Net | $ | 546,374 | $ | 578,684 | ||||
Depreciation and amortization expense was $36,006 and $28,610 for the three months ended March 31, 2021 and 2020, respectively.
As of December 31, 2020, construction in progress represents cost of construction for the new space for Saber, which was completed and placed into service in January 2021.
| 6. | EQUITY METHOD INVESTMENTS |
GG CIRCUIT LLC
During 2018 Helix eSports invested $1,250,000 into GG Circuit LLC (“GG Circuit”) 20% ownership. GG Circuit is a progressive e-sport services company that helps e-sport centers around the globe successfully run their businesses. With next-generation, cloud-based management software solution, ggLeap, centers are able to run
| 16 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 6. | EQUITY METHOD INVESTMENTS (continued) |
games, as well as run their own local tournaments. They also offer a year-round schedule of official ggChampions managed events and tournaments for the most popular esports games of today principally engaged in the e-sports industry. During 2019 Helix eSports invested $1,100,000 to increase their ownership to 28%. Helix eSports’ share of the net loss from GG Circuit is reported in the unaudited condensed consolidated statements of operations and members’ equity (deficit) as loss from equity investment reporting $119,597 and $166,413 for the three months ended March 31, 2021 and 2020, respectively.
| 7. | JOINT VENTURE |
HELIX ESPORTS ACADEMY, LLC
In November 2020, Helix eSports and Rhombus Group, LLC (“Rhombus”) entered into an operating agreement (“Academy Operating Agreement”) to form a joint venture, Helix eSports Academy, LLC (“Helix Academy”), for the purpose to develop and operate e-sports centers, establish and operate e-sports academies. Helix eSport’s share of the net loss from Helix Academy is reported in the unaudited condensed consolidated statements of operations and members’ equity (deficit) as loss from equity investment reporting $10,747 and $0 for the three months ended March 31, 2021 and 2020, respectively.
On February 18, 2021, Helix eSports entered into a trademark license agreement with Helix Academy. In the agreement Helix eSports is granting Helix Academy exclusive right to use the Helix eSports trademark in connection with the ordinary course of business. Helix Academy agrees to pay Helix eSports an annual license fee equal to 2% of Helix Academy’s gross revenue. For the three months ended March 31, 2021 and 2020, total license fee income reported in the unaudited condensed consolidated statements of operations and members’ equity (deficit) $154 and $0.
| 8. | LOANS PAYABLE |
During 2020, 2019, and 2018 Saber had a revolving six-month loan with Square Inc. The loan had a variable interest rate between 12% - 17% annually. Payments were deducted monthly from the merchant credit card sales processed through Square’s point of sale application. As of March 31, 2021 and December 31, 2020, Saber had a principal balance of $23,560. The Square loans as of March 31, 2021 and December 31, 2020 mature on August 3, 2021. One of the Company’s members assumed this loan personally, as of the sale date of June 1, 2021.
During 2020 Saber received a lease incentive for signing a new lease to be used to build out a new gaming center (see Note 10). The lease incentive is non-interesting bearing and payable on demand if not used for the build out. As of March 31, 2021 and December 31, 2020, Saber had a principal balance of $13,400.
| 17 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 8. | LOANS PAYABLE (continued) |
New Jersey Economic Development Authority Loan Payable
During 2020, Helix eSports and Saber received proceeds of from the New Jersey Economic Development Authority (“NJEDA”) Small Business Emergency Assistance Loan Program. This program provided working capital loans of up to $100,000 to businesses with less than $5 million in revenues. Loans made through the program will have ten-year terms with zero percent for the first five years, then resetting to the EDA’s prevailing floor rate (capped at 3.00%) for the remaining five years. The funds have restrictions related to their use in certain types of activities. The Company may apply for forgiveness of amounts due under the loan, with the amount of potential loan forgiveness to be calculated in accordance with the requirements of the NJEDA based on payroll costs. As of March 31, 2021 and December 31, 2020, the outstanding principal balance for Helix eSports and Saber is $15,000 and $9,000, respectively. As mentioned in Note 1, the Company’s Equity Holders are selling their membership interest in the Company to EEG, this transaction would cause the Company to be in default of the loan. The Company expects to have this loan forgiven but is in default as of the sale date, June 1, 2021.
Paycheck Protection Program Loans
On April 21, 2020, Helix eSports, entered into an original loan agreement with Old Dominion Bank as the lender (“Lender”) for a loan in an aggregate principal amount of $42,339 (the “loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and implemented by the U.S. Small Business Administration (the “SBA”). The Lender has security interest in all assets of Helix eSports. Helix eSports applied for forgiveness in March 2021 and received acknowledgement full forgiveness of the principal and accrued interest as of April 20, 2021. As of March 31, 2021 and December 31, 2020, Helix eSports had a principal balance of $42,339 and $42,339, respectively.
On March 1, 2021 Helix eSports, entered into an original loan agreement with Old Dominion Bank as the lender for a loan in an aggregate principal amount of $107,754 pursuant to the Paycheck Protection Plan Round 2 (“PPP2”) under the Consolidated Appropriations Act, 2021 and by the SBA. As of March 31, 2021 and December 31, 2020, Helix eSports had a principal balance of $107,754 and $0. Under the term of the loans, the Company is in default, due to the sale and change in ownership. The Company has applied for forgiveness and is expecting the loan to be forgiven.
On May 1, 2020 Saber, entered into an original loan agreement with Chase Bank as the lender for a loan in an aggregate principal amount of $15,553 pursuant to the PPP under the CARES Act and by the SBA. As of March 24, 2021, Saber received full forgiveness of the principal and accrued interest and reported as a gain on extinguishment of debt on the unaudited condensed consolidated statements of operations and members’ equity (deficit).
On March 16, 2021 Saber, entered into an original loan agreement with Chase Bank as the lender for a loan in an aggregate principal amount of $15,447 pursuant to PPP2 under the Consolidated Appropriations Act, 2021 and by the SBA. As of March 31, 2021 and December 31, 2020, Saber had a principal of $15,447 and $0. Under the term of the loans, the Company is in default, due to the sale and change in ownership. The Company has applied for forgiveness and is expecting the loan to be forgiven.
| 18 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 8. | LOANS PAYABLE (continued) |
Paycheck Protection Program Loans (continued)
Loans issued prior to June 5, 2020, mature in two years and bears interest at a rate of 1% per year. Loans issued after June 5, 2020 mature in five years and bears interest at a rate of 1% per year. All payments deferred through the six-month anniversary of the date of the loan. Principal and interest are payable monthly commencing on November 1, 2020, May 18, 2022, and June 3, 2022 and may be prepaid by the Company at any time prior to maturity without penalty. The Company may apply for forgiveness of amounts due under the loan, with the amount of potential loan forgiveness to be calculated in accordance with the requirements of the PPP based on payroll costs, any mortgage interest payments, any covered rent payments and any covered utilities payments during the 8-24 week period after the origination date of the loan. The Company utilized the proceeds of the loans for payroll and other qualifying expenses, but there can be no assurances that any portion of the loan will be forgiven. As mentioned in Note 1, the Company’s Equity Holders sold their membership interest in the Company to EEG, this transaction cause the Company to be in default of the loans. The Company has received forgiveness for PPP loans and expects full forgiveness for PPP2 loans.
Economic Injury Disaster Loans
On April 14, 2020, Helix Foxboro entered into a promissory note agreement with the SBA as the lender (“Lender”) for a loan in an aggregate principal amount of $15,000 (the “loan”) pursuant to its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business.
Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan is up to $150,000, with proceeds to be used for working capital purposes. Payments to the loan will begin twelve (12) months from the date of the promissory notes. The balance of principal and interest will be payable thirty (30) years from the date of the promissory note. Interest will accrue at the rate of 3.75% per annum and will accrue only on funds advanced from date(s) of each advance. As mentioned in Note 1, the Company’s Equity Holders are selling their membership interest in the Company to EEG, this transaction would cause the Company to be in default of the loan. The Company paid the loan balance at the closing on June 1, 2021, as discussed in Note 1.
The chart below is the summary of the loans payable reported on the unaudited condensed consolidated balance sheets as of:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Square loan payable | $ | 23,560 | $ | 23,560 | ||||
| NJEDA payable | 24,000 | 24,000 | ||||||
| PPP loans payable | 165,541 | 57,892 | ||||||
| EIDL payable | 15,000 | 15,000 | ||||||
| Lease incentive payable | 13,400 | 13,400 | ||||||
| $ | 241,501 | $ | 133,852 | |||||
| 19 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 8. | LOANS PAYABLE (continued) |
The chart below is the aggregate maturities of the loans payable for the next five years and thereafter are payable as follows as of March 31,2021:
| Year Ending December 31,: | Amount | |||
| Remainder of 2021 | $ | 81,390 | ||
| 2022 | 17,295 | |||
| 2023 | 27,290 | |||
| 2024 | 27,548 | |||
| 2025 | 27,811 | |||
| Thereafter | 60,167 | |||
| 241,501 | ||||
| Less: current portion | (81,390 | ) | ||
| Total | $ | 160,111 |
| 9. | WORKING CAPITAL ADVANCE |
As discussed in Note 1, the Company signed a purchase agreement to sell Helix Holdings membership units to EEG. Pursuant to this transaction, EEG advanced $400,000 to the Company as working capital and an initial deposit on the sale. During 2020, the Company received $400,000 in advance proceeds. The advances shall be evidenced by a zero-interest Promissory Note, in a form to be mutually agreed upon by the Company and EEG. In connection with the Helix Closing, the closing did not take place by May 14, 2021; however, the outstanding balance of the working capital advance totaling $400,000 was credited to EEG as a reduction to the purchase price upon Closing.
In January 2021, in connection with the Operating Expense Payments (see Note 1), the Company entered into a Promissory Note with a principal amount of $400,000. In addition to the credit terms stated in Note 1, in the event that the Helix Purchase Agreement is terminated prior to Closing by EEG for Cause, or by the Company or the Company Holders, other than by reason of the Closing not having taken place on or prior to May 14, 2021, EEG will be entitled to repayment of 100% of the Principal Amount. Any required repayments to EEG resulting from a termination of the Helix Purchase Agreement prior to Closing, as provided immediately above, will be payable to EEG upon the earlier of (i) the consummation of a debt or equity financing in the aggregate amount of not less than $3.0 million by an Acquired Company, and (ii) January 26, 2022. The Promissory Note bears no interest, except default interest at the rate of 6.5% per annum until paid, triggered upon failure of the Company to pay when due any amount of principal. The acquisition of Helix did not close by May 14, 2021, and therefore, EEG forgave $200,000 of the Operating Expense Payments. The remaining amount of $200,000 was credited to EEG as a reduction to the purchase price upon Closing.
In May 2021, a non-refundable operating expense payment was made by EEG to Helix in the amount of $100,000. This payment was not repayable to EEG and was used to fund operating expenses of Helix through the closing of the acquisition of Helix by EEG.
As of March 31, 2021 and December 31, 2020 the working capital advance and operating expense payments had a balance of $800,000 and $400,000, respectively, as reported on the unaudited condensed consolidated balance sheets.
| 20 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 10. | LEASING ACTIVITIES |
The Company determines if a contract contains a lease at inception. U.S. GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease terms used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonable certain and failure to exercise such operations which result in an economic penalty. The operating and financing leases are guaranteed by Helix eSports.
The Company has operating leases for gaming center facilities. Leases with an initial term of 12 months or less are not recognized in the unaudited condensed consolidated balance sheets, the leases are recognized on the unaudited condensed consolidated statements of operations in the general and administrative expenses totaling $11,985 and $25,339, for the three months ended March 31, 2021 and 2020, respectively. The variable rate lease that was not recognized on the unaudited condensed consolidated balance sheets is still subject to the qualitative and quantitative disclosures from ASC 842-20-50-3 and 842-20-50-4. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.
ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the comment date in determining the present value of future lease payments.
The Company has financing leases with an affiliate (see Note 12) for gaming equipment, located in Foxboro, Massachusetts. The leases have remaining lease terms of 4 years, some of which include options to extend the leases for up to 3 years to 5 years.
| 21 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 10. | LEASING ACTIVITIES (continued) |
The following summarizes the line items in the unaudited condensed consolidated balance sheets which include amounts for operating and finance leases as of:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Operating Leases | ||||||||
| Right of use asset | $ | 729,909 | $ | 776,232 | ||||
| Total right of use asset | 729,909 | 776,232 | ||||||
| Operating lease liability, current portion | 229,256 | 225,939 | ||||||
| Operating lease liability, noncurrent | 685,856 | 740,578 | ||||||
| Total operating lease liabilities | $ | 915,112 | $ | 966,517 | ||||
| Finance Leases | ||||||||
| Finance lease right of use assets | $ | 122,361 | $ | 122,361 | ||||
| Amortization of right of use assets | (28,551 | ) | (22,433 | ) | ||||
| Finance lease right of use assets, net | 93,810 | 99,928 | ||||||
| Finance lease liability, current portion | 41,867 | 41,032 | ||||||
| Finance lease liability, noncurrent | 82,149 | 92,936 | ||||||
| Total finance lease liabilities | $ | 124,016 | $ | 133,968 | ||||
The following summarizes the weighted average remaining lease term and discount rate as of:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | 3.75 years | 4 years | ||||||
| Finance leases | 3.75 years | 4 years | ||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | 3.31 | % | 3.31 | % | ||||
| Finance leases | 11.34 | % | 11.34 | % | ||||
| 22 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 10. | LEASING ACTIVITIES (continued) |
The maturities of lease liabilities as of March 31, 2021 were as follows:
| Year Ending December 31,: | Operating | Finance | ||||||
| Remainder of 2021 | $ | 194,058 | $ | 38,028 | ||||
| 2022 | 241,786 | 50,702 | ||||||
| 2023 | 249,040 | 50,702 | ||||||
| 2024 | 256,511 | - | ||||||
| 2025 | 36,000 | - | ||||||
| Total lease payments | 977,395 | 139,432 | ||||||
| Less: Interest | (62,283 | ) | (15,416 | ) | ||||
| Present value of lease liabilities | $ | 915,112 | $ | 124,016 | ||||
The following summarizes the line items in the unaudited condensed consolidated statements of operations and members’ equity (deficit) which include the components of lease expense for the three months ended March 31:
| 2021 | 2020 | |||||||
| Operating lease expense included in general and administrative expenses | $ | 52,441 | $ | 47,240 | ||||
| Finance lease cost: | ||||||||
Amortization of lease assets included in depreciation and amortization expense | $ | 6,118 | $ | 4,079 | ||||
| Interest on leases liabilities included in interest expense | 2,723 | 2,293 | ||||||
| Total finance costs | $ | 8,841 | $ | 6,372 | ||||
The following summarizes cash flow information related to leases for the three months ended March 31:
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 106,569 | $ | 46,876 | ||||
| Operating cash flows from finance leases | 2,723 | 2,293 | ||||||
| Financing cash flows from finance leases | (9,953 | ) | - | |||||
| Lease assets obtained in exchange for lease obligations: | ||||||||
| Finance leases | - | 122,361 | ||||||
On September 1, 2020 Saber entered into a two year lease agreement for space to construct a gaming center located in New Jersey, for no base rent payment but for 50% of Saber’s net profits from the gaming center, this is a variable lease payment. Per ASC 842 variable lease payments are defined as, payments by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstance occurring after the commencement date, other than passage of time. Variable lease payments other than those that depend on an index or a rate should not be included in lease payments for purposes of classification and measurement of the lease (unless those payments are in substance fixed lease payments). With no base rent and a variable lease payment that is highly unpredictable month to month it would not qualify as a fixed lease payment in substance. As such, the lease payments cannot be valued accurately to create the right-of-use asset and lease liability. The lease commenced in January 2021.
| 23 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 10. | LEASING ACTIVITIES (continued) |
The Lessor awarded Saber with a lease incentive of $13,400 to be used towards leasehold improvements. The current award is reported on the unaudited condensed consolidated balance sheets on the loan payable line item. As of March 31, 2021 and December 31, 2020, Saber incurred $3,040 in the construction of the new gaming facility. This amount is reported as part of the property and equipment, net on the unaudited condensed consolidated balance sheets as of March 31, 2021.
| 11. | EQUITY INCENTIVE PLAN |
On February 11, 2019, the stockholders of Team Genji approved the Team Genji, Inc. 2019 Equity Incentive Plan (the “2019 Plan”). The executive officers, employees, consultants, and directors of Team Genji, including its affiliated companies are eligible to participate in the 2019 Plan. The 2019 Plan is administered by the Board of Directors (the “Board”). The 2019 Plan provides for the grant of equity-based compensation in the form of incentive stock options, non-qualified stock options, restricted stock, or any combination thereof.
The 2019 Plan also permits the grant of awards that qualify for “performance-based compensation” within the meaning of Section 162(m) of the U.S. Internal Revenue Code. The Board has the authority to determine the type of award, as well as the amount, terms and conditions of each award, under the 2019 Plan subject to the limitations and other provisions of the 2019 Plan. An aggregate of 80,000 shares of Team Genji’s common stock are authorized for issuance under the 2019 Plan, subject to adjustment as provided in the 2019 Plan for stock splits, dividends, distributions, recapitalizations and other similar transactions or events. If any shares subject to an award are forfeited, expire, lapse or otherwise terminate without issuance of such shares, such shares shall, to the extent of such forfeiture, expiration, lapse or termination, again be available for issuance under the 2019 Plan. As of March 31, 2021 and December 31, 2020 no shares have been granted or exercised, respectively.
| 12. | RELATED PARTY TRANSACTIONS |
During 2019, Saber received computers in exchange for a loan from an affiliate, LanLease, LLC, valued at $66,846. The loan was zero interest, unsecure and payable on demand. In January 2021, LanLease, LLC agreed to convert the loan to member equity. As of March 31, 2021 and December 31, 2020, the total outstanding balance is $- and $66,846, respectively.
During 2020, and 2019, Helix eSports and Saber received computers and operating funds in exchange for a loan from an affiliate, Winding River LLC, valued at $102,000 and $53,538, respectively. As of March 31, 2021 and December 31, 2020, the total outstanding balance is $117,438 and $155,538, respectively. These funds were used to support the operations of Helix eSports and Saber. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, an affiliate, SCV LLC, provided loan proceeds to Helix eSports, SPJ Foxboro, and Helix Foxboro. As of March 31, 2021 and December 31, 2020, the total outstanding balance is $46,000, $13,000, and $70,686, respectively. These funds were used to support the operations of Helix eSports, SPJ Foxboro, and Helix Foxboro. The loan is a zero interest, unsecured, and is payable on demand.
| 24 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 12. | RELATED PARTY TRANSACTIONS (continued) |
During the three months ended March 31, 2021 and 2020, Helix eSports and Helix Foxboro received operating funds in exchange for a loan from an affiliate, LanLease LLC, valued at $65,900 and $2,556, respectively. As of March 31, 2021 and December 31, 2020, the total outstanding balance is $65,900 and $2,556, respectively. The loan is a zero interest, unsecured, and is payable on demand.
During the three months ended March 31, 2021, LanLease LLC, an affiliate, collected credit card sales on behalf of SPJ Foxboro. As of March 31, 2021, SPJ Foxboro has a receivable from LanLease LLC valued at $7,602. The receivable is zero interest bearing and payable on demand.
During March 2020, Helix eSports received loan proceeds from an affiliate, Blue Guitar LLC, of $15,000, respectively. As of March 31, 2021 and December 31, 2020, the total outstanding balance is $15,000 and $15,000, respectively. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, LanLease LLC and Helix Foxboro entered into a lease agreement for gaming equipment (see Note 10). The leased equipment was capitalized as a finance lease, the asset and liability are valued at $93,810 and $124,016, respectively on the unaudited condensed consolidated balance sheets as of March 31, 2021. The asset and liability are valued at $99,928 and $133,968, respectively, on the consolidated balance sheets as of December 31, 2020.
On April 10, 2020, the Company purchased the two-pro e-sports teams in Rocket League and Rainbow Six: Siege (the “Teams”) for $14,713. The purchase included the two team’s player contracts, commercial sponsorships, publisher relationships, all merchandise and products applicable to the teams, all league standings and participation slots for the team, all revenues related to the teams arising after April 1, 2020. As mentioned in Note 4 discontinued operations, on November 10, 2020 the Company entered into an asset transfer agreement for their pro e-sports teams with an affiliate, Oxygen, for $100. The Company continued to collect all prizes and paid the expenses for the pro e-sports team after November 10, 2020 through March 31, 2021. As of March 31, 2021 and December 31, 2020, the Company had a payable to an affiliate and an advance to an affiliate of $20,357 and $76,905, respectively, reported on the unaudited condensed consolidated balance sheets resulting from expenses paid for prior to the transfer. The payable to affiliate is zero interest and is payable on demand.
Loan from Member
During 2018 the majority member of Helix Holding loaned Helix eSport $144,292 for operating capital. During 2019, $79,500 was converted from a loan to member equity. During 2020, the member loaned the Company another $95,000 to support the operations of Helix eSports. During the three months ended March 31, 2021 the member loaned the Company another $67,000. As of March 31, 2021 and December 31, 2020, the balance due to the member is $226,792 and $175,792, respectively. The loan is a zero interest, unsecured, and is payable on demand.
During 2020, the majority member of Helix Holding loaned SPJ Foxboro and Helix Foxboro $6,000 and $10,000, respectively, to support the operations of both companies. As of March 31, 2021, the outstanding balances are $6,000 and $10,000, respectively. As of December 31, 2020, the outstanding balances are $6,000 and $10,000. The loans are a zero interest, unsecured, and is payable on demand.
| 25 |
Helix Holdings, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
| 13. | OTHER INCOME |
During the three months ended March 31, 2021, the Company mined and sold cryptocurrency. These funds were used to support the operations of the of the Company. The realized gains for the sale of the mined cryptocurrency totaled $61,779 as reported on the unaudited condensed consolidated statements of operations and members’ equity (deficit).
| 14. | SUBSEQUENT EVENTS |
Management has evaluated, for potential recognition and disclosure, events subsequent to the balance sheet date through August 12, 2021, the date the unaudited condensed consolidated financial statements were available to be issued.
On April 12, 2021, Helix Foxboro entered into a standby letter of credit with First Republic Bank in the amount of $58,686, set to expire on December 31, 2025. The standby letter of credit is required with their lease at their Foxboro, Massachusetts gaming center.
| 26 |
Exhibit 99.4
ggCircuit, LLC
Unaudited Condensed Consolidated Financial Statements
and Independent Auditors’ Review Report
As of March 31, 2021 and December 31, 2020
and for the Three Months Ended March 31, 2021 and 2020
ggCircuit, LLC
Contents
INDEPENDENT AUDITORS’ REVIEW REPORT
To the Members of
ggCircuit, LLC
We have reviewed the accompanying condensed consolidated financial statements of ggCircuit, LLC (an Indiana corporation) and Subsidiary (collectively, the “Company”), which comprise the condensed consolidated balance sheet of as of March 31, 2021, and the related condensed consolidated statements of operations and comprehensive loss, changes in members’ deficit, and cash flows for the three-month periods ended March 31, 2021 and 2020, and the related notes.
Management’s Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of the condensed interim financial information in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America.
Auditors’ Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information as a whole. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America.
Report on Condensed Consolidated Balance Sheet as of December 31, 2020
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, changes in members’ equity (deficit), and cash flows for the year then ended (not presented herein); and in our report dated April 21, 2021, we expressed an unmodified audit opinion on those audited consolidated financial statements. In our opinion, the accompanying condensed consolidated balance sheet of the Company as of December 31, 2020, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
/s/ Friedman LLP
Marlton, New Jersey
August 4, 2021
| 1 |
ggCircuit, LLC
Condensed Consolidated Balance Sheets
March 31, 2021 and December 31, 2020
(Unaudited)
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 472,558 | $ | 56,915 | ||||
| Accounts receivable, net | 103,973 | 158,416 | ||||||
| Prepaid expenses | 19,274 | 21,892 | ||||||
| Total current assets | 595,805 | 237,223 | ||||||
| Equipment, net | 7,704 | 8,860 | ||||||
| Other assets: | ||||||||
| Software development costs, net | 136,894 | 171,126 | ||||||
| Total assets | $ | 740,403 | $ | 417,209 | ||||
| Liabilities and Members’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Revolving credit facility | $ | 600,000 | $ | 600,000 | ||||
| Operating advance | 600,000 | - | ||||||
| Paycheck protection program loan | 85,750 | 10,000 | ||||||
| Note payable, member | 200,000 | 200,000 | ||||||
| Accounts payable and other liabilities | 367,943 | 250,023 | ||||||
| Accounts payable - related party | - | 4,550 | ||||||
| Deferred revenue | 196,992 | 235,770 | ||||||
| Total current liabilities | 2,050,685 | 1,300,343 | ||||||
| Noncurrent liabilities: | ||||||||
| Long-term debt - EIDL | 150,000 | 150,000 | ||||||
| Total liabilities | 2,200,685 | 1,450,343 | ||||||
| Contingencies | ||||||||
| Members’ deficit | (1,460,282 | ) | (1,033,134 | ) | ||||
| Total liabilities and members’ deficit | $ | 740,403 | $ | 417,209 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
ggCircuit, LLC
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the Three Months Ended March 31, 2021 and 2020
(Unaudited)
| 2021 | 2020 | |||||||
| Revenue, net: | ||||||||
| Subscriptions, net (including related party subscription | ||||||||
| revenue of $1,337 for the three months ended | ||||||||
| March 31, 2020) | $ | 176,510 | $ | 182,668 | ||||
| Consulting | 215,077 | 145,660 | ||||||
| Strategic partnership | 214,081 | 150,000 | ||||||
| Total revenue, net | 605,668 | 478,328 | ||||||
| Cost of revenue: | ||||||||
| Support and maintenance | 65,594 | 103,400 | ||||||
| Professional services | 92,174 | 42,676 | ||||||
| Web hosting | 39,355 | 81,937 | ||||||
| Total cost of revenue | 197,123 | 228,013 | ||||||
| Gross profit | 408,545 | 250,315 | ||||||
| Operating expenses: | ||||||||
| Sales, general, and administrative | 177,102 | 226,808 | ||||||
| Sales, general, and administrative - related party | 37,500 | 75,000 | ||||||
| Product research and development | 318,519 | 371,698 | ||||||
| Product research and development - related party | 71,127 | 70,451 | ||||||
| Depreciation and amortization | 35,388 | 26,868 | ||||||
| Total operating expenses | 639,636 | 770,825 | ||||||
| Other income (expense): | ||||||||
| Gain on extinguishment of debt | 10,000 | - | ||||||
| Loss on write-off of advances to affiliate | - | (70,000 | ) | |||||
| Interest expense - related party | (4,063 | ) | (1,354 | ) | ||||
| Transaction costs (Note 1) | (201,986 | ) | - | |||||
| Total other expense, net | (196,049 | ) | (71,354 | ) | ||||
| Net loss | (427,140 | ) | (591,864 | ) | ||||
| Other comprehensive loss: | ||||||||
| Foreign currency translation adjustment | (8 | ) | (2,489 | ) | ||||
| Comprehensive loss | $ | (427,148 | ) | $ | (594,353 | ) | ||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 3 |
ggCircuit, LLC
Condensed Consolidated Statements of Changes in Members’ Deficit
For the Three Months Ended March 31, 2021 and 2020
(Unaudited)
| Balance, January 1, 2020 - 111,111 units issued and outstanding | $ | 140,075 | ||
| Net loss | (591,864 | ) | ||
| Foreign currency translation adjustment | (2,489 | ) | ||
| Balance, March 31, 2020 - 111,111 units issued and outstanding | $ | (454,278 | ) | |
| Balance, January 1, 2021 - 111,111 units issued and outstanding | (1,033,134 | ) | ||
| Net loss | (427,140 | ) | ||
| Foreign currency translation adjustment | (8 | ) | ||
| Balance, March 31, 2021 - 111,111 units issued and outstanding | $ | (1,460,282 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
ggCircuit, LLC
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2021 and 2020
(Unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (427,140 | ) | $ | (591,864 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Bad debt | - | 1,200 | ||||||
| Depreciation and amortization | 35,388 | 26,868 | ||||||
| Gain on extinguishment of debt | (10,000 | ) | - | |||||
| Write-off of advances to affiliate | - | 70,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable | 54,443 | (75,149 | ) | |||||
| Prepaid expenses | 2,618 | 5,429 | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable and other liabilities | 117,912 | 35,344 | ||||||
| Accounts payable - related party | (4,550 | ) | (4,875 | ) | ||||
| Deferred revenue | (38,778 | ) | 94,721 | |||||
| Net cash used in operating activities | (270,107 | ) | (438,326 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Due from related party | - | (15,000 | ) | |||||
| Net cash used in investing activities | - | (15,000 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Operating advance | 600,000 | - | ||||||
| Proceeds from paycheck protection program loan | 85,750 | - | ||||||
| Borrowings from note payable, member | - | 250,000 | ||||||
| Net cash provided by financing activities | 685,750 | 250,000 | ||||||
| Net increase (decrease) in cash | 415,643 | (203,326 | ) | |||||
| Cash, beginning of the period | 56,915 | 246,736 | ||||||
| Cash, end of the period | $ | 472,558 | $ | 43,410 | ||||
| Supplementary disclosure of cashflow information: | ||||||||
| Interest paid | $ | 2,709 | $ | - | ||||
| Noncash investing and financing activities: | ||||||||
| Principal of paycheck protection program loan forgiven | $ | 10,000 | $ | - | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business
ggCircuit, LLC (ggCircuit) was organized as an Indiana limited liability company in March 2018 to provide software as a service (SaaS) and leading-edge solutions for the esports industry. ggCircuit and its wholly-owned subsidiary, ggCircuit Limited (GG Limited) (collectively, the Company) offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers and product manufacturers. The Company’s Limited Liability Company Agreement (Operating Agreement) provides for two classes of common units (Units). ggCircuit has authorization under the Operating Agreement to issue one million Units. As of March 31, 2021 and December 31, 2020, ggCircuit had 111,111 Class A Units issued and outstanding. There were no Class B Units issued as of March 31, 2021 and December 31, 2020. Under the terms of the Operating Agreement, the term of ggCircuit will continue perpetually unless sooner terminated as provided in the Operating Agreement. Under the terms of the Operating Agreement, a Member’s liability is limited to capital contributions previously made by such member and shall have no personal liabilities for ggCircuit or each other.
GG Limited is a private limited company under the registered office in Northern Ireland incorporated in July 2015. GG Limited provides SaaS services to esport centers worldwide. GG Limited is wholly-owned by ggCircuit.
ggCircuit, LLC Purchase Agreement
In January 2021, the Company entered into a purchase agreement with Esports Entertainment Group, Inc. (Esports) whereby Esports can acquire from the members of the Company all of the issued and outstanding membership units of the Company (GGC Units), making the Company a wholly owned subsidiary of Esports (referred to as the GGC Purchase Agreement).
As consideration for the GGC Units, Esports agreed to pay the members of the Company $26,000,000 to be paid fifty percent (50%) in shares of Common Stock (the GGC Share Consideration) of Esports, and fifty percent (50%) in cash. The Closing under the GGC Purchase Agreement was subject to the simultaneous closing under a similar Purchase Agreement with Helix Holdings, LLC (Helix). The Closing was also subject to (i) the completion of the Fairness Opinion; (ii) an audit as of and for the two years ended December 31, 2020 of the Company; and (iii) the approval of Esports’ shareholders to the issuance of the GGC Share Consideration and Helix Share Consideration in satisfaction of NASDAQ Rule 5635(a).
In connection with the negotiation of the GGC Purchase Agreement, Esports advanced an aggregate of $600,000 to the Company during 2020 (Esports Loan) under an a revolving credit facility agreement with Esports (see Note 6). If closing took place prior to May 14, 2021, Esports would have received a full credit against the purchase price for the Esports Loan.
Upon execution of the GGC Purchase Agreement, Esports paid the Company an additional $600,000 to be used for operating expenses pending the Closing (the Operating Expense Payments) (See Note 6). If the Closing took place on or prior to April 30, 2021, Esports would have received a full credit against the GGC Purchase Price for the Operating Expense Payments. If the Closing took place after April 30, 2021 but prior to May 14, 2021, Esports would have received a 60% credit against the GGC Purchase Price for the Operating Expense Payments and the remaining 40% of the Operating Expense Payments would be forgiven. If Closing took place after May 14, 2021, 50% of the Operating Expense Payments would be repayable to Esports and the remaining 50% of the Operating Expense Payments would be forgiven.
| 6 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Amendment to ggCircuit LLC Purchase Agreement
On May 21, 2021, Esports and the Company amended the GGC Purchase Agreement pursuant to the Amendment No. 1 to Equity Purchase Agreement (the GGC Amendment) to, among other things, (A) update Exhibit A thereto; (B) provide for an additional indemnifiable event by the Company’s Equity Holders under Section 10.02 of the GGC Purchase Agreement with respect to post-closing pre-mature departures of certain key employees of the Company; (C) extend the End Date (as defined in the GGC Purchase Agreement) to June 3, 2021; (D) provide for a non-refundable operating expense payment to the Company in the amount of $100,000; provided, however, that if the transaction does not close on or before June 1, 2021, Esports is required to make an additional non-refundable payment in the amount of $100,000 to the Company; (E) increase the amount of the Purchase Price (as defined in the GGC Purchase Agreement) to be paid in cash from $13,000,000 to $15,000,000 and reduce the amount of the Purchase Price to be paid in stock from $13,000,000 to $11,000,000; and (F) change the Stock Payment (as defined in the GGC Purchase Agreement) calculation from a variable formula to a fixed price formula, resulting in $11,000,000 of the Purchase Price being payable to the Company Equity Holders in shares of the Esports’s common stock valued at $13.25 per share (830,189 shares).
ggCircuit LLC Purchase Agreement Closing
On June 1, 2021, Esports, the Company and the Company Equity Holders, having met all conditions precedent in the GGC Purchase Agreement, consummated the closing for the GGC Units (the GGC Closing). Pursuant to the GGC Purchase Agreement, as consideration for the GGC Units, Esports paid the Company Equity Holders at the GGC Closing: (i) $15,000,000 in cash (the GGC Cash Consideration) and $11,000,000 in stock (the GGC Stock Consideration) through the issuance of 830,189 shares of the Esports’s common stock, par value $0.0001 per share. In connection with the GGC Cash Consideration, Esports received credit for certain loans and operating expense payments made by Esports to the Company during 2020 and 2021 (see Note 6).
2. Liquidity and Going Concern
The Company has incurred substantial losses and cash used in operating activities since inception. For the three months ended March 31, 2021 and 2020, the Company had a net loss of $427,140 and $591,864 and net cash used in operations of $270,107 and $438,326, respectively. As of March 31, 2021 and December 31, 2020, the Company had a members’ deficit of $1,460,282 and $1,033,134, respectively. The Company was acquired by Esports on June 1, 2021 (see Note 1). Esports is expected to provide the necessary liquidity required to pay for operating costs and continue to finance business activities. Based on the cash generated from operations, available cash, and liquidity expected to be provided by Esports, the Company expects to have available funds to satisfy its current obligations to continue operations. As a result, the acquisition with Esports has alleviated the going concern doubt that existed at December 31, 2020.
The outbreak of the 2019 coronavirus disease (COVID-19), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, adversely affected workforces, economies, and financial markets globally. Due to outbreak of COVID-19, esports gaming centers have experienced negative effects and noticeable disruptions from COVID-19
| 7 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Liquidity and Going Concern (continued)
related restrictions. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and new information may emerge concerning the COVID-19 pandemic which may result in continued negative effects to the esports industry.
3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company prepares its Unaudited Interim Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany transactions and balances have been eliminated in consolidation.
Unaudited Interim Condensed Financial Statements
The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements, and, in the opinion of management, include all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position as of March 31, 2021 and its results of operations and cash flows for the three months ended March 31, 2021 and 2020. The financial data and other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full fiscal year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes as of and for the year ended December 31, 2020.
Estimates
The preparation of Unaudited Interim Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Occasionally, balances may exceed the FDIC deposit insurance amount; that excess is uninsured. The Company did not have cash equivalents at March 31, 2021 and December 31, 2020.
Accounts Receivables
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within a set time period from the invoice date. Accounts receivable are stated at the amount management expects to collect on outstanding balances from customers.
| 8 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. If actual collections experience changes, revision to the allowance may be required. Accounts are written off against the allowance when they are determined to be uncollectible based on management’s assessment of individual accounts. There was no allowance for doubtful accounts at March 31, 2021. The allowance for doubtful accounts was $15,600 at December 31, 2020. Bad debt expense was $1,200 for the three months ended March 31, 2020. There was no bad debt expense for the three months ended March 31, 2021.
Prepaid Expenses
Prepaid expenses represent goods or services for which payment has been made but the goods have not been received or services have not been rendered.
Equipment
Equipment is recorded at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Repair and maintenance costs are expensed as incurred. Estimated useful life for equipment was three years.
Software Development Costs
Costs incurred to develop software for internal-use are capitalized and amortized over the useful life of the software. Amortization of capitalized software development costs begin when the application is substantially complete and ready for its intended use. Amortization is computed using the straight-line method over the estimated economic life of the product which is estimated to be three years. Costs related to design or maintenance of internal-use software are expensed as incurred.
Long-lived Assets
Long-lived assets, including definite-life intangible assets, are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount to future undiscounted cash flows expected to be generated by the related asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the estimated fair value of the asset. No impairment was recognized for long-lived assets for the three months ended March 31, 2021 and 2020. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Income Taxes
ggCircuit is a limited liability company and has elected to be taxed as a partnership in accordance with provisions of the Internal Revenue Code. The members report their share of ggCircuit’s income or loss on their individual income tax return. Accordingly, ggCircuit does not provide for income taxes in the consolidated financial statements.
| 9 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Income Taxes (continued)
GG Limited is a private limited company subject to the tax jurisdiction of Northern Ireland. Under statutory requirements of Northern Ireland, GG Limited is subject to business tax on its profits. GG Limited provides for current and deferred tax liabilities and assets using an asset and liability approach, along with a valuation allowance as appropriate. Deferred income taxes arise from temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and operating loss and tax credit carryforwards, if any. Deferred income taxes are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.
The Company reviews its tax positions for uncertainty and records a provision for tax positions which may not be sustained based on their technical merits if examined by the taxing authorities. At March 31, 2021 and December 31, 2020, there were no matters requiring a provision for uncertain tax positions. The tax years 2018-2020 remain open to examination by the taxing jurisdictions to which the Company is subject.
Revenue Recognition
The Company determines revenue recognition by:
| ● | Identifying the contract, or contracts, with a customer; | |
| ● | Identifying the performance obligations in each contract; | |
| ● | Determining the transaction price; | |
| ● | Allocating the transaction price to the performance obligations in each contract; and | |
| ● | Recognizing revenue when, or as, performance obligations are satisfied by transferring the promised goods or services. |
Revenue Recognition
Subscription Revenue, Net – revenue generated by subscription services through the Company’s cloud-based esport management platform provided to customers net of discounts and coupons. The Company’s primary performance obligation is to provide the customer access to the hosted platform. The Company recognizes subscription revenue ratably over the term of the contract, which 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.
Consulting Revenue - revenue generated by services provided to customers to provide hardware and equipment, sourcing, training, planning, and technology implementation services. The Company considers hardware and equipment, and implementation services (sourcing, training, planning, and technology implementation services), and design of user interface 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.
| 10 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Strategic Partnership Revenue - revenue generated from partnership contracts with strategic customers. 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 with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the SaaS sold, customer demographics, geographic locations, and the number and types of users within our contracts.
Deferred Revenue
Deferred revenue primarily consists of customer payments received in advance of revenues being recognized from our subscription and strategic partnership contracts.
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Beginning of the period | $ | 235,770 | $ | 180,982 | ||||
| Additions | 231,658 | 1,115,774 | ||||||
| Revenue recognized | (270,436 | ) | (1,060,986 | ) | ||||
| End of the period | $ | 196,992 | $ | 235,770 | ||||
Practical Expedients
As permitted under ASU 2014-09 (and related ASUs), the Company has elected to use the following practical expedients that are available under Topic 606:
| ● | To recognize commission expense, an incremental cost of obtaining a contract, as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less; | |
| ● | To apply the revenue standard to a portfolio of contracts (or performance obligations) with similar characteristics, as it expects that the effects on the consolidated financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts; and |
| 11 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
| ● | The Company has elected the significant financing component practical expedients in applying Topic 606. Accordingly, the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. |
Sales Tax
The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of accounts receivable.
Concentrations of Business and Credit Risk
The Company reviews the credit history of customers before extending credit, monitors receivable balances closely, and establishes allowances for doubtful accounts based on specific customer risk, industry risks, historical trends, and other information. The Company does not require collateral for accounts receivables.
Three customers accounted for 23%, 26%, and 11% of the Company’s consolidated revenue for the three months ended March 31, 2021. One customer accounted for 31% consolidated revenue for the three months ended March 31, 2020. Three customers accounted for 21%, 35%, and 15% of the Company’s consolidated accounts receivable at March 31, 2021 and accounted for 27%, 21%, and 18% of the Company’s consolidated accounts receivable at December 31, 2020.
One related party vendor, Velocity 42 (see Note 10), represented approximately 11% of total expenditures for each of the three months ended March 31, 2021 and 2020.
Foreign Currency Translation
The British pound is the functional currency of GG Limited. The Company translates the functional currency into U.S. dollars based on the current exchange rate at the end of the period for the balance sheet, and a weighted average rate for the period in the unaudited condensed consolidated statements of operations and comprehensive loss. Translation adjustments of $4,595 and $4,603 are reflected as accumulated other comprehensive income in members’ deficit at March 31, 2021 and December 31, 2020, respectively.
Advertising Costs
The Company incurs advertising costs in the normal course of business, which are expensed as incurred. Advertising costs were $6,423 and $21,199 for the three months ended March 31, 2021 and 2020, respectively, and are included in sales, general, and administrative expense in the unaudited condensed consolidated statements of operations.
| 12 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Research and Development Costs
Expenditures for research and development activities relating to software development are expensed as incurred. Research and development costs were $389,646 and $442,149, for the three months ended March 31, 2021 and 2020, respectively.
Variable Interest Entity
In accordance with Accounting Standards Codification 810, the Company considers entities affiliated with the Company through common ownership to be Variable Interest Entities (VIE). Under the consolidation guidance, the Company must make an evaluation of the entity to determine if they are required to be consolidated.
Generally, a VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
In October 2018, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17).
ASU 2018-17 permits a private company (the reporting entity) to elect an alternative not to apply variable interest entity (VIE) guidance if (a) the reporting entity and the legal entity are under common control; (b) the reporting entity and the legal entity are not under common control of a public business entity; (c) the legal entity under common control is not a public business entity; and (d) the reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsection of Topic 810.
The Company determined that Tilt, LLC, Velocity 42, and Helix eSports LLC met all of the criteria of the private company alternative and has elected not to evaluate the entity for potential consolidation.
Recently Issued Accounting Guidance
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company’s accounts receivables, certain financial instruments, and contract assets. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022, and requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting
| 13 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Recently Issued Accounting Guidance (continued)
period in which the guidance is effective. ASU 2016-13 will become effective for the Company on January 1, 2023. The Company is evaluating the new guidance and its impact, if any, on the accompanying unaudited condensed consolidated financial statements.
4. Accounts Receivable
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accounts receivable | $ | 103,973 | $ | 174,016 | ||||
| Allowance for doubtful accounts | - | (15,600 | ) | |||||
| $ | 103,973 | $ | 158,416 | |||||
5. Software Development Costs
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Software development costs | $ | 410,775 | $ | 410,775 | ||||
| Less accumulated amortization | (273,881 | ) | (239,649 | ) | ||||
| $ | 136,894 | $ | 171,126 | |||||
Amortization expense was $34,232 and $25,712 for the three months ended March 31, 2021 and 2020, respectively.
Estimated amortization expense in each of the succeeding years is as follows:
| Years ending December 31, | ||||
| For the 9 months ended December 31, 2021 | $ | 86,460 | ||
| 2022 | 39,069 | |||
| 2023 | 11,365 | |||
| $ | 136,894 | |||
| 14 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
6. Loans Payable
Revolving Credit Facility
In September 2020, the Company entered into a letter of intent with a third-party (Esports) for the sale of all the stock and assets of the Company (see Note 1). In conjunction with the acquisition, on September 22, 2020 (the effective date), the Company entered into an agreement with the acquirer of the Company for a revolving credit facility with maximum availability of $600,000 with interest rate of 0%. The credit facility matures the earlier of 12 months following the effective date or the date the transaction is completed or terminated. At March 31, 2021 and December 31, 2020, the outstanding balance of the revolving credit facility was $600,000. In connection with the GGC Closing, the closing did not take place by May 14, 2021; however, the outstanding balance of the Esports Loan totaling $600,000 was credited to Esports as a reduction to the purchase price upon Closing.
Operating Expense Payments
In January 2021, in connection with the Operating Expense Payments (see Note 1), the Company entered into a Promissory Note with a principal amount of $600,000. In addition to the credit terms stated in Note 1, in the event that the GGC Purchase Agreement is terminated prior to Closing by Esports for Cause, or by the Company or the Company Holders, other than by reason of the Closing not having taken place on or prior to May 14, 2021, Esports will be entitled to repayment of 100% of the Principal Amount. Any required repayments to Esports resulting from a termination of the GGC Purchase Agreement prior to Closing, as provided immediately above, will be payable to Esports upon the earlier of (i) the consummation of a debt or equity financing in the aggregate amount of not less than $4.5 million by an Acquired Company, and (ii) January 26, 2022. The Promissory Note bears no interest, except default interest at the rate of 6.5% per annum until paid, triggered upon failure of the Company to pay when due any amount of principal. The acquisition of ggCircuit did not close by May 14, 2021, and therefore, Esports forgave $300,000 of the Operating Expense Payments. The remaining amount of $300,000 was credited to Esports as a reduction to the purchase price upon Closing.
| 7. | Long-term debt |
In May 2020, ggCircuit entered into an Economic Injury Disaster Loan (EIDL) under the U.S. Small Business Administration (SBA) with a principal amount of $150,000. Interest on the loan accrues at 3.75% per annum. Commencing in June 2021, the loan is payable in monthly installments of $731 including principal and interest through May 2050. The loan is secured by substantially all of the Company’s assets and is guaranteed by the Company’s majority members. Proceeds of EIDL can only be used by the Company as working capital to alleviate economic injury in accordance with the terms of the EIDL agreement. Under the terms of the loan, if the Company changes ownership without SBA’s prior written consent, the loan will be considered to be in default and the SBA may a) require immediate payment of all amounts owing under this Note; b) have recourse to collect all amounts owing from any Borrower or Guarantor (if any); c) file suit and obtain judgment; d) take possession of any Collateral; or e) Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement. On June 4, 2021, the principal of the EIDL in the amount of $150,000 was paid in full.
| 15 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Long-term Debt (continued)
Long-term debt matures as follows:
| Years ending December 31, | ||||
| For the 9 months ended December 31, 2021 | $ | - | ||
| 2022 | - | |||
| 2023 | 2,550 | |||
| 2024 | 3,299 | |||
| 2025 | 3,425 | |||
| Thereafter | 140,726 | |||
| Total | $ | 150,000 | ||
8. Paycheck Protection Program
In April 2020, the Company received funding pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Paycheck Protection Program (the Program) in the amount of $85,750. Under the terms of the Program, recipients may be granted forgiveness for all or a portion of the funding if that amount is used for qualifying expenses as described in the CARES Act. The Company used the entire amount for qualifying expenses and met all other eligibility criteria for forgiveness in the Program. A portion of the loan in the amount of $75,750 was forgiven in November 2020. At December 31, 2020, the outstanding balance was $10,000 and was forgiven in January 2021.
In February 2021, the Company entered into another bank loan pursuant to the Program with principal amounts of $85,750. Interest on the loan accrues at 1.0% per annum. The Company can apply for forgiveness of this loan. Under the terms of this loan, the borrower is in default if the Company changes ownership without prior consent of the lender. If there is a default, the lender may a) require immediate payment of all amounts owing under this Note; b) collect all amounts owing from any Borrower or Guarantor; c) file suit and obtain judgment; d) take possession of any Collateral; or e) sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement. Commencing in November 2021, the loan is payable in monthly installments of principal plus interest through February 2026. On June 14, 2021, the loan in the amount of $85,750 was forgiven.
9. Related-party Transactions
Related parties are entities affiliated with the Company through common ownership.
Tilt
For the three months ended March 31, 2020, the Company made $15,000 in advances to Tilt, LLC (Tilt), an entity owned by a member of the Company, primarily to accommodate financing needs of this related entity. The advance bears no interest. For the three months ended March 31, 2020, $70,000 in advances to Tilt were written off. For the three months ended March 31, 2020 the Company incurred $37,500 in management fees from Tilt. There were no management fees incurred from Tilt for the three months ended March 31, 2021.
| 16 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Velocity 42
For the three months ended March 31, 2021 and 2020, the Company incurred $71,127 and $70,451, respectively, in product research and development expenses provided by Velocity 42, an entity with common ownership. For each of the three months ended March 31, 2021 and 2020 the Company incurred $37,500, in management fees from Velocity 42. At December 31, 2020, the Company had $4,550 due to Velocity 42. There were no amounts due to Velocity 42 at March 31, 2021.
Helix eSports LLC
The Company receives revenue for services provided to certain affiliates. Revenue is based on contractually agreed-upon rates and charged to affiliates based on services provided. For the three months ended March 31, 2020, the Company provided services to Helix eSports LLC (Helix eSports), a related party under common ownership, for services related to subscription services of $1,337. There were no related party revenues from Helix eSports for the three months ended March 31, 2021.
Note Payable, Member
In April 2020, a member of the Company loaned funds to the Company. As of March 31, 2021 and December 31, 2020, the outstanding balance was $200,000. The note accrues interest at 6.5% per annum and is payable at maturity on March 31, 2021. Upon maturity, if principal and interest are not paid in full, the loan is deemed to be in default and converts to a term loan with monthly payments of principal and interest through June 1, 2022. Interest on the term loan would be 10.5% per annum. Interest incurred during the three months ended March 31, 2021 and 2020, was $4,063 and $1,354, respectively. In March 2021, the loan was amended to extend the maturity date to July 1, 2021. On May 31, 2021, the outstanding balance in the amount of $200,000 was paid in full.
10. Income Tax
Deferred tax assets were comprised of the following temporary differences:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Net operating loss carryforwards | $ | 33,354 | $ | 32,991 | ||||
| Less valuation allowance | (33,354 | ) | (32,991 | ) | ||||
| $ | - | $ | - | |||||
| 17 |
ggCircuit, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Income Tax (continued)
A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company is in a cumulative loss position, which represents significant negative evidence for the Company to determine that a full valuation allowance be established against its deferred tax assets in its non-U.S. jurisdiction. The valuation allowance will offset assets associated with future tax deductions and carryforward items. Until an appropriate level of profitability is attained, a valuation allowance will be maintained on non-U.S. deferred tax assets. At March 31, 2021 and December 31, 2020, the Company had unused non-U.S. net operating loss carryforwards of approximately $170,000 which have indefinite carryforward periods.
11. Contingencies
The Company is a party to various actions and claims arising in the ordinary course of business. In the opinion of management and legal counsel, these claims and actions, both individually and in the aggregate, can be resolved in a manner which will not result in a material liability.
12. Subsequent Events
Subsequent events were evaluated through August 4, 2021, the date the unaudited condensed consolidated financial statements were available to be issued.
| 18 |
Exhibit 99.5
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On June 1, 2021, Esports Entertainment Group, Inc. (the “Company”) completed its acquisition of ggCIRCUIT LLC (“GGC”) and Helix Holdings, LLC (“Helix”). GGC offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers and product manufacturers. Helix is an owner and operator of esports centers providing esports programming and gaming infrastructure and is also the owner of the esports analytics platform, Genji Analytics, and LANduel, a proprietary player-versus-player esports wagering platform. The operations of Helix and GGC, (collectively referred to herein as the “Acquired Companies”) share common management and are related businesses such that Helix held an equity interest in GGC prior to closing.
The accompanying unaudited pro forma condensed combined financial statements (“unaudited pro forma financial information”) has been prepared based on the historical financial statements of the Company and the Acquired Companies after giving effect to their respective equity purchase agreements. The unaudited pro forma financial information is intended to provide information about how the acquisition of the Acquired Companies may have affected the Company’s historical financial statements. The unaudited pro forma condensed combined statements of operations for the nine months ended March 31, 2021 and the year ended June 30, 2020, combines the historical consolidated statements of operations of the Company for these periods, derived from the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) on May 17, 2021, and Annual Report on Form 10-K filed with the SEC on October 1, 2020, with the respective historical consolidated statements of operations of the Acquired Companies as if the acquisition of the Acquired Companies had occurred on July 1, 2019. The unaudited pro forma condensed combined balance sheet at March 31, 2021 combines the historical consolidated balance sheet of the Company as derived from the Quarterly Report on Form 10-Q filed with the SEC on May 17, 2021, and the historical consolidated balance sheet of the Acquired Companies as of March 31, 2021 on a pro forma basis as if the acquisition of the Acquired Companies occurred on the same balance sheet date.
The Company and the Acquired Companies have different fiscal year ends. The historical unaudited pro forma condensed combined statement of operations for the nine months ended March 31, 2021 combines the Company’s historical unaudited consolidated statement of operations for the nine months ended March 31, 2021 with the results of the Acquired Companies for the nine months ended December 31, 2020, derived by adding the historical audited consolidated statements of operations of The Acquired Companies for the year December 31, 2020, and then subtracting the historical unaudited condensed consolidated statements of operations for the three months ended March 31, 2020.
The historical unaudited pro forma condensed combined statement of operations for the year ended June 30, 2020 combines the Company’s historical audited consolidated statement of operations for the year ended June 30, 2020 with the results of The Acquired Companies for the year ended March 31, 2020, derived by adding the historical unaudited condensed consolidated statements of operations of The Acquired Companies for the three months ended March 31, 2020 to its historical audited consolidated statements of operations for the year ended December 31, 2019, and then subtracting the historical unaudited condensed consolidated statements of operations for the three months ended March 31, 2019.
The unaudited pro forma financial information should be read in conjunction with the accompanying notes to the unaudited pro forma financial information and:
| ● | the historical unaudited condensed consolidated financial statements of the Company for the three and nine months ended March 31, 2021 included in the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 17, 2021; |
| ● | the historical audited consolidated financial statements of the Company for the year ended June 30, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on October 1, 2020; |
| ● | the historical unaudited condensed consolidated financial statements of Helix for the three months ended March 31, 2021 and 2020 as included in this Current Report on Form 8-K/A filed with the SEC on August 12, 2021; |
| ● | the historical audited consolidated financial statements of Helix for the years ended December 31, 2020 and 2019, as included in this Current Report on Form 8-K/A filed with the SEC on August 12, 2021. |
| ● | the historical unaudited condensed consolidated financial statements of GGC for the three months ended March 31, 2021 and 2020 as included in this Current Report on Form 8-K/A filed with the SEC on August 12, 2021; |
| ● | the historical audited consolidated financial statements of GGC for the years ended December 31, 2020 and 2019, as included in this Current Report on Form 8-K/A filed with the SEC on August 12, 2021. |
| ● | the announcement of the entry into an Equity Purchase Agreement with Helix, as included in the Current Report on Form 8-K filed with the SEC on January 22, 2021. |
| ● | the announcement of the entry into an equity purchase agreement with GGC, as included in the Current Report on Form 8-K filed with the SEC on January 22, 2021. |
| ● | the announcement of the amendment to the equity purchase agreement with Helix, as included in the Current Report on Form 8-K filed with the SEC on May 26, 2021. |
| ● | the announcement of the amendment to the equity purchase agreement with GGC, as included in the Current Report on Form 8-K filed with the SEC on May 26, 2021. |
| ● | the announcement of the closing of the Convertible Note as included in the Current Report on Form 8-K filed with the SEC on June 1, 2021. |
The unaudited pro forma financial information has been presented for illustrative purposes only and do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition of the Acquired Companies occurred on the dates indicated. Further, the unaudited pro forma financial information also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma transaction accounting adjustments represent management’s estimates based on information available as of the date of these unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and analyses are performed.
Esports Entertainment Group, Inc.
Pro Forma Condensed Combined Balance Sheet
March 31, 2021
(Unaudited)
| Historical | Pro Forma | |||||||||||||||||||||||||||||||||||
| Esports Entertainment Group, Inc. | ggCircuit LLC | Helix Holdings, LLC | ggCircuit
LLC Transaction Accounting Adjustments | Notes | Helix
Holdings, LLC Transaction Accounting Adjustments | Notes | Other Transaction Accounting Adjustments | Notes | Pro Forma Combined | |||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||||||||||||||
| Cash | $ | 16,880,683 | $ | 472,558 | $ | 134,119 | $ | (14,100,000 | ) | (a) | $ | (9,400,000 | ) | (a) | $ | 32,044,580 | (i) | $ | 26,031,940 | |||||||||||||||||
| Restricted cash | 3,428,366 | - | - | - | - | - | 3,428,366 | |||||||||||||||||||||||||||||
| Accounts receivable, net | 153,011 | 103,973 | 65,154 | - | - | - | 322,138 | |||||||||||||||||||||||||||||
| Receivables reserved for users | 1,486,024 | - | - | - | - | - | 1,486,024 | |||||||||||||||||||||||||||||
| Loans receivable | 2,000,000 | - | - | (1,200,000 | ) | (a) (c) | (800,000 | ) | (a) (c) | - | - | |||||||||||||||||||||||||
| Other receivables | 920,115 | - | - | - | - | - | 920,115 | |||||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 1,423,581 | 19,274 | 37,083 | 1,200,000 | (a) | 1,609,349 | (a) | - | 4,289,287 | |||||||||||||||||||||||||||
| Total current assets | 26,291,780 | 595,805 | 236,356 | (14,100,000 | ) | (8,590,651 | ) | 32,044,580 | 36,477,870 | |||||||||||||||||||||||||||
| Equipment, net | 80,904 | 7,704 | 546,374 | - | - | - | 634,982 | |||||||||||||||||||||||||||||
| Right-of-use asset, net | 546,012 | - | 823,719 | - | - | - | 1,369,731 | |||||||||||||||||||||||||||||
| Intangible assets, net | 27,810,029 | 136,894 | - | - | - | - | 27,946,923 | |||||||||||||||||||||||||||||
| Goodwill | 16,992,199 | - | - | 22,700,751 | (d) | 14,073,956 | (e) | - | 53,766,906 | |||||||||||||||||||||||||||
| Other non-current assets | 1,290,353 | - | 1,445,721 | - | (1,340,728 | ) | (g) | - | 1,395,346 | |||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 73,011,277 | $ | 740,403 | $ | 3,052,170 | $ | 8,600,751 | $ | 4,142,577 | $ | 32,044,580 | $ | 121,591,758 | ||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 5,305,176 | $ | 367,943 | $ | 454,486 | $ | - | $ | - | $ | - | $ | 6,127,605 | ||||||||||||||||||||||
| Liabilities to customers | 3,218,798 | - | - | - | - | - | 3,218,798 | |||||||||||||||||||||||||||||
| Deferred revenue | 145,091 | 196,992 | - | (196,992 | ) | (f) | - | - | 145,091 | |||||||||||||||||||||||||||
| Loans payable and Advances from Esports Entertainment Group, Inc. | - | 1,200,000 | 800,000 | (1,200,000 | ) | (g) | (800,000 | ) | (g) | - | - | |||||||||||||||||||||||||
| Notes payable - current | 158,141 | 85,750 | 81,390 | (85,750 | ) | (g) | (81,390 | ) | (g) | - | 158,141 | |||||||||||||||||||||||||
| Notes payable to related party - current | - | 200,000 | 584,127 | (200,000 | ) | (g) | (584,127 | ) | (g) | - | - | |||||||||||||||||||||||||
| Operating lease liability - current | 240,725 | - | 229,256 | - | - | - | 469,981 | |||||||||||||||||||||||||||||
| Finance lease liability - current | - | - | 41,867 | - | - | - | 41,867 | |||||||||||||||||||||||||||||
| Contingent consideration - current | 300,000 | - | - | - | - | - | 300,000 | |||||||||||||||||||||||||||||
| Total current liabilities | 9,367,931 | 2,050,685 | 2,191,126 | (1,682,742 | ) | (1,465,517 | ) | - | 10,461,483 | |||||||||||||||||||||||||||
| Notes payable | 186,898 | 150,000 | 160,111 | (150,000 | ) | (g) | (160,111 | ) | (g) | 32,515,000 | (i) | 32,701,898 | ||||||||||||||||||||||||
| Operating lease liability | 1,729,138 | - | 685,856 | - | - | - | 2,414,994 | |||||||||||||||||||||||||||||
| Finance lease liability | 322,205 | - | 82,149 | - | - | - | 404,354 | |||||||||||||||||||||||||||||
| Total liabilities | 11,606,172 | 2,200,685 | 3,119,242 | (1,832,742 | ) | (1,625,628 | ) | 32,515,000 | 45,982,729 | |||||||||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | ||||||||||||||||||||||||||||||||||||
| Preferred stock | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Common stock | 20,167 | - | - | 830 | (b) | 528 | (b) | - | 21,525 | |||||||||||||||||||||||||||
| Additional paid-in capital | 104,417,852 | - | - | 9,272,381 | (b) | 5,900,605 | (b) | - | 119,590,838 | |||||||||||||||||||||||||||
| Accumulated deficit | (42,077,212 | ) | (1,460,282 | ) | (67,072 | ) | 1,160,282 | (c) (h) | (132,928 | ) | (c) (h) | (470,420 | ) | (i) | (43,047,632 | ) | ||||||||||||||||||||
| Accumulated other comprehensive loss | (955,702 | ) | - | - | - | - | (955,702 | ) | ||||||||||||||||||||||||||||
| Total stockholders’ equity | 61,405,105 | (1,460,282 | ) | (67,072 | ) | 10,433,493 | 5,768,205 | (470,420 | ) | 75,609,029 | ||||||||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 73,011,277 | $ | 740,403 | $ | 3,052,170 | $ | 8,600,751 | $ | 4,142,577 | $ | 32,044,580 | $ | 121,591,758 | ||||||||||||||||||||||
Esports Entertainment Group, Inc.
Pro Forma Condensed Combined Statement of Operations
For the Nine Months ended March 31, 2021
(Unaudited)
| Historical | Pro Forma | |||||||||||||||||||||||||||||||||
| Esports Entertainment Group, Inc. | ggCircuit LLC | Helix Holdings, LLC | ggCircuit
LLC Transaction Accounting Adjustments | Notes | Helix
Holdings, LLC Transaction Accounting Adjustments | Notes | Other Transaction Accounting Adjustments | Notes | Pro Forma Combined | |||||||||||||||||||||||||
| Net revenue | $ | 7,983,293 | $ | 1,504,296 | $ | 351,322 | $ | - | $ | - | $ | - | $ | 9,838,911 | ||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||||
| Cost of revenue | 4,249,889 | 593,138 | 43,806 | - | - | - | 4,886,833 | |||||||||||||||||||||||||||
| Sales and marketing | 4,891,688 | - | - | - | - | - | 4,891,688 | |||||||||||||||||||||||||||
| General and administrative | 14,082,111 | 1,508,051 | 1,982,762 | - | - | - | 17,572,924 | |||||||||||||||||||||||||||
| Total operating expenses | 23,223,688 | 2,101,189 | 2,026,568 | - | - | - | 27,351,445 | |||||||||||||||||||||||||||
| Operating loss | (15,240,395 | ) | (596,893 | ) | (1,675,246 | ) | - | - | - | (17,512,534 | ) | |||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||
| Change in fair value of warrant liability | (4,729,924 | ) | - | - | - | - | - | (4,729,924 | ) | |||||||||||||||||||||||||
| Change in fair value of contingent consideration | (1,305,804 | ) | - | - | - | - | (1,305,804 | ) | ||||||||||||||||||||||||||
| Interest expense | - | (13,542 | ) | - | - | - | (2,100,000 | ) | (k) | (2,113,542 | ) | |||||||||||||||||||||||
| Net amortization of debt discount and premium on convertible debt | - | - | - | - | - | (1,719,375 | ) | (l) | (1,719,375 | ) | ||||||||||||||||||||||||
| Other non-operating expense | - | (60,248 | ) | (162,075 | ) | - | - | - | (222,323 | ) | ||||||||||||||||||||||||
| Other non-operating income | (265,486 | ) | 11,354 | 21,056 | - | - | - | (233,076 | ) | |||||||||||||||||||||||||
| Gain on settlement of debt | - | 75,750 | - | - | - | - | 75,750 | |||||||||||||||||||||||||||
| Loss before income taxes | (21,541,609 | ) | (583,579 | ) | (1,816,265 | ) | - | - | (3,819,375 | ) | (27,760,828 | ) | ||||||||||||||||||||||
| Income tax | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Net loss from continuing operations | (21,541,609 | ) | (583,579 | ) | (1,816,265 | ) | - | - | (3,819,375 | ) | (27,760,828 | ) | ||||||||||||||||||||||
| Loss from Discontinued Operations | - | - | (262,548 | ) | - | - | - | (262,548 | ) | |||||||||||||||||||||||||
| Net Loss | (21,541,609 | ) | (583,579 | ) | (2,078,813 | ) | - | - | (3,819,375 | ) | (28,023,376 | ) | ||||||||||||||||||||||
| Basic and diluted loss per common share | (1.54 | ) | (1.83 | ) | ||||||||||||||||||||||||||||||
| Weighted average number of common shares outstanding, basic and diluted | 13,974,197 | 830,189 | (a) | 528,302 | (a) | 15,332,688 | ||||||||||||||||||||||||||||
Esports Entertainment Group, Inc.
Pro Forma Condensed Combined Statement of Operations
For the Year Ended June 30, 2020
(Unaudited)
| Historical | Pro Forma | |||||||||||||||||||||||||||||||||||
| Esports Entertainment Group, Inc. | ggCircuit LLC | Helix Holdings, LLC | ggCircuit LLC Transaction Accounting Adjustments | Notes | Helix Holdings, LLC Transaction Accounting Adjustments | Notes | Other Transaction Accounting Adjustments | Notes | Pro Forma Combined | |||||||||||||||||||||||||||
| Net revenue | $ | - | $ | 1,948,874 | $ | 865,110 | $ | - | $ | - | $ | - | $ | 2,813,984 | ||||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||||||
| Cost of revenue | - | 965,035 | - | - | - | - | 965,035 | |||||||||||||||||||||||||||||
| General and administrative | 4,049,714 | 2,760,122 | 1,566,541 | 1,500,000 | (j) (c) | 1,809,349 | (j) (c) | 470,420 | (i) | 12,156,146 | ||||||||||||||||||||||||||
| Total operating expenses | 4,049,714 | 3,725,157 | 1,566,541 | 1,500,000 | 1,809,349 | 470,420 | 13,121,181 | |||||||||||||||||||||||||||||
| Operating loss | (4,049,714 | ) | (1,776,283 | ) | (701,431 | ) | (1,500,000 | ) | (1,809,349 | ) | (470,420 | ) | (10,307,197 | ) | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||||
| Interest expense | (1,995,458 | ) | - | - | - | - | (2,792,222 | ) | (k) | (4,787,680 | ) | |||||||||||||||||||||||||
| Net amortization of debt discount and premium on convertible debt | (1,156,877 | ) | - | - | - | - | (2,292,500 | ) | (l) | (3,449,377 | ) | |||||||||||||||||||||||||
| Change in fair value of derivative liabilities | (2,432,302 | ) | - | - | - | - | - | (2,432,302 | ) | |||||||||||||||||||||||||||
| Loss on extinguishment of debt | (2,795,582 | ) | - | - | - | - | - | (2,795,582 | ) | |||||||||||||||||||||||||||
| Gain on warrant exchange | 1,894,418 | - | - | - | - | - | 1,894,418 | |||||||||||||||||||||||||||||
| Other non-operating expense | - | (45,648 | ) | (580,198 | ) | - | - | - | (625,846 | ) | ||||||||||||||||||||||||||
| Other non-operating income | - | (1,354 | ) | - | - | - | - | (1,354 | ) | |||||||||||||||||||||||||||
| Impairment of intangible asset | (67,132 | ) | - | - | - | - | - | (67,132 | ) | |||||||||||||||||||||||||||
| Gain on settlement of debt | 253,588 | - | - | - | - | - | 253,588 | |||||||||||||||||||||||||||||
| Foreign exchange gain | 42 | - | - | - | - | - | 42 | |||||||||||||||||||||||||||||
| Loss before income taxes | (10,349,017 | ) | (1,823,285 | ) | (1,281,629 | ) | (1,500,000 | ) | (1,809,349 | ) | (5,555,142 | ) | (22,318,423 | ) | ||||||||||||||||||||||
| Income tax | (2,398 | ) | - | - | - | - | - | (2,398 | ) | |||||||||||||||||||||||||||
| Net loss from continuing operations | (10,351,415 | ) | (1,823,285 | ) | (1,281,629 | ) | (1,500,000 | ) | (1,809,349 | ) | (5,555,142 | ) | (22,320,821 | ) | ||||||||||||||||||||||
| Loss from Discontinued Operations | - | - | (254,681 | ) | - | - | - | (254,681 | ) | |||||||||||||||||||||||||||
| Net Loss | (10,351,415 | ) | (1,823,285 | ) | (1,536,310 | ) | (1,500,000 | ) | (1,809,349 | ) | (5,555,142 | ) | (22,575,501 | ) | ||||||||||||||||||||||
| Basic and diluted loss per common share | $ | (1.50 | ) | $ | (2.74 | ) | ||||||||||||||||||||||||||||||
| Weighted average number of common shares outstanding, basic and diluted | 6,880,321 | 830,189 | (a) | 528,302 | (a) | 8,238,812 | ||||||||||||||||||||||||||||||
Note 1 - Description of Transaction
On June 1, 2021, Esports Entertainment Group, Inc. (the “Company”) completed its acquisition of the issued and outstanding membership units of ggCIRCUIT LLC (“GGC”). The acquisition was completed in accordance with the equity purchase agreement dated January 22, 2021 (“GGC Purchase Agreement”) and amended on May 21, 2021. GGC offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers and product manufacturers. The total consideration paid at closing was $26,000,000, with $14,100,000 paid in cash at closing and $900,000 paid through application of loans receivable from GGC, inclusive of operating advances, toward the purchase consideration. The Company also issued 830,189 shares common stock at closing using a value per share $13.25 pursuant to the 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 purchase consideration of GGC has been adjusted by $1,200,000 representing amounts paid a closing and deposited in escrow that is contingent upon continued employment of certain selling shareholders. The purchase consideration was determined to be $23,073,211, excluding cash paid at closing that is contingent upon employee retention that will be recognized as compensation expense over the relevant service period.
On June 1, 2021, Esports Entertainment Group, Inc. (the “Company”) completed its acquisition of the issued and outstanding membership units of Helix Holdings, LLC (“Helix”). The acquisition was completed in accordance with the equity purchase agreement dated January 22, 2021 (“Helix Purchase Agreement”) and amended on May 21, 2021. Helix is an owner and operator of esports centers providing esports programming and gaming infrastructure, and is also the owner of the esports analytics platform, Genji Analytics, and LANduel, a proprietary player-versus-player esports wagering platform. The total consideration paid at closing was $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. The Company also issued 528,302 shares of common stock at closing using a value per share of $13.25 pursuant to the Helix Purchase Agreement. The fair value of the share consideration paid at closing to be $5,901,133 using the closing share price of the Company on the date of acquisition. The purchase consideration of Helix has been adjusted by $1,609,349 representing amounts paid at closing and deposited in escrow that is contingent upon continued employment of certain selling shareholders. The purchase consideration was determined to be $14,291,784, excluding cash paid at closing that is contingent upon employee retention that will be recognized as compensation expense over the relevant service period.
The cash portion of the purchase price of the Helix and GGC (collectively, “the Acquired Companies”) was financed by the Company with available cash and through the issuance of a Senior Convertible Note (“Convertible Note”) on June 2, 2021, with an original principal amount (“Original Principal Amount”) of $35,000,000. The Company received proceeds of $32.5 million upon issuance of the Convertible Note, net of debit issuance costs of $2.5 million. The Convertible Note bears interest at a rate of 8% per annum and matures two years following the date of issuance on June 2, 2023. The principal balance due at maturity on the Convertible Note is $37,100,000, representing a 6% premium to the Original Principal Amount that is being amortized to interest expense over the term of the Convertible Note. The Convertible Note is convertible at the option of the holder into shares of the Company’s common stock at a conversion price of $17.50 per share.
The Convertible Note was issued with 2,000,000 Series A warrants and 2,000,000 Series B warrants. The Series A warrants were determined to be freestanding warrants because they are legally detachable and separately exercisable. The Series B warrants do not become exercisable until such time as the Convertible Note is redeemed by the Company. The Convertible Note and the Series B warrants were determined to be substantially equivalent to one convertible debt instrument. The Series A and B warrants have an exercise price of $17.50 and the warrants are callable by the Company should the volume weighted average share price of the Company exceed $32.50 for each of 30 consecutive trading days following the date such warrants become eligible for exercise.
Note 2 - Basis of Pro Forma Presentation
The unaudited pro forma condensed combined balance sheet gives effect to the purchase of the Acquired Companies as if the acquisition occurred on March 31, 2021. The unaudited pro forma condensed combined statement of operations for the year ended June 30, 2020 and the nine months ended March 31, 2021 give effect to the acquisition of the Acquired Companies by the Company on July 1, 2019.
The Company and The Acquired Companies have different fiscal year-ends. The Company’s fiscal year ends on June 30, whereas The Acquired Companies’ fiscal years end on December 31. The unaudited pro forma condensed combined financial information has been prepared utilizing period ends that are within 93 days, as permitted by Rule 11-02 Regulation S-X. The unaudited pro forma condensed combined balance sheet combines the historical unaudited condensed consolidated balance sheet of the Company and the Acquired Companies at March 31, 2021.
The historical unaudited pro forma condensed combined statement of operations for the nine months ended March 31, 2021 combines the Company’s historical unaudited condensed consolidated statement of operations for the nine months ended March 31, 2021 with the historical audited consolidated statement of operations of the Acquired Companies for the year ended December 31, 2020 and then subtracting the historical unaudited condensed consolidated statement of income for the three months ended March 31, 2020.
The historical unaudited pro forma condensed combined statement of operations for the year ended June 30, 2020 combines the Company’s historical audited consolidated statement of operations for the year ended June 30, 2020 with the results of the Acquired Companies derived by adding the historical unaudited condensed consolidated statements of operations of the Acquired Companies for the three months ended March 31, 2020 to its historical audited consolidated statement of income for the year ended December 31, 2019, and then subtracting the historical unaudited condensed consolidated statements of operations for the three months ended March 31, 2019.
The Acquired Companies Purchase was determined to qualify as a business combination. The acquisition accounting included in the unaudited pro forma condensed combined financial statements is preliminary and will change in connection with the work being performed by a third-party valuation specialist. While the Company has engaged a valuation specialist to estimate the fair value of identifiable intangible assets, the valuation requires the Company to provide additional information to determine preliminary values. As a result, differences between the acquisition accounting included in the pro forma financial information and the final acquisition accounting could be material.
The Convertible Note also contains a conversion feature and was issued with Series A freestanding warrants that were determined to be liability classified. A determination of fair value for the conversion feature and fair value applicable to the Series A freestanding warrants by the third-party valuation specialist may further result in an increase to the debt discount on the convertible notes and result in additional interest expense resulting from the amortization of the debt discount. In additional, changes to the fair value of the liability classified Series A warrants may further result in income statement volatility. The changes resulting from the determination of a fair value for these features by a third-party valuation specialist could be material.
Note 3 – Accounting Policies
The accounting policies of the Company may vary materially from those of the Acquired Companies. During preparation of the unaudited pro forma condensed combined financial information, the Company has performed a preliminary analysis and is not aware of any material differences, and accordingly, this unaudited pro forma condensed combined financial information assumes no material differences in accounting policies between the two companies other than the pro forma reclassifications detailed in Note 5. Following the acquisition date, the Company will conduct a final review of The Acquired Companies’ accounting policies in order to determine if differences in accounting policies require adjustment or reclassification of the Acquired Companies’ results of operations or reclassification of assets or liabilities to conform to the accounting policies and classifications of the Company. As a result of this review, the Company may identify differences that when adjusted or reclassified, could have a material impact on this unaudited pro forma condensed combined financial information.
Note 4 – Estimated Preliminary Purchase Consideration
The table below presents the total estimated preliminary purchase consideration:
| ggCircuit LLC | Helix Holdings, LLC | Total | ||||||||||
| Cash consideration paid at closing | $ | 12,900,000 | $ | 7,790,651 | $ | 20,690,651 | ||||||
| Loan receivable applied toward purchase consideration | 900,000 | 600,000 | $ | 1,500,000 | ||||||||
| Share consideration paid at closing | 9,273,211 | 5,901,133 | 15,174,344 | |||||||||
| Total estimated preliminary purchase consideration | $ | 23,073,211 | $ | 14,291,784 | $ | 37,364,995 | ||||||
Note 5 – Reclassification Adjustments
Certain reclassifications have been made to The Acquired Companies’ historical balance sheets to conform the to the Company’s presentation as follows:
| Entity | Presentation before reclassification | Presentation after reclassification | March 31, 2021 | |||||||
| GGC | Revolving credit facility | Loans payable and Advances from Esports Entertainment Group, Inc. | 600,000 | |||||||
| GGC | Operating advance | Loans payable and Advances from Esports Entertainment Group, Inc. | 600,000 | |||||||
| GGC | Paycheck protection loan | Notes payable - current | 85,750 | |||||||
| GGC | Note payable, member | Notes payable to related party - current | 200,000 | |||||||
| GGC | Accounts payable and other liabilities | Accounts payable and accrued expenses | 367,943 | |||||||
| GGC | Long-term debt - EIDL | Notes payable | 150,000 | |||||||
| GGC | Members’ deficit | Accumulated deficit | (1,460,282 | ) | ||||||
| Helix | Property and Equipment, net | Equipment, net | 546,374 | |||||||
| Helix | Finance lease right-of-use asset, net | Right-of-use asset, net | 93,810 | |||||||
| Helix | Operating lease right-of-use asset, net | Right-of-use asset, net | 729,909 | |||||||
| Helix | Investment in GG Circuit LLC | Other non-current assets | 1,340,728 | |||||||
| Helix | Investment in Helix eSports Academy, LLC | Other non-current assets | 39,253 | |||||||
| Helix | Other assets | Other non-current assets | 65,740 | |||||||
| Helix | Accounts payable | Accounts payable and accrued expenses | 22,983 | |||||||
| Helix | Accrued expenses and other current liabilities | Accounts payable and accrued expenses | 362,785 | |||||||
| Helix | Accrued payroll | Accounts payable and accrued expenses | 68,718 | |||||||
| Helix | Loan payable, current portion | Notes payable - current | 81,390 | |||||||
| Helix | Loan payable to affiliate, current portion | Notes payable to related party - current | 341,335 | |||||||
| Helix | Working capital advance | Loans payable and Advances from Esports Entertainment Group, Inc. | 800,000 | |||||||
| Helix | Loan payable to member, current portion | Notes payable to related party - current | 242,792 | |||||||
| Helix | Total Members’ Equity (Deficit) | Accumulated deficit | (67,072 | ) | ||||||
Certain reclassifications have been made to The Acquired Companies’ historical consolidated results of operations to conform to the Company’s presentation as follows:
| Entity | Presentation before reclassification | Presentation after reclassification | For the Nine Months ended March 31, 2021 | For the Year Ended June 30, 2020 | ||||||||||
| GGC | Subscription, net | Net revenue | 485,099 | 374,704 | ||||||||||
| GGC | Subscription, net - related party | Net revenue | 4,904 | 66,300 | ||||||||||
| GGC | Consulting | Net revenue | 522,593 | 929,345 | ||||||||||
| GGC | Consulting - related party | Net revenue | 9,600 | 27,000 | ||||||||||
| GGC | Strategic partnership | Net revenue | 482,100 | 519,990 | ||||||||||
| GGC | Event management | Net revenue | - | 31,535 | ||||||||||
| GGC | Support and maintenance | Cost of revenue | 187,435 | 176,085 | ||||||||||
| GGC | Support and maintenance - related party | Cost of revenue | - | 57,600 | ||||||||||
| GGC | Professional services | Cost of revenue | 258,472 | 338,375 | ||||||||||
| GGC | Professional services - related party | Cost of revenue | - | 52,594 | ||||||||||
| GGC | Web hosting | Cost of revenue | 147,231 | 329,015 | ||||||||||
| GGC | Event expense | Cost of revenue | - | 11,366 | ||||||||||
| GGC | Sales, general, and administrative | General and administrative | 578,614 | 373,119 | ||||||||||
| GGC | Sales, general, and administrative - related party | General and administrative | 112,500 | 610,197 | ||||||||||
| GGC | Product research and development | General and administrative | 545,704 | 1,332,552 | ||||||||||
| GGC | Depreciation and amortization | General and administrative | 103,315 | 125,108 | ||||||||||
| GGC | Gain on extinguishment of debt | Loss on extinguishment of debt | 75,750 | - | ||||||||||
| GGC | Loss on write-off of advances to affiliate | Other non-operating expense | (5,000 | ) | (45,648 | ) | ||||||||
| GGC | Grant income | Other non-operating income | 11,354 | (1,354 | ) | |||||||||
| GGC | Interest expense - related party | Interest expense | (13,542 | ) | - | |||||||||
| GGC | Other expenses | Other non-operating expense | (55,248 | ) | - | |||||||||
| GGC | Foreign currency translation adjustment | Foreign currency translation adjustment | 4,723 | 4,010 | ||||||||||
| Helix | Sales, net | Net revenue | 193,424 | 581,993 | ||||||||||
| Helix | Analytics income | Net revenue | 105,000 | 230,000 | ||||||||||
| Helix | Rental income and other income | Net revenue | 52,898 | 53,117 | ||||||||||
| Helix | Cost of sales | Cost of revenue | 43,806 | - | ||||||||||
| Helix | Operating expenses | General and administrative | 1,279,367 | 1,037,761 | ||||||||||
| Helix | General and administrative expenses | General and administrative | 626,194 | 339,004 | ||||||||||
| Helix | Research and development expenses | General and administrative | 77,201 | 189,776 | ||||||||||
| Helix | Loss from equity investment | Other non-operating expense | (162,075 | ) | (580,198 | ) | ||||||||
| Helix | Other income | Other non-operating income | 21,056 | - | ||||||||||
| Helix | Loss from operations of discontinued Pro E-Sports Teams | Loss from Discontinued Operations | (262,548 | ) | (254,681 | ) | ||||||||
Note 6 – Transaction Accounting Adjustments
| a) | Represents the total cash consideration paid at closing of $15,000,000 for GGC and $10,000,000 for Helix, less loans receivable including operating advances of $900,000 and $600,000 that were applied toward the cash purchase consideration of GGC and Helix, respectively. The total cash consideration paid at closing included amounts deposited into escrow by the Company of $1,200,000 for the GGC acquisition and $1,609,349 for the Helix acquisition that is contingent upon continued employment by selling shareholders. The amount deposited in escrow is classified within prepaid and other current assets within the unaudited pro forma condensed combined balance sheet at March 31, 2021. |
| b) | Represents share consideration paid at closing. The Company issued 830,189 shares of common stock for the acquisition of GGC with a fair value of $9,273,211 determined using the share price on the acquisition date of $11.17 (830,189 shares of common stock issued with a par value of $.001 with balance recorded as additional paid in capital). The Company issued 528,302 shares of common stock for the acquisition of Helix with a fair value of $5,901,133 determined using the share price on the acquisition date of $11.17 (528,302 shares of common stock issued with a par value of $.001 with balance recorded as additional paid in capital). |
| c) | The remaining balance of the loans receivable from GGC of $300,000 and Helix of $200,000 that had not been applied toward the purchase price was expensed to general and administrative in the unaudited pro forma condensed combined statement of operations for the year ended June 30, 2020. These receivable amounts could not be applied toward the purchase consideration as the acquisition of GGC and Helix did not close by May 14, 2021. |
| d) | Represents the estimate of goodwill resulting from acquisition of GGC determined using the purchase consideration of $23,073,211 (refer to Note 4) and net assets assumed of $372,460 (determined using the $1,460,282 of historical net liabilities of GGC at March 31, 2021 as adjusted for liabilities that were excluded from the acquisition). |
| e) | Represents the estimate of goodwill resulting from acquisition of Helix determined using the purchase consideration of $14,291,784 (refer to Note 4) and net assets assumed of $217,828 (determined using the $67,072 of historical net liabilities of Helix at March 31, 2021 as adjusted for liabilities that were excluded from the acquisition). |
| f) | Represents decrease in deferred revenue to its estimated fair value on the date of acquisition of GGC and Helix. |
| g) | The acquisition of GGC and Helix excluded the assumption of any affiliate or third-party debt of by the Company. The investment in GGC by Helix of $1,340,728 included in Other non-current assets on the Pro Forma Condensed Combined Balance Sheet, was also eliminated, as upon acquisition both GGC and Helix are wholly owned subsidiaries of the Company. |
| h) | The historical accumulated members deficit of GGC of $1,460,282 and Helix of $67,072 was eliminated in the unaudited pro forma condensed combined balance sheet at March 31, 2021. |
| i) | Represent gross proceeds received from issuance of the Convertible Note of $35,000,000, less debt issuance costs of $2,485,000. The gross proceeds were further reduced by transaction related expenses for the GGC and Helix acquisition of $470,420 that were paid with the proceeds from issuance of the Convertible Note. These transaction expenses are recorded in general and administrative expense in the unaudited pro forma condensed combined statement of operations for the year ended June 30, 2020. |
| j) | Represents compensation costs recognized for service by selling shareholders in the post-combination period of the GGC and Helix acquisitions. The compensation cost for these employees is expensed over a period of one year to general and administrative expense in the unaudited pro forma condensed combined statements of operations for the year ended June 30, 2020. |
| k) | The Convertible Note accrues interest at a rate of 8% per annum. Interest expense on the Convertible note included in the unaudited pro forma condensed consolidated statement of operations for the nine months ended March 31, 2021 and the year ended June 30, 2020 is $2,100,000 and $2,792,222, respectively. |
| l) | Represents the amortization of the debt discount and premium payable on the Original Principal Amount of $1,719,375 and $2,292,500 recorded in the unaudited pro forma condensed combined statement of operations for the nine months ended March 31, 2021 and the year ended June 30, 2020, respectively. |