Esports Entertainment Group, Inc 10-Q for FY2022 Q2
Esports Entertainment Group, Inc. (GMBL)
About this 10-Q
Esports Entertainment Group, Inc filed this 10-Q on February 22, 2022, covering the quarter ended December 31, 2021 (FY2022 Q2).
Headline figures
Quarter ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.53M
- up 515.2% from $2.36M a year earlier
- Net loss
- $34.33M
- compared with a net loss of $7.29M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended:
For the transition period from __________________ to __________________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(Commission File No.) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered Symbol(s) | ||
| The
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| The
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| The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐
As of February 18, 2022, there were shares of common stock, par value $0.001 issued and outstanding.
ESPORTS ENTERTAINMENT GROUP, INC.
Quarterly Report on Form 10-Q
For the Quarter ended December 31, 2021
TABLE OF CONTENTS
| i |
Esports Entertainment Group, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| December 31, 2021 | June 30, 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Receivables reserved for users | ||||||||
| Other receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Liabilities to customers | ||||||||
| Deferred revenue | ||||||||
| Senior convertible note | - | |||||||
| Current portion of notes payable and other long-term debt | ||||||||
| Operating lease liability - current | ||||||||
| Contingent consideration - current | - | |||||||
| Total current liabilities | ||||||||
| Senior convertible note, net of unamortized discount | - | |||||||
| Notes payable and other long-term debt | ||||||||
| Warrant liability | ||||||||
| Deferred income taxes | - | |||||||
| Operating lease liability – non-current | ||||||||
| Contingent consideration – non-current | - | |||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | - | - | ||||||
| Mezzanine equity: | ||||||||
| 10% Series A cumulative redeemable convertible preferred stock, $ par value, authorized, shares issued and outstanding, aggregate liquidation preference $ | - | |||||||
| 10% Series A cumulative redeemable convertible preferred stock | - | |||||||
| Stockholders’ equity | ||||||||
| Preferred stock $ par value; shares authorized | - | - | ||||||
| Common stock $ par value; shares authorized, and shares issued and outstanding as of December 31, 2021 and June 30, 2021, respectively | ||||||||
| Common stock | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
Esports Entertainment Group, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | - | ( | ) | - | ||||||||||
| Loss on conversion of senior convertible note | ( | ) | - | ( | ) | - | ||||||||||
| Loss on extinguishment of senior convertible note | ( | ) | - | ( | ) | - | ||||||||||
| Change in fair value of derivative liability | ( | ) | - | ( | ) | - | ||||||||||
| Change in fair value of warrant liability | ( | ) | ||||||||||||||
| Change in fair value of contingent consideration | - | - | ||||||||||||||
| Other non-operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ||||||||||||||||
| Income tax benefit (expense) | - | - | ||||||||||||||
| Net loss | $ | $ | $ | $ | ||||||||||||
| Dividend on 10% Series A cumulative redeemable convertible preferred stock | ( | ) | - | ( | ) | - | ||||||||||
| Accretion of 10% Series A cumulative redeemable convertible preferred stock to redemption value | ( | ) | - | ( | ) | - | ||||||||||
| Net loss attributable to common stockholders | $ | $ | $ | $ | ||||||||||||
| Net loss per common share: | ||||||||||||||||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
Esports Entertainment Group, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss | $ | $ | $ | $ | ||||||||||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation loss | ||||||||||||||||
| Total comprehensive loss | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
Esports Entertainment Group, Inc.
Condensed Consolidated Statements of Changes in 10% Series A Cumulative Redeemable Convertible Preferred Stock and Stockholders’ Equity
For the Three and Six Months Ended December 31, 2021 and 2020
(Unaudited)
| Shares | Amount | Shares | Amount | capital | Deficit | loss | Equity | |||||||||||||||||||||||||
| 10% Series A Cumulative Redeemable | Accumulated | |||||||||||||||||||||||||||||||
| Convertible Preferred Stock | Common Stock | Additional paid-in | Accumulated | other comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | loss | Equity | |||||||||||||||||||||||||
| Balance as at July 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock | ||||||||||||||||||||||||||||||||
| Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock, shares | ||||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | ||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | ||||||||||||||||||||||||||||||||
| Conversion of Senior Convertible Note | ||||||||||||||||||||||||||||||||
| Conversion of Senior Convertible Note, shares | ||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs | ||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs, shares | ||||||||||||||||||||||||||||||||
| Common stock issued upon the exercise of stock options | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued upon the exercise of warrants | ||||||||||||||||||||||||||||||||
| Common stock issued upon the exercise of warrants, shares | ||||||||||||||||||||||||||||||||
| Common stock and warrants issued for LHE Enterprises Limited | ||||||||||||||||||||||||||||||||
| Common stock and warrants issued for LHE Enterprises Limited, shares | ||||||||||||||||||||||||||||||||
| Common stock issued for Flip Acquisition | ||||||||||||||||||||||||||||||||
| Common stock issued for Flip Acquisition, shares | ||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||
| Conversion of Senior Convertible Note | - | - | - | - | ||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued upon the exercise of stock options | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for services | - | - | ( | ) | - | - | - | |||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance as at July 1, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Common stock issued upon the exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock and warrants issued for LHE Enterprises Limited | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for Flip Acquisition | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Beginning balance, value | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Common stock issued upon the exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Ending balance, value | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Esports Entertainment Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| 2021 | 2020 | |||||||
| Six Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization and depreciation | ||||||||
| Right-of-use asset amortization | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( | ) | - | |||||
| Loss on conversion of senior convertible note | - | |||||||
| Loss on extinguishment of senior convertible note | - | |||||||
| Amortization of debt discount | - | |||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||
| Change in fair value of contingent consideration | ( | ) | - | |||||
| Change in fair value of derivative liability | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | - | |||||
| Receivables reserved for users | ( | ) | ( | ) | ||||
| Other receivables | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other non-current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Liabilities to customers | ||||||||
| Deferred revenue | - | |||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash consideration paid for Bethard acquisition, net of cash acquired | ( | ) | - | |||||
| Cash consideration paid for Argyll, net of cash acquired | - | ( | ) | |||||
| Cash consideration paid for FLIP | - | ( | ) | |||||
| Payments made in connection with loans receivable | - | ( | ) | |||||
| Purchase of intangible assets | ( | ) | ( | ) | ||||
| Purchases of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock, net of issuance costs | - | |||||||
| Payment of dividends on 10% Series A cumulative redeemable convertible preferred stock | ( | ) | - | |||||
| Issuance of common stock under the ATM, net of issuance costs | - | |||||||
| Payment of Bethard contingent consideration | ( | ) | - | |||||
| Proceeds from exercise of stock options and warrants, net of issuance costs | ||||||||
| Repayment of notes payable and finance lease | ( | ) | - | |||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate on changes in cash and restricted cash | ( | ) | ( | ) | ||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| December 31, 2021 | December 31, 2020 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash and restricted cash | $ | $ | ||||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| June 30, 2021 | June 30, 2020 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash and restricted cash | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Esports Entertainment Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| December 31, 2021 | December 31, 2020 | |||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| CASH PAID FOR: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISLCOSURE OF NON-CASH FINANCING ACTIVITIES: | ||||||||
| Fair value of contingent consideration payable in cash and common stock for Bethard acquisition | $ | $ | ||||||
| Conversion of Senior Convertible Notes to common stock | $ | $ | ||||||
| Accretion of 10% Series A cumulative redeemable convertible preferred stock | $ | $ | ||||||
| Settlement proceeds due from sale of common stock under the ATM | $ | $ | ||||||
| Right-of-use asset obtained in exchange for operating lease obligation | $ | $ | ||||||
| Common stock issued for Argyll | $ | $ | ||||||
| Settlement of Argyll acquisition warrant liability for common stock | $ | $ | ||||||
| Deposit applied to purchase consideration in acquisition of Argyll | $ | $ | ||||||
| Common stock issued for FLIP acquisition at closing | $ | $ | ||||||
| Settlement of FLIP contingent consideration in common stock | $ | $ | ||||||
| Share settlement of liabilities to be settled in stock account | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
Esports Entertainment Group, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Nature of Operations
Esports Entertainment Group, Inc. (“Company” or “EEG”) was formed in the State of Nevada on July 22, 2008 under the name Virtual Closet, Inc., before changing its name to DK Sinopharma, Inc. on June 6, 2010 and then to, VGambling, Inc. on August 12, 2014. On or about April 24, 2017, VGambling, Inc. changed its name to Esports Entertainment Group, Inc.
The Company is a diversified operator of iGaming, traditional sports betting and esports businesses with a global footprint. The Company’s strategy is to build and acquire iGaming and traditional sports betting platforms and use them to grow the esports business whereby customers have access to game centers, online tournaments and player-versus-player wagering. On July 31, 2020, the Company commenced revenue generating operations with the acquisition of LHE Enterprises Limited, a holding company for Argyll Entertainment (“Argyll”), an online sportsbook and casino operator. On January 21, 2021, the Company completed its acquisition of Phoenix Games Network Limited, the holding company for the Esports Gaming League (“EGL”), and provider of event management and team services, including live and online events and tournaments. On March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming operations of Lucky Dino Gaming Limited, a company registered in Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered in Estonia (collectively referred to as “Lucky Dino”).
On June 1, 2021, the Company also acquired Helix Holdings, LLC (“Helix”) and ggCircuit, LLC (“GGC”). Helix is an owner and operator of esports centers that provide esports programming and gaming infrastructure and is also the owner of the Genji Analytics (Genji Analytics has been rebranded as “EEG Labs” as of October 6, 2021), an analytics platform, and LANDuel, a proprietary player-versus-player wagering platform. GGC is a business-to-business software company that provides cloud-based management for gaming centers, a tournament platform and integrated wallet and point-of-sale solutions. On July 13, 2021, the Company completed its acquisition of the online casino and sports book business operating under the brand of Bethard (referred to herein as “Bethard”). Bethard’s business-to-consumer operations provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses in Sweden, Spain, Malta and Ireland.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation and principles of consolidation
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Pursuant to the rules and regulations of the SEC, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full fiscal year. The unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual period ended June 30, 2021.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Reportable Segment
The
Company determined it has
| 7 |
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported results of operations or total assets, liabilities and stockholders’ equity. The amounts previously reported in other income and foreign exchange loss were reclassified to other non-operating income (loss) on the unaudited condensed consolidated statements of operations. The prior period amounts reported as taxes payable and equity to be issued were reclassified to accounts payable and accrued expenses for the current period presentation on the unaudited condensed consolidated balance sheets.
Use of estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation and accounting for equity awards related to warrants and stock-based compensation, determination of fair value for derivative instruments, the valuation and recoverability of goodwill and intangible assets, the accounting for business combinations, including estimating contingent consideration and allocating purchase price, estimating fair value of intangible assets, estimating the useful life of fixed assets and intangible assets, as well as the estimates related to accruals and contingencies.
Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one year from the date of issuance of these unaudited condensed consolidated financial statements.
As of December 31, 2021, the Company had not maintained compliance with the
covenants of the Senior Convertible Note, having identified non-compliance with the same financial covenants previously identified at
September 30, 2021. In consideration for obtaining a waiver from the compliance with certain covenants, as of December 31, 2021 and
through March 30, 2022, the Company has agreed to enter into an exchange agreement whereby the Company has exchanged the existing
Senior Convertible Note with a new Senior Convertible Note (the “New Note”) resulting in the increase of the principal outstanding
balance of indebtedness from the current carrying value $
The
evaluation of going concern under the accounting guidance requires significant judgment. In addition to the changes related to the
New Note, the Company must consider it has historically incurred losses and negative cash flows in recent years as it has prepared
to grow its esports business through acquisition and new venture opportunities. The Company must also consider its current liquidity
as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing
and generating future profits. As of December 31, 2021, the Company had $
In
determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going
concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional
financing sources it believes are currently available to fund its operations and drive future growth that include (i) the ability to
access capital using the at-the-money (“ATM”) equity offering program available to the Company whereby the Company can sell
shares to raise gross proceeds up to $
| 8 |
COVID-19
The novel coronavirus (“COVID-19”) emerged in December 2019 and has since adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets. Beginning in early 2020 and continuing into 2022, the COVID-19 pandemic adversely impacted many different industries. The ongoing COVID-19 pandemic could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the duration of the impact of COVID-19. The COVID-19 pandemic therefore presents material uncertainty and risk with respect to us and our performance and could affect our financial results in a materially adverse way. During the initial outbreak of COVID-19, almost all major sports events and leagues were postponed or put-on hold. The cancelation of the major sports events and canceled or postponed seasons, had a significant short-term negative effect on betting activity globally. As a result, sports book operators faced major short-term losses in betting volumes. While the major sporting events and leagues have returned, due to the emergence of new variants of COVID-19 there have been additional disruptions and the possibility remains that sports seasons and sporting events may be further suspended, cancelled or rescheduled. The Company’s revenue varies based on sports seasons and sporting events amongst other factors, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect its revenue, possibly materially. A significant or prolonged decrease in consumer spending on entertainment or leisure activities would also likely have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations. However, the Company’s product offerings that do not rely on sports seasons and sporting events or in person attendance, such as iGaming casino operations and online tournaments, may partially offset this adverse impact on revenue. Online casino operations have generally continued as normal without any noticeable disruption due to the COVID-19 outbreak. The virus’s effect on online casino activity globally is expected to be overall positive or neutral.
Remote working, travel restrictions and border closures have not materially impacted the Company’s ability to manage and operate the day-to-day functions of the business. Management has been able to operate in a virtual setting. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm the business over the long term. Travel restrictions impacting people can restrain the ability to operate, but at present we do not expect these restrictions on personal travel to be material to the Company’s operations or financial results.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption and reduced operations. A materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on our business, financial condition and results of operations. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.
Cash and Cash Equivalents
Cash
includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months
or less. As of December 31, 2021 and June 30, 2021 the Company did not have any financial instruments classified as cash equivalents.
At times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
Accounts are insured by the FDIC up to $
Restricted Cash
Restricted cash includes cash reserves maintained for compliance with gaming regulations that require adequate liquidity to satisfy the Company’s liabilities to customers.
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Receivables Reserved for Users
User deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded as a receivable reserved for users on the consolidated balance sheets. An allowance for doubtful accounts may be established if it is determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance for doubtful accounts is recognized as a loss within general and administrative expenses in the unaudited condensed consolidated statements of operations. The allowance for doubtful accounts is not material to the unaudited condensed consolidated financial statements.
Liabilities to Customers
The Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings and player losses. The Company maintains a restricted cash balance and player deposits held by third parties, recorded as receivables reserved for users on the unaudited condensed consolidated balance sheets, at levels equal to or exceeding its liabilities to customers.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Digital Assets
Digital assets are comprised of Ethereum cryptocurrency. The digital assets are included in current assets in the accompanying unaudited condensed consolidated balance sheets. The classification of digital assets as a current asset has been made after the Company’s consideration of the consistent daily trading volume on cryptocurrency exchange markets. There are no limitations or restrictions on the Company’s ability to sell Ethereum, and the pattern of actual sales of Ethereum by the Company. Digital assets purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed below.
Digital assets held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital asset at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting. The Company generally liquidates its Ethereum position monthly, or more frequently depending upon the market conditions. The Company’s recognized realized gains through the sale and disbursement of digital assets during the three and six months ended December 31, 2021 and 2020 was not material to the unaudited condensed consolidated financial statements. At December 31, 2021, the Company’s digital assets were not material to the unaudited condensed consolidated financial statements.
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Impairment of Long-Lived Assets
Equipment
and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and circumstances
indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of future undiscounted
cash flows are determined through estimated disposition date of the asset. To the extent that estimated future undiscounted net cash
flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the
carrying value of such asset and its fair value, considering external market participant assumptions. An estimation of future cash flows
requires significant judgment as the Company makes assumptions about future revenues and market conditions. Since the determination of
future cash flows is an estimate of future performance, there may be impairments recognized in future periods in the event future cash
flows do not meet expectations. There was
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S. GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback years, existing taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.
Derivative Instruments
The Company evaluates its convertible notes and equity instruments, as well warrants, to determine if those contracts or embedded components of those contracts qualify as derivatives. The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument. The Company records the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the unaudited condensed consolidated statements of operations.
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Fair Value Measurements
Fair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third is considered unobservable:
| Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company adjusts contingent consideration resulting from a business combination, as well as derivative financial instruments and warrant liabilities to fair value on a recurring basis. The fair value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been determined to approximate carrying amounts due to the short maturities of these instruments. The fair value of the Senior Convertible Note and lease liabilities approximate their carrying value based on current interest and discount rates.
Basic income (loss) per share is calculated using the two-class method. Under the two-class method, basic income (loss) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period excluding the effects of any potentially dilutive securities. Diluted income (loss) per share is computed similar to basic income (loss) per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential common shares had been issued if such additional common shares were dilutive. Diluted income (loss) per share includes the effect of potential common shares, such as the Company’s preferred stock, notes, warrants and stock options, to the extent the effect is dilutive. As the Company had net losses for all the periods presented, basic and diluted loss per share are the same, and additional potential common shares have been excluded, as their effect would be anti-dilutive.
Schedule of Weighted Average Diluted Common Shares Outstanding
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Common stock options | ||||||||
| Common stock warrants | ||||||||
| Common stock issuable upon conversion of senior convertible note | ||||||||
| 10% Series A cumulative redeemable convertible preferred stock | ||||||||
| Contingently issuable shares | ||||||||
| Total | ||||||||
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Revenue and Cost Recognition
The revenue of the Company is currently generated from online casino and sports betting (referred to herein as “iGaming” revenue), as well from the provision of esports event and team management services. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers (“ASC 606”) when control of a product or service is transferred to a customer. The amount of revenue is measured at the transaction price, or the amount of consideration that the Company expects to receive in exchange for transferring a promised good or service. The transaction price includes estimates of variable consideration to the extent that it is probable that a significant reversal of revenue recognized will not occur.
Revenue generating activities of the Company may be subject to value added tax (“VAT”) in certain jurisdictions in which the Company operates. Revenue is presented net of VAT in the consolidated statements of operations. VAT receivables and VAT payables are included in other receivables and accounts payable and accrued expenses, respectively on the consolidated balance sheets. Sales to customers do not have significant financing components or payment terms greater than 12 months.
iGaming Revenue
iGaming revenue is derived from the placement of bets by end-users, also referred to as customers, through online gaming sites. The transaction price in an iGaming contract, or Net Gaming Revenue (“NGR”), is the difference between gaming wins and losses, as further reduced by any nondiscretionary incentives awarded to the customer. Gaming transactions involve four performance obligations, namely the settlement of each individual bet, the honoring of discretionary incentives available to the customer through loyalty reward programs, the award of free spin and deposit match bonuses, and the winning of a casino jackpot. The total amount wagered by a customer is commonly referred to as the win or Gross Gaming Revenue (“GGR”). The GGR is allocated to each performance obligation using the relative standalone selling price (“SSP”) determined for iGaming contracts.
Revenue recognition for individual wagers is recognized when the gaming occurs, as such gaming activities are settled immediately. The revenue allocated to incentives, such as loyalty points offered through a rewards program, is deferred and recognized as revenue when the loyalty points are redeemed. Revenue allocated to free spins and deposit matches, referred to as bonuses, are recognized at the time that they are wagered. The revenue for jackpot games is recognized when the jackpot is won by the customer. The Company applies a practical expedient by accounting for its performance obligations on a portfolio basis as iGaming contracts have similar characteristics. The Company expects the application of the revenue recognition guidance to a portfolio of iGaming contracts will not materially differ from the application of the revenue recognition guidance on an individual contract basis.
The Company evaluates bets that its users place on websites owned by third party brands in order to determine whether it may recognize revenue on a gross basis, when acting as the principal provider of the wagering service, or on a net basis, when acting as an intermediary or agent. The principal in a wagering service involving a third party is generally the entity that controls the wagering service such that it has a right to the services being performed by the third party and can direct the third party in delivery of the service to its users. The Company records revenue on a gross basis as it has determined it is the principal in transactions involving third parties, such as revenue sharing arrangements, as it controls the wagering service being offered to the users such that it has a right to the service performed by third parties and can further direct third parties in providing services to users. The Company further records expenses related to its revenue sharing arrangements and other third party iGaming expenses within costs of revenue in the consolidated statements of operations.
Esports Gaming and Other Revenue
The Company derives revenue from the operation of esports game centers, sales of subscriptions to access cloud-based software used by independent operators of game centers, as well as from consulting and data analytic services provided to game operators. The revenue from the operation of game centers by the Company is recognized when a customer purchases time to use the esports gaming equipment at each center. The revenue from time purchased by a customer and from the sale of concessions is recognized at the point of sale. The revenue derived from the sale of subscription services to cloud-based software used by game centers is recognized over the term of the contract, which generally can range from one month to one year in duration, beginning on the date the customer is provided access to the Company’s hosted software platform.
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The software subscriptions also allow for game center operators to enable their equipment to mine cryptocurrency on behalf of the Company when gaming stations are not in use by the end user. The software allows the Company to combine the computer power of participating game center operators for the purpose of adding a block to the blockchain within a mining pool where the Company is a participant. The Company enters into mining pools with mining pool operators to provide computing power to the mining pool to mine cryptocurrency digital assets. The Company is entitled to a fractional share of the fixed cryptocurrency digital asset award the mining pool operator receives (less transaction fees to the mining pool operator) for successfully adding a block to the blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. A digital asset award is received by the Company from the mining pool, in the form of Ethereum, for successfully adding a block to the blockchain. The Company records an expense for the amount paid to each game center operator, in the form of U.S. dollars, based on the game center’s computing power the Company contributed toward the mining of the award. This expense is approximately 90% of the amount received. The amounts due to the game center operators are paid in U.S. dollars. The fair value of the Ethereum awarded is recognized by the Company as revenue at the time the Ethereum coin is added to the blockchain. The transaction consideration of the Ethereum the Company receives, if any, is non-cash consideration. The amount of revenue is recorded using the price of an Ethereum coin quoted in U.S. dollar at the time the award. The transaction consideration for the mining of cryptocurrency is variable consideration as it is based on the number of blocks added to the blockchain and the amount of Ethereum received from the mining pool. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. The Company records revenue on a gross basis as it has determined it is the principal in the transactions with the mining pool as it controls the provision of the computing power. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could impact the Company’s consolidated financial position and results from operations.
The Company further provides consultation services related to the use of hardware and equipment for gaming operations together with implementation services that include sourcing, training, planning, and installation of technology. The Company considers services related to hardware and equipment, implementation, and any design of user interface for the customer as separate performance obligations. Revenue for hardware equipment and design of custom user interface is recognized at a point in time upon delivery and completion. Implementation services are recognized over time, as services are performed.
The Company also has contracts with software companies to provide talent data analytics and related esports services, which include analytic development, other related services to develop software and applications for tournaments, to provide data support, data gathering, gameplay analysis and reporting which includes talent analytics and related esports services, including analytic development, data analysis, survey design, interview services, player dossiers, and expert services. The Company recognizes revenue from its data analytic services over the life of the contract utilizing the output method, using a direct measurement of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contact. The Company elected to use the right to invoice practical expedient and recognize revenue based on the amounts invoiced. The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date.
The Company has partnership contracts with strategic customers within the esports industry. The partnership contracts are negotiated agreements, which contain both licensing arrangements of intellectual property and development services, including fixed and variable components. The variability of revenue is driven by development plans and results of sales as specified by the partnership contract, which are known as of an invoice date. Partnership contracts generally do not have terms that extend beyond one year. The Company considers licensing arrangements and development services as separate performance obligations. Licensing revenues are recorded over time. Revenue associated with development is recognized over time, as labor is incurred.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each distinct performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account the Company’s overall pricing objectives, considering market conditions and other factors, including the value of the deliverables in the contracts, customer demographics, geographic locations, and the number and types of users within the contracts.
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Esports Event Management and Team Service Revenue
The Company derives revenue from esports event management and team services. Esports event management services support the creation, production and delivery of an esports event by providing event staffing, gaming consoles, and other technical goods and services for a customer event that is either hosted live in person or online. The revenue generated from esports event management services is generally earned on a fixed fee basis per event. The esports team services offerings of the Company include recruitment and management services offered to sports clubs to facilitate their entrance into esports tournament competition. Team services provided to a customer may include player recruitment, administration of player contracts, processing of tournament admission, providing logistical arrangements, as well as providing ongoing support to the team during the event. Team services are earned on a fixed fee basis per tournament.
Esports event management and team services revenues are recognized over the term of the event or the relevant contractual term for services as this method best depicts the transfer of control to the customer. The Company recognizes revenue for event management services based on the number of days completed for the event relative to the total days of the event. Revenue from team management services is recognized from inception of the contract through the end of the tournament using the number of days completed relative to the total number of days in the contract term. Revenue collected in advance of the event management or team services is recorded as deferred revenue on the consolidated balance sheets. The Company may also enter into profit sharing arrangements which are determined based on the net revenue earned by the customer for an event in addition to a fixed fee. Revenue recognition for profit sharing arrangements is recognized at the time the revenue from the event is determined, which is generally at the conclusion of the event. An event or team services contact may further require the Company to distribute payments to event or tournament attendees resulting in the recognition of a processing fee by the Company. The Company does not recognize revenue from the processing of payments until the conclusion of the event or tournament.
The Company evaluates the service being provided under an esports event and team services contract to determine whether it should recognize revenue on a gross basis as the principal provider of the service, or on a net basis in a manner similar to that of an agent. The Company has determined that for esports event and team services contracts that allow for the assignment of individual tasks to a third party contractor, the Company acts as the principal provider of the service being offered to the customer as it remains primarily responsible for fulfilling the contractual promise to the customer. In profit sharing arrangements, such as events that allow for the Company to share in the revenue earned by a customer for an event, the Company has determined it acts in the role of an agent to the customer as the event creator. The Company has also determined it acts as an agent when it collects a processing fee for performing the service of distributing prize money on behalf of its customers to event or tournament winners.
Contract Liabilities
Liabilities to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities. The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users is based on the estimated fair value of the loyalty point incentive available to the user.
The Company also records payments received in advance of performance under an esports gaming services contract or event management or team services contract as deferred revenue.
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Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this standard as of July 1, 2021. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
Recently Issued Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The standard clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. The guidance is effective for the fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements.
In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this standard on its unaudited condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company is currently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASC 350). The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The guidance is effective for the fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements.
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From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.
Note 3 – Business Acquisitions
Bethard Acquisition
On
July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited (“Bethard”)
that provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain,
Malta and Ireland (the “Bethard Business”). The acquisition of Bethard expands the iGaming operations of the Company in Europe
and provides the Company with increased opportunity to cross-sell its esports offerings to a larger customer base. The acquisition of
Bethard resulted in the Company acquiring the outstanding share capital of Prozone Limited, a public liability company registered in
Malta, that had previously received the assets of Bethard in a pre-closing restructuring by the seller. The initial payment of purchase
consideration for Bethard included cash paid at closing of €
The preliminary estimate of the purchase consideration, pending the completion of a final valuation to calculate the fair value of the contingent cash consideration, is as follows:
Schedule of Preliminary Purchase Price Allocation of Acquisition
| Cash paid at closing | $ | |||
| Second Payment | ||||
| Total cash consideration paid for Bethard | ||||
| Contingent cash consideration | ||||
| Total preliminary purchase price consideration | $ |
The
preliminary estimated purchase consideration excludes contingent share consideration payable to the sellers as there is no indication
such contingent share contingent consideration will become payable from a successful assignment of the specified ambassador agreement.
The sellers of the Bethard had up to 6 months to assign the ambassador agreement to receive the contingent share consideration. After
6 months, the contingent share consideration is reduced by €
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The preliminary purchase price and purchase price allocation pending a final valuation of assets acquired and liabilities assumed is as follows:
| Receivables reserved for users | $ | |||
| Intangible assets | ||||
| Goodwill | ||||
| Other non-current assets | ||||
| Accrued liabilities | ( | ) | ||
| Player liability | ( | ) | ||
| Deferred income taxes | ( | ) | ||
| Total | $ |
The acquired intangible assets, useful lives and a preliminary estimate of fair value at the acquisition date follows:
Schedule of Fair Value of Acquired Intangible Assets
Useful Life (years) | Fair Value | |||||
| Tradename | $ | |||||
| Player interface | ||||||
| Gaming licenses | ||||||
| Player relationships | ||||||
| Total | $ | |||||
Qualitative
factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable
intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of benefits from securing
buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, as well as acquiring
a talented workforce and cost savings opportunities. The goodwill of Bethard is not deductible for tax purposes. Transaction related
expenses incurred for the acquisition of the Bethard Business total $
Pro Forma Operating Results
The following table summarizes pro forma results of operations for the three and six months ended December 31, 2020 as if Bethard, as well as the recent acquisitions of the Company completed during the year ended June 30, 2021, namely Argyll, Lucky Dino, EGL, ggCircuit and Helix, had been acquired on July 1, 2020. The results of operations of FLIP acquired during the year ended June 30, 2021 were excluded from the pro forma presentation for the three and six months ended December 31, 2020 due to immateriality. The results of operations of Bethard, as well as the previous acquisitions identified above, are included in the unaudited condensed consolidated statement of operations of the Company for the three and six months ended December 31, 2021, with any differences resulting from the acquisition of Bethard on July 13, 2021 assessed as immaterial.
The pro forma results of operations for the three and six months ended December 31, 2020 were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had these acquisitions been made as of July 1, 2020 and may not be useful in predicting the future results of operations for the Company. The actual results of operations may differ materially from the pro forma amounts included in the table below.
Schedule of Unaudited Pro Forma Operating Results
Three
months | Six
months December 31, 2020 | |||||||
| Net revenue | $ | $ | ||||||
| Net loss | $ | $ | ||||||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | ||
| 18 |
The pro forma operating results of operations for the three and six months ended December 31, 2020 are based on the individual historical results of the Company and the businesses acquired, with adjustments to give effect as if the acquisitions had occurred on July 1, 2020, after giving effect to certain adjustments including the amortization of intangible assets and depreciation of equipment resulting from the acquisitions.
Note 4 – Other Receivables
The components of other receivables are as follows:
Schedule of Other Receivables
| December 31, 2021 | June 30, 2021 | |||||||
| Marketing receivables from revenue partners | $ | $ | ||||||
| Receivable from revenue sharing arrangement | ||||||||
| Indirect taxes | ||||||||
| Other | ||||||||
| Other receivables | $ | $ | ||||||
Note 5 – Prepaid Expenses and Other Current Assets
The components of prepaid expenses and other current assets are as follows:
Schedule of Prepaid Expenses and Other Current Assets
| December 31, 2021 | June 30, 2021 | |||||||
| Prepaid marketing costs | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Other | ||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
Note 6 – Equipment
The components of equipment are as follows:
Schedule of Equipment
| December 31, 2021 | June 30, 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Leasehold improvements | ||||||||
| Finance lease asset | ||||||||
| Equipment, at cost | ||||||||
| Accumulated depreciation and finance lease amortization | ( | ) | ( | ) | ||||
| Equipment, net | $ | $ | ||||||
Depreciation
expense and finance lease amortization expense was $
| 19 |
Note 7 – Goodwill and Intangible Assets
A summary of the changes in the balance of goodwill is as follows:
Schedule of Goodwill
Six months ended December 31, 2021 | ||||
| Goodwill, balance at beginning of year | $ | |||
| Acquisition of Bethard | ||||
| Foreign currency translation – Fiscal 2022 | ( | ) | ||
| Goodwill, balance at end of period | $ | |||
The intangible amounts comprising the intangible asset balance are as follows:
Schedule of Intangible Assets
| December 31, 2021 | June 30, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Tradename | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Developed technology and software | ( | ) | ( | ) | ||||||||||||||||||||
| Gaming licenses | ( | ) | ( | ) | ||||||||||||||||||||
| Player relationships | ( | ) | ( | ) | ||||||||||||||||||||
| Internal-use software | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Amortization
expense was $
The estimated future amortization related to definite-lives of intangible assets, including amortization related to the preliminary allocation of fair value to the intangible assets of Bethard, are as follows:
Schedule of Future Amortization of Intangible Assets
| Remainder of fiscal 2022 | $ | |||
| Fiscal 2023 | ||||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Fiscal 2026 | ||||
| Thereafter | ||||
| Total | $ |
Note 8 – Other Non-Current Assets
The components of other non-current assets are as follows:
Schedule of Other Non-Current Assets
| December 31, 2021 | June 30, 2021 | |||||||
| iGaming regulatory deposits | $ | $ | ||||||
| iGaming deposit with service providers | ||||||||
| Rent deposit | ||||||||
| Other | ||||||||
| Other non-current assets | $ | $ | ||||||
| 20 |
Note 9 – Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as follows:
Schedule of Account Payable and Accrued Expenses
| December 31, 2021 | June 30, 2021 | |||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued marketing | ||||||||
| Accrued payroll and benefits | ||||||||
| Accrued gaming liabilities | ||||||||
| Accrued professional fees | ||||||||
| Accrued jackpot liabilities | ||||||||
| Accrued other liabilities | ||||||||
| Accrued legal settlement (Note 13) | - | |||||||
| Total | $ | $ | ||||||
Note 10 – Related Party Transactions
The
Company reimburses the Chief Executive Officer for office rent and related expenses. The Company incurred charges for the Chief Executive
Officer for office expense reimbursement of $
On
May 4, 2017, the Company entered into a services agreement and a referral agreement with Contact Advisory Services Ltd., an entity that
is partly owned by a member of the Board of Directors. The Company incurred general and administrative expenses of $
The
Company has retained legal and corporate secretarial services from a member of its Board of Directors through a consultancy agreement
dated August 1, 2020 and an employment agreement dated June 15, 2020. The legal consultancy agreement requires payments of £
Note 11 – Leases
The
Company leases office and building space and equipment under operating lease agreements and equipment under finance lease
agreements. The Company’s lease agreements have terms not exceeding five years. Certain leases contain options to extend that
are assessed by management at the commencement of the lease and are included in the lease term if the Company is reasonably certain
of exercising. In July 2021,
Schedule of Assets and Liabilities Related to Operating Leases
Condensed Consolidated Balance Sheet Caption | December 31, 2021 | June 30, 2021 | ||||||||
| Assets: | ||||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | $ | |||||||
| Finance lease assets | Equipment, net | |||||||||
| Total lease assets | $ | $ | ||||||||
| Liabilities: | ||||||||||
| Current: | ||||||||||
| Operating lease liabilities | Operating lease liability - current | $ | $ | |||||||
| Operating lease liabilities, current | Operating lease liability - current | $ | $ | |||||||
| Finance lease liabilities | Current portion of notes payable and other long-term debt | |||||||||
| Finance lease liabilities, current | Current portion of notes payable and other long-term debt | |||||||||
| Long-term: | ||||||||||
| Operating lease liabilities | Operating lease liability - non-current | |||||||||
| Operating lease liabilities, noncurrent | Operating lease liability - non-current | |||||||||
| Finance lease liabilities | Notes payable and other long-term debt | |||||||||
| Finance lease liabilities, noncurrent | Notes payable and other long-term debt | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| 21 |
The
operating lease expense and finance lease expense for the three months ended December 31, 2021 were $
Weighted average remaining lease terms and discount rates follow:
Schedule of Weighted Average Remaining Lease Terms and Discount Rates
| December 31, 2021 | June 30, 2021 | |||||||
| Weighted Average Remaining Lease Term (Years): | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
The future minimum lease payments at December 31, 2021 follows:
Schedule of Maturity of Operating Lease Liability
| Operating Lease | Finance Lease | |||||||
| Remainder of fiscal 2022 | $ | $ | ||||||
| Fiscal 2023 | ||||||||
| Fiscal 2024 | ||||||||
| Fiscal 2025 | ||||||||
| Fiscal 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ||||||||
| Present value of lease liabilities | $ | $ | ||||||
Note 12 – Long-Term Debt
Notes payable and other long-term debt
The components of notes payable and other long-term debt are as follows:
Schedule of Long-term Debt
| December 31, 2021 | June 30, 2021 | |||||||
| Notes payable | $ | $ | ||||||
| Finance lease obligation (See Note 11) | ||||||||
| Less current portion of notes payable and long-term debt | ( | ) | ( | ) | ||||
| Notes payable and other long-term debt | $ | $ | ||||||
The
Company assumed a note payable of £
The maturities of long-term debt are as follows:
Schedule of Maturities of Long-term Debt
| Fiscal 2022 | $ | |||
| Fiscal 2023 | ||||
| Total before unamortized discount | ||||
| Less: unamortized discount and issuance costs | ||||
| Total | $ |
| 22 |
Senior Convertible Note
On
June 2, 2021, the Company issued a Senior Convertible Note in the principal amount of $
The
Senior Convertible Note is convertible, at the option of the holder, into shares of the Company’s common stock at a conversion
price of $
The
Senior Convertible Note is subject to a most favored nation provision and standard adjustments in the event of any stock split, stock
dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue, or issue
any variable rate securities, the holder of the Senior Convertible Note has the additional right to substitute such variable price (or
formula) for the conversion price. If the holder were to substitute a floor price of $
If
an event of default occurs, the holder of the Senior Convertible Note has the right to alternate conversion (“Alternate Conversion”)
and may elect to convert the Senior Convertible Note, inclusive of a
In
connection with an event of default, the holder may require the Company to redeem in cash any or all of the Senior Convertible Note.
The redemption price will equal
| 23 |
In addition, unless approval is obtained from the Company’s stockholders as required by Nasdaq, the Company is prohibited from issuing any shares of common stock upon conversion of the Senior Convertible Note or otherwise pursuant to the terms of the Senior Convertible Note, if the issuance of such shares of common stock would exceed of the Company’s outstanding shares of common stock, or otherwise exceed the aggregate number of shares of common stock which the Company may issue without breaching the Company’s obligations under the rules and regulations of Nasdaq.
In
connection with a change of control, as defined in the Senior Convertible Note, the holder may require the Company to redeem all or any
portion of the Senior Convertible Note.
The Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. The Company will also be subject to certain financial covenants relating to available cash, ratio of outstanding indebtedness to market capitalization and minimum cash flow. The Company is also subject to financial covenants as it relates minimum revenues commencing June 30, 2022.
The
Company previously determined that it had not maintained compliance with its Senior Convertible Note covenants at September 30,
2021. The Company therefore requested and received a waiver dated October 13, 2021 for (i) any known breaches or potential breaches of
financial covenants in effect related to the available cash test and minimum cash flow test through December 25, 2021, (ii) any known
breach resulting from the placement of a lien on the outstanding share capital of Prozone Limited, the entity that holds the assets of
Bethard, through Additional Payment Due Date (see discussion of the Bethard acquisition in Note 3) and (iii) any known breach which would
result from the Company’s announcement that it would purchase an equity interest in Game Fund Partners Group LLC through the contribution
of up to shares of common stock.
In
consideration for the waiver, the Company agreed to permit the conversion of up to $
Subsequent to December 31, 2021, the holder
of the Senior Convertible Note converted the remaining principal amount of $
As of December 31, 2021, the Company had not
maintained compliance with the covenants of the Senior Convertible Note, having identified non-compliance with the same financial covenants
previously identified at September 30, 2021. In consideration for obtaining a waiver from the compliance with certain covenants, as of
December 31, 2021 and through March 30, 2022, the Company has agreed to enter into an exchange agreement whereby the Company has exchanged
the existing Senior Convertible Note with the New Note resulting in the increase of the principal outstanding balance of indebtedness
from the current carrying value $
The Company further entered into a non-binding term sheet dated February 22, 2022, to restructure the New Note to mitigate the risk of default on the covenants in future periods. As of February 22, 2022, a new debt facility containing these terms had not been completed. As the existing covenants remain in effect until the signing of a new debt facility documents, and the Company has a history of requiring a waiver from the existing covenants, it was determined that the Company cannot support compliance with the existing covenants for one year following December 31, 2021. The Company has therefore recognized its obligation under the Senior Convertible Note as a current liability at December 31, 2021 in the unaudited condensed consolidated balance sheet.
| 24 |
The Company also previously obtained a waiver from the holder of the Senior Convertible Note on November 2, 2021 in connection with its announcement to commence an underwritten registered public offering of its 10.0% Series A Cumulative Redeemable Convertible Preferred Stock (discussed in the Note 15). In consideration for this waiver, the Company agreed to increase the cash price payable upon a redemption of the Senior Convertible Note by the Company to be equal to 10% of the conversion amount, as defined in agreement as any unpaid principal, minimum return due to the holder, and unpaid interest due on such redemption date. The Company agreed to pay the holder of the Senior Convertible Note an amount of $1,500,000 under the terms of a registration rights agreement. The Company recognized the amount payable to the holder of the Senior Convertible Note under the registration rights agreement in other non-operating income (loss) in the unaudited condensed consolidated statement of operations for the six months ended December 31, 2021 and in accounts payable and accrued expenses at December 31, 2021 on the unaudited condensed consolidated balance sheet.
Warrants
The
Company issued
The
Company determined the Series A and Series B Warrants should be classified as a liability as the warrants are redeemable for cash in
the event of a fundamental transaction, as defined in the Senior Convertible Note agreement, which includes a change in control. The
Company has recorded a liability for the Series A Warrants and Series B Warrants at fair value on the issuance date with subsequent changes
in fair value reflected in earnings. At June 30, 2021, the Company determined the total fair value of the Series A Warrants and Series
B Warrants to be $
The
proceeds from the issuance of the Senior Convertible Note were allocated to the Series A Warrants and Series B Warrants using the with-and-without
method. Under this method, the Company first allocated the proceeds from the issuance of the Senior Convertible Note to the Series A
Warrants and Series B Warrants based on their initial fair value measurement, and then allocated the remaining proceeds to the Senior
Convertible Note. The debt discount on the Senior Convertible Note is being amortized over its term of two years. The Company accelerated
the amortization of the debt discount on the Senior Convertible Note at December 31, 2021 resulting in the Company recording of a loss
on extinguishment of $
| 25 |
The components of our long-term debt including the Senior Convertible Note on the unaudited condensed consolidated balance sheet at December 31, 2021 follows:
Schedule Components of Long-term Debt
| 2021 | ||||
| Current portion of notes payable and long-term debt | ||||
| Notes payable and long-term debt (non-current) | ||||
| Total | $ |
Note 13 – Commitments and contingencies
Commitments
On
October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (“Team”) to obtain certain sponsorship-related
rights and benefits that include the ability to access commercial opportunities. The Company had agreed to initially pay the Team $in cash and $in common stock during the period
On
August 17, 2020, the Company entered into an agreement with Bally’s Corporation, an operator of various online gaming and wagering
services in the state of New Jersey, USA, to assist the Company in its entrance into the sports wagering market in New Jersey under the
State Gaming Law. The commencement date of the arrangement with Bally’s was March 31, 2021. The Company paid $
The
Company has signed a subscription and operating agreement with Game Fund Partners LLC to support the development of a planned $
In
the ordinary course of business, the Company enters into multi-year agreements to purchase sponsorships with professional teams as part
of its marketing efforts to expand competitive esports gaming. As of December 31, 2021, the commitments under these agreements are estimated
at $
| 26 |
Contingencies
In
September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that they were owed $
The Company at times may be involved in litigation relating to claims arising from its operations in the normal course of business. The Company is currently not involved in any litigation that it believes could have a material adverse effect on our financial condition or results of operations.
Note 14 – Revenue and Geographic Information
The Company is a provider of iGaming, traditional sports betting and esports services that commenced revenue generating operations during the year ended June 30, 2021 with the acquisitions of Argyll, FLIP, EGL, Lucky Dino, GGC and Helix. The Company acquired Bethard in July 2021 adding to its revenue generating operations. The revenues and long-lived assets of Argyll, EGL Lucky Dino and Bethard have been identified to our international operations as they principally service customers in Europe, inclusive of the United Kingdom. The revenues and long-lived assets of FLIP, GGC and Helix principally service customers in the United States.
A disaggregation of revenue by type of service for the three and six months ended December 31, 2021 and 2020 is as follows:
Schedule of Disaggregated by Revenue
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Online betting and casino revenues | $ | $ | $ | $ | ||||||||||||
| Esports and other revenues | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
A summary of revenue by geography for the three and six months ended December 31, 2021 and 2020 is as follows:
Schedule of Revenues with Customers Disaggregated by Geographical Area
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
A summary of long-lived assets by geography is as follows:
Schedule of Long-Lived Assets by Geography
| December 31, 2021 | June 30, 2021 | |||||||
| United States | $ | $ | ||||||
| International | ||||||||
| Total | $ | $ | ||||||
Note 15 – 10% Series A Cumulative Redeemable Convertible Preferred Stock
The
Company is authorized to issue shares of preferred stock. On November 10, 2021, the
Company designated shares of preferred stock as 10% Series A cumulative redeemable convertible preferred stock (“10%
Series A Cumulative Redeemable Convertible Preferred Stock”), with a par value of $ per share and liquidation value of $
| 27 |
In
addition, under the terms of the underwriting agreement for the public offering of the 10% Series A Cumulative Redeemable Convertible
Preferred Stock, the Company granted the underwriters a 45-day option to purchase up to an additional shares. On December 10,
2021, there was a partial exercise of shares. Net proceeds from the additional sale, after deducting issuance costs totaled $
Conversion
Each
share of 10% Series A Cumulative Redeemable Convertible Preferred Stock is convertible into one share of the Company’s common stock
at a conversion price of $
Dividends
Dividends on the 10% Series A Cumulative Redeemable Convertible Preferred Stock accrue daily and are cumulative from the date of issuance. The dividends on the 10% Series A Cumulative Redeemable Convertible Preferred Stock are payable monthly in arrears on the last day of each calendar month, when, as and if declared by the Company’s Board of Directors, at the rate of 10.0% per annum. In the event the dividends are not paid in cash, the dividends shall continue to accrue at a dividend rate of 10.0%.
Redemption and Liquidation
The 10% Series A Cumulative Redeemable Convertible Preferred Stock is also redeemable, at the option of the Board of Directors, in whole or in part, at any time on or after January 1, 2023.
The 10% Series A Cumulative Redeemable Convertible Preferred Stock includes a change of control put option which allows the holders of the 10% Series A Cumulative Redeemable Convertible Preferred Stock to require the Company to repurchase such holders’ shares in cash in an amount equal to the initial purchase price plus accrued dividends.
The 10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable upon certain deemed liquidation events, such as a change in control. Because a deemed liquidation event could constitute a redemption event outside of the Company’s control, all shares of preferred stock have been presented outside of permanent equity in mezzanine equity on the unaudited condensed consolidated balance sheets. The instrument is initially recognized at fair value net of issuance costs. The Company reassesses whether the 10% Series A Cumulative Redeemable Convertible Preferred Stock is currently redeemable, or probable to become redeemable in the future, as of each reporting date. If the instrument meets either of these criteria, the Company will accrete the carrying value to the redemption value. The 10% Series A Cumulative Redeemable Convertible Preferred Stock has not been adjusted to its redemption amount as of December 31, 2021 because a deemed liquidation event is not considered probable.
The 10% Series A Cumulative Redeemable Convertible Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable, and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the 10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares of 10% Series A Cumulative Redeemable Convertible Preferred Stock have been presented outside of permanent equity in mezzanine equity on the unaudited condensed consolidated balance sheets.
Voting Rights
The holders of the 10% Series A Cumulative Redeemable Convertible Preferred Stock will not have any voting rights, except whenever dividends on any share of any series of preferred stock (“Applicable Preferred Stock”) have not have been paid in an aggregate amount equal to four monthly dividends on the share, the holders of the Applicable Preferred Stock will have the exclusive and special right, voting separately as a class and without regard to series, to elect at an annual meeting of shareholders or special meeting held in place of it one member of the Board of Directors, until all arrearages in dividends and dividends in full for the current monthly period have been paid.
| 28 |
Note 16 – Equity
Common Stock
The following is a summary of common stock issuances for the six months ended December 31, 2021:
| ● | During the six months ended December 31, 2021, the Company issued shares of common stock for services with a weighted average fair value of $ per share. |
| ● | During
the six months ended December 31, 2021, the Company issued shares of common stock from the exercise of stock options with
a weighted average exercise price of $ or $ |
| ● | During
the six months ended December 31, 2021, the Company issued
shares of common stock, with aggregate proceeds of $ |
| ● | During
the six months ended December 31, 2021, the holder of the Senior Convertible Note converted an aggregate conversion value of $ |
The following is a summary of common stock issuances for the six months ended December 31, 2020:
| ● | During
the six months ended December 31, 2020, the Company issued shares of its common stock for services rendered with a weighted
average fair value of $ per share or $ |
| ● | On
September 14, 2020, the Company issued shares of common stock in relation to the Flip acquisition. The Company recorded the
estimated fair value on the shares issued in the amount of $ |
| ● | During
the six months ended December 31, 2020, the Company issued shares of common stock for the exercise of stock options and
warrants with a weighted average exercise price of $ per share or $ |
| ● | During
the six months ended December 31, 2020, the Company issued shares of common stock for the Argyll acquisition that was completed
on July 31, 2020. The Company recorded these shares at fair value in the amount of $ |
At-the Market Equity Offering Program
On
September 3, 2021, the Company entered “at the market” equity offering program (“ATM”) to sell up to an aggregate
of $
| 29 |
Common Stock Warrants
On
April 16, 2020, the Company closed an offering, (the “April 2020 Offering”), in which it sold units consisting
of one share of common stock and one Unit A Warrant and one Unit B Warrant, for a total of warrants, with each warrant entitling
the holder to purchase one share of common stock price at $ per share. The Company issued an additional Unit A Warrants and
additional Unit B Warrants to the underwriter pursuant to an over-allotment option each entitling the holder to purchase one
share of common stock at $ per share. There were
In
connection with the April 2020 Offering the Company also issued shares of common stock and warrants (“Conversion
Warrants”) to purchase one share of common stock at $ per share upon the conversion of $
On
July 31, 2020, the Company issued
A summary of the warrant activity follows:
Schedule of Warrant Activity
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Intrinsic Value | |||||||||||||
| Outstanding, July 1, 2020 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Exchanged | ||||||||||||||||
| Forfeited or cancelled | ) | |||||||||||||||
| Outstanding, June 30, 2021 | ||||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or cancelled | ||||||||||||||||
| Outstanding, September 30, 2021 | ||||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or cancelled | ||||||||||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
Common Stock Options
On
September 10, 2020, the Company’s Board of Directors adopted the 2020 Equity and Incentive Plan (the “2020 Plan”) that
provides for the issuance of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation
rights to officers, employees, directors, consultants, and other key persons. Under the 2020 Plan, the maximum number of shares of common
stock authorized for issuance was shares.
| 30 |
Schedule of Stock Option Activity
Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding, June 30, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ) | |||||||
| Cancelled | ||||||||
| Outstanding, September 30, 2021 | ||||||||
| Granted | ||||||||
| Exercised | ) | |||||||
| Cancelled | ) | |||||||
| Outstanding, December 31, 2021 | $ | |||||||
As of December 31, 2021, the weighted average remaining life of the options outstanding was years. There are options are exercisable at December 31, 2021, with a weighted average exercise price of $.
Stock Based Compensation
During the three months ended December 31, 2021 and 2020, the Company recorded stock-based compensation expense of $ and $, respectively and during the six months ended December 31, 2021 and 2020, the Company recorded stock-based compensation expense of $ and $, respectively, for the amortization of stock options and the issuance of common stock to employees and contractors for services which has been recorded as general and administrative expense in the unaudited condensed consolidated statements of operations.
The Company had previously recognized stock-based compensation expense of $ during its year ended June 30, 2020 related to the issuance of shares of common stock for services rendered, comprised of shares granted to management, shares granted to employees, and shares granted to consultants. At June 30, 2020, the Company had recorded the fair value of these shares issued as liabilities to be settled in stock. During the first quarter of the Company’s fiscal year ended June 30, 2021, the Company settled the balance of the liabilities to be settled in stock through the issuance of common stock in a non-cash transaction.
Schedule of Weighted Average Assumptions Valued Using Black-Scholes Option Pricing Model
| Six months ended December 31, 2021 | ||||
| Expected term, in years | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | ||||
| Grant date fair value | $ | |||
Note 17 – Fair Value Measurements
The following financial instruments were measured at fair value on a recurring basis:
Schedule of Fair Value of Financial Instruments
| December 31, 2021 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Contingent consideration (Note 3) | $ | $ | $ | $ | ||||||||||||
| Warrant liability (Note 12) | $ | $ | $ | $ | ||||||||||||
| June 30, 2021 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Warrant liability (Note 12) | $ | $ | $ | $ | ||||||||||||
| 31 |
A summary of the changes in Level 3 financial instruments for the three and six months ended December 31, 2021 is as follows:
Summary of the Changes in Level 3 Financial Instruments
| Warrant
Liability | Contingent Consideration | |||||||
| Balance at June 30, 2021 | $ | $ | ||||||
| Fair value of contingent consideration for Bethard at acquisition (Note 3) | — | |||||||
| Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | ( | ) | — | |||||
| Balance at September 30, 2021 | ||||||||
| Payments of Bethard contingent consideration | — | ( | ) | |||||
| Change in fair value of Bethard contingent consideration liability (Note 3) | — | ( | ) | |||||
| Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | ( | ) | — | |||||
| Balance at December 31, 2021 | $ | $ | ||||||
The warrants outstanding at December 31, 2021 issued with the Senior Convertible Note were valued using a Monte Carlo based valuation model with the following assumptions:
Schedule of Warrants Outstanding
| December 31, 2021 | June 30, 2021 | |||||||
| Contractual term, in years | – | – | ||||||
| Expected volatility | % – | % | % – | % | ||||
| Risk-free interest rate | % – | % | % – | % | ||||
| Dividend yield | ||||||||
| Conversion / exercise price | $ | $ | ||||||
Argyll Warrant Valuation
During
the year ended June 30, 2021, the Company issued
Subsequent
to September 30, 2020, the holder of the warrants issued in the Argyll acquisition exercised the warrants resulting in the issuance of
Note 18 – Income Taxes
The Company’s provision for income taxes for the three and six months ended December 31, 2021 and 2020 is as follows:
Schedule of Provision for Income Taxes
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Six months ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Income tax benefit | $ | $ | $ | $ | ||||||||||||
Management’s expected annualized
effective tax rate would be
The
Company recorded a discrete income tax benefit of $
Note 19 – Subsequent Events
On January 21, 2022, we were granted our transactional waiver by the New Jersey Division of Gaming Enforcement (‘‘DGE’’), as part of our multi-year partnership with Bally’s Corporation (previously Twin River Worldwide Holdings, Inc), to launch their proprietary mobile sports betting product, ‘‘Vie.gg’, in the state of New Jersey, as a real money wagering “skin” of Bally’s Atlantic City, the holder of a New Jersey Casino License, Internet Gaming Permit and a Sports Wagering License.
On
February 22 2022, and as disclosed in Note 12, Long-Term Debt, in consideration for obtaining a waiver from the compliance with certain
covenants, as of December 31, 2021 and through March 30, 2022, the Company has agreed to enter into an exchange agreement whereby
the Company has exchanged the existing Senior Convertible Note with the New Note resulting in the increase of the principal outstanding
balance of indebtedness from the current carrying value $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section of this report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like, believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.
Overview
Esports is the competitive playing of video games by amateur and professional teams as a spectator sport. Esports typically takes the form of organized, multiplayer video games that include genres such as real-time strategy, fighting, first-person shooter and multiplayer online battle arena games. As of December 31, 2021, the three most popular esports Strike: Global games were Dota 2, League of Legends (each multiplayer online battle arena games) and Counter Offensive (a first-person shooter game). Other popular games include Fortnite, StarCraft II, Call of Duty¸ Overwatch, Hearthstone and Apex Legends. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including twitch.tv and youtube.com.
Esports Entertainment Group, Inc. (“Company” or “EEG”) is an esports focused iGaming and entertainment company with a global footprint. EEG’s strategy is to build and acquire betting and related platforms, and lever them into the rapidly growing esports vertical. We are focused on driving growth in two markets that include iGaming (“EEG iGaming”) and esports (“EEG Games”).
While EEG is focused on driving customer growth, revenues and brand recognition in both the iGaming and esports markets, it continues to operate as one reportable segment in the delivery of entertainment to its customers through its wagering and esports platforms. This determination considers the organizational structure of the Company and the nature of financial information available and reviewed by the chief operating decision maker to assess performance and make decisions about resource allocations.
We have financed operations primarily through the sale of equity securities, including the use of our ATM facility, and through the issuance of debt. Until revenues are sufficient to meet our needs, we will continue to attempt to secure financing through equity or debt securities.
EEG iGaming:
EEG iGaming includes the esports betting platform with full casino and sportsbook functionality and services for iGaming customers. Our in-house gambling software platform, Phoenix, is a modern reimagined sportsbook that caters to both millennial esports bettors as well as traditional sports bettors. Phoenix is being developed through the assets and resources from our FLIP acquisition.
EEG’s goal is to be a leader in the large and rapidly growing sector of esports real-money wagering, offering fans the ability to wager on professional esports events in a licensed and secure environment. From February 2021, under the terms of our Maltese Gaming Authority (MGA) license, we are now able to accept wagers from residents of over 180 jurisdictions including countries within the European Union, Canada, New Zealand and South Africa, on our ‘‘Vie.bet’’ platform.
Alongside the Vie.bet esports focused platform, EEG owns and operates:
| ● | Argyll Entertainment’s flagship Sportnation.bet online sportsbook and casino brand, licensed in the UK and Ireland, | |
| ● | Lucky Dino’s 5 online casino brands licensed by the MGA on its in-house built iDefix casino-platform, and | |
| ● | The recently acquired Bethard online sportsbook and casino brands, operating under MGA, Spanish, Irish and Swedish licenses. |
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On August 17, 2020, we announced entry into a multi-year partnership with Twin River Worldwide Holdings, Inc, now Bally’s Corporation, to launch their proprietary mobile sports betting product, ‘‘Vie.gg’, in the state of New Jersey, as a real money wagering “skin” of Bally’s Atlantic City, the holder of a New Jersey Casino License, Internet Gaming Permit and a Sports Wagering License. We were granted our transactional waiver by the New Jersey Division of Gaming Enforcement (‘‘DGE’’) on January 21, 2022, with a “softplay” period starting January 25, 2022.
We also currently hold five Tier-1 gambling licenses (Malta, UK, Ireland, Spain and Sweden) and are in the process of acquiring one in New Jersey. Our acquisitions of Argyll Entertainment, Lucky Dino and Bethard provide a foothold in mature markets in Europe into which we believe we can cross-sell our esports offerings.
EEG Games:
EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of 1) in-person experiences (at Helix Centers), 2) online tournaments (through our recently acquired EGL tournament platform), and 3) player-vs-player wagering (through our soon-to-be-released LANDuel product). In order to provide exposure to our platforms, we have signed numerous exclusive marketing relationships with professional sports organizations across the NFL, NBA, NHL and MLS.
Underpinning our focus on esports and EEG Games customers, is our proprietary infrastructure software, ggCircuit. ggCircuit is the leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments.
We believe that as the size of the market and the number of esports enthusiasts continues to grow, so will the number of esports enthusiasts who gamble on events, which would likely increase the demand for our platform.
Impact of COVID-19
The novel coronavirus (“COVID-19”) emerged in December 2019 and has since adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets. Beginning in early 2020 and continuing into 2022, the COVID-19 pandemic adversely impacted many different industries. The ongoing COVID-19 pandemic could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the duration of the impact of COVID-19. The COVID-19 pandemic therefore presents material uncertainty and risk with respect to us and our performance and could affect our financial results in a materially adverse way. During the initial outbreak of COVID-19, almost all major sports events and leagues were postponed or put-on hold. The cancelation of the major sports events and canceled or postponed seasons, had a significant short-term negative effect on betting activity globally. As a result, iGaming and event operators faced major short-term losses in betting volumes. While the major sporting events and leagues have returned, due to the emergence of new variants of COVID-19 there have been additional disruptions and the possibility remains that sports seasons and sporting events may be further suspended, cancelled or rescheduled. The Company’s revenue varies based on sports seasons and sporting events amongst other factors, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect its revenue, possibly materially. A significant or prolonged decrease in consumer spending on entertainment or leisure activities would also likely have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers or tournaments, reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations. However, the Company’s product offerings that do not rely on sports seasons and sporting events or in person attendance, such as iGaming casino operations and online tournaments, may partially offset this adverse impact on revenue. Online casino operations have generally continued as normal without any noticeable disruption due to the COVID-19 outbreak. The virus’s expected effect on online casino activity globally is expected to be overall positive or neutral.
Remote working, travel restrictions and border closures have not materially impacted the Company’s ability to manage and operate the day-to-day functions of the business. Management has been able to operate in a virtual setting. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm the business over the long term. Travel restrictions impacting people can restrain the ability to operate, but at present we do not expect these restrictions on personal travel to be material to the Company’s operations or financial results.
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The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption and reduced operations. A materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on our business, financial condition and results of operations. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.
Regulatory Environment
In July 2020, the Swedish Ministry for Finance implemented a number of restrictive measures on online casino operators in reaction to the impact of COVID-19 restrictions. These included caps on deposits and bonuses. This had a negative impact on revenues across the industry during that period. These restrictions were lifted on November 14, 2021.
A new licensing regime for online operators was introduced in the Netherlands, with applications being accepted from April 1, 2021. EEG did not apply for a license after assessing the criteria for applying and the extremely restrictive application by the Dutch regulator. The first licenses took effect on October 1, 2021. In a surprise to the market, the Dutch Minister issued guidance warning that even those operators that were not targeting the Dutch market but were passively accepting Dutch customers would be punished, with authorities given the power to issue increased fines. Prior to this guidance, operators had understood that passive acceptance of bets was permissible whilst preparing for a license application. The vast majority of unlicensed operators (including EEG’s brands) promptly withdrew from the Dutch market completely on October 1, 2021, closing all active Dutch customer accounts. The sudden and earlier than anticipated withdrawal from the Dutch market had a negative impact on the unlicensed operators in the region.
The Company continues to monitor developments related to regulatory activities.
Results of Operations
Comparison of the three months ended December 31, 2021 and 2020
Revenue
Revenue totaled $14.5 million in the three months ended December 31, 2021, an increase of $12.1 million, or 504%, to from the $2.4 million recorded in the three months ended December 31, 2020. The increase is primary attributable to the iGaming operations of Lucky Dino and Argyll that were acquired during fiscal year ended June 30, 2021 and Bethard that was acquired in July 2021.
Cost of Revenue
Cost of revenue totaled $6.5 million in the three months ended December 31, 2021, an increase of $5.2 million, or 400%, from the $1.3 million recorded in the three months ended December 31, 2020. The increase is primary attributable to the iGaming operations of Lucky Dino, Argyll and Bethard acquisitions and includes $3.3 million for additional payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $1.7 million for the game provider expenses and $0.2 million higher other direct expenses related to the delivery of services.
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Sales and Marketing
Sales and marketing expense totaled $6.9 million in the three months ended December 31, 2021, an increase of $5.0 million, or 263%, over the $1.9 million recorded for the three months ended December 31, 2020. The increase was primarily attributable to $3.4 million higher marketing affiliate costs related to iGaming services, $0.9 million in additional sponsorship agreements with professional sports clubs and our service partners and $0.7 million higher other advertising and promotion expenses including event promotion.
General and Administrative
General and administrative expense totaled $13.2 million for the three months ended December 31, 2021, an increase of $8.3 million, or 169%, over the $4.9 million recorded for the three months ended December 31, 2020. The increase was primarily attributable to increases in payroll costs of $3.6 million, depreciation and acquisition related intangibles of $2.7 million and $2.1 million related to other general and administrative cost including incremental costs for information technology related disbursements, offset by a decrease in professional fees, including accounting and legal expenses of $0.1 million.
Other Income (expense)
Other income (expense), net increased $26.3 million from an expense of $1.5 million for the three months ended December 31, 2020 to an expense of $27.8 million for the three months ended December 31, 2021. The increase in other expense for the three months ended December 31, 2021 results primarily from $6.0 million loss on the conversion of the Senior Convertible Note and $1.5 million loss from the change in value of the related derivative liability, driven by the conversion of a principal amount of approximately $5.7 million into 1.7 million shares of common stock, respectively, of the $7.5 million immediate conversion option provided to the Senior Convertible Note holder as part of the October 13, 2021 waiver provided on the covenants related to the Senior Convertible Note and $28.5 million of loss on extinguishment primarily attributable to amortization of the debt discount and the consideration to the holder for the February 22, 2022 waiver provided on the covenants related to the Senior Convertible Note and $2.4 million in interest expense. These expenses were offset by other income primarily made up of $8.7 million from the reduction in fair value of the warrant liability established for warrants convertible into shares of common stock that had been issued to the holder of the Senior Convertible Note. The fair value of the warrant liability, determined using a Monte Carlo based valuation model, decreased from $11.7 million as of September 30, 2021 to $3.0 million as of December 31, 2021. The Company also recognized income of $1.9 million related to the change in the fair value of the contingent consideration due as part of the Bethard transaction. During the three months ended December 31, 2020, the Company recorded an unfavorable change of $1.5 million to the preliminary fair value of the warrant liability that was included in the preliminary purchase consideration for the Argyll acquisition, resulting in an expense being recognized in the unaudited condensed consolidated statement of operations for three months ended December 31, 2020.
Comparison of the six months ended December 31, 2021 and 2020
Revenue
Revenue totaled $30.9 million in the six months ended December 31, 2021, an increase of $28.3 million, or 1088%, from the $2.6 million recorded in the six months ended December 31, 2020. The increase is primary attributable to the iGaming operations of Lucky Dino and Argyll that were acquired during the fiscal year ended June 30, 2021 and Bethard that was acquired in July 2021.
Cost of Revenue
Cost of revenue totaled $13.0 million in the six months ended December 31, 2021, an increase of $11.2 million, or 622%, from the $1.8 million recorded in the six months ended December 31, 2020. The increase is primary attributable to the iGaming operations of Lucky Dino, Argyll and Bethard acquisitions and includes $7.1 million for additional payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $3.2 million additional for the game provider expenses and $0.9 million higher other direct expenses related to the delivery of services.
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Sales and Marketing
Sales and marketing expense totaled $14.3 million in the six months ended December 31, 2021, an increase of $11.8 million, or 472%, over the $2.5 million recorded for the six months ended December 31, 2020. The increase was primarily attributable to $8.0 million higher marketing affiliate costs related to iGaming services, $2.4 million in additional expense for sponsorship agreements with professional sports clubs and our service partners and $1.4 million higher other advertising and promotion expenses including event promotion.
General and Administrative
General and administrative expense totaled $24.3 million for the six months ended December 31, 2021, an increase of $16.3 million, or 204%, over the $8.0 million recorded for the six months ended December 31, 2020. The increase was primarily attributable to increases in payroll costs of $7.7 million, depreciation and acquisition related intangibles of $5.7 million, professional fees, including accounting and legal expenses of $0.6 million and $2.3 million related to other general and administrative cost including incremental costs for information technology related disbursements and costs of acquisitions. The increases were driven by the timing of the acquisitions and growth in staff.
Other Income (expense)
Other income (expense), net changed $20.3 million from income of $0.5 million for the six months ended December 31, 2020 to an expense of $19.8 million for the six months ended December 31, 2021. The other expense for the six months ended December 31, 2021 results primarily from $6.0 million loss on the conversion of the Senior Convertible Note and $1.5 million loss from the change in value of the related derivative liability, driven by the conversion of a principal amount of approximately $5.7 million into 1.7 million shares of common stock, respectively, of the $7.5 million immediate conversion option provided to the Senior Convertible Note holder as part of the October 13, 2021 waiver provided on the covenants related to the Senior Convertible Note and $28.5 million of loss on extinguishment primarily attributable to amortization of the debt discount and the consideration to the holder for the February 22, 2022 waiver provided on the covenants related to the Senior Convertible Note and $4.8 million in interest expense. These expenses were offset by other income primarily made up of $20.5 million from the reduction in fair value of the warrant liability established for warrants convertible into shares of common stock that had been issued to the holder of the Senior Convertible Note. The fair value of the warrant liability, determined using a Monte Carlo based valuation model, decreased from $23.5 million as of June 30, 2021 to $3.0 million as of December 31, 2021. The Company also recognized income of $1.9 million related to the change in the fair value of the contingent consideration due as part of the Bethard transaction. During the six months ended December 31, 2020, the Company recorded a favorable change of $0.6 million to the preliminary fair value of the warrant liability that was included in the preliminary purchase consideration for the Argyll acquisition. A preliminary estimate of fair value of the warrant liability of $5.5 million had been included in the preliminary purchase consideration of Argyll at the acquisition date of July 31, 2020. The calculation of the fair value of the warrant liability established for the Argyll acquisition decreased to $4.9 million at December 31, 2020, resulting a benefit recognized in the unaudited condensed consolidated statement of operations for six months ended December 31, 2020.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies.
Liquidity and Going Concern
The Company must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the unaudited condensed consolidated financial statements included in this report are issued. The evaluation of going concern under the accounting guidance requires significant judgment. The Company has determined that certain factors raise substantial doubt about our ability to continue as a going concern.
As of December 31, 2021, the Company had not maintained compliance with the covenants of the Senior Convertible Note, having identified non-compliance with the same financial covenants previously identified at September 30, 2021. In consideration for obtaining a waiver from the compliance with certain covenants, as of December 31, 2021 and through March 30, 2022, the Company has agreed to enter into an exchange agreement whereby the Company has exchanged the existing Senior Convertible Note with the New Note resulting in the increase of the principal outstanding balance of indebtedness from the current carrying value $29.2 million, as adjusted for the conversions of principal and Premium on Principal through February 22, 2022, to $35.0 million. The increase in the principal balance of $5.8 million was recognized as a loss on extinguishment of Senior Convertible Note on the unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2021. The Company has further accelerated the recognition of the remaining debt discount and Premium on Principal in connection with the exchange and issuance of the New Note. This resulted in the recognition of a loss on extinguishment of the Senior Convertible Note of $22.6 million for the three and six months ended December 31, 2021 in the unaudited condensed consolidated statement of operations.
The Company further entered into a non-binding term sheet dated February 22, 2022, to restructure the New Note to mitigate the risk of default on the covenants in future periods. As of February 22, 2022, a new debt facility containing these terms had not been completed.
The Company has agreed to include the following key terms in the new debt facility documents (i) 8% interest rate paid monthly with make-whole through maturity upon conversion, redemption or amortization, payable in cash or shares; (ii) update the conversion structure to 25% of the outstanding balance at a conversion price of $7.00, 25% of the outstanding balance at a conversion price of $8.00, 25% of the outstanding balance at a conversion price of $9.00, and 25% of the outstanding balancer at a conversion price of $10.00; (iii) file a revised registration statement for the new debt facility documents; (v) redeem the indebtedness in 15 monthly cash installments of $2.3 million commencing on the first trading day of each month starting on April 1, 2022 and ending on the June 2, 2023, the same maturity date as the existing Senior Convertible Note.
The evaluation of going concern under the accounting guidance requires significant judgment. In addition to the changes related to the New Note, the Company must consider it has historically incurred losses and negative cash flows in recent years as it has prepared to grow its esports business through acquisition and new venture opportunities. The Company must also consider its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits. As of December 31, 2021, the Company had $1.0 million of available cash on-hand and net current liabilities of $49.1 million. On February 18, 2022, one business day preceding this filing, the Company had approximately $1.4 million of available cash on-hand. The Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations without additional financing. Although the Company has financing available, as further described below, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the Company and the esports and iGaming industry. The combination of these conditions were determined to raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of the unaudited condensed consolidated financial statements.
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In determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes are currently available to fund its operations and drive future growth that include (i) the ability to access capital using the at-the-money (“ATM”) equity offering program available to the Company whereby the Company can sell shares to raise gross proceeds up to $20 million (the Company has sold an aggregate of 1.2 million shares through the ATM through February 18, 2022, one business day preceding this filing, for gross proceeds of $4.0 million and had $16.0 million of gross proceeds remaining under the ATM at February 18, 2022), (ii) the ability to sell shares of common stock of the Company through a shelf registration statement on Form S-3 (File No. 333-252370) declared effective by the Securities and Exchange Commission (SEC) on February 5, 2021, and (iii) the ability to raise additional financing from other sources. These above plans are likely to require the Company to place reliance on several factors, including favorable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern.
The Company’s sources and (uses) of cash for the six months ended December 31, 2021 and 2020 are as follows:
| 2021 | 2020 | |||||||
| Cash used in operating activities | $ | 7,599,212 | $ | 6,746,415 | ||||
| Cash used in investing activities | $ | 20,185,745 | $ | 2,179,413 | ||||
| Cash provided by financing activities | $ | 8,025,614 | $ | 4,258,042 | ||||
At December 31, 2021, we had total current assets of $12.0 million and total current liabilities of $61.1 million. Net cash used in operating activities for the six months ended December 31, 2021 was $7.6 million, which includes a net loss of $34.9 million, offset by net non-cash adjustments of $20.8 million.
Net cash used in investing activities for the six months ended December 31, 2021 totaled $20.2 million principally related to the Bethard acquisition.
Net cash provided by financing activities for the six months ended December 31, 2021 totaled 8.0 million that related to proceeds from the issuance of the 10% Series A cumulative redeemable convertible preferred stock and issuance of common stock under the ATM offset by the contingent consideration of Bethard and repayments of notes payable and finance lease.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our unaudited condensed consolidated financial statements and the accompanying notes to unaudited condensed consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, including (with respect to the three and six months ended December 31, 2021) the ongoing and potential impacts of the COVID-19 pandemic and related regulatory and government mandates and restrictions. Actual results may differ from these estimates.
Our critical accounting policies are those that are both material to the presentation of our financial condition and results of operations and require management’s most subjective and complex judgments. There have been no material changes or updates to our critical accounting policies and estimates during the three and six months ended December 31, 2021 as compared to the critical accounting policies and estimates disclosed in our June 30, 2021 10-K.
Off Balance Sheet Arrangements
None.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. For the reasons set forth below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Previously identified material weakness
During fiscal 2021, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not operating effectively at a reasonable assurance level. The material weaknesses identified during management’s assessment included insufficient period-end financial reporting controls as it relates to segregation of duties, reviews of completed or non-recurring transactions, and procedures for preparing the financial statements and disclosures, and insufficient controls as it relates to information technology and evaluation of operating effectiveness of information technology controls.
During fiscal 2022, and the six months ended December 31, 2021, we continue to implement remediation initiatives in response to the previously identified material weakness, including, but not limited to, initiating the hiring of additional experienced accounting and compliance personnel, and engaging with third party experts to strengthen the implementation of additional disclosure controls and procedures, including those designed to strengthen our segregation of duties and review processes related to accounting and financial statement presentation and disclosures. While we believe that these efforts have improved and will continue to improve our disclosure controls and procedures, remediation of the material weakness will require validation and testing of the operating effectiveness of disclosure internal controls over a sustained period of financial reporting cycles.
Our remediation efforts activities are ongoing and are subject to continued management review supported by ongoing design and testing. Notwithstanding the material weakness, our management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.
Changes in internal control over financial reporting
Other than our ongoing remediation efforts with respect to our disclosure controls and procedures, which extend to our internal control over financial reporting, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Inherent limitation on the effectiveness of internal control
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that they were owed $192,664, as well as warrants to purchase 1,417,909 shares of the Company’s common stock as compensation for their acting as the placement agent for the sale of the Company’s securities between June 2017 and 2018. This matter was brought to arbitration on December 7, 2020. On February 3, 2021, the arbitration awarded Boustead Securities, LLC $289,874 in damages and allowable costs (excluding attorneys’ fees) with interest accruing approximately $21 per day. The Company paid $294,051 to settle the arbitration award, inclusive of accrued interest, on August 24, 2021.
The Company at times may be involved in litigation relating to claims arising from its operations in the normal course of business. The Company is currently not involved in any litigation that it believes could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors
Other than the below, we believe there are no changes that constitute material changes from the risk factors previously disclosed in our Form 10-K, filed with the SEC on October 13, 2021.
Public health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally. Due to the outbreak of COVID-19, almost all major sports events and leagues were postponed or put-on hold, for the period of Apr 2020-June 2020. The cancelation of major sports events had a significant short-term negative effect on betting activity globally. As a result, iGaming operators faced major short-term losses in betting volumes. To date online casino operations have generally continued as normal without any noticeable disruption due to the COVID-19 outbreak. The virus’s expected effect on online casino activity globally is expected to be overall positive or neutral. Travel restrictions and border closures have not materially impacted our ability to manage and operate the day-to-day functions of our business. Management has been able to operate in a virtual setting. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to operate, but at present we do not expect these restrictions on personal travel to be material to our business operations or financial results.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2021, we issued 4,000 shares of common stock as compensation for services provided.
During the three months ended December 31, 2021, we issued 5,500 shares of common stock upon the exercise of stock options.
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Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosure
Not Applicable.
Item 5. Other Information
On February 22, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with an accredited investor (the “Holder”) whereby that certain existing senior convertible note of the Company, in the principal amount of $35,000,000 dated May 28, 2021 (the “Surrendered Note”), has been exchanged with a new senior convertible note in the aggregate principal amount of $35,000,000 (the “New Note”), upon entering into the Exchange Agreement.
The New Note bears interest at a rate of 8% per annum and matures on June 2, 2023 (the “Maturity Date”, subject to extension in certain circumstances, including bankruptcy and outstanding events of default). After the occurrence and during the continuance of an Event of Default (as defined in the New Note), the New Note will accrue interest at the rate of 12.0% per annum.
The New 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 New Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If we enter into any agreement to issue (or issue) any variable rate securities, the Holder has the additional right to substitute such variable price (or formula) for the conversion price.
If an Event of Default has occurred under the New Note, the Holder may elect to alternatively convert the New Note at the Alternate Conversion Price (as defined in the Convertible Note). In connection with an Event of Default, the Holder may require us to redeem in cash any or all of the New Note. The redemption price will equal 100% of the outstanding principal of the New Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or an amount equal to market value of the shares of our common stock underlying the New Note, as determined in accordance with the New Note, if greater.
The Holder will not have the right to convert any portion of a New Note, to the extent that, after giving effect to such conversion, the Holder (together with certain related parties) would beneficially own in excess of 4.99% of the shares of our common stock outstanding immediately after giving effect to such conversion. The Holder may from time to time increase this limit to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase.
In addition, unless we obtain the approval of our stockholders as required by Nasdaq, we are prohibited from issuing any shares of common stock upon conversion of the New Note or otherwise pursuant to the terms of the New Note, if the issuance of such shares of common stock would exceed 19.99% of our outstanding shares of common stock or otherwise exceed the aggregate number of shares of common stock which we may issue without breaching our obligations under the rules and regulations of Nasdaq.
In connection with a Change of Control (as defined in the Convertible Note), the Holder may require us to redeem all or any portion of the New Note. The redemption price per share will equal the greatest of (i) 115% of the outstanding principal of the New Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, (ii) 115% of the market value of the shares of our common stock underlying the New Note, as determined in accordance with the New Note, and (iii) 115% of the aggregate cash consideration that would have been payable in respect of the shares of our common stock underlying the New Note, as determined in accordance with the New Note.
At any time after the date we provide notice to the holder of our incurring of additional debt, the Holder will have the right to have us redeem all or a portion of the Convertible at a redemption price of 100% of the portion of the New Note subject to redemption.
We will be subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. We also will be subject to certain financial covenants relating to available cash, our ratio of debt to market capitalization and minimum cash flow relating to minimum revenue.
Subject to certain conditions as set forth in the New Note, we may redeem the New Note at a price equal to 100% of the outstanding principal of the New Note to be redeemed, together with accrued and unpaid interest and unpaid late charges thereon.
In addition, pursuant to the Exchange Agreement, the Company received a waiver, effective as of May 28, 2021, and through March 30, 2022 of any known breaches of the New Note.
Other than for the aforementioned, no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
| ESPORTS ENTERTAINMENT GROUP, INC. | ||
| Date: February 22, 2022 | By: | /s/ Grant Johnson |
Grant Johnson Chief Executive Officer, and Chairman of the Board of Directors (Principal Executive Officer) | ||
| Date: February 22, 2022 | By: | /s/ Daniel Marks |
Daniel Marks Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) | ||
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