UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended:
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Securities registered pursuant to Section 12(b) of the Act:
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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)
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As of May 20, 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 March 31, 2022
TABLE OF CONTENTS
| i |
Esports Entertainment Group, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, 2022 | 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 (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Liabilities to customers | ||||||||
| Deferred revenue | ||||||||
| Senior convertible note | - | |||||||
| Derivative liability | - | |||||||
| 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 $ | - | |||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock $ par value; shares authorized | - | - | ||||||
| Common stock $ par value; shares authorized, and shares issued and outstanding as of March 31, 2022 and June 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
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)
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Asset impairment charges | - | - | ||||||||||||||
| 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 on Senior Convertible Note | ( | - | ( | ) | - | |||||||||||
| 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)
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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 (Deficit)
For the Three and Nine Months Ended March 31, 2022 and 2021
(Unaudited)
| 10% Series A Cumulative Redeemable | Accumulated | Total | ||||||||||||||||||||||||||||||
| Convertible Preferred Stock | Common Stock | Additional paid-in | Accumulated | other comprehensive | Stockholders’ Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | loss | (Deficit) | |||||||||||||||||||||||||
| Balance as at July 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | | |||||||||||||||||||||
| 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 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||
| Common stock and warrants issued in equity financing, net of issuance costs | - | - | - | - | ||||||||||||||||||||||||||||
| Conversion of senior convertible note | - | - | - | - | ||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Common stock issued in equity financing, net of issuance costs | - | - | - | - | ||||||||||||||||||||||||||||
| Stock issued for EGL Acquisition | - | - | - | - | ||||||||||||||||||||||||||||
| Stock issued for FLIP Acquisition | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued upon the exercise of options and warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | ||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
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)
| Nine Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization and depreciation | ||||||||
| Asset impairment charges | - | |||||||
| 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 | - | |||||||
| Other non-cash charge, net | - | ( | ) | |||||
| 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 | ( | ) | ( | ) | ||||
| Other, net | - | ( | ) | |||||
| 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 Lucky Dino, net of cash acquired | - | ( | ) | |||||
| Cash consideration paid for EGL, 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 equity financing, net of issuance costs | ||||||||
| 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 leases | ( | ) | ( | ) | ||||
| 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:
| March 31, 2022 | March 31, 2021 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| June 30, 2021 | June 30, 2020 | |||||||
| Cash | $ | $ | ||||||
| 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)
| March 31, 2022 | March 31, 2021 | |||||||
| 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 | $ | $ | ||||||
| Right-of-use asset obtained in exchange for operating lease obligation | $ | $ | ||||||
| Finance lease asset obtained in exchange for financing lease obligation | $ | $ | ||||||
| Common stock issued for Argyll | $ | $ | ||||||
| Change in purchase price consideration related to warrant liability for Argyll acquisition | $ | $ | ||||||
| Settlement of Argyll acquisition warrant liability for common stock | $ | $ | ||||||
| Common stock issued for EGL | $ | $ | ||||||
| Contingent consideration payable for EGL | $ | $ | ||||||
| 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 EEG Labs, an analytics platform, and 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.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation and principles of consolidation
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Pursuant to the rules and regulations of the SEC, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full fiscal year. The unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual period ended June 30, 2021.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Reportable Segment
The Company determined it has one reportable segment. This determination considers the organizational structure of the Company and the nature of financial information available and reviewed by the chief operating decision maker to assess performance and make decisions about resource allocations.
| 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 (deficit).
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 unaudited condensed consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The
Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one
year from the date of issuance of these unaudited condensed consolidated financial statements. One such factor considered by the Company
is its compliance with certain debt covenants under terms of the Senior Convertible Note (the “Senior Convertible Note” or
“New Note”). The Company has not maintained compliance with certain debt covenants and is currently in default under the
terms of the Senior Convertible Note. On February 28, 2022 the Company exchanged the existing Senior Convertible Note (the “Old
Senior Convertible Note”) with the New Note resulting in the increase of the principal outstanding balance of indebtedness from
the carrying value of $
In
addition to compliance with debt covenants, the Company has considered historical losses and negative cash flows from operations
in its evaluation of going concern. The Company has also considered its liquidity and future market and economic conditions as it relates
to obtaining financing and generating future profits. On March 2, 2022 the Company closed an offering (the “March 2022 Offering”)
in which it sold units at $consisting of one share of common stock and one
warrant for a total of
The Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations without additional financing. Although the Company has financing available, as further described below, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the Company and the esports and iGaming industry. The combination of these conditions was determined to raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.
In
determining whether 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 potential proceeds from
the exercise of the
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 unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.
| 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. The ongoing impacts of the COVID-19 pandemic has introduced material uncertainty and risk with respect to the Company and its performance, especially as it relates to in-person attendance at events and game centers.
The Company has previously indicated that a significant or prolonged decrease in consumer spending on entertainment or leisure activities may have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations. During the three months ended March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers is not expected to attain levels previously forecasted. As such, the Company recognized an impairment of long-lived assets held by its EGL, and Helix businesses and impairment of goodwill held by its EGL, GGC and Helix businesses. See Notes 6, 7 and 11 for discussion of the asset impairment charges.
The ultimate impact of the COVID-19 pandemic on other areas of the business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the continuing 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 March 31, 2022 and June 30, 2021 the Company did not have any financial instruments classified as cash equivalents. At
times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
Accounts are insured by the FDIC up to $
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.
| 9 |
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 unaudited condensed 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 currently 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 digital assets, and the pattern of actual sales of digital assets 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. Impairment losses of the Company’s digital assets were not material to the unaudited condensed consolidated financial statements for the three or nine months ended March 31, 2022.
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 digital assets 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 nine months ended March 31, 2022 and 2021 was not material to the unaudited condensed consolidated financial statements. At March 31, 2022, the Company’s digital assets were not material to the unaudited condensed consolidated financial statements.
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Goodwill
Goodwill represents the excess of fair value of consideration paid for an acquired entity over the fair value of the assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but rather it is tested for impairment at the reporting unit level on an annual basis on April 1 for each fiscal year, or more often if events or changes in circumstances indicate that more likely than not the carrying amount of the asset may not be recoverable. A reporting unit represents an operating segment or a component of an operating segment. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a single reporting unit is less than its carrying amount. If it is determined that the fair value is less than its carrying amount, the excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss in accordance with Accounting Standards Update (“ASU”) No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The Company utilizes a discounted cash flow analysis, referred to as an income approach, and uses internal and market multiples, to assess reasonableness of assumptions, to determine the estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including anticipated revenue growth rates, discount rates, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on our operating and capital forecasts. As a result, actual results may differ from the estimates utilized in our income approach. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, the Company also considers the combined fair values of our reporting units to a reasonable market capitalization of the Company. The Company may elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test.
During
the three and nine months ended March 31, 2022, the Company recognized goodwill impairment charges of $
Intangible assets
Intangible
assets with determinable lives consist of player relationships, developed technology and software, tradename and gaming licenses. Intangible
assets with determinable lives are amortized on a straight-line basis over their estimated useful lives of
Impairment of Long-Lived Assets
Equipment
and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and
circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of
future undiscounted cash flows are determined through estimated disposition date of the asset. To the extent that estimated future
undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to
the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. An
estimation of future cash flows requires significant judgment as the Company makes assumptions about future results and market
conditions. Since the determination of future cash flows is an estimate of future performance, there may be impairments recognized
in future periods in the event future cash flows do not meet expectations. The Company recognized $
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.
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Derivative Instruments
The Company evaluates its convertible notes and equity instruments, as well as warrants, to determine if those contracts or embedded components of those contracts qualify as derivatives (Note 12). The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability (Note 17). In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense (Note 17).
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.
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. Certain long-lived assets may be periodically required to be measured at fair value on a nonrecurring basis, including long-lived assets that are impaired. The fair value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been determined to approximate carrying amounts due to the short maturities of these instruments. The fair value of the Senior Convertible Note and lease liabilities approximate their carrying value based on current interest and discount rates.
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.
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Common stock options | ||||||||
| Common stock warrants | ||||||||
| Common stock issuable upon conversion of senior convertible note | ||||||||
| 10% Series A cumulative redeemable convertible preferred stock | ||||||||
| 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 when gaming stations are not in use by the end user. The software allows the participating game center operators to contribute their computer power for the purpose of adding a block to the blockchain within a mining pool where the Company and the participating game center operators are participants. The Company’s software enables the participating game center operators to enter into mining pools with mining pool operators to provide computing power to the mining pool to mine cryptocurrency digital assets. The Company and the participating game center operators are 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 and participating game center operators’ fractional share is based on the proportion of computing power 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 crypto currency (i.e. Ethereum), for successfully adding a block to the blockchain. The Company records a payable for the amount due to each participating game center operator, in the form of U.S. dollars, based on the participating game center operators’ computing power contributed toward the mining of the award less a fee charged by the Company. The amounts due to the participating game center operators are paid in U.S. dollars. The Company recognizes the fair value of the digital awards, net of fees and amounts payable to the game center operators, as revenue at the time the digital award is added to the blockchain using the price of the digital coin quoted in U.S. dollars. The transaction consideration of the digital award the Company receives, if any, is non-cash consideration. The Company records revenue on a net basis as it has determined it is the agent in the transactions with the mining pool and facilitates the provision of the computing power and payments for the participating game center operators. 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 the digital asset 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. 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 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.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASC 350). The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The guidance is effective for the fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company adopted this standard for its interim impairment test performed at March 31, 2022. See Note 7 for additional information regarding the results of the impairment test performed on its goodwill and intangible assets.
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.
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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:
| 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:
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 nine months ended March 31, 2021 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 nine months ended March 31, 2021 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 nine months ended March 31, 2022, with any differences resulting from the acquisition of Bethard on July 13, 2021 assessed as immaterial.
The pro forma results of operations for the three and nine months ended March 31, 2021 were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had these acquisitions been made as of July 1, 2020 and may not be useful in predicting the future results of operations for the Company. The actual results of operations may differ materially from the pro forma amounts included in the table below:
| Three months ended March 31, 2021 | Nine months March 31, 2021 | |||||||
| Net revenue | $ | $ | ||||||
| Net loss | $ | $ | ||||||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | ||
| 18 |
The pro forma operating results of operations for the three and nine months ended March 31, 2021 are based on the individual historical results of the Company and the businesses acquired, with adjustments to give effect as if the acquisitions had occurred on July 1, 2020, after giving effect to certain adjustments including the amortization of intangible assets and depreciation of equipment resulting from the acquisitions.
Note 4 – Other Receivables
The components of other receivables are as follows:
| March 31, 2022 | 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:
| March 31, 2022 | 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:
| March 31, 2022 | 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:
Nine months ended March 31, 2022 | ||||
| Goodwill, balance at beginning of year | $ | |||
| Acquisition of Bethard | ||||
| Impairment charges | ( | ) | ||
| Foreign currency translation – Fiscal 2022 | ( | ) | ||
| Goodwill, balance at end of period | $ | |||
The Company tests its goodwill for impairment annually on April 1. However, during the third quarter the Company concluded that goodwill impairment indicators existed based on the significant volatility in the Company’s stock price where the Company experienced a sustained reduction from the middle of the quarter through March 31, 2022 and subsequently. As of March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers is not expected to attain levels previously forecasted and that under the current liquidity and investment constraints it is less likely to reach the previously forecasted revenue and profits for EGL and GGC. These factors and the continuing impacts of the COVID-19 pandemic, uncertainties caused by inflation and world stability, resulted in the Company evaluating its goodwill and long-lived assets, including intangible assets, for impairment as of March 31, 2022.
The Company performed an interim
impairment test on its long-lived assets, including its definite-lived intangible assets using an undiscounted cash flow analysis to
determine if the cash flows expected to be generated by the asset groups over the estimated remaining useful life of the primary
assets were sufficient to recover the carrying value of the asset groups, which were determined to be at the reporting unit level.
Based on the circumstances described above as of March 31, 2022, the Company determined its EGL, Helix, and GGC asset groups failed
the undiscounted cash flow recoverability test. Accordingly, the Company estimated the fair value of its individual long-lived
assets to determine if any asset impairment charges were present. The Company’s estimation of the fair value of the
definite-lived intangible assets included the use of discounted cash flow and cost analyses, reflecting estimates of future
revenues, royalty rates, cash flows, discount rates, development costs and obsolescence. Based on these analyses, the Company
concluded the fair values of certain intangible assets were lower than their current carrying values, and at March 31, 2022, the
Company recognized impairment of $
In accordance with ASC 350, for goodwill, after
considering the above asset impairment charges to the asset groups, the Company performed an interim impairment test as of March
31, 2022 that compared the estimated fair value of each reporting unit to their respective carrying values. The estimated fair value
of each reporting unit was derived primarily by utilizing a discounted cash flows analysis. The results of the impairment tests
performed indicated that the carrying value of the EGL, GGC and Helix reporting units exceeded their estimated fair values determined
by the Company. Based on the results of the March 31, 2022 interim goodwill impairment testing procedures, the Company recognized
impairments of goodwill totaling $
The assumptions used in the cost and undiscounted and discounted cash flow analyses require significant judgment, including judgment about appropriate growth rates, and the amount and timing of expected future cash flows. The Company’s forecasted cash flows were based on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions used in the cash flows were revenue growth rates, operating expenses and gross margins and the discount rates in the discounted cash flows. The assumptions used consider the current early growth stage of the Company and the emergence from a period impacted by COVID-19. The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its procedures for estimating future cash flows for each reporting unit, asset group and intangible asset are reasonable and consistent with current market conditions as of the testing date. If the markets that impact our business continue to deteriorate, the Company could recognize further goodwill and long-lived asset impairment charges.
In total, as described in detail above, the Company
recorded $
There were
The intangible amounts comprising the intangible asset balance are as follows:
| March 31, 2022 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Tradename | $ | $ | ( | ) | $ | |||||||
| Developed technology and software | ( | ) | ||||||||||
| Gaming licenses | ( | ) | ||||||||||
| Player relationships | ( | ) | ||||||||||
| Internal-use software | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| June 30, 2021 | ||||||||||||
| 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-lived intangible assets, including amortization related to the preliminary allocation of fair value to the intangible assets of Bethard, are as follows:
| 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:
| March 31, 2022 | 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:
| March 31, 2022 | 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 services from a member of its Board of Directors through a consultancy agreement dated August 1, 2020 and an employment
agreement dated June 15, 2020. The consultancy agreement requires payments of £
The Company retained the services of its Chief Financial Officer through
a consultancy agreement dated April 2, 2022 and an employment agreement dated April 2, 2022. The Company remits monthly payments to its
Chief Financial Officer of NZD
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 June 2020 the Company commenced a finance lease for computer equipment for one of its owned and operated game centers. The lease has
annual payments of $
Condensed Consolidated Balance Sheet Caption | March 31, 2022 | 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 | $ | $ | |||||||
| Finance lease liabilities | Current portion of notes payable and other long-term debt | |||||||||
| Long-term: | ||||||||||
| Operating lease liabilities | Operating lease liability - non-current | |||||||||
| Finance lease liabilities | Notes payable and other long-term debt | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| 21 |
The
Company recognized in asset impairment charges in the unaudited condensed consolidated statements of operations, $
Weighted average remaining lease terms and discount rates follow:
| March 31, 2022 | 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 March 31, 2022 follows:
| 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:
| March 31, 2022 | June 30, 2021 | |||||||
| Notes payable | $ | $ | ||||||
| Finance lease obligation (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:
| 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, the Old Senior Convertible Note before it was exchanged for the New Note
on February 22, 2022. The Old Senior Convertible Note was issued to the Holder in the principal amount of $
The
Old Senior Convertible Note was convertible, at the option of the Holder, into shares of the Company’s common stock at a conversion
price of $
On
February 22, 2022, the Company agreed to enter into the Exchange Agreement with the Holder whereby the Old Senior Convertible Note
of the Company, with a remaining principal amount of $
The
interest rate on the Old Senior Convertible Note from June 2, 2022 through February 22, 2022, and
The
New Note is convertible, at the option of the Holder, into shares of the Company’s common stock at a conversion price of $
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 New 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
| 23 |
In addition, unless approval of our stockholders as required by Nasdaq Stock Market LLC (“Nasdaq”) is obtained, the Company is prohibited from issuing any shares of common stock upon conversion of the New Note or otherwise pursuant to the terms of the New Note, if the issuance of such shares of common stock would exceed of our outstanding shares of common stock or otherwise exceed the aggregate number of shares of common stock which the Company may issue without breaching our obligations under the rules and regulations of Nasdaq. Should the holder convert the principal balance outstanding at March 31, 2022 at the Alternate Conversion Price that is currently available to the holder, or a portion of the principal balance, the Company may be subject to remit amounts to the holder materially in excess of the principal balance outstanding through payment of cash. Refer also to discussion of the Alternate Conversion below for further discussion of this settlement option available to the Holder.
In
connection with a Change of Control (as defined in the New Note), the Holder may require us to redeem all or any portion of the New Note.
At
any time after the date the Company provides 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
Under the New Note, and consistent with the Old Senior Convertible Note, the Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. The Company is also subject to certain financial covenants relating to available cash, our ratio of debt 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
New Note is subject to a most favored nation provision and standard adjustments in the event of any stock split, stock dividend, stock
combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue, or issue any variable
rate securities, the Holder of the New Note has the additional right to substitute such variable price (or formula) for the conversion
price. If the Holder were to substitute a floor price of $
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
| 24 |
As discussed above, during the three months ended December 31, 2021, the Company had not maintained compliance with the covenants of the Senior Convertible Note, having identified non-compliance with the same financial covenants previously identified at September 30, 2021. The Company obtained a waiver from the compliance with certain covenants, as of December 31, 2021 and through March 30, 2022. The Company further entered into a non-binding term sheet dated February 22, 2022, to restructure the New Note to mitigate the risk of default on the covenants in future periods. This term sheet expired without a new debt facility being completed. Since the expiration of the waiver on March 30, 2022, the Company is not in compliance with its covenants. The Company is in default and has continued to recognize its obligation under the Senior Convertible Note as a current liability at March 31, 2022 in the unaudited condensed consolidated balance sheet. The Company has not remitted payment to the Holder of the Senior Convertible Note an amount equal to 30% of the gross proceeds from the March 2022 Offering to be applied as a reduction of principal (see Note 16).
The
Company previously determined that it had not maintained compliance with its Senior Convertible Note covenants at September 30, 2021.
The Company therefore requested and received a waiver dated October 13, 2021 for (i) any known breaches or potential breaches of financial
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 Note 3 for discussion of the Bethard acquisition) and (iii) any known breach which would result from
the Company’s announcement that it would purchase an equity interest in Game Fund Partners Group LLC through the contribution of
up to shares of common stock.
In
consideration for the October 13, 2021 waiver, the Company agreed to permit the conversion of up to $
The
Company also previously obtained a waiver from the Holder of the Old Senior Convertible Note on November 2, 2021 in connection with its
announcement to commence an underwritten registered public offering of its
| 25 |
Make-Whole Derivative Liability
The New Note agreement includes provision
that should the Company be in both
breach of its debt covenants and its price per common share trade below the Conversion Floor Price of $
The make-whole provision in the New Note is a derivative liability. The Company’s obligation to make a payment under the make-whole provision previously assessed as remote with an immaterial fair value. This considered that the Company had previously obtained debt waivers from the holder for its breaches of debt covenants. The Company’s historical stock price had also traded at levels significantly in excess of the Conversion Floor Price. The Company had further signed a non-binding term sheet on February 22, 2022 (in combination with entering into the New Note) for the purpose of revising the debt covenants that were to be included in a revised or amended note agreement. At March 31, 2022, the Company was unable to complete an agreement to restructure the terms and covenants of the New Note. The stock price further continued to trade materially below the Conversion Floor Price and the Company was also unable to secure a debt waiver. The make-whole provision was determined to represent a liability of the Company and the fair value of the derivative liability at March 31, 2022 was determined using a Monte Carlo valuation model. See Note 17 for further discussion of the fair value determined for the derivative liability.
At March 31, 2022, the Company estimates that
it would be required to issue up to shares of common stock under the Alternate Conversion provisions of the New Note. The Company further estimated the derivative
liability to the holder to be $
Warrants
March 2022 Warrants
On
March 2, 2022 the Company completed the March 2022 Offering, an equity offering in which it sold units at $consisting of one share of common stock and one
warrant for a total of
The
March 2022 Warrants may be exercised at any time after issuance for one share of common stock of the Company at an exercise price of
$
The
Company determined the March 2022 Warrants should be classified as a liability as the warrants are redeemable for cash in the event of
a fundamental transaction, as defined in the Common Stock Purchase Warrant agreement, which includes a change in control. The Company
has recorded a liability for the March 2022 Warrants at fair value on the issuance date with subsequent changes in fair value reflected
in earnings. At March 2, 2022, the date of the common stock issuance, the Company determined the total fair value of the March 2022 Warrants
to be $
Series A and Series B 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 Old Senior Convertible Note were allocated to the Series A Warrants and Series B Warrants using
the with-and-without method. Under this method, the Company first allocated the proceeds from the issuance of the Old Senior
Convertible Note to the Series A Warrants and Series B Warrants based on their initial fair value measurement, and then allocated
the remaining proceeds to the Old Senior Convertible Note. The debt discount on the Old Senior Convertible Note was being amortized
over its term of two years. The Company accelerated the amortization of the debt discount on the Old Senior Convertible Note during
the second quarter resulting in the Company recording of a loss on extinguishment of $
| 26 |
Components of Long-Term Debt
The components of our long-term debt including the Senior Convertible Note on the unaudited condensed consolidated balance sheet at March 31, 2022 follows:
| 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 from
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 March 31, 2022, the commitments under these agreements are estimated
at $
| 27 |
Contingencies
The Company at times may be involved in pending or threatened litigation relating to claims arising from its operations in the normal course of business. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time.
In determining the appropriate level of specific liabilities, if any, the Company considers a case-by-case evaluation of the underlying data and updates our evaluation as further information becomes known. Specific liabilities are provided for loss contingencies to the extent the Company concludes that a loss is both probable and estimable. The Company did not have any liabilities recorded as of March 31, 2022 or June 30, 2021. However, the results of litigation are inherently unpredictable, and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity.
In
September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that they were owed $
Other than discussed above, the Company is currently not involved in any other litigation that it believes could have a material adverse effect on our financial condition or results of operations as reported in these unaudited condensed consolidated financial statements.
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 nine months ended March 31, 2022 and 2021 is as follows:
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Online betting and casino revenues | $ | $ | $ | $ | ||||||||||||
| Esports and other revenues | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
A summary of revenue by geography for the three and nine months ended March 31, 2022 and 2021 is as follows:
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
A summary of long-lived assets by geography is as follows:
| March 31, 2022 | 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 $
| 28 |
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
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 March 31, 2022 because a deemed liquidation event is not considered probable.
The 10% Series A Cumulative Redeemable Convertible Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable, and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the 10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares of 10% Series A Cumulative Redeemable Convertible Preferred Stock have been presented outside of permanent equity in mezzanine equity on the 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.
| 29 |
Note 16 – Equity
Common Stock
The following is a summary of common stock issuances for the nine months ended March 31, 2022:
| ● | During
the nine months ended March 31, 2022, as part of the March 2022 Offering, the Company sold units at $,
consisting of one share of common stock and one warrant with an exercise price of $ |
| ● | During the nine months ended March 31, 2022, the Company issued shares of common stock for services with a weighted average fair value of $ per share. |
| ● | During
the nine months ended March 31, 2022, the Company issued shares of common stock from the exercise
of stock options with a weighted average exercise price of $per share
or $ |
| ● | During
the nine months ended March 31, 2022, the Company issued shares of common stock, with aggregate proceeds of $ |
| ● | During
the nine months ended March 31, 2022, the holder of the Senior Convertible Note converted an aggregate conversion value of $ |
The following is a summary of common stock issuances for the nine months ended March 31, 2021:
| ● | On
February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors
resulting in the raise of $ |
| ● | During
the nine months ended March 31, 2021, the Company issued shares of common stock as a component of the purchase consideration
for Argyll. The Company recorded the issuance of these shares at fair value in the amount of $ |
| ● | During
the nine months ended March 31, 2021, the Company issued a total of shares of common stock as a component of the purchase
consideration for FLIP, inclusive of share consideration paid to settle a portion of the purchase consideration that was recorded
as a contingent liability. The Company recorded the issuances of these shares at a total fair value of $ |
| ● | During
the nine months ended March 31, 2021, the Company issued shares of common stock as a component of the purchase consideration
for EGL. The Company recorded the issuance of these shares at fair value in the amount of $
|
| ● | During
the nine months ended March 31, 2021, the Company issued shares of common stock for the exercise of options and warrants
with a weighted average exercise price of $ per share or $ |
| ● | During
the nine months ended March 31, 2021, the Company issued
|
| ● | During
the nine months ended March 31, 2021, the Company issued shares of its common stock for services rendered with a weighted
average fair value of $ per share or $ |
At-the Market Equity Offering Program
On
September 3, 2021, the Company entered “at the market” equity offering program to sell up to an aggregate of $
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Common Stock Warrants
On
March 2, 2022, the Company closed an offering March 2022 Offering, in which it sold units at $ consisting of one share
of common stock and one warrant exercisable at any time after issuance for one share of common stock of the Company for a total of
On
July 31, 2020, the Company issued
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 $
A summary of the warrant activity follows:
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Intrinsic Value | |||||||||||||
| Outstanding, July 1, 2020 | $ | $ | ||||||||||||||
| 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 | ||||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or cancelled | ||||||||||||||||
| Outstanding, March 31, 2022 | $ | $ | ||||||||||||||
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.
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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 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Cancelled | ( | ) | ||||||
| Outstanding, March 31, 2022 | $ | |||||||
As of March 31, 2022, the weighted average remaining life of the options outstanding was years. There are options exercisable at March 31, 2022, with a weighted average exercise price of $.
Stock Based Compensation
During the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense of $ and $, respectively and during the nine months ended March 31, 2022 and 2021, 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.
As of March 31, 2022, unamortized stock compensation for stock options was $ with a weighted-average recognition period of years. The options granted during the nine months ended March 31, 2022 were valued using the Black-Scholes option pricing model using the following weighted average assumptions:
| Nine months ended March 31, 2022 | ||||
| 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:
| March 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Contingent consideration (Note 3) | $ | $ | $ | $ | ||||||||||||
| Liability for the March 2022 Warrants (Note 12) | $ | $ | $ | $ | ||||||||||||
| Liability for the Series A and Series B Warrants (Note 12) | $ | $ | $ | $ | ||||||||||||
| Derivative liability on Senior Convertible Note (Note 12) | $ | $ | $ | $ | ||||||||||||
| June 30, 2021 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liability for the Series A and Series B Warrants (Note 12) | $ | $ | $ | $ | ||||||||||||
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A summary of the changes in Level 3 financial instruments for the three and nine months ended March 31, 2022 is as follows:
| Warrant Liability | Contingent Consideration | Derivative liability on Senior Convertible Note |
||||||||||
| 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 | ||||||||||||
| 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) | ( | ) | — | — | ||||||||
| Change in the fair value of the derivative liability on Senior Convertible Note (Note 12) | — | — | ||||||||||
| Balance at March 31, 2022 | $ | $ | $ | |||||||||
The Series A and Series B Warrants outstanding at March 31, 2022 were valued using a Monte Carlo valuation model with the following assumptions:
| March 31, 2022 | June 30, 2021 | |||||||
| Contractual term, in years | – | – | ||||||
| Expected volatility | % – | % | % – | % | ||||
| Risk-free interest rate | % – | % | % – | % | ||||
| Dividend yield | ||||||||
| Conversion / exercise price | $ | $ | ||||||
The value of the March 2022 Warrants issuance at March 2, 2022 were valued using a Monte Carlo valuation model with the following assumptions:
| March 2, 2022 | ||||
| Contractual term, in years | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | ||||
| Conversion / exercise price | $ | |||
On issuance, the March 2022 Warrants were classified as a Level 3 instrument and were subsequently transferred out of Level 3 and classified as a Level 1, as subsequent valuations were based upon the market price of the warrants. At March 31, 2022 the March 2022 Warrants were valued using the market price.
The value of the derivative liability on Senior Convertible Note at March 31, 2022 were valued using a Nonperformance risk adjusted Monte Carlo valuation model with the following assumptions:
| March 31, 2022 | ||||
| Contractual term, in years | ||||
| Expected volatility | % | |||
| Asset volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | ||||
| Conversion / exercise price | $ | |||
The
fair value of a derivative instrument in a liability position includes measures of the Company’s nonperformance risk. Significant
changes in nonperformance risk used in the fair value measurement of the derivative liability may result in a significantly changes to
the fair value measurement. The cash liability calculated under the terms of the New Note of approximately
$
The following is information relative to the Company’s derivative instruments in the condensed consolidated balance sheet as of March 31, 2022:
| Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | March 31, 2022 | June 30, 2021 | |||||||
| Derivative liability on Senior Convertible Note (Note 12) | Derivative liability | $ | $ | |||||||
The effect of the derivative instruments on the unaudited condensed consolidated statements of operations is as follows:
| Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||||||||||||
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income on Derivatives | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Derivative liability on Senior Convertible Note (Note 12) | Change in fair value of derivative liability on Senior Convertible Note | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
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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
Assets Measured on a Nonrecurring Basis
Assets that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment. The Company’s estimates of fair value required it to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain. The carrying value of the assets after any impairment approximates fair value.
The Company assesses the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses the fair value of goodwill, using the income approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant.
The Company uses undiscounted future cash flows of the asset or asset group for equipment and intangible assets. During the three and nine months ended March 31, 2022, the Company wrote down certain long-lived assets other than goodwill related to the same reporting unit to fair value. The Company estimated the fair value when conducting the long-lived asset impairment tests primarily using an income approach and used a variety of unobservable inputs and underlying assumptions consistent with those discussed above for purposes of our goodwill impairment test.
During the three and nine months ended March 31, 2022, the Company recognized asset impairment charges to the goodwill and long-lived assets of the EGL, GGC and Helix reporting units (See Notes 6, 7 and 11).
Note 18 – Income Taxes
The Company’s provision for income taxes for the three and nine months ended March 31, 2022 and 2021 is as follows:
| Three months ended | Nine months ended | |||||||||||||||
| March 31 | March 31 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Income tax benefit (expense) | $ | ( | ) | $ | $ | $ | ||||||||||
| 34 |
Management’s
expected annualized effective tax rate would be
For
the nine months ended March 31, 2022, the Company
recorded a discrete income tax benefit of $
Note 19 – Subsequent Events
Over-Allotment option
On
April 1, 2022 the underwriters of the March 2022 Offering exercised the Over-Allotment option of
Failure to Satisfy Nasdaq Continued Listing Rule or Standard
On April 11, 2022, the Company received a deficiency notification letter from the Listing Qualifications Staff of the Nasdaq Stock Market LLC indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $ per share for the previous 30 consecutive business days.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days from the date of such notice, or until October 8, 2022, to regain compliance with the minimum bid price requirement. To regain compliance, the bid price for the Company’s common stock must close at $ per share or more for a minimum of 10 consecutive business days.
Nasdaq’s written notice has no effect on the listing or trading of the Company’s common stock at this time, and the Company is currently evaluating its alternatives to resolve this listing deficiency.
| 35 |
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 March 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. |
| 36 |
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.
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 Game Centers), 2) online tournaments (through our EGL tournament platform), and 3) player-vs-player wagering (through our proprietary wagering 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. The ongoing impacts of the COVID-19 pandemic has introduced material uncertainty and risk with respect to the Company and its performance, especially as it relates to in-person attendance at events and game centers.
The Company has previously indicated that a significant or prolonged decrease in consumer spending on entertainment or leisure activities may have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations. During the three months ended March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers is not expected to attain levels previously forecasted. As such, the Company recognized an impairment of long-lived assets held by its Helix game center business and impairment of goodwill held by EGL and GGC business. See Note 6, 7 and 11 for discussion of the asset impairment charges.
The ultimate impact of the COVID-19 pandemic on other areas of the business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the continuing 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.
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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 March 31, 2022 and 2021
Revenue
Revenue totaled $15.7 million in the three months ended March 31, 2022, an increase of $10.3 million, or 191%, from the $5.4 million recorded in the three months ended March 31, 2021. The increase is primarily 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 and GGC that was also acquired during the fiscal year ended June 30, 2021.
Cost of Revenue
Cost of revenue totaled $6.3 million in the three months ended March 31, 2022, an increase of $4.0 million, or 174%, from the $2.3 million recorded in the three months ended March 31, 2021. The increase is primarily attributable to the iGaming operations of Lucky Dino, Argyll and Bethard acquisitions and includes $2.7 million for additional payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $0.9 million for the game provider expenses and $0.4 million higher other direct expenses related to the delivery of services.
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Sales and Marketing
Sales and marketing expense totaled $7.1 million in the three months ended March 31, 2022, an increase of $4.7 million, or 196%, over the $2.4 million recorded for the three months ended March 31, 2021. The increase was primarily attributable to $3.9 million higher marketing affiliate costs related to iGaming services, $0.6 million in additional sponsorship agreements with professional sports clubs and our service partners and $0.2 million higher other advertising and promotion expenses including event promotion.
General and Administrative
General and administrative expense totaled $14.3 million for the three months ended March 31, 2022, an increase of $8.0 million, or 127%, over the $6.3 million recorded for the three months ended March 31, 2021. The increase was primarily attributable to increases of $4.5 million in payroll costs, 2.6 million depreciation and amortization, $2.0 million related to other general and administrative cost including incremental costs for information technology related disbursements, and $0.3 million in professional fees, including accounting and legal expenses. This was offset by $1.4 million less transaction costs than the corresponding prior period.
Impairment
The Company experienced a sustained reduction of its share price during the second half of the three months ended March 31, 2022. The Company’s market capitalization implied an enterprise value which was significantly less than the sum of the estimated fair values of our reporting units, and as previously indicated, that with COVID-19 continuing and a significant or prolonged decrease in consumer spending on entertainment or leisure activities having 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, we determined that an indicator of a goodwill impairment was present as of March 31, 2022. During the three months ended March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers is not expected to attain levels previously forecasted and that under the current liquidity and investment constraints it is less likely to reach the previously forecasted revenue and profits in EGL and GGC. Therefore, the Company recognized $38.6 million of asset impairment charges of long-lived assets, including $23.1 million of goodwill and $15.5 million of long-lived assets in the EGL, GGC and Helix reporting units, for the three months ended March 31, 2022. There were no impairment charges for the three months ended March 31, 2021.
Other Income (expense)
Other income (expense), net changed $6.1 million from an expense of $6.8 million for the three months ended March 31, 2021 to an expense of $12.9 million for the three months ended March 31, 2022. The change from other expense to other income for the three months ended March 31, 2022 results primarily from the $20.6 million derivative liability on senior convertible note expense and $0.6 million interest expense on the New Note offset by the $8.2 million gain on the fair value of warrants in the three months ended March 31, 2022. The fair value of the Series A and Series B warrant liabilities was determined using a Monte Carlo valuation model. The Series A and Series B Warrants, fair value decreased from $3.1 million as of December 31, 2021 to $0.3 million. The 15 million warrants issued as part of the March 2022 equity offering were initially valued using a Monte Carlo Valuation Model and then subsequently using the market value of the publicly traded warrants. The March 2022 Warrants decreased $5.4 million from initial fair value of $9.5 million as of March 2, 2022 to $4.1 million as of March 31, 2022, resulting in a total gain of $8.2 million. During the three months ended March 31, 2021, the Company recorded a $5.4 million loss related to the settlement of the warrant liability recorded in connection with the acquisition of Argyll through issuance of common stock and a $1.3 million loss to settle the contingent liability established in connection with the acquisition of FLIP through the issuance of common stock in the three months ended March 31, 2021.
Comparison of the nine months ended March 31, 2022 and 2021
Revenue
Revenue totaled $46.6 million in the nine months ended March 31, 2022, an increase of $38.6 million, or 483%, from the $8.0 million recorded in the nine months ended March 31, 2021. The increase is primarily attributable to the iGaming operations of Lucky Dino and Argyll that were acquired during the fiscal year ended June 30, 2021 and Bethard that was acquired in July 2021 and GGC that was also acquired during the fiscal year ended June 30, 2021.
Cost of Revenue
Cost of revenue totaled $19.2 million in the nine months ended March 31, 2022, an increase of $15.0 million, or 357%, from the $4.2 million recorded in the nine months ended March 31, 2021. The increase is primarily attributable to the iGaming operations of Lucky Dino, Argyll and Bethard acquisitions and includes $9.6 million for additional payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $4.1 million additional for the game provider expenses and $1.3 million higher other direct expenses related to the delivery of services.
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Sales and Marketing
Sales and marketing expense totaled $21.3 million in the nine months ended March 31, 2022, an increase of $16.4 million, or 335%, over the $4.9 million recorded for the nine months ended March 31, 2021. The increase was primarily attributable to $12.0 million higher marketing affiliate costs related to iGaming services, $3.0 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 $38.7 million for the nine months ended March 31, 2022, an increase of $24.6 million, or 174%, over the $14.1 million recorded for the nine months ended March 31, 2021. The increase was primarily attributable to increases of $12.0 million in payroll costs, $8.4 million depreciation and amortization, $4.6 million related to other general and administrative cost including incremental costs for information technology related disbursements, and $0.8 million in professional fees, including accounting and legal expenses. This was offset by $1.2 million less transaction costs than the prior period.
Impairment
The Company experienced a sustained reduction of its share price during the second half of the three months ended March 31, 2022. The Company’s market capitalization implied an enterprise value which was significantly less than the sum of the estimated fair values of our reporting units, and as previously indicated, that with COVID-19 continuing and a significant or prolonged decrease in consumer spending on entertainment or leisure activities may have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and revenues, we determined that an indicator of a goodwill impairment was present as of March 31, 2022. During the three months ended March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers is not expected to attain levels previously forecasted and that under the current liquidity and investment constraints it is less likely to reach the previously forecasted revenue and profits in EGL and GGC. Therefore, the Company recognized $38.6 million of asset impairment charges of long-lived assets, including $23.1 million of goodwill and $15.5 million of long-lived assets in the EGL, GGC and Helix reporting units, for the nine months ended March 31, 2022. There were no impairment charges for the nine months ended March 31, 2021.
Other Income (expense)
Other income (expense), net changed $26.4 million from an expense of $6.3 million for the nine months ended March 31, 2021 to an expense of $32.7 million for the nine months ended March 31, 2022. The other expense for the nine months ended March 31, 2022 results primarily from the $22.1 million derivative liability on senior convertible note expense, $28.5 million of loss on extinguishment primarily attributable to amortization of the debt discount, $6.0 million loss on the conversion of the Senior Convertible Note, driven by the conversion of a principal provided to the Senior Convertible Note holder as part of the October 13, 2021 waiver provided on the covenants related to the Senior Convertible Note and $5.4 million in interest expense. These expenses were offset by other income primarily made up of $2.0 million for the change in the fair value of the contingent consideration due as part of the Bethard transaction and $28.6 million from the reduction in fair value of the warrant liability. Consistent with the valuation methods discussed above, the Series A and Series B Warrants, fair value decreased from $23.5 million as of June 30, 2021 to $0.3 million and the March 2022 Warrants decreased from initial fair value of $9.5 million as of March 2, 2022 to $4.1 million as of March 31, 2022, resulting in a total gain of $28.6 million. During the nine months ended March 31, 2021, the majority of the expense was from the $4.7 million loss related to the settlement of the warrant liability recorded in connection with the acquisition of Argyll through issuance of common stock and the $1.3 million loss to settle the contingent liability established in connection with the acquisition of FLIP through the issuance of common stock.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see 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 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. One such factor considered by the Company is its compliance with certain debt covenants under terms of the Senior Convertible Note (the “Senior Convertible Note” or “New Note”). The Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible Note. On February 28, 2022 the Company exchanged the existing Senior Convertible Note (the “Old Senior Convertible Note”) with the New Note resulting in the increase of the principal outstanding balance of indebtedness from the carrying value of $29.1 million, as adjusted for the conversions of principal and Premium on Principal through February 22, 2022, to $35.0 million. The New Note is classified as a current liability on the unaudited condensed consolidated balance sheet as it may be redeemed by the holder prior to its maturity date. The Company has also recorded a derivative liability for the alternate conversion in the Senior Convertible Note of $20,573,051 in current liabilities on the unaudited condensed consolidated balance sheet million that may be due to the holder as part of the make-whole liability under the default terms of the Senior Convertible Note. The cash liability calculated under the terms of the New Note of approximately $80,000,000 is materially higher than the fair value of the derivative liability of $20,573,051 calculated at March 31, 2022. The calculated make-whole liability may differ materially from the amount at which the Company may be required to pay under the New Note. The Company has held non-binding discussions with the Holder to restructure its obligation under the New Note. However, there can be no guarantee that the Company will be able to reach an agreement to restructure the New Note.
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The evaluation of going concern under the accounting guidance requires significant judgment. In addition to compliance with debt covenants, the Company has considered 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. On March 2, 2022 the Company closed an offering (the “March 2022 Offering”) in which it sold 15.0 million units at $1.00 consisting of one share of common stock and one warrant for a total of 15.0 million warrants with an exercise price of $1.00 (the “March 2022 Warrants”). The March 2022 Offering provided net cash proceeds of $13.6 million. As of March 31, 2022, the Company had $9.4 million of available cash on-hand and net current liabilities of $59.2 million. The amount of available cash on hand on May 20, 2022, one business day preceding this filing, was $5.6 million.
The Company believes that its current level of cash and cash equivalents are not sufficient to fund Its operations and obligations without additional financing. Although the Company has financing available, as further described below, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the Company and the esports and iGaming industry. The combination of these conditions was determined to raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.
In determining whether 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 potential proceeds from the exercise of the 15.0 million March 2022 Warrants exercisable at $1.00, outstanding at March 31, 2022, (ii) 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 May 20, 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 May 20, 2022), (iii) the ability to sell shares of common stock of the Company through a shelf registration statement on Form S-3 (File No. 333-252370) declared effective by the Securities and Exchange Commission (SEC) on February 5, 2021, and (iv) the ability to raise additional financing from other sources. The Company is also in discussions with the Holder of the Senior Convertible Note to restructure the payment terms and debt covenants. 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 nine months ended March 31, 2022 and 2021 are as follows:
| 2022 | 2021 | |||||||
| Cash used in operating activities | $ | 14,100,783 | $ | 11,102,910 | ||||
| Cash used in investing activities | $ | 20,189,188 | $ | 32,963,130 | ||||
| Cash provided by financing activities | $ | 23,681,839 | $ | 52,777,325 | ||||
At March 31, 2022, we had total current assets of $17.1 million and total current liabilities of $76.3 million. Net cash used in operating activities for the nine months ended March 31, 2022 was $14.1 million, which includes a net loss of $98.5 million, offset by net non-cash adjustments of $76.4 million.
Net cash used in investing activities for the nine months ended March 31, 2022 totaled $20.2 million principally related to the Bethard acquisition.
Net cash provided by financing activities for the nine months ended March 31, 2022 totaled 23.7 million that related to proceeds from the issuance of 15 million shares of common stock as part of the March 2022 Offering, 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 nine months ended March 31, 2022) 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. Other than the adoption of ASU No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment discussed in Note 2, there have been no material changes or updates to our critical accounting policies and estimates during the three and nine months ended March 31, 2022 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 nonrecurring 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 nine months ended March 31, 2022, we continue to implement remediation initiatives in response to the previously identified material weakness, including, but not limited to, the hiring of additional experienced accounting, audit 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 March 31, 2022 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.
The Company has not maintained compliance with certain financial covenants and is currently in default under the terms of the New Note. This could adversely affect our financial condition and our ability to meet our payment obligations on our indebtedness.
We have breached certain covenants under the New Note and are currently in default under its terms. Specifically, we failed to maintain compliance with certain financial covenants relating to available cash, our ratio of debt to market capitalization and minimum cash flow. In addition, the Company has not remitted payment to the Holder of the New Note in an amount equal to 30% of the gross proceeds from the March 2022 Offering to be applied as a reduction of principal. Furthermore, the New Note includes a provision that should both (i) the Company be in breach of its debt covenants and (ii) the price of the Company’s common stock trade below the Conversion Floor Price of $2.1832, the Holder may elect the Alternate Conversion option that includes a make-whole provision payable to the Holder in cash. As of March 31, 2022, the Company was in breach of its debt covenants and the price per share of its common stock had declined below the Conversion Floor Price. The Company estimates that it would be required to issue, subject to shareholder approval per Nasdaq rules up to 16,031,513 shares of common stock under the Alternate Conversion provisions of the New Note if the Holder elects the Alternate Conversion option. We have not been notified by the holder that it elected to convert the New Note at the Alternate Conversion option due to these breaches, nor has the Holder waived such breaches and any resulting defaults. The cash liability calculated under the terms of the New Note of approximately $80,000,000 is materially higher than the fair value of the derivative liability of $20,573,051 calculated at March 31, 2022. The calculated make-whole liability may differ materially from the amount at which the Company may be required to pay under the New Note. The Company has held non-binding discussions with the Holder to restructure its obligation under the New Note. However, there can be no guarantee that the Company will be able to reach an agreement to restructure the New Note.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2022, we issued 50,000 shares of common stock as compensation for services provided.
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Item 3. Defaults Upon Senior Securities
The Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible Note. See Note 2 and Note 12 of the unaudited condensed consolidated financial statements for additional information.
Item 4. Mine Safety Disclosure
Not Applicable.
Item 5. Other Information
None
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: May 23, 2022 | By: | /s/ Grant Johnson |
Grant Johnson Chief Executive Officer, and Chairman of the Board of Directors (Principal Executive Officer) | ||
| Date: May 23, 2022 | By: | /s/ Damian Mathews |
Damian Mathews Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) | ||
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