UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2021
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission File Number: 000-55954
| ESPORTS ENTERTAINMENT GROUP, INC |
| (Exact name of registrant as specified in its charter) |
| Nevada | 26-3062752 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer identification No.) | |
Block 6, Triq Paceville St. Julians, Malta, STJ 3109 |
89109 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (268) 562-9111
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock | GMBL | The Nasdaq Stock Market LLC | ||
| Common Stock Purchase Warrants | GMBLW | The Nasdaq Stock Market LLC |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of December 31, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was $63,602,362 based on the closing price reported for such date on the Nasdaq Capital Markets. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of October 11, 2021, there were 21,985,172 shares of common stock, par value $0.001 issued and outstanding.
TABLE OF CONTENTS
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
In this Annual Report on Form 10-K, the terms “we”, “our”, and “us” refer to Esports Entertainment Group, Inc. and our wholly owned subsidiaries.
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Corporate History
Esports Entertainment Group, Inc. (the “Company” or “EEG”) was formed in the State of Nevada on July 22, 2008 under its prior name Virtual Closet, Inc. Virtual Closet, Inc. changed its name to DK Sinopharma, Inc. on June 6, 2010. DK Sinopharma, Inc. changed its name 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 was engaged in a number of different enterprises up until May 20, 2013, when, pursuant to the terms of the Share Exchange Agreement, the Company acquired all of the outstanding capital stock of H&H Arizona Corporation in exchange for 3,333,334 shares of its common stock. From May 2013 until August 2018, its operations were limited to designing, developing and testing its wagering systems. The Company launched its online esports wagering website (www.vie.gg) in August 2018.
Business 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 genre’s such as real-time strategy, fighting, first-person shooter and multiplayer online battle arena games. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including twitch.tv and youtube.com.
EEG
is an esports focused iGaming and entertainment company with a global footprint. EEG’s strategy is to build and acquire betting
and related platforms, and lever them into the rapidly growing esports vertical. We operate the business in two verticals, EEG iGaming
and EEG Games.
Recent Developments:
Bethard Acquisition
On July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited that provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain, Malta and Ireland (“Bethard Business”). The initial payment of purchase consideration for the Bethard Business of €17,000,000 (approximately $20,067,871 using exchange rates in effect at the acquisition date) includes €13,000,000 (approximately $15,346,019 using exchange rates in effect at the acquisition date) that was paid in cash at closing and €4,000,000 (approximately $4,721,852 using exchange rates in effect at the acquisition date) payable in cash (“Second Payment”) no later than October 1, 2021 (“Second Payment Date”). The Company is also required to pay additional cash purchase consideration during the 24 month period following the acquisition date (“Additional Payment”) equal to 15% of net gaming revenue until the Second Payment Date, with the percentage then decreasing to 10% - 12% of net gaming revenue during subsequent months. The total purchase consideration also includes a payment of up to €7,600,000 (approximately $8,971,519 using exchange rates in effect at the acquisition date) of contingent share consideration should a specific ambassador agreement be successfully assigned to Bethard following the acquisition date.
The acquisition of the Bethard Business included (i) the brand names of the Bethard Business (Bethard, Fastbet and Betive); (ii) domains relating to the brands acquired; (iii) the customer databases relating to the acquired brands; (iv) website content, materials and code pertaining to the domains acquired; (v) certain licensee rights under an ambassador agreement; and (vi) B2C online gambling licenses in Sweden, Spain, Malta, and Ireland.
The acquisition was completed pursuant to the terms of the purchase agreement dated May 25, 2021 whereby the Company acquired the outstanding share capital, of Prozone Limited (“Prozone”) that had previously received the assets of the Bethard Business in a pre-closing restructuring (“Pre-Closing Restructuring”) by the seller. The purchase price for the shares of Prozone was originally determined as the aggregate of (i) a closing payment of EUR 16,000,000; (ii) subject to certain conditions as outlined in the purchase agreement, an amount corresponding to 12% of Net Gaming Revenue (as defined in the Purchase Agreement) for 24 months from the date of the closing of the Purchase Agreement ( the “Relevant Period”) and payable by the Purchaser to the Seller on a monthly basis (in respect of Net Gaming Revenue generated during the relevant month during the Relevant Period) (the “Additional Payment”); and (iii) subject to certain conditions as outlined in the purchase agreement, shares of the Company’s common stock to be allotted and issued to the Seller by the second year anniversary of the Closing Date, representing an aggregate value of the USD Currency Equivalent of EUR 7,600,000 or such lower amount as may be applicable in accordance with the purchase agreement.
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Prior to the closing of the Bethard acquisition, the purchase agreement had been amended (“First Amendment”) to (i) defer the Second Payment of EUR 4,000,000 no later than the Second Payment Date (ii) require the Company to pay an additional EUR 1,000,000 on the First Payment Date to acquire a deposit that had been funded by the seller with the Spanish Gaming Authority (DGOJ) as a guarantee for regulatory purposes, and (iii) require the Additional Payment, discussed above, be increased from 12% of the Net Gaming Revenue during Relevant Period, effective July 1 2021, to 15% of Net Gaming Revenue until the Second Payment Due Date, following which it would be reduced to 12% of Net Gaming Revenue for the remainder of the Relevant Period. On October 6, 2021, the Company entered into second amendment agreement (“Second Amendment”) to extend the Second Payment Date until October 14, 2021 during which time the Additional Payment will remain at 15% of NGR.
In connection with the Pre-Closing Restructuring, Prozone also entered into agreements that included (i) a white label platform licensing agreement (“White Label Agreement’), (ii) a turnkey platform licensing agreement (“Turnkey Agreement”), and (iii) a services agreement whereby the seller will provide transitional and support services to Prozone during a 24 month period following the acquisition. Pursuant to the terms of the White Label Agreement and/or the Turnkey Agreement, Prozone has agreed to operate for a minimum period of 24 months utilizing the seller’s platform. After 24 months, Prozone shall be free to terminate the White Label Agreement and/or Turnkey Agreement (as applicable) and migrate any domains and customer databases acquired to another platform of Prozone’s choice. The seller has agreed to ensure that each of the licenses acquired by the Company and included in the acquisition of the Bethard Business will be transferred to Prozone as soon as practicable, subject to such transfers being permitted under the relevant local regulations.
On July 13, 2021, the Company and Seller, having met all conditions precedent, consummated the closing of the Bethard acquisition. The Company paid the Seller EUR 12,000,000 representing the cash due at closing pursuant to the purchase agreement and EUR 1,000,000 pursuant to the First Amendment. The Second Payment remains payable by October 14, 2021.
ggCircuit Acquisition
On June 1, 2021, the Company completed the acquisition of issued and outstanding membership units of ggCIRCUIT LLC (“GGC”). The acquisition was completed in accordance with the equity purchase agreement dated January 22, 2021 and amended on May 21, 2021. GGC offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers and product manufacturers. GGC offers proprietary software management and rewards platforms for esports gaming centers and connects player communities with publishers and product manufacturers. The total consideration paid at closing was $24,273,211 with $14,100,000 paid in cash at closing and $900,000 paid through application of loans receivable from GGC, inclusive of operating advances, toward the purchase consideration. The Company also issued 830,189 shares common stock at closing using a value per share $13.25 pursuant to the purchase agreement. The fair value of the share consideration paid at closing was determined to be $9,273,211 using the closing share price of the Company on the date of acquisition.
Helix Acquisition
On June 1, 2021, the Company the acquisition of the issued and outstanding membership units of Helix Holdings, LLC (“Helix”). The acquisition was completed in accordance with the equity purchase agreement dated January 22, 2021 and amended on May 21, 2021. Helix is an owner and operator of esports centers providing esports programming and gaming infrastructure, and is also the owner of the esports analytics platform, Genji Analytics, and LANduel, a proprietary player-versus-player esports wagering platform. The total consideration paid at closing was $15,901,133, with $9,400,000 paid in cash and $600,000 paid through application of loans receivable from Helix, inclusive of operating advances, toward the purchase consideration. The Company also issued 528,302 shares of common stock at closing using a value per share of $13.25 pursuant to the purchase agreement. The fair value of the share consideration paid at closing to be $5,901,133 using the closing share price of the Company on the date of acquisition.
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Issuance of Senior Convertible Note
On May 28, 2021, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor pursuant to which we sold a Senior Convertible Note dated June 2, 2021, with an initial principal amount of $35 million (the “Senior Convertible Note”) in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The Convertible Note bears interest at a rate of 8% per annum and matures two years following the date of issuance (the “Maturity Date”, subject to extension in certain circumstances, including bankruptcy and outstanding events of default). In addition to the principal amount the Company is required to pay an additional amount equal to 6% of the outstanding principal amount. After the occurrence and during the continuance of an Event of Default, as defined in the Senior Convertible Note, the Convertible Note will accrue interest at the rate of 12.0% per annum.
The Senior Convertible Note is convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $17.50 per share. The Convertible Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If we enter into any agreement to issue (or issue) any variable rate securities, the noteholder has the additional right to substitute such variable price (or formula) for the conversion price.
In connection with the sale of the Senior Convertible Note, the Company issued Series A Warrants and Series B Warrants. The Series A Warrants provide the holder of the Senior Convertible Note with the right to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $17.50 per share. The Series A Warrants expire in 4 years after the issuance date. The Series A Warrants have a cashless exercise provision provides that no effective registration statement exists and a beneficial ownership limitation of 4.99% which may be increased or decreased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase.
The Series B Warrants provide the holder of the Senior Convertible Note with the right to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $17.50 per share. The Series B Warrant expires in 2 years after the issuance date. The Series B Warrants have a cashless exercise provision provides that no effective registration statement exists and a beneficial ownership limitation of 4.99% which may be increased or decreased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase. The Series B Warrants are only exercisable to the extent that the indebtedness owing under the Senior Convertible Note is redeemed. For every share of common stock issuable upon conversion of the redemption amount on the Senior Convertible Note, one warrant share will vest and be eligible for exercise.
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On July 13, 2021, the holder of the Senior Convertible Note consented to the pledge agreement entered into with the Bethard acquisition discussed above. The holder waived a provision of the Senior Convertible Note prohibiting a pledge of assets, and agreed that such a lien represented by the pledge shall constitute a “permitted lien” for purposes of Senior Convertible Note.
FLIP Acquisition
On September 3, 2020 the Company, entered into an Assignment of Intellectual Property Rights Agreement (the “IP Assignment Agreement”), by and among the Company, AHG Entertainment Associates (“AHG”) and Flip Sports Limited (“FLIP”) whereby the Company acquired all intellectual property rights in connection with the software developed by FLIP and owned by AHG related to AHG’s online games and rewards platform and all other online software (“FLIP acquisition”). This includes all works in relation to the same, including, but not limited to the source code of the software and all technical and functional information and documentation required to operate the software, all artwork, content and materials used in connection with the software and any other works in respect of which AHG is the legal and beneficial owner and which are being used in connection with the Software (the “Works” together with the intellectual property rights in the Software the “Assigned Intellectual Property”). The IP Assignment Agreement was also subject to Transfer of Undertakings (Protection of Employment) Regulations 2006 pursuant to U.K. labour law, protecting employees whose business is being transferred to another business. Accordingly, as of the acquisition date, the FLIP employees had become employees of the Company.
As consideration for the FLIP acquisition, the Company agreed to pay AHG an aggregate of $1,100,000 payable as follows: (a) $100,000 in cash on the closing date; and (b) that certain number of shares the Company’s restricted common stock, equal to $1,000,000 at a price per share equal to the 30-day weighted average of the Company’s common stock immediately prior to the issuance in accordance with the following payment schedule (i) that certain number of shares equal to $500,000 issued to AHG on the closing date; and (ii) that certain number of shares equal to $500,000 of restricted common stock issued to AHG on the sixth (6) month anniversary of the closing date, subject to the continued employment of certain key employees of Flip as identified in the IP Assignment Agreement.
In addition to satisfying the cash consideration payable for FLIP acquisition of $100,000, the Company also issued 93,808 shares of common stock with a fair value $411,817 on the closing date of September 2, 2020. The Company had estimated the contingent share consideration payable based on the retention of certain key FLIP employees to have a fair value of $500,000 on the closing date. The contingent share consideration was settled on March 3, 2021 through the issuance of 93,808 shares of common stock have a market value on the date of settlement of $1,805,804, resulting in the recognition of $1,305,804 as the change in fair value of contingent consideration in the consolidated statement of operations for the year ended June 30, 2021.
For the period up until the 4th anniversary following the FLIP acquisition, the terms of the acquisition provide that AHG may (i) use, reproduce and exploit the AHG Software Copy (as defined in the license agreement) on an exclusive basis within the jurisdictions outlined therein; (ii) after the 4th anniversary use, reproduce and exploit the AHG Software Copy on a non-exclusive basis anywhere in the world; and (iii) at any time after the FLIP acquisition change, copy, alter, add to, take from, adapt or translate the Software in order to create, use and exploit versions of the Software created for AHG and the Company in accordance with the terms of License Agreement.
In consideration of the development of software customized by the Company pursuant to certain modifications as set forth in the license agreement, as well the installation of such software and the knowledge transfer services (“Knowledge Transfer”) provided by the Company in order to assist AHG in its project of creating custom software to adapt to its own needs, AHG shall pay the Company the sum of thirty thousand pounds (30,000 GBP) per month from the FLIP acquisition date until such development and Knowledge Transfer are completed. In consideration for the Company providing any further support services, AHG shall pay to the Company such fee as may be agreed in writing between the parties from time to time based on a developer day rate of £500 per day.
EGL Acquisition
On January 21, 2021, the Company completed its acquisition of Phoenix Games Networks Limited, a company incorporated in the United Kingdom, acquiring all of the issued and outstanding share capital of Phoenix pursuant to a purchase agreement dated December 21, 2020. Phoenix, through its wholly owned subsidiary Xseries Limited, operates the Esports Gaming League (“EGL”), a business-to-business (“B2B”) centric provider of live and online events and tournaments where gamers can compete and engage with content relating to esports and video games. The Company acquired the business herein referred to by its brand name EGL for total purchase consideration of $2,975,219. The total purchase consideration included $481,386 of cash paid at closing, (net cash paid at closing being $477,350 after adjustment for cash acquired of $4,036), and the issuance of 292,511 shares of common stock with a fair value of $2,193,833 as determined using the closing share price on the date of acquisition. The purchase consideration also included an estimate of $300,000 for contingent consideration (“Holdback Consideration”) payable by the Company in cash and share consideration based on the progress of EGL towards the achievement of certain revenue targets based on the ability of EGL to achieve certain revenue targets by May 16, 2021. The Holdback Consideration was settled by the Company for $145,153 paid in cash, (increasing the total cash paid for EGL to $622,503), and through issuance of 63,110 shares of common stock with a fair value of $597,650, as determined using the closing price on the date of settlement. The incremental consideration paid in excess of the amount estimated at Holdback Consideration of $442,803 was recorded to change in fair value of contingent consideration within the statement of operations for the year ended June 30, 2021.
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The terms of the EGL purchase agreement may further require the Company to pay an additional $2,750,000 (equivalent to approximately £2,000,000 of purchase price using exchange rates at the acquisition date) in contingent earnout consideration (“Earnout Consideration”) if EGL is to achieve an earnings benchmark on the 18 month anniversary of the closing date. On the date of acquisition, the Company determined that the likelihood of a payout of the Earnout Consideration was remote and therefore did not assign a value to the Earnout Consideration on the date of acquisition. This considers the Earnout Consideration benchmark increases during the earnout period for amounts invested by the Company in the operations of EGL. The Earnout Consideration benchmark used to determine the minimum threshold for payment of additional purchase consideration payable by the Company also increases should there be an increase in the value of the share consideration that was issued by the Company on the date of acquisition.
Lucky Dino Acquisition
On March 1, 2021, the Company completed its 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”). Lucky Dino is licensed by the Malta Gaming Authority to operate online casinos under four brands, namely luckydino.com, casinojefe.com, kalevalakasino.com, and olaspill.com. The acquisition of the assets of Lucky Dino was completed in accordance with an asset purchase agreement dated December 14, 2020 resulting in the payment of cash by the Company of €25,000,000 (approximately $30,133,725 using exchange rates in effect at the acquisition date).
Argyll Acquisition
On July 7, 2020, Esports Entertainment Group, Inc. (the “Company”), entered into a stock purchase agreement (the “Purchase Agreement”), by and among the Company, LHE Enterprises Limited (“LHE”), and AHG Entertainment, LLC (“AHG”) whereby the Company acquired all of the outstanding capital stock of LHE and its subsidiaries, (i) Argyll Entertainment AG, (ii) Nevada Holdings Limited and (iii) Argyll Productions Limited (collectively the “Acquired Companies”).
On July 31, 2020, the Company consummated the closing of the Purchase Agreement. As consideration for the Acquired Companies, the Company (i) paid AHG $1,250,000 in cash (the “Cash Purchase Price”); (ii) issued to AHG 650,000 shares of common stock of the Company with a fair value of $3,802,500 (the “Consideration Shares”); and (iii) issued to AHG warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share (the “Consideration Warrants” together with the Cash Purchase Price and the Consideration Shares the “Purchase Price”).
EEG iGaming:
In the EEG iGaming vertical, we have a best-in-class esports betting platform with full casino and sportsbook functionality. 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 of FLIP Sports Limited, a software development company, that we acquired in September 2020.
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. |
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 we intend to have this platform, which was previously licensed in Curacao, live in the state in prior to December 31, 2021, as a real-money wagering ‘’skin’’ of Bally’s Atlantic City, the holder of a New Jersey Casino License, Internet Gaming Permit and Sports Wagering License. However, there is no assurance that the ‘’live’’ date will be met, as there are numerous technology and other approvals required before going ‘’live’’. See Item IA, Risk Factors.
In total, we currently hold five Tier-1 gambling licenses (Malta, UK, Ireland, Spain and Sweden) and are in the process of obtaining a casino service industry enterprise (‘’CSIE’’) license 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.
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EEG Games:
In the EEG Games vertical, our focus is on providing esports entertainment experiences for every gamer. We do this through a combination of 1) in-person experiences (at Helix Centers), 2) online tournaments (through recently acquired EGL tournament platform), and 3) player-vs-player wagering (through our soon-to-be-released LANDuel product). In order to provide exposure for our platforms, we have signed numerous exclusive marketing relationships with professional sports organizations across the NFL, NBA, NHL and MLS.
Underpinning our EEG Games vertical is our proprietary infrastructure software, ggCircuit. ggCircuit is the leading provider of local area network (“LAN”) center management software, enabling us to seamlessly manage mission critical functions such as game licensing and payments.
Competition/Competitive Advantages/Operational Strengths
The online gambling and wagering industry is increasingly competitive. With relatively low barriers to entry, new competitors are entering the esports wagering and video game tournament segments. In both of these segments, there currently exist several major competitors. Most of EEG’s current competitors, including Unikrn, bet365, William Hill, Betway, and Pinnacle Sports, have far greater resources than us.
We believe the following strengths position us for sustainable growth:
Management Team and Key Personnel Experience: EEG’s Board includes senior managers with extensive experience in online gambling, esports, information technology, compliance, regulation, accounting and finance. EEG’s Officers and management include individuals with extensive experience in online gambling, esports, information technology, marketing, business development, payment processing, compliance, regulation, accounting, finance and customer service.
Unique Positioning within Digital Gaming: EEG is a digital gaming company with an esports-first focus and digital gaming company with full esports businesses; leading the effort to broaden legislation for betting on esports competitions. We are uniquely focused on connecting to customers across a broad set of retail and digital businesses to achieve greater revenue, scale, and profitability, as well as shaping esports infrastructure to facilitate omni-channel betting.
Top Tier Technology Assets:
| ● | EEG has acquired businesses with state-of-the-art B2B/B2C technologies across esports competition infrastructure, for in-person and internet-based competitions, for tournaments, esports wagering and skill-based betting. | |
| ● | Genji Analytics: an established esports analytics provider for game publishers and esports leagues included with the acquisition of Helix facilitates betting through provision of customized marketing, better betting lines and greater customer retention. | |
| ● | ggCircuit Proprietary Platform: ggCircuit’s ggLeap cloud-based management software solution enables Gaming Centers to run games through the stat integrated client, reward gamers for playing the games they love, as well as run their own local tournaments. ggCircuit is currently used by over 600 LAN centers and connects with over 2 million gamers monthly. In the future, we plan to offer products such as player-vs-player betting to the gamers on the network. | |
| ● | Lucky Dino’s online casino platform - iDefix, a modern online casino platform licensed in Malta, upon which the Lucky Dino’s online casino brands operate. iDefix provides a full technical solution for casino operations, with various management tools as well as in-depth business intelligence reporting and analysis. The technology is built on a scalable event-driven micro-services-based architecture offering advanced automation features including AML compliance and KYC handling, responsible gambling management and monitoring, fraud and bonus abuse detection, as well as gamification, CRM and bonus management. | |
| ● | Argyll’s proprietary sports betting rewards and bonus efficiency technology, provides an industry-leading customer loyalty program, driving above industry customer retention rates and player lifetime values. The Program helped earn Argyll the Innovative Start-up of the Year award and the 2018 EGR Marketing & Innovation Awards, and will be able to be leveraged across all of EEG’s verticals. | |
| ● | Argyll’s technology and Lucky Dino’s full iGaming tech stack will accelerate the development of EEG’s new Vie esports-centric platform, and generate synergies from further digital gaming acquisitions. |
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Strong Brand Partnerships: EEG has already partnered, via “affiliate Marketing Agreements’’, with twelve leading brands in pro sports, including football, hockey, basketball and soccer, with an aggregate fanbase of over 50 million, as well as with several individual social media influencers.
| ● | Pro sports team partnerships lever huge customer databases for esports tournament participation and betting, lowering EEGs customer acquisition costs. | |
| ● | As a “Marketing Affiliate’’, the esports team will provide their fans with a link to the online tournament platform of EGL, where the fan can enter tournaments to win team merchandise, and subscribe to subsequent tournaments. |
Helix LAN Center Expertise: Our Helix team prides themselves on building LAN Centers in an efficient manner and programming the centers to engage local communities. This programming (community tournaments, after-school camps, pro-team watch parties) is what drives traffic to these centers on a day-in day-out basis. Because of the team’s expertise in this area, we plan to drive further engagement through universities, theme parks and pro sports teams by building and managing centers on their properties.
Growth Strategy
In the future, we intend to:
| ● | Expand our Esports services into more of the 41 states where skill-based gambling is legal, enhance our Product offering, as well as create relationships with players that will migrate into our Vie.gg real-money wagering platform. | |
| ● | Expand our Esports Wagering services into more jurisdictions, utilizing the MGA gaming license, which provides opportunity for access into over 180 countries, as well as the recent multi-year partnership with Bally’s Corporation, to launch our proprietary mobile sports betting product 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. In accordance with standard practice, prior to our CSIE Licensure, we will request approval from the New Jersey Division of Gaming Enforcement (‘’DGE’’) to operate pursuant to a transactional waiver order. | |
| ● | Continue with our M&A strategy in the iGaming and Traditional Sports Betting space, to acquire profitable operators in different jurisdictions, that will also allow for cross-pollination of services (Sportsbook, Casino and Esports). |
Future Products and Services:
Online Esports Tournament Play
EEG intends to offer players from around the world, including the United States, (unless prohibited in a state or international jurisdiction), the ability to enter and participate in online video game tournaments and win cash prizes, via our enhanced EGL Tournament platform. Online esports tournament play consists of two or more people playing against each other in a game from their personal phones or computers, where such players do not necessarily have to be playing in real time. These events could be held over the course of a day, a week or even a month and the winner will be the one with the top score or the fastest time at the conclusion of the event. Cash-based tournaments involving games of skill are not considered gambling in most U.S. states because the generally accepted definition of gambling involves three specific things: (1) the award of a prize, (2) paid-in consideration (meaning entrants pay to compete) and (3) an outcome determined on the basis of chance. As a result, games of skill are not generally subject to the same laws and regulations as our esports event wagering service. We expect participants in our tournaments being able to enter and play against each other with prize money distributed to the last remaining competitors. We anticipate collecting a tournament entry fee for our tournaments, as well as a percentage of total winnings that are paid to users (typically 10% of the entry fees) and thus none of their money will be at risk or otherwise dependent on the outcome. We intend to offer users a wide selection of video games of skill to be played online for real money in small groups to major tournaments. The tournament platform will also serve as a tool to help them determine which markets they are finding the most esports players. We believe using the tournament platform to penetrate the US market will allow us to grow our brand within the esports community and lead to lower customer-acquisition-costs for our wagering platform.
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International Market Expansion
EEG received a Gaming Service License for online betting from the Malta Gaming Authority in April 2020, established a brick and mortar office in such jurisdiction and commenced online gaming operations in that jurisdiction in February 2021, through the Vie.gg and Argyll Brands. The Lucky Dino and Bethard brand acquisitions added additional Spanish and Swedish licenses, together with UK and Irish licenses that Argyll already operates under. In order to effectively penetrate international markets, we intend to translate our website into several additional languages and offer customer service and technical support in the local language of key markets.
EEG’s Online Wagering Platforms
According to Zion Market Research’s, Online Gambling & Betting Market by Game Form (Poker, Casino, Sports Betting, Bingo, Lottery, Horse Racing Betting, and Others) and by Component (Hardware, Software, and Service): Global Industry Perspective, Comprehensive Analysis and Forecast, 2017 – 2024, the online gambling market represents one of the fastest growing segments of the gambling industry. Zion Market estimated the size of the global online gambling market in 2018 was in excess of US$45.8 billion and is projected to reach US$94.4 billion by 2024.
Although the Vie.gg brand is focused solely on offering online wagering on the widest range of esports events broadcast from around the world, the acquisition of Lucky Dino included the acquisition of iDefix, a modern online casino platform licensed in Malta, that the Lucky Dino online casino brands operate on. iDefix provides a full technical solution for casino operations, with various management tools as well as in-depth business intelligence reporting and analysis. The Argyll and Bethard Brands offer online users traditional casino style games such as roulette, blackjack, or slots, as well as offering online wagering on traditional sporting events such as soccer, horse racing and football.
On the Vie.gg esports-focused wagering platform, a player can place a bet on a team participating in any number of tournaments which are scheduled to be held in the upcoming weeks. They also maintain a “how to play” section on the website which provides players with instructional videos on placing bets as well as other pieces of information that may be beneficial to an inexperienced player or a new user of our website. Additionally, we maintain a “frequently asked questions” section which provides customers with the ability to easily navigate general questions relating to the website, personal account information, payment processing, betting rules and procedures as well as tips.
Marketing and Sales Initiatives
The Company has several sponsorship marketing agreements in place for its website as well as an extended marketing agreement with Dignitas, an esports brand owned by Harris Blitzer sports and entertainment with multiple professional teams playing several titles with over a million fans worldwide.
EEG is looking to expand into new geographic territories by obtaining licenses to operate in those territories. The need for hands-on implementation in these territories and support will require investment in additional marketing activities, offices, and other overhead.
We will also accelerate our expansion if we find complementary businesses that we are able to acquire in other markets. Marketing efforts to expand into new territories have included esports team and tournament sponsorship, affiliate marketing, social media advertising, content creation, and attendance at esports and gaming events in addition to personal contact with other industry leaders.
We plan to increase our marketing efforts and awareness of our brands through our websites, www.vie.gg and www.sportnation.bet, as well as future offerings by:
| ● | Educating sports betting consumers to bet on esports and we want gamers to start betting on esports. |
| ● | Sponsoring professional esports teams and tournaments that have a global reach. |
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| ● | Working with sports and gaming celebrities and social media influencers who have an interest in video games and esports to generate new customers. We intend to increase our efforts in attracting esports players and other celebrities who have an interest in video games and esports. |
| ● | Using a multichannel approach focused on acquiring and retaining customers we intend to utilize multiple social media platforms to promote our wagering business including, but not limited to, Facebook Twitter, Instagram, Snapchat, TikTok, Youtube, Twitch, Whatsapp, QQ, WeChat, email and SMS messages and using online advertisements, paid search optimization, and various social media campaigns to increase our online presence and drive traffic to our website. We intend to increase investments in online advertisements, including esports gambling-related websites. We also intend to continue to invest in optimizing the Company’s website in an effort to become the premier esports gaming and gambling website in the industry. |
Regulations Affecting our Business
The offering and operation of online real-money gambling platforms and related software and solutions is subject to extensive regulation and approval by various national, federal, state, provincial, tribal and foreign agencies (collectively, “gaming authorities”). Gambling laws are usually based on public policy declaration designed to protect the integrity of the gaming industry and its consumers, as well as to enhance economic development and tourism and to increase tax revenue. To accomplish these goals, gambling laws require EEG to obtain licenses or findings of suitability from gaming authorities for EEG, including each of our subsidiaries engaged in these activities, and certain of our directors, officers, employees and in some instances, significant shareholders (typically beneficial owners of more than 5% of a company’s outstanding equity unless waived as a passive institutional investor). The criteria used by gambling authorities to make determinations as to qualification and suitability of an applicant varies among jurisdictions, but generally require the submission of detailed personal and financial information followed by a thorough and sometimes lengthy investigation. Gaming authorities have broad discretion in determining whether an applicant qualifies for licensing or should be found suitable. Gambling authorities generally look, at a minimum, to the following criteria when determining to grant a license or finding of suitability, including (i) the financial stability, integrity and responsibility of the applicant, (ii) the quality, security and regulatory compliance of the applicant’s online real-money platform and gaming equipment and related software, as applicable, and (iii) the history and associations of the applicant. Gambling authorities may, subject to certain administrative proceeding requirements, (i) deny an application, or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, and (ii) fine any person licensed, registered or found suitable or approved. Notwithstanding the foregoing, some jurisdictions explicitly prohibit gaming in all or certain forms and we will not market our gambling services in these jurisdictions. If any director, officer or employee of EEG fails to qualify for a license or is found unsuitable (including due to the failure to submit the required documentation) by a gaming authority, EEG may deem it necessary, or be required to, sever its relationship with such person, which may include terminating the employment of any such person. Gambling authorities have the right to investigate any individual or entity having a material relationship with EEG, to determine whether such individual or entity is suitable or should be licensed to do business as a business associate of ours. In addition, certain gambling authorities monitor the activities of the entities they regulate both in their respective jurisdiction and in other jurisdictions to ensure that these entities are in compliance with local standards on a worldwide basis.
On May 14, 2018, the Supreme Court of the United States struck down the Professional and Amateur Sports Protection Act, a 1992 law that barred state-authorized sports gambling with some exceptions and made Nevada the only state where a person could wager on the results of a single game. Since the Supreme Court’s decision, sports gambling has commenced in numerous states and many more states have enabling legislation pending. We plan to explore expansion of our esports online wagering platform into other US States, at the appropriate time, and seek licenses in the United States in addition to the New Jersey license
The Unlawful Internet Gambling Enforcement Act of 2006 (“UIEGA”) made it a federal offense, punishable by up to five years in prison, for a business to accept payments “in connection with the participation of another person in unlawful internet gambling.” In support of such new prohibitions, the UIGEA uses a variety of terms — some of which are ambiguous or undefined. Initially, the UIGEA broadly defines a “bet or wager” as: the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.
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Further, a “bet or wager” specifically includes a chance on a lottery or prize awarded predominantly by chance; a “scheme” as defined in Title 28, U.S.C. § 3702 relating to government-sponsored amateur or professional sports betting and, “any instructions or information pertaining to the establishment or movement of funds by the bettor or customer in, to, or from, an account with the business of betting or wagering.” While this final prohibition incorporates the term “business of betting or wagering,” that term is not specifically defined anywhere in the UIGEA. The only reference to that term comes in § 5362(2), which states: The term “business of betting or wagering” does not include the activities of a financial transaction provider, or any interactive computer service or telecommunications service.
Nonetheless, the law does contain specific prohibitions. In order to establish a violation of the UIGEA, it must be shown that:
| 1. | A “person” was engaged in the business of betting or wagering; | |
| 2. | That person knowingly accepted a financial instrument or proceeds thereof; and, | |
| 3. | That instrument was accepted (by the person) in connection with the participation of another person in “unlawful Internet gambling.” |
In the context of this statute “unlawful Internet gambling” is defined as follows:
To place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the state or tribal lands in which the bet or wager is initiated, received, or otherwise made.
Therefore, the UIGEA only applies to online gambling transactions that are already prohibited by other state, federal, or tribal laws. Therefore, in order for the financial transaction to be prohibited by § 5363 of the UIGEA, the bet or wager must be “initiated, received, or otherwise made” in a place where such activity (the bet of wager) violates preexisting state, federal, or tribal law.
Similarly, several other laws provide federal law enforcement with the authority to enforce and prosecute gambling operations conducted in violation of underlying state gambling laws. As with UIEGA, these enforcement laws include the Illegal Gambling Business Act and the Travel Act. No violation of the UIGEA, the Illegal Gambling Business Act or the Travel Act can be found absent a violation of an underlying state law or other federal law. In addition, the Wire Act of 1961 (the “Wire Act”) provides that anyone engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, will be fined or imprisoned, or both. However, the Wire Act notes that it shall not be construed to prevent the transmission in interstate or foreign commerce of information for use in news reporting of sporting events or contests, or for the transmission of information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on that sporting event or contest is legal into a State or foreign country in which such betting is legal. In 2018, the U.S. Department of Justice (the “DOJ”) reversed its previously-issued opinion published in 2011, which stated that interstate transmissions of wire communications that do not relate to a “sporting event or contest” fall outside the purview of the Wire Act. The DOJ’s updated opinion concluded instead that the Wire Act was not limited to wagering on sporting events or contests, and that certain of its provisions apply to non-sports-related wagering activity. In June 2019, a federal district court in New Hampshire ruled that the DOJ’s new interpretation of the Wire Act was erroneous and vacated the DOJ’s new opinion. On January 20, 2021, the First Circuit reaffirmed the district court’s decision. The DOJ did not appeal to the Supreme Court. However, while a positive result, arguably the case is binding precedent only within the First Circuit, and only applies to the specific parties in the lawsuit. Accordingly, the Wire Act could still impact our ability to engage in online internet gaming in the future
At the current time, we are able to accept wagers on our vie.gg website from residents of over 149 jurisdictions including Canada, Japan, Germany and South Africa. We do not accept wagers from United States residents at this time and therefore the bet or wager on our platform is not “initiated, received, or otherwise made” in a place where such activity violates preexisting state, federal, or tribal law.
Intellectual Property
We have not filed to register any patents, trade names or trademarks in any jurisdictions in relation to our Vie.gg brand, but we do intend to file applications to register patents, tradenames or trademarks in the near future.
Within the European Union, Argyll Entertainment owns a registered trademark for its SportNation brand, and Esports Entertainment Malta owns several trademarks for its Lucky Dino, Kalevala, Casinojefi and Fiksukasino brands. ggCircuit, LLC also owns the ggCircuit trademark.
Esports Entertainment Group has applied for trademarks for its VIE and EGL brands, and are awaiting them being officially granted by the respective IP Office.
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Risks Related to Our Business
Since we have a limited operating history and have only recently commenced revenue producing operations, it is difficult for potential investors to evaluate our business.
While we were incorporated under the laws of Nevada in July 2008, we did not begin to commence revenue generating operations until July 2020 with the acquisition of Argyll Entertainment. Since this acquisition, we also acquired several businesses including FLIP, EGL, Lucky Dino, ggCircuit, Helix and Bethard. Prior to these acquisitions, our operations had focused primarily on the design, development and testing of our wagering systems. We continue to be subject to all the risks and uncertainties inherent in a new business and sale of new products and services. As a result, we still must establish many corporate functions necessary to operate our business, including finalizing our administrative structure, continuing our product development, assessing and expanding our marketing activities, implementing financial systems and controls and personnel recruitment. Accordingly, you should consider the Company’s prospects in light of the costs, uncertainties, delays, and difficulties frequently encountered by companies that are in a development stage. You should carefully consider the risks and uncertainties that a company, such as ours, with a limited operating history will face. In particular, you should consider that we cannot provide assurance that we will be able to:
| ● | successfully implement or execute our current business plan; | |
| ● | maintain our management team; | |
| ● | raise sufficient funds in the capital markets to effectuate our business plan; | |
| ● | attract, enter into or maintain contracts with, and retain customers; and/or | |
| ● | compete effectively in the extremely competitive environment in which we operate. |
If we cannot successfully accomplish any of the foregoing objectives, our business may not succeed.
We have a history of accumulated deficits, recurring losses and negative cash flows from operating activities. We may be unable to achieve or sustain profitability.
We have only recently commenced revenue producing operations during the year ended June 30, 2021 through the previously mentioned acquisitions. If we are unable to increase revenues in future periods, we will not be able to achieve and maintain profitability. Beyond this, we may incur significant losses in the future for a number of reasons including other risks described in this document, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not ever be able to achieve profitability. We incurred negative cash flows from operating activities and recurring net losses in fiscal years 2021 and 2020. As of June 30, 2021, and 2020, our accumulated deficit was $46,908,336 and $20,535,602, respectively. These factors, among others, raised substantial doubt about our ability to continue as a going concern.
Our quarterly results can fluctuate and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
The betting operations of the Company are subject to the seasonal variations dictated by the sporting calendar, which may have an effect on its financial performance. Traditional sports have an off-season that can cause a corresponding, temporary decrease in their respective revenues. The Company’s ability to generate revenues is also affected by the scheduling of major events that do not occur annually.
Cancellation or curtailment of significant sporting events, for example due to adverse weather, traffic or transport disruption or civil disturbances or the outbreak of infectious diseases, or the failure of certain sporting teams to qualify for sporting events, may adversely impact the business, financial condition and results of operations of the Company for the relevant period.
We may require additional capital to support our growth plans, and such capital may not be available on terms acceptable to us, if at all. This could hamper our growth and adversely affect our business.
We intend to make significant investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new offerings and features or enhance our existing offerings and features, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance, capital markets conditions and other factors. If we raise additional funds by issuing equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our currently issued and outstanding equity or debt, and our existing shareholders may experience dilution. If we are unable to obtain additional capital when required, or on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges or unforeseen circumstances could be adversely affected, and our business may be harmed.
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We may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth associated with multiple acquisitions.
As part of our business strategy, we have made, and we intend to continue to make, acquisitions as opportunities arise to add new or complementary businesses, products, brands or technologies. In some cases, the costs of such acquisitions may be substantial, including as a result of professional fees and due diligence efforts. There is no assurance that the time and resources expended on pursuing a particular acquisition will result in a completed transaction, or that any completed transaction will ultimately be successful. In addition, we may be unable to identify suitable acquisition or strategic investment opportunities, or may be unable to obtain any required financing or regulatory approvals, and therefore may be unable to complete such acquisitions or strategic investments on favorable terms, if at all. We may decide to pursue acquisitions with which our investors may not agree and we cannot assure investors that any acquisition or investment will be successful or otherwise provide a favorable return on investment. In addition, acquisitions and the integration thereof require significant time and resources and place significant demands on our management, as well as on our operational and financial infrastructure. In addition, if we fail to successfully close transactions or integrate new teams, or integrate the products and technologies associated with these acquisitions into our company, our business could be seriously harmed. Acquisitions may expose us to operational challenges and risks, including:
| ● | the ability to profitably manage acquired businesses or successfully integrate the acquired businesses’ operations, personnel, financial reporting, accounting and internal controls, technologies and products into our business; | |
| ● | increased indebtedness and the expense of integrating acquired businesses, including significant administrative, operational, economic, geographic or cultural challenges in managing and integrating the expanded or combined operations; | |
| ● | entry into jurisdictions or acquisition of products or technologies with which we have limited or no prior experience, and the potential of increased competition with new or existing competitors as a result of such acquisitions; | |
| ● | diversion of management’s attention and the over-extension of our operating infrastructure and our management systems, information technology systems, and internal controls and procedures, which may be inadequate to support growth; | |
| ● | the ability to fund our capital needs and any cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general economic or market conditions, or unforeseen internal difficulties; and | |
| ● | the ability to retain or hire qualified personnel required for expanded operations. |
Our acquisition strategy may not succeed if we are unable to remain attractive to target companies or expeditiously close transactions. Issuing shares of Class A common stock to fund an acquisition would cause economic dilution to existing stockholders. If we develop a reputation for being a difficult acquirer or having an unfavorable work environment, or target companies view our Class A common stock unfavorably, we may be unable to consummate key acquisition transactions essential to our corporate strategy and our business may be seriously harmed.
Risks that impact our customers may impact us.
Because we generate website traffic through our affiliate marketing program, if participants in our affiliate marketing program see a slowdown in business or website traffic it may lead to fewer visitors on our website, which could have an adverse effect on our business.
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Because four of our directors and a substantial portion of our assets are located in jurisdictions other than the United States and Canada, you may have no effective recourse against the directors not located in the United States and Canada for misconduct and may not be able to enforce judgment and civil liabilities against these directors.
Four of our directors and a substantial portion of our assets are or may be located in jurisdictions outside the U.S. As a result, a person may not be able to affect service of process within the U.S. on our directors and officers. A person also may not be able to recover against them on judgments of U.S. courts or to obtain original judgments against them in foreign courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.
We are vulnerable to additional or increased taxes and fees.
We believe that the prospect of raising significant additional revenue through taxes and fees is one of the primary reasons that certain jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant taxes and fees in addition to the normal federal, state, provincial and local income taxes and such taxes and fees may be increased at any time. From time to time, legislators and officials have proposed changes in tax laws or in the administration of laws affecting the gaming industry. Many states and municipalities, including ones in which we operate, are currently experiencing budgetary pressures that may make it more likely they would seek to impose additional taxes and fees on our operations. It is not possible to determine the likelihood or extent of any such future changes in tax laws or fees, or changes in the administration of such laws; however, if enacted, such changes could have a material adverse impact on our business.
Our growth prospects depend on the legal status of real-money gaming in various jurisdictions, including within the United States, and legalization may not occur in as many states or countries as we expect, or may occur at a slower pace than we anticipate. Additionally, even if jurisdictions legalize real money gaming, this may be accompanied by legislative or regulatory restrictions and/or taxes that make it impracticable or less attractive to operate in those jurisdictions, or the process of implementing regulations or securing the necessary licenses to operate in a particular jurisdiction may take longer than we anticipate, which could adversely affect our future results of operations and make it more difficult to meet our expectations for financial performance.
A number of US states have legalized, or are currently considering legalizing, real money gaming, and our business, financial condition, results of operations and prospects are significantly dependent upon legalization of real money gaming. If a large number of additional states or the federal government enact real money gaming legislation and we are unable to obtain, or are otherwise delayed in obtaining the necessary licenses to operate online sports betting or iGaming websites in U.S. jurisdictions where such games are legalized, our future growth in online sports betting and iGaming could be materially impaired.
As we enter into new jurisdictions, states or the federal government may legalize real money gaming in a manner that is unfavorable to us. As a result, we may encounter legal, regulatory and political challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with the new opportunity. For example, certain states require us to have a relationship with a retail operator for online Sportsbook access, which tends to increase our costs of revenue. States that have established state-run monopolies may limit opportunities for participants like us. States also impose substantial tax rates on online sports betting and iGaming revenue, in addition to the federal excise tax of 25 basis points on the amount of each wager. As most state product taxes apply to various measures of modified gross profit, tax rates, whether federal- or state-based, that are higher than we expect will make it more costly and less desirable for us to launch in a given jurisdiction, while tax increases in any of our existing jurisdictions may adversely impact our profitability.
Therefore, even in cases in which a jurisdiction purports to license and regulate sports betting or iGaming, the licensing and regulatory regimes can vary considerably in terms of their business-friendliness and at times may be intended to provide incumbent operators with advantages over new licensees. Therefore, some “liberalized” regulatory regimes are considerably more commercially attractive than others.
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Furthermore, in the online real money gaming industry, a significant “first mover” advantage exists. Our ability to compete effectively in respect of a particular style of online real money gaming in the United States may be premised on introducing a style of gaming before our competitors. Failing to do so (“move first”) could materially impair our ability to grow in the online real money gaming space. We may fail to accurately predict when online real money gaming will be legalized in significant jurisdictions. The legislative process in each state and at the Federal level is unique and capable of rapid, often unpredictable change. If we fail to accurately forecast when and how, if at all, online real money gaming will be legalized in additional state jurisdictions, such failure could impair our readiness to introduce online real money gaming offerings in such jurisdictions which could have a material adverse impact on our business.
Our business is subject to online security risk, including security breaches, and loss or misuse of our stored information as a result of such a breach, including customers’ personal information, could lead to government enforcement action or other litigation, potential liability, or otherwise harm our business.
We receive, process, store and use personal information and other customer data. There are numerous federal, state and local laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us which could have an adverse impact on our business. In the area of information security and data protection, many states have passed laws requiring notification to customers when there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these types of laws may increase in the future as a result of changes in interpretation or changes in law. Any failure on our part to comply with these types of laws may subject us to significant liabilities.
Third parties we work with, such as vendors, may violate applicable laws or our policies, and such violations may also put our customers’ information at risk and could in turn have an adverse impact on our business. We are also subject to payment card association rules and obligations under each association’s contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for the associated expense and penalties. If we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry. Many companies, including ours, have been the targets of such attacks. Any security breach caused by hacking which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction of our players may harm our reputation and our ability to retain existing players and attract new players.
If unauthorized disclosure of the source code we currently license we could potentially lose future trade secret protection for that source code. This could make it easier for third parties to compete with our products by copying functionality which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code also could increase security risks.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third party vendor; however, such measures cannot provide absolute security.
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Risks related to our reliance on third party technology, platforms and software (“third-party software”), and any failures, errors, defects or disruptions in such third-party software could diminish our brand and reputation, subject us to liability, disrupt our business and adversely affect our operating results and growth prospects.
We rely on third party software that is critical to the performance of our platform and offerings and to user satisfaction, the principal suppliers being SB Tech for our Argyll and Bethard Brands, and Betconstruct, for our Vie.bet and SportNation.com brands.
If there is any interruption to the third-party software provided by these suppliers or their products or services are not as scalable as anticipated or at all, or if there are problems in upgrading such products or services, our business could be adversely affected, and we may be unable to find adequate replacement services on a timely basis or at all and/or at a reasonable price. Additionally, third-party software may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch. If a particular product offering is unavailable when end users attempt to access it or navigation through our platforms is slower than they expect, users may be unable to place their bets and may be less likely to return to our platforms as often, if at all. Furthermore, programming errors, defects and data corruption could disrupt our operations, adversely affect the experience of our users, harm our reputation, cause our users to stop utilizing our platforms, divert our resources and delay market acceptance of our offerings, any of which could result in legal liability to us or harm our business, financial condition, results of operations and prospects. Moreover, end users are discriminating about the nature of the products offered and our suppliers do not provide new and improved products on a regular basis, we may lose market share.
There is a risk that if the contracts with such third parties are terminated and not renewed, or not renewed on favorable terms, or if they do not get the level of support (in terms of updates and technical assistance) they require as we grow, this will materially impact upon our financial condition and performance going forward. There may be circumstances in which we wish to terminate our arrangements with such suppliers due to poor performance or other reasons but we are unable to do so. Any such circumstance may have a material adverse effect on our reputation, business, financial condition and results of operations.
We are dependent upon such software suppliers defending any challenges to their intellectual property; any litigation that arises as a result of such change could materially impact upon us and, following even if legal actions were successfully defended, such actions could disrupt our business in the interim, divert management time and result in significant cost and expense for us. Further, any negative publicity related to any of our third-party partners, including any publicity related to regulatory concerns, could adversely affect our reputation and brand, and could potentially lead to increased regulatory or litigation exposure.
As a condition of an ongoing licence, permit or other authorization required for their business, a key supplier to the Company may determine that a condition of the ongoing use of their products and services, or the continuation of the licence, is that the Company should block custom from certain territories, which may cause business disruption and loss should the Company either need to switch suppliers at short notice or discontinue business in certain territories, either permanently (while such suppliers are necessary) or pending the expiry of contract notice periods and/or the sourcing of alternative suppliers.
We rely on third-party providers to validate the identity and identify the location of our users, and if such providers fail to perform adequately, provide accurate information or we do not maintain business relationships with them, our business, financial condition and results of operations could be adversely affected.
There is no guarantee that the third-party geolocation and identity verification systems that we rely on will perform adequately, or be effective. We rely on our geolocation and identity verification systems to ensure we are in compliance with certain laws and regulations, and any service disruption to those systems would prohibit us from operating our offerings, and would adversely affect our business. Additionally, incorrect or misleading geolocation and identity verification data with respect to current or potential users received from third-party service providers may result in us inadvertently allowing access to our offerings to individuals who should not be permitted to access them, or otherwise inadvertently deny access to individuals who should be able to access our offerings, in each case based on inaccurate identity or geographic location determination. Our third-party geolocation services provider relies on its ability to obtain information necessary to determine geolocation from mobile devices, operating systems, and other sources. Changes, disruptions or temporary or permanent failure to access such sources by our third-party services providers may result in their inability to accurately determine the location of our users. Moreover, our inability to maintain our existing contracts with third-party services providers, or to replace them with equivalent third parties, may result in our inability to access geolocation and identity verification data necessary for our day-to-day operations. If any of these risks materializes, we may be subject to disciplinary action, fines, lawsuits, and our business, financial condition and results of operations could be adversely affected.
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We rely on third-party payment processors to process deposits and withdrawals made by our users, and if we cannot manage our relationships with such third parties and other payment-related risks, our business, financial condition and results of operations could be adversely affected.
We rely on a limited number of third-party payment processors to process deposits and withdrawals made by our users. If any of our third-party payment processors terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate payment processor, and may not be able to secure similar terms or replace such payment processor in an acceptable time frame. Further, the software and services provided by our third-party payment processors may not meet our expectations, contain errors or vulnerabilities, be compromised or experience outages. Any of these risks could cause us to lose our ability to accept online payments or other payment transactions or make timely payments to our users, any of which could make our technology less trustworthy and convenient and adversely affect our ability to attract and retain our users.
Nearly all of our payments are made by credit card, debit card or through other third-party payment services, which subjects us to certain regulations and to the risk of fraud. Any introduction of legislation or regulations restricting financial transactions with online gambling operators or prohibiting the use of credit cards and other banking instruments for online gambling transactions, or any other increase in the stringency of regulation of financial transactions, whether in general or in relation to the online gambling industry in particular, may restrict the ability of EEG to accept payment from its customers or facilitate withdrawals by them. Certain governments may seek to impede the online gambling industry by introducing legislation or through enforcement measures designed to prevent customers or financial institutions based in their jurisdictions from transferring money to online gambling operations. They may seek to impose embargoes on currency use, wherever transactions are taking place. This may result in the providers of payment systems for a particular market deciding to cease providing their services for such market. This in turn would lead to an increased risk of payments due to EEG being misappropriated, frozen or diverted by banks and credit card companies. We may in the future offer new payment options to users that may be subject to additional regulations and risks. There may be a limited availability of alternative systems, in particular in light of recent consolidation in the financial services industry. We are also subject to a number of other laws and regulations relating to the payments we accept from our users, including with respect to money laundering, money transfers, privacy and information security. If we fail to comply with applicable rules and regulations, we may be subject to civil or criminal penalties, fines and/or higher transaction fees and may lose our ability to accept online payments or other payment card transactions, which could make our offerings less convenient and attractive to our users. If any of these events were to occur, our business, financial condition and results of operations could be adversely affected.
For example, if we are deemed to be a money transmitter as defined by applicable regulation, we could be subject to certain laws, rules and regulations enforced by multiple authorities and governing bodies in the United States and numerous state and local agencies who may define money transmitter differently. For example, certain states may have a more expansive view of who qualifies as a money transmitter. Additionally, outside of the United States, we could be subject to additional laws, rules and regulations related to the provision of payments and financial services, and if we expand into new jurisdictions, the foreign regulations and regulators governing our business that we are subject to will expand as well. If we are found to be a money transmitter under any applicable regulation and we are not in compliance with such regulations, we may be subject to fines or other penalties in one or more jurisdictions levied by federal or state or local regulators, including state Attorneys General, as well as those levied by foreign regulators. In addition to fines, penalties for failing to comply with applicable rules and regulations could include criminal and civil proceedings, forfeiture of significant assets or other enforcement actions. We could also be required to make changes to our business practices or compliance programs as a result of regulatory scrutiny.
If we fail to detect fraud or theft, including by our users and employees, our reputation may suffer which could harm our brand and reputation and negatively impact our business, financial condition and results of operations and can subject us to investigations and litigation.
We have in the past incurred, and may in the future incur, losses from various types of financial fraud, including use of stolen or fraudulent credit card data, claims of unauthorized payments by a user and attempted payments by users with insufficient funds. Bad actors use increasingly sophisticated methods to engage in illegal activities involving personal information, such as unauthorized use of another person’s identity, account information or payment information and unauthorized acquisition or use of credit or debit card details, bank account information and mobile phone numbers and accounts. Under current credit card practices, we may be liable for use of funds on our products with fraudulent credit card data, even if the associated financial institution approved the credit card transaction.
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Acts of fraud may involve various tactics, including collusion. Successful exploitation of our systems could have negative effects on our product offerings, services and user experience and could harm our reputation. Failure to discover such acts or schemes in a timely manner could result in harm to our operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing a material adverse effect on our business, financial condition, results of operations and prospects. In the event of the occurrence of any such issues with our existing technology or product offerings, substantial engineering and marketing resources and management attention may be diverted from other projects to correct these issues, which may delay other projects and the achievement of our strategic objectives.
In addition, any misappropriation of, or access to, users’ or other proprietary information or other breach of our information security could result in legal claims or legal proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, including for failure to protect personal information or for misusing personal information, which could disrupt our operations, force us to modify our business practices, damage our reputation and expose us to claims from our users, regulators, employees and other persons, any of which could have an adverse effect on our business, financial condition, results of operations and prospects.
Despite measures we have taken to detect and reduce the occurrence of fraudulent or other malicious activity on our offerings, we cannot guarantee that any of our measures will be effective or will scale efficiently with our business. Our failure to adequately detect or prevent fraudulent transactions could harm our reputation or brand, result in litigation or regulatory action and lead to expenses that could adversely affect our business, financial condition and results of operations.
We are required to comply with applicable anti-money laundering and countering the financing of terrorism legislation a breach of which could lead to government enforcement action or other litigation, potential liability, or otherwise harm our business.
The Company receive deposits and other payments from customers in the normal course of their business. The receipt of monies from customers imposes anti-money laundering and other obligations and potential liabilities on the Company. Compliance with all such laws and regulations creates complex regulatory obligations which involves a risk of large financial penalties (in not being fully compliant) and additional potential burdens (in being fully compliant). While the Company has processes in place regarding customer profiling and the identification of customers’ source of funds, such processes may fail or prove to be inadequate whether in respect of the source of customers’ funds or otherwise. Any such failure or inadequacy could have a material adverse effect on the Company’s financial position and impact upon its licensing obligations.
Handling, or any form of facilitating the use of criminal property, is a crime in all jurisdictions in which the Company takes material custom (and going forward will take material custom). In instances where no local licensing regime is in place and there is doubt in connection with the legality of the remote supply of gambling services, there is a risk that the authorities will claim that money movements in connection with gambling amounts to money laundering, irrespective of whether the intention is actually to launder money (i.e. to disguise or conceal its provenance). This gives rise to a risk that when monies are held in (or moved into) certain territories, authorities may wish to freeze their onward payment, seek to trace money movements into different jurisdictions and recover the relevant sums. This would give rise to conflicts of law issues (not all the definitions of what comprises criminal property are identical in all jurisdictions) and what may not amount to money laundering in one jurisdiction may satisfy the definition in that other territory. There is a risk that should any such claim be brought and be successful, significant funds may have to be repatriated to the jurisdiction bringing a claim, which would have a significant impact on the profitability of the Company.
We rely on other third-party data and live-streaming providers for real-time and accurate data and/or live streams for sporting events, and if such third parties do not perform adequately or terminate their relationships with us, our costs may increase and our business, financial condition and results of operations could be adversely affected.
We rely on third-party sports data and live streaming providers to obtain accurate information regarding schedules, results, performance and outcomes of sporting events and the live streaming of such events, such as horse racing. We rely on this data to determine when and how bets are settled. We have experienced, and may continue to experience, errors in this data and/or streaming feed which may result in us incorrectly settling bets. If we cannot adequately resolve the issue with our end users, our end users may have a negative experience with our offerings, our brand or reputation may be negatively affected and our users may be less inclined to continue or resume utilizing our products or recommend our platform to other potential users. As such, a failure or significant interruption in our service would harm our reputation, business and operating results.
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Furthermore, if any of our data and/or live streaming partners terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate provider, and may not be able to secure similar terms or replace such providers in an acceptable time frame. Any of these risks could increase our costs and adversely affect our business, financial condition and results of operations. Further, any negative publicity related to any of our third-party partners, including any publicity related to regulatory concerns, could adversely affect our reputation and brand, and could potentially lead to increased regulatory or litigation exposure.
We may be subject to the payment of contributions or fees to sporting bodies or rights holders for the use of their data.
Gambling operators can be liable to make contributions to sporting bodies whether under regulations or agreement, such as The Horserace Betting Levy Board in the UK, as a way of ensuring certain revenues generated from betting on sports are used to benefit those sports or related interests. We may also be required to pay royalties or other types of levy to the organizers of sporting events, or the rights holders in respect of such, to offer betting markets on such events. Any requirement to pay additional levies, fees or royalties would have a material adverse effect on our business. In all such cases, the level of any such levy, fee or royalty will be outside the control of the Company. The Company cannot predict with any certainty what future payments may be required for the success of their business in the future and what other additional resources will need to be made available to address the conditions which impose fees, royalties or other levies, as well as sports integrity issues.
The success, including win or hold rates, of existing or future online betting and casino gaming products depends on a variety of factors and is not completely controlled by us.
The sports betting and casino gaming industries are characterized by an element of chance. Accordingly, our Argyll Brands employ theoretical win rates to estimate what a certain type of sports bet or game, on average, will win or lose in the long run. Net win is impacted by variations in the hold percentage (the ratio of net win to total amount wagered), or actual outcome, on our games and sports betting we offer to our users. We use the hold percentage as an indicator of a casino game’s or sports bet’s performance against its expected outcome. Although each game or sports bet generally performs within a defined statistical range of outcomes, actual outcomes may vary for any given period. In addition to the element of chance, win rates (hold percentages) may also (depending on the game involved) be affected by the spread of limits and factors that are beyond our control, such as an end user’s skill, experience and behavior, the mix of games played, the financial resources of users, the volume of bets placed and the amount of time spent gambling. As a result of the variability in these factors, the actual win rates on our online casino games and sports bets may differ from the theoretical win rates we have estimated and could result in the winnings of our casino game’s or sports bet’s users exceeding those anticipated. The variability of win rates (hold rates) also have the potential to negatively impact our financial condition, results of operations, and cash flows.
Participation in the sports betting industry exposes us to trading, liability management and pricing risk. We may experience lower than expected profitability and potentially significant losses as a result of a failure to determine accurately the odds in relation to any particular event and/or any failure of its sports risk management processes.
Our fixed-odds betting products involve betting where winnings are paid on the basis of the stake placed and the odds quoted. Odds are determined with the objective of providing an average return to the Company over a large number of events and therefore, over the long term, gross win percentage is expected to remain fairly constant. However, there can be significant variation in gross win percentage event-by-event and day-by-day. As a result, in the short term, there is less certainty of generating a positive gross win, and we may experience significant losses with respect to individual events or betting outcomes, in particular if large individual bets are placed on an event or betting outcome or series of events or betting outcomes. Odds compilers and risk managers are capable of human error, thus even allowing for the fact that a number of betting products are subject to capped pay-outs, significant volatility can occur. In addition, it is possible that there may be such a high volume of trading during any particular period that even automated systems would be unable to address and eradicate all risks. Any significant losses on a gross-win basis could have a material adverse effect on our business, financial condition and results of operations. In addition, if a jurisdiction where we hold or wish to apply for a license imposes a high turnover tax for betting (as opposed to a gross-win tax), this too would impact profitability, particularly with high value/low margin bets, and likewise have a material adverse effect on our business.
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Our profitability depends upon many factors for which no assurance can be given.
Profitability depends upon many factors, including the ability to develop and maintain valuable products and services, our ability to identify and obtain the rights to additional products to add to our existing product line, success and expansion of our sales programs, expansion of our customer base, obtaining the right balance of expense levels and the overall success of our business activities. While we expect significant revenue growth during the next 12 months as a result of our recent acquisitions of Argyll, EGL, Lucky Dino, ggCircuit, Helix and Bethard, we may not may not be able to achieve or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or even continue our operations. A decline in the value of our stock could also cause you to lose all or part of your investment.
Future cash flows fluctuations may affect our ability to fund our working capital requirements or achieve our business objectives in a timely manner.
Our working capital requirements and cash flows are expected to be subject to quarterly and yearly fluctuations, depending on such factors as timing and size of capital expenditures, levels of sales and collection of receivables, customer payment terms and supplier terms and conditions. We expect that a greater than expected slow-down in capital spending by our customers may require us to adjust our current business model. As a result, our revenues and cash flows may be materially lower than we expect and we may be required to reduce our capital expenditures and investments or take other measures in order to meet our cash requirements. We may seek additional funds from liquidity-generating transactions and other conventional sources of external financing (which may include a variety of debt, convertible debt and/or equity financings). We cannot provide any assurance that our net cash requirements will be as we currently expect. Our inability to manage cash flow fluctuations resulting from the above factors could have a material adverse effect on our ability to fund our working capital requirements from operating cash flows and other sources of liquidity or to achieve our business objectives in a timely manner.
Our business may be materially and adversely affected by increased levels of debt and debt covenants.
In order to finance our business or to finance possible acquisitions we may incur significant levels of debt compared to historical levels, and we may need to secure additional sources of funding, which may include debt or convertible debt financing, in the future. A high level of debt, arduous or restrictive terms and conditions relating to accessing certain sources of funding, failure to meet the financial and/or other covenants in our credit and/or support facilities and any significant reduction in, or access to, such facilities, poor business performance or lower than expected cash inflows could have adverse consequences on our ability to fund our business operations. Other effects of a high level of debt include the following:
| ● | we may have difficulty borrowing money in the future or accessing sources of funding; | |
| ● | we may need to use a large portion of our cash flows from operating activities to pay principal and interest on our indebtedness, which would reduce the amount of cash available to finance our operations and other business activities; | |
| ● | a high debt level, arduous or restrictive terms and conditions, or lower than expected cash flows would make us more vulnerable to economic downturns and adverse developments in our business; putting us at risk of violating debt covenants; and | |
| ● | if operating cash flows are not sufficient to meet our operating expenses, capital expenditures and debt service requirements as they become due, we may be required, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction of new products and services, sell assets and/or forego business opportunities including acquisitions, research and development projects or product design enhancements. |
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The gaming and interactive entertainment industries are intensely competitive. Esports faces competition from a growing number of companies and, if Esports is unable to compete effectively, its business could be negatively impacted.
There is intense competition amongst gaming solution providers. There are a number of established, well financed companies producing both land-based and online gaming and interactive entertainment products and systems that compete with the products of the Company. As some of our competitors have financial resources that are greater than Esports’, they may spend more money and time on developing and testing products, undertake more extensive marketing campaigns, adopt more aggressive pricing policies or otherwise develop more commercially successful products than the Company, which could impact the Company’s ability to win new marketing contracts and renew our existing ones. Furthermore, new competitors may enter the Company’s key market areas. If the Company is unable to obtain significant market presence or if it loses market share to its competitors, the Company’s results of operations and future prospects would be materially adversely affected. There are many companies with already established relationships with third parties, including gaming operators that are able to introduce directly competitive products and have the potential and resources to quickly develop competitive technologies. The Company’s success depends on its ability to develop new products and enhance existing products at prices and on terms that are attractive to its customers.
There has also been consolidation among the Company’s competitors in the esports and gaming industry. Such consolidation could result in the formation of larger competitors with increased financial resources and altered cost structures, which may enable them to offer more competitive pricing models, gain a larger market share of customers, expand product offerings and broaden their geographic scope of operations.
Esports’ online offerings are part of new and evolving industries, which presents significant uncertainty and business risks.
The online gaming and interactive entertainment industry, which includes social, casual and mobile gaming and interactive entertainment, is relatively new and continues to evolve. Whether these industries grow and whether Esports’ online business will ultimately succeed, will be affected by, among other things, developments in social networks, mobile platforms, legal and regulatory developments (such as the passage of new laws or regulations or the extension of existing laws or regulations to online gaming activities), taxation of gaming activities, data privacy laws and regulation and other factors that the Company is unable to predict and which are beyond the Company’s control. Given the dynamic evolution of these industries, it can be difficult to plan strategically, and it is possible that competitors will be more successful than the Company at adapting to change and pursuing business opportunities. Additionally, as the online gaming industry advances, including with respect to regulation, the Company may become subject to additional compliance-related costs. Consequently, the Company cannot provide assurance that its online and interactive offerings will grow at the rates expected or be successful in the long term.
Several companies have launched online social casino offerings, and new competitors are likely to continue to emerge, some of which may be operated by social gaming companies with a larger base of existing users, or by casino operators with more experience in operating a casino. If our products do not obtain popularity or maintain popularity or fail to grow in a manner that meets management’s expectations, our results of operations and financial condition could be harmed.
We operate in a very competitive business environment and if we do not adapt our approach and our products to meet this competitive environment, our business, results of operations or financial condition could be adversely impacted.
There is intense competition in the gaming management and gaming products industry which is characterized by dynamic customer demand and rapid technological advances. Today, there are many systems providers in the U.S. and abroad offering casinos and gaming operators “total solution” casino management and table games management systems. As a result, we must continually adapt our approach and our products to meet this demand and match technological advances and if we cannot do so, our business results of operations or financial condition may be adversely impacted. Conversely, the development of new competitive products or the enhancement of existing competitive products in any market in which we operate could have an adverse impact on our business, results of operations or financial condition. If we are unable to remain dynamic in the face of changes in the market, it could have a material adverse effect on our business, results of operations or financial condition.
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Our growth will depend on our ability to attract and retain users, and the loss of our users, failure to attract new users in a cost-effective manner, or failure to effectively manage our growth could adversely affect our business, financial condition, results of operations and prospects.
Our ability to achieve growth in revenue in the future will depend, in large part, upon our ability to attract new users to our offerings, retain existing users of our offerings and reactivate users in a cost-effective manner. Achieving growth in our community of users may require us to increasingly engage in sophisticated and costly sales and marketing efforts, which may not make sense in terms of return on investment. We have used and expect to continue to use a variety of free and paid marketing channels, in combination with compelling offers and exciting games to achieve our objectives. For paid marketing, we intend to leverage a broad array of advertising channels, including sponsorships, affiliate networks, social media platforms, such as Facebook, Instagram, Twitter and Twitch, paid and organic search, and other digital channels, such as mobile display. If the search engines on which we rely modify their algorithms, change their terms around gaming, or if the prices at which we may purchase listings increase, then our costs could increase, and fewer users may click through to our website. If links to our website are not displayed prominently in online search results, if fewer users click through to our website, if our other digital marketing campaigns are not effective, or if the costs of attracting users using any of our current methods significantly increase, then our ability to efficiently attract new users could be reduced, our revenue could decline and our business, financial condition and results of operations could be harmed.
In addition, our ability to increase the number of users of our offerings will depend on continued user adoption of esports. Growth in the esports industry and the level of demand for and market acceptance of our product offerings will be subject to a high degree of uncertainty. We cannot assure that consumer adoption of our product offerings will continue or exceed current growth rates, or that the industry will achieve more widespread acceptance.
Additionally, as technological or regulatory standards change and we modify our platforms to comply with those standards, we may need users to take certain actions to continue playing, such as performing age verification checks or accepting new terms and conditions. Users may stop using our product offerings at any time, including if the quality of the user experience on our platform, including our support capabilities in the event of a problem, does not meet their expectations or keep pace with the quality of the customer experience generally offered by competitive offerings.
Failure to attract, retain and motivate key employees may adversely affect the Company’s ability to compete and the loss of the services of key personnel could have a material adverse effect on Esports’ business.
The Company depends on the services of a few key executive officers. The loss of any of these key persons could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company’s success is also highly dependent on its continuing ability to identify, hire, train, motivate and retain highly qualified technical, marketing and management personnel. Competition for such personnel can be intense, and the Company cannot provide assurance that it will be able to attract or retain highly qualified technical, marketing and management personnel in the future. Stock options may comprise a significant component of key employee compensation, and if the Company’s Common Share price declines, it may be difficult to retain such individuals. Similarly, changes in the Company’s share price may hinder the Company’s ability to recruit key employees, as they may elect to seek employment with other companies that they believe have better long-term prospects. The Company’s inability to attract and retain the necessary technical, marketing and management personnel may adversely affect its future growth and profitability. The Company’s retention and recruiting may require significant increases in compensation expense, which would adversely affect the Company’s results of operation.
The leadership of Esports’ Chief Executive Officer, Mr. Grant Johnson (“Mr. Johnson”), has been a critical element of the Company’s success. The departure, death or disability of Mr. Johnson or other extended or permanent loss of his services, or any negative market or industry perception with respect to him or arising from his loss, could have a material adverse effect on the Company’s business. Esports’ other executive officers and other members of senior management have substantial experience and expertise in Esports’ business and have made significant contributions to its growth and success. The unexpected loss of services of one or more of these individuals could also adversely affect the Company. Esports is not protected by key man or similar life insurance covering members of senior management but is contemplating obtaining key man insurance.
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Our management team has limited experience managing a public company and regulatory compliance may divert our attention from the day-to-day management of its business.
Our management team has limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. These obligations typically require substantial attention from our senior management and could divert our attention away from the day-to-day management of our business.
Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act of 2002, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
We are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Although we are not required to provide an attestation report on the internal controls over financial reporting by our independent registered public accounting firm, we are required to comply with applicable requirements of the Sarbanes-Oxley Act as well as other rules and regulations that include, and not limited to, the listing standards of The Nasdaq Stock Market, including changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial controls. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We might encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting as it relates to our operations inclusive of recent business combinations. If we cannot favorably assess the effectiveness of our internal control over financial reporting, investors could lose confidence in our financial information and the price of our common stock could decline.
Failure to remediate our material weakness or maintain adequate financial, information technology and management processes and controls could lead to errors in our financial reporting, which could adversely affect our business.
We have identified material weaknesses in our internal control that includes the inability to (i) complete an effective assessment of our internal controls over financial reporting, (ii) maintain sufficient period-end financial reporting controls related to segregation of duties, reviews of completed or non-recurring transactions, and procedures for preparing the financial statements and disclosures, and (iii) maintain sufficient information technology controls and perform testing of information technology controls for operating effectiveness. If we do not remediate our material weaknesses and complete our implementation of internal controls, we may not detect errors timely, produce reliable financial reports, and prevent financial fraud. A lack of internal control could also result in regulatory scrutiny and a loss of confidence by stakeholders, which in-turn could harm our business and adversely affect the market price of our common stock. Failure to comply with Section 404 of Sarbanes-Oxley could also potentially subject us to sanctions or investigations by the SEC, FINRA or other regulatory authorities, as well as increase the risk of liability arising from litigation based on securities law.
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The Company’s business is vulnerable to changing economic conditions and to other factors that adversely affect the industries in which it operates.
The demand for entertainment and leisure activities tends to be highly sensitive to changes in consumers’ disposable income, and thus can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond the control of the Company. Unfavorable changes in general economic conditions, including recessions, economic slowdown, sustained high levels of unemployment, and increasing fuel or transportation costs, may reduce customers’ disposable income or result in fewer individuals visiting casinos, whether land-based or online, or otherwise engaging in entertainment and leisure activities, including gambling. As a result, the Company cannot ensure that demand for its products or services will remain constant. Continued or renewed adverse developments affecting economies throughout the world, including a general tightening of availability of credit, decreased liquidity in many financial markets, increasing interest rates, increasing energy costs, acts of war or terrorism, transportation disruptions, natural disasters, declining consumer confidence, sustained high levels of unemployment or significant declines in stock markets, could lead to a further reduction in discretionary spending on leisure activities, such as gambling. Any significant or prolonged decrease in consumer spending on entertainment or leisure activities could reduce the Company’s online games, reducing the Company’s cash flows and revenues. If the Company experiences a significant unexpected decrease in demand for its products, it could incur losses.
Changes in ownership of competitors or consolidations within the gaming industry may negatively impact pricing and lead to downward pricing pressures which could reduce revenue.
A decline in demand for the Company’s products in the gaming industry could adversely affect its business. Demand for the Company’s products is driven primarily by the replacement of existing services as well as the expansion of existing online gaming, and the expansion of new channels of distribution, such as mobile gaming. Additionally, consolidation within the online gambling market could result in the Company facing competition from larger combined entities, which may benefit from greater resources and economies of scale. Also, any fragmentation within the industry creating a number of smaller, independent operators with fewer resources could also adversely affect the Company’s business as these operators might cause a further slowdown in the replacement cycle for the Company’s products.
Litigation costs and the outcome of litigation could have a material adverse effect on the Company’s business.
From time to time, Esports may be subject to litigation claims through the ordinary course of its business operations regarding, but not limited to, employment matters, security of consumer and employee personal information, contractual relations with suppliers, marketing and infringement of trademarks and other intellectual property rights. Litigation to defend Esports against claims by third parties, or to enforce any rights that Esports may have against third parties, may be necessary, which could result in substantial costs and diversion of Esports’ resources, causing a material adverse effect on its business, financial condition and results of operations. Aside from the lawsuit and other matters referenced herein under the heading “Legal Proceedings”, the Company is not aware of any current material legal proceedings outstanding, threatened or pending as of the date hereof by or against the Company, given the nature of its business, it is, and may from time to time in the future be, party to various, and at times numerous, legal, administrative and regulatory inquiries, investigations, proceedings and claims that arise in the ordinary course of business. Because the outcome of litigation is inherently uncertain, if one or more of such legal matters were to be resolved against the Company for amounts in excess of management’s expectations, the Company’s results of operations and financial condition could be materially adversely affected.
Our business may be materially and adversely affected by the combined company’s business following acquisitions. If the Company is required to write down goodwill and other intangible assets, the Company’s financial condition and results would be negatively affected.
When the Company acquires a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. According to the Board issued Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and Accounting Standards Update No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill and intangible assets deemed to have indefinite lives no longer be amortized but instead be tested for impairment at three different points in time. The first is the transitional test, which was required at the beginning of the fiscal year in which ASC Topic 350 was adopted. In general, the valuation methods used for the transitional test must be consistent with all subsequent impairment testing. The second type of impairment testing is the interim test, which is required if certain “trigger events” occur, such as adverse changes in the business climate or market which might negatively impact the value of a reporting unit. Finally, companies must also perform annual tests for impairment. However, upon meeting certain criteria, some firms may not require a quantitative annual test. Other intangible assets will continue to be amortized over their useful lives. Under current accounting standards, if the Company determines goodwill or intangible assets are impaired, the Company will be required to write down these assets. Any write-down would have a negative effect on the consolidated financial statements.
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Risks Related to International Operations
The risks related to international operations, in particular in countries outside of the United States and Canada, could negatively affect the Company’s results.
A material proportion of the Company’s operations are conducted in foreign jurisdictions including, but not limited to: the United Kingdom, Malta and Sweden. It is expected that the Company will derive more than 80% of its revenue from transactions denominated in currencies other than the United States dollar, and the Company expects that receivables with respect to foreign sales will continue to account for a significant majority of its total accounts and receivables outstanding. As such, the Company’s operations may be adversely affected by changes in foreign government policies and legislation or social instability and other factors which are not within the control of the Company, including, but not limited to, recessions in foreign economies, expropriation, nationalization and limitation or restriction on repatriation of funds, assets or earnings, longer receivables collection periods and greater difficulty in collecting accounts receivable, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses, changes in gaming policies, regulatory requirements or the personnel administering them, currency fluctuations and devaluations, exchange controls, economic sanctions and royalty and tax increases, risk of terrorist activities, revolution, border disputes, implementation of tariffs and other trade barriers and protectionist practices, taxation policies, including royalty and tax increases and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection of intellectual property particularly in countries with fewer intellectual property protections, the effects that evolving regulations regarding data privacy may have on the Company’s online operations, adverse changes in the creditworthiness of parties with whom the Company has significant receivables or forward currency exchange contracts, labor disputes and other risks arising out of foreign governmental sovereignty over the areas in which the Company’s operations are conducted. The Company’s operations may also be adversely affected by social, political and economic instability and by laws and policies of such foreign jurisdictions affecting foreign trade, taxation and investment. If the Company’s operations are disrupted and/or the economic integrity of its contracts is threatened for unexpected reasons, its business may be harmed.
The Company’s international activities may require protracted negotiations with host governments, national companies and third parties. Foreign government regulations may favor or require the awarding of contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In the event of a dispute arising in connection with the Company’s operations in a foreign jurisdiction where it conducts its business, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of the courts of United States or Canada or enforcing American and Canadian judgments in such other jurisdictions. The Company may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly, the Company’s activities in foreign jurisdictions could be substantially affected by factors beyond the Company’s control, any of which could have a material adverse effect on it. The Company believes that management’s experience to date in commercializing its products and solutions in Europe and the Caribbean may be of assistance in helping to reduce these risks. Some countries in which the Company may operate may be considered politically and economically unstable.
Doing business in the industries in which the Company operates often requires compliance with numerous and extensive procedures and formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities. In some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity or the actions taken. Management of the Company is unable to predict the effect of additional corporate and regulatory formalities which may be adopted in the future including whether any such laws or regulations would materially increase Esports’ cost of doing business or affect its operations in any area.
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Esports may in the future enter into agreements and conduct activities outside of the jurisdictions where it currently carries on business, which expansion may present challenges and risks that Esports has not faced in the past, any of which could adversely affect the results of operations and/or financial condition of Esports.
The Company is subject to foreign exchange and currency risks that could adversely affect its operations, and the Company’s ability to mitigate its foreign exchange risk through hedging transactions may be limited.
The Company expects that it will derive in excess of 80% of its revenues in currencies other than the United States dollar; however, a substantial portion of the Company’s operating expenses are incurred in United States dollars. Fluctuations in the exchange rate between the U.S. dollar, the Euro and other currencies may have a material adverse effect on the Company’s business, financial condition and operating results. The Company’s consolidated financial results are affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated transactions denominated in currencies other than United States dollars and from the translation of foreign-currency-denominated balance sheet accounts into United States dollar-denominated balance sheet accounts. The Company is exposed to currency exchange rate fluctuations because portions of its revenue and expenses are denominated in currencies other than the United States dollar, particularly the Euro. In particular, uncertainty regarding economic conditions in Europe and the debt crisis affecting certain countries in the European Union pose risk to the stability of the Euro. Exchange rate fluctuations could adversely affect the Company’s operating results and cash flows and the value of its assets outside of United States. If a foreign currency is devalued in a jurisdiction in which the Company is paid in such currency, then the Company’s customers may be required to pay higher amounts for the Company’s products, which they may be unable or unwilling to pay.
While the Company may enter into forward currency swaps and other derivative instruments intended to mitigate the foreign currency exchange risk, there can be no assurance the Company will do so or that any instruments that the Company enters into will successfully mitigate such risk. If the Company enters into foreign currency forward or other hedging contracts, the Company would be subject to the risk that a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and the Company may be unable to take action to protect its exposure. In the event of a counterparty default, the Company could lose the benefit of its hedging contract, which may harm its business and financial condition. In the event that one or more of the Company’s counterparties becomes insolvent or files for bankruptcy, its ability to eventually recover any benefit lost as a result of that counterparty’s default may be limited by the liquidity of the counterparty. The Company expects that it will not be able to hedge all of its exposure to any particular foreign currency, and it may not hedge its exposure at all with respect to certain foreign currencies. Changes in exchange rates and the Company’s limited ability or inability to successfully hedge exchange rate risk could have an adverse impact on the Company’s liquidity and results of operations.
Global privacy concerns could result in regulatory changes and impose additional costs and liabilities on the Company, limit its use of information, and adversely affect its business.
Personal privacy has become a significant issue in Canada, the United States, Europe, and many other countries in which the Company currently operates and may operate in the future. Many federal, state, and foreign legislatures and government agencies have imposed or are considering imposing restrictions and requirements about the collection, use, and disclosure of personal information obtained from individuals. Changes to laws or regulations affecting privacy could impose additional costs and liability on the Company and could limit its use of such information to add value for customers. If the Company were required to change its business activities or revise or eliminate services, or to implement burdensome compliance measures, its business and results of operations could be harmed. In addition, the Company may be subject to fines, penalties, and potential litigation if it fails to comply with applicable privacy regulations, any of which could adversely affect the Company’s business, liquidity and results of operation.
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The Company’s results of operations could be affected by natural events in the locations in which it operates or where its customers or suppliers operate.
Esports, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and other geological events, including hurricanes, earthquakes, or flood that could disrupt operations. Any serious disruption at any of Esports’ facilities or the facilities of its customers or suppliers due to a natural disaster could have a material adverse effect on Esports’ revenues and increase its costs and expenses. If there is a natural disaster or other serious disruption at any of Esports’ facilities, it could impair its ability to adequately supply its customers, cause a significant disruption to its operations, cause Esports to incur significant costs to relocate or re-establish these functions and negatively impact its operating results. While Esports intends to seek insurance against certain business interruption risks, such insurance may not adequately compensate Esports for any losses incurred as a result of natural or other disasters. In addition, any natural disaster that results in a prolonged disruption to the operations of Esports’ customers or suppliers may adversely affect its business, results of operations or financial condition.
Risks Related to Regulation
The Company is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could adversely affect its operations, reputation, business, prospects, operating results and financial condition.
We are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S. regulations such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions and other penalties. It may be difficult to oversee the conduct of any contractors, third-party partners, representatives or agents who are not our employees, potentially exposing us to greater risk from their actions. If our employees or agents fail to comply with applicable laws or company policies governing our international operations, we may face legal proceedings and actions which could result in civil penalties, administration actions and criminal sanctions. Any determination that we have violated any anti-corruption laws could have a material adverse impact on our business. Changes in trade sanctions laws may restrict the Company’s business practices, including cessation of business activities in sanctioned countries or with sanctioned entities.
Violations of these laws and regulations could result in significant fines, criminal sanctions against Esports, its officers or its employees, requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, prohibitions on the conduct of its business and its inability to market and sell the Company’s products in one or more countries. Additionally, any such violations could materially damage the Company’s reputation, brand, international expansion efforts, ability to attract and retain employees and the Company’s business, prospects, operating results and financial condition.
We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violation of anti-money laundering laws or regulations by any of our properties could have a material adverse impact on our business.
The gaming industry is heavily regulated and failure by the Company to comply with applicable requirements could be disruptive to its business and could adversely affect its operations.
The gaming industry is subject to extensive scrutiny and regulation at all levels of government, both domestic and foreign, including but not limited to, federal, state, provincial, local, and in some instances, tribal authorities. While the regulatory requirements vary by jurisdiction, most require:
| ● | licenses and/or permits; |
| ● | findings of suitability; |
| ● | documentation of qualifications, including evidence of financial stability; and |
| ● | other required approvals for companies who operate in online gaming or manufacture or distribute gaming equipment and services, including but not limited to approvals for new products. |
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Compliance with the various regulations applicable to internet gaming is costly and time-consuming. Regulatory authorities at the non-U.S., U.S. federal, state and local levels have broad powers with respect to the regulation and licensing of internet gaming operations and the Company’s licenses may be revoked, suspended or limited for non-compliance and regulators have the power to impose substantial fines on us and take other actions, any one of which could have a material adverse effect on our business, financial condition, results of operations and prospects. These laws and regulations are dynamic and subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current laws or regulations or enact new laws and regulations regarding these matters. We will strive to comply with all applicable laws and regulations relating to our business. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules. Non-compliance with any such law or regulations could expose us to claims, proceedings, litigation and investigations by private parties and regulatory authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business.
Any license, permit, approval or finding of suitability may be revoked, suspended or conditioned at any time. The loss of a license in one jurisdiction could trigger the loss of a license or affect the Company’s eligibility for a license in another jurisdiction. The Company may be unable to obtain or maintain all necessary registrations, licenses, permits or approvals, and could incur fines or experience delays related to the licensing process which could adversely affect its operations. The finding of suitability process may be expensive and time-consuming. The Company’s delay or failure to obtain licenses and approvals in any jurisdiction may prevent it from distributing its solutions and generating revenues. A gaming regulatory body may refuse to issue or renew a registration, license or other approval if the Company, or one of its directors, officers, employees or associates: (i) is considered to be a detriment to the integrity or lawful conduct or management of gaming, (ii) no longer meets a registration, license or other approval requirement, (iii) has breached or is in breach of a condition of registration, licensure, other approval or an operational agreement with a regulatory authority, (iv) has made a material misrepresentation, omission or misstatement in an application for registration, license or other approval or in reply to an enquiry by a person conducting an audit, investigation or inspection for a gaming regulatory authority, (v) has been refused a similar registration, license or other approval in another jurisdiction, (vi) has held a similar registration, or license or other approval in that province, state or another jurisdiction which has been suspended, revoked or cancelled, or (vii) has been convicted of an offence, inside or outside of the United States that calls into question the Company’s honesty or integrity or the honesty or integrity of one of its directors, officers, employees or associates. Or is otherwise a disqualifying offense
Generally, any person who fails or refuses to apply for a finding of suitability or a license within the prescribed period after being advised that it is required by gaming authorities may be denied a license or found unsuitable, as applicable. Furthermore, we may be subject to disciplinary action or our licenses may be in peril if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us or any of our subsidiaries, we: (i) pay that person any dividend or interest upon our voting securities; (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities.
Additionally, the Company’s services must be approved in some jurisdictions in which they are offered; this process cannot be assured or guaranteed. Obtaining these approvals is a time-consuming process that can be extremely costly. Even where a jurisdiction regulates online gaming, it may not be commercially desirable to secure a license in such a jurisdiction due to tax or other operational considerations.
A provider of gaming solutions may pursue corporate regulatory approval with regulators of a particular jurisdiction while it pursues technical regulatory approval for its gaming solutions by that same jurisdiction. It is possible that after incurring significant expenses and dedicating substantial time and effort towards such regulatory approvals, that Esports may not obtain either of them. If the Company fails to obtain the necessary certification, registration, license, approval or finding of suitability in a given jurisdiction, it would likely be prohibited from distributing its services in that particular jurisdiction altogether. If the Company fails to seek, does not receive, or receives a revocation of a license in a particular jurisdiction for its games, hardware or software, then it cannot sell, service or place on a participation or leased basis or license its products in that jurisdiction and its issued licenses in other jurisdictions may be impacted. Furthermore, some jurisdictions require license holders to obtain government approval before engaging in some transactions, such as business combinations, reorganizations, stock offerings and repurchases. The Company may not be able to obtain all necessary registrations, licenses, permits, approvals or findings of suitability in a timely manner, or at all. Delays in regulatory approvals or failure to obtain such approvals may also serve as a barrier to entry to the market for the Company’s solutions. If the Company is unable to overcome the barriers to entry, it will materially affect its results of operations and future prospects. To the extent new gaming jurisdictions are established or expanded, the Company cannot guarantee it will be successful in penetrating such new jurisdictions or expanding its business in line with the growth of existing jurisdictions. As the Company enters into new markets, it may encounter legal and regulatory challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with the new market opportunity. If the Company is unable to effectively develop and operate within these new markets, then its business, operating results and financial condition could be impaired. The Company’s failure to obtain the necessary regulatory approvals in jurisdictions, whether individually or collectively, would have a material adverse effect on its business.
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To expand into new jurisdictions, the Company may need to be licensed, obtain approvals of its products and/or seek licensure of its officers, directors, major shareholders, key employees or business partners. Any delays in obtaining or difficulty in maintaining regulatory approvals needed for expansion within existing markets or into new jurisdictions can negatively affect the Company’s opportunities for growth or delay its ability to recognize revenue from the sale or installation of products in any such jurisdictions.
The Company is subject to regulation affecting internet gaming which varies from one jurisdiction to another and future legislative and court proceedings pertaining to internet gaming may have a material impact on the operations and financial results of Esports.
Online gambling is not unequivocally legal in all jurisdictions. The Company is licensed to supply gambling services from jurisdictions in which it operates but not in every jurisdiction where the customer is located.
Some countries have introduced regulations attempting to restrict or prohibit internet gaming, while others have taken the position that internet gaming should be regulated and have adopted or are in the process of considering legislation to enable that regulation.
While the U.K. and other European countries and territories such as Malta, Alderney and Gibraltar have currently adopted a regime which permits its licensees to accept wagers from any jurisdiction, other countries, including the United States have, or are in the process of implementing, regimes which permit only the targeting of the domestic market provided a local license is obtained and local taxes accounted for. Other European countries and territories continue to defend a licensing regime that protects monopoly providers and have combined this with an attempt to outlaw all other supplies. By contrast, a number of countries have not passed legislation in relation to online gambling but may introduce it. Some jurisdictions have not updated legislation focused on land-based gambling which may be interpreted in an unfavorable way to online gambling. Different jurisdictions have different views to determining where gambling takes place and which jurisdiction’s law applies and these views may change from time to time.
We currently block, through IP address filtering, direct access to wagering on our website from the United States and other jurisdictions that the Company is precluded from supplying its services to pursuant to its gaming licenses. Individuals are required to enter their age upon gaining access to our platform and any misrepresentation of such users age will result in the forfeiting of his or her deposit and any withdrawals from such users account requires proof of government issued identification. In addition, our payment service providers use their own identity and ISP verification software. Despite all such measures, it is conceivable that that a user, under age, or otherwise could devise a way to evade our blocking measures and access our website from the United States or any other foreign jurisdiction in which we do not currently permit users to use our services.
Future legislative and court decisions may have a material impact on the operations and financial results. Therefore, there is a risk that civil and criminal proceedings, including class actions brought by or on behalf of prosecutors or public entities incumbent monopoly providers, or private individuals, could be initiated against the Company, internet service providers, credit card processors, advertisers and others involved in the internet gaming industry. Such potential proceedings could involve substantial litigation expense, penalties, fines, seizure of assets, injunctions or other restrictions being imposed upon the Company or its licensees or other business partners, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as impact upon the Company’s reputation.
There can be no assurance that legally enforceable prohibiting legislation will not be proposed and passed in jurisdictions relevant or potentially relevant to the Company’s business to legislate or regulate various aspects of the internet or the online gaming industry (or that existing laws in those jurisdictions will not be interpreted negatively). Compliance with any such legislation may have a material adverse effect on the Company’s business, financial condition and results of operations, either as a result of the Company’s determining that a jurisdiction should be blocked, or because a local license may be costly for the Company or its licensees to obtain and/or such licenses may contain other commercially undesirable conditions.
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The Company may not be able to capitalize on the expansion of online or other forms of interactive gaming or other trends and changes in the gaming industry, including due to laws and regulations governing these industries.
The Company participates in the new and evolving interactive gaming industry through its online, social and mobile products. The Company intends to take advantage of the liberalization of online and mobile gaming, within Canada, the U.S. and internationally; however, expansion of online and mobile gaming involves significant risks and uncertainties, including legal, business and financial risks. The success of online and mobile gaming and the Company’s interactive products and services may be affected by future developments in social networks, including Facebook, mobile platforms, regulatory developments, data privacy laws and other factors that the Company is unable to predict and are beyond its control. Consequently, the Company’s future operating results relating to its online gaming products and services are difficult to predict, and Esports cannot provide assurance that its products and services will grow at expected rates or be successful in the long term.
Additionally, the Company’s ability to successfully pursue its interactive gaming strategy depends on the laws and regulations relating to wagering through interactive channels. Internationally, laws relating to online gaming are evolving, particularly in Europe. To varying degrees, a number of European governments have taken steps to change the regulation of online wagering through the implementation of new or revised licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers. The Company cannot predict the timing, scope or terms of any such state, federal or foreign laws and regulations, or the extent to which any such laws and regulations will facilitate or hinder its interactive strategy.
The Company’s ability to operate in its proposed online jurisdictions or expand in new online jurisdictions could be adversely affected by new or changing laws or regulations, new interpretations of existing laws or regulations, and difficulties or delays in obtaining or maintaining required licenses or product approvals.
Changes in existing gaming laws or regulations, new interpretations of existing gaming laws or regulations or changes in the manner in which existing laws and regulations are enforced, all with respect to online gaming activities, may hinder or prevent the Company from continuing to operate in those jurisdictions where it currently carries on business, which would harm its operating results and financial condition. Furthermore, gaming regulatory bodies may from time to time amend the various disclosures and reporting requirements. If the Company fails to comply with any existing or future disclosure or reporting requirements, the regulators may take action against the Company which could ultimately include fines, the conditioning, suspension or revocation of approvals, registrations, permits or licenses and other disciplinary action. It cannot be assured that the Company will be able to adequately adjust to such potential changes. Additionally, evolving laws and regulations regarding data privacy, cyber security and anti-money laundering could adversely impact opportunities for growth in Esports’ online business, and could result in additional compliance-related costs.
Public opinion can also exert a significant influence over the regulation of the gaming industry. A negative shift in the public’s perception of gaming could affect future legislation in different jurisdictions. Among other things, such a shift could cause jurisdictions to abandon proposals to legalize gaming, thereby limiting the number of new jurisdictions into which the Company could expand. Negative public perception could also lead to new restrictions on or to the prohibition of gaming in jurisdictions in which the Company currently operates.
Regulations that may be adopted with respect to the internet and electronic commerce may decrease the growth in the use of the internet and lead to the decrease in the demand for Esports’ products and services.
In addition to regulations pertaining to the gaming industry in general and specifically to online gaming, the Company may become subject to any number of laws and regulations that may be adopted with respect to the internet and electronic commerce. New laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation, advertising, intellectual property, information security, and the characteristics and quality of online products and services may be enacted. As well, current laws, which predate or are incompatible with the internet and electronic commerce, may be applied and enforced in a manner that restricts the electronic commerce market. The application of such pre-existing laws regulating communications or commerce in the context of the internet and electronic commerce is uncertain. Moreover, it may take years to determine the extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal privacy are applicable to the internet. The adoption of new laws or regulations relating to the internet, or particular applications or interpretations of existing laws, could decrease the growth in the use of the internet, decrease the demand for Esports’ products and services, increase Esports’ cost of doing business or could otherwise have a material adverse effect on Esports’ business, revenues, operating results and financial condition.
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Esports shareholders are subject to extensive governmental regulation and if a shareholder is found unsuitable by a gaming authority, that shareholder would not be able to beneficially own the Company’s Common Shares directly or indirectly.
In many jurisdictions, gaming laws can require any of the Company’s shareholders to file an application, be investigated, and qualify or have his, her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant should be deemed suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered or found suitable or approved, for any cause deemed reasonable by the gaming authorities.
Furthermore, any person required by a gaming authority to be found suitable, who is found unsuitable by the gaming authority, may not hold directly or indirectly ownership of any voting security or the beneficial or record ownership of any non-voting security or any debt security of any public corporation which is registered with the relevant gaming authority beyond the time prescribed by the relevant gaming authority. A violation of the foregoing may constitute a criminal offence. A finding of unsuitability by a particular gaming authority impacts that person’s ability to associate or affiliate with gaming licenses in that particular jurisdiction and could impact the person’s ability to associate or affiliate with gaming licenses in other jurisdictions.
Many jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage of voting securities of a gaming company and, in some jurisdictions, non-voting securities, typically 5%, to report the acquisition to gaming authorities, and gaming authorities may require such holders to apply for qualification or a finding of suitability, subject to limited exceptions for “institutional investors” that hold a company’s voting securities for investment purposes only.
Current environmental laws and regulations, or those enacted in the future, could result in additional liabilities and costs. Compliance with these laws could increase Esports’ costs and impact the availability of components required to manufacture its products. Violation of these laws may subject Esports to significant fines, penalties or disposal costs, which could negatively impact its results of operations, financial position or cash flows.
Legislative and regulatory changes could negatively affect our business and the business of our customers.
Legislative and regulatory changes may affect demand for or place limitations on the placement of our products. Such changes could affect us in a variety of ways. Legislation or regulation may introduce limitations on our products or opportunities for the use of our products and could foster competitive products or solutions at our or our customers’ expense. Our business will likely also suffer if our products became obsolete due to changes in laws or the regulatory framework.
Legislative or regulatory changes negatively impacting the gaming industry as a whole or our customers in particular could also decrease the demand for our products. Opposition to gaming could result in restrictions or even prohibitions of gaming operations in any jurisdiction or could result in increased taxes on gaming revenues. Tax matters, including changes in state, federal or other tax legislation or assessments by tax authorities could have a negative impact on our business. A reduction in growth of the gaming industry or in the number of gaming jurisdictions or delays in the opening of new or expanded casinos could reduce demand for our products. Changes in current or future laws or regulations or future judicial intervention in any particular jurisdiction may have a material adverse effect on our existing and proposed foreign and domestic operations. Any such adverse change in the legislative or regulatory environment could have a material adverse effect on our business, results of operations or financial condition.
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In the context of our EU-facing operations, we may be subject to specific compliance obligations under the General Data Protection Regulation (EU) 2016/679 (the “GDPR”) and associated laws and regulations in different EU Member States in which we operate. In addition, portions of our business established outside the EU may be required to comply with the requirements of the GDPR and associated EU legislation with respect to the offering of products or services to, or the monitoring of, individuals in the EU. We may also be subject to the local privacy and data protection laws of the EU Member States in which we offer products or services. Failure to comply with these EU data protection and privacy laws, can carry penalties and potential criminal sanctions, as well as the risk of litigation. In addition, Directive 2002/58/EC (as amended by Directive 2009/136/EC) (together, the “e-Privacy Directive”) governs, among other things, the use of cookies and the sending of electronic direct marketing within the European Union and, as such, will apply to our marketing activities within the EU. Following Brexit, the UK has adopted its own data protection and direct marketing laws (the “UK data protection laws”) which are currently based on the corresponding EU legislation. Our UK-facing operations may therefore be subject to specific compliance obligations under the UK data protection laws.
In our efforts to comply with these requirements, we rely on positions and interpretations of the law that have yet to be fully tested before the relevant courts and regulators. While the UK data protection laws are currently similar to the corresponding EU laws, it is possible that those laws will diverge in the future; to the extent that those laws do diverge, then that may increase the costs of maintaining regulatory compliance. There is also a risk that it may become more difficult to make cross-border transfers of personal data, as a result of diverging data protection regimes in the territories where our customers are located and the territories where our operations are based. If a regulator or court of competent jurisdiction determined that one or more of our compliance efforts does not satisfy the applicable requirements of the GDPR or the e-Privacy Directive, or the UK data protection laws, or if any party brought a claim in this regard, there could be potential governmental or regulatory investigations, enforcement actions, regulatory fines, compliance orders, litigation or public statements against us by consumer advocacy groups or others, and that could cause customers to lose trust in us and damage our reputation. Likewise, a change in guidance could be costly and have an adverse effect on our business.
Risks Related to Intellectual Property and Technology
Esports’ intellectual property may be insufficient to properly safeguard its technology and brands.
The Company may apply for patent protection in the United States, Canada, Europe and other countries relating to certain existing and proposed processes, designs and methods and other product innovations. Patent applications can, however, take many years to issue and the Company can provide no assurance that any of these patents will be issued at all. If the Company is denied any or all of these patents, it may not be able to successfully prevent its competitors from imitating its solutions or using some or all of the processes that are the subject of such patent applications. Such imitation may lead to increased competition within the finite market for the Company’s solutions. Even if pending patents are issued to the Company, its intellectual property rights may not be sufficiently comprehensive to prevent its competitors from developing similar competitive products and technologies. The Company’s success may also depend on its ability to obtain trademark protection for the names or symbols under which it markets its products and to obtain copyright protection and patent protection of its proprietary technologies, intellectual property and other game innovations and if the granted patents are challenged, protection may be lost. The Company may not be able to build and maintain goodwill in its trademarks or obtain trademark or patent protection, and there can be no assurance that any trademark, copyright or issued patent will provide competitive advantages for Esports or that Esports’ intellectual property will not be successfully challenged or circumvented by competitors.
Computer source codes for technology Esports licenses may also receive protection under international copyright laws. As such, EEG, or the party which it licenses the source code from, may need to initiate legal proceedings following such use to obtain orders to prevent further use of the source code.
The Company will also rely on trade secrets, ideas and proprietary know-how. Although the Company generally requires its employees and independent contractors to enter into confidentiality and intellectual property assignment agreements, it cannot be assured that the obligations therein will be maintained and honored. If these agreements are breached, it is unlikely that the remedies available to the Company will be sufficient to compensate it for the damages suffered. In spite of confidentiality agreements and other methods of protecting trade secrets, the Company’s proprietary information could become known to or independently developed by competitors. If the Company fails to adequately protect its intellectual property and confidential information, its business may be harmed, and its liquidity and results of operations may be materially adversely impacted.
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The Company may be subject to claims of intellectual property infringement or invalidity and adverse outcomes of litigation could unfavorably affect its operating results.
Monitoring infringement and misappropriation of intellectual property can be difficult and expensive, and the Company may not be able to detect infringement or misappropriation of its proprietary rights. Although the Company intends to aggressively pursue anyone who is reasonably believed to be infringing upon its intellectual property rights and who poses a significant commercial risk to the business, to protect and enforce its intellectual property rights, initiating and maintaining suits against such third parties will require substantial financial resources. The Company may not have the financial resources to bring such suits, and, if it does bring such suits, it may not prevail. Regardless of the Company’s success in any such actions, the expenses and management distraction involved may have a material adverse effect on its financial position.
A significant portion of the Company’s revenues may be generated from products using certain intellectual property rights, and EEG’s operating results would be negatively impacted if it was unsuccessful in licensing certain of those rights and/or protecting those rights from infringement, including losses of proprietary information from breaches of the Company’s cyber security efforts.
Further, the Company’s competitors have been granted patents protecting various gaming products and solutions features, including systems, methods and designs. If the Company’s products and solutions employ these processes, or other subject matter that is claimed under its competitors’ patents, or if other companies obtain patents claiming subject matter that the Company uses, those companies may bring infringement actions against it. The question of whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. In addition, because patent applications can take many years to issue, there may be applications now pending of which the Company is unaware, which might later result in issued patents that the Company’s products and solutions may infringe. There can be no assurance that the Company’s products, including those with currently pending patent applications, will not be determined to have infringed upon an existing third-party patent. If any of the Company’s products and solutions infringes a valid patent, the Company may be required to discontinue offering certain products or systems, pay damages, purchase a license to use the intellectual property in question from its owner, or redesign the product in question to avoid infringement. A license may not be available or may require EEG to pay substantial royalties, which could in turn force EEG to attempt to redesign the infringing product or to develop alternative technologies at a considerable expense. Additionally, the Company may not be successful in any attempt to redesign the infringing product or to develop alternative technologies, which could force the Company to withdraw its product or services from the market.
The Company may also infringe other intellectual property rights belonging to third parties, such as trademarks, copyrights and confidential information. As with patent litigation, the infringement of trademarks, copyrights and confidential information involve complex legal and factual issues and the Company’s products, branding or associated marketing materials may be found to have infringed existing third-party rights. When any third-party infringement occurs, the Company may be required to stop using the infringing intellectual property rights, pay damages and, if it wishes to keep using the third party intellectual property, purchase a license or otherwise redesign the product, branding or associated marketing materials to avoid further infringement. Such a license may not be available or may require EEG to pay substantial royalties.
It is also possible that the validity of any of EEG’s intellectual property rights might be challenged either in standalone proceedings or as part of infringement claims in the future. There can be no assurance that EEG’s intellectual property rights will withstand an invalidity claim and, if declared invalid, the protection afforded to the product, branding or marketing material will be lost.
Moreover, the future interpretation of intellectual property law regarding the validity of intellectual property by governmental agencies or courts in the United States, Canada, Europe or other jurisdictions in which EEG has rights could negatively affect the validity or enforceability of the Company’s current or future intellectual property. This could have multiple negative impacts including, without limitation, the marketability of, or anticipated revenue from, certain of EEG’s products. Additionally, due to the differences in foreign patent, trademark, copyright and other laws concerning proprietary rights, the Company’s intellectual property may not receive the same degree of protection in foreign countries as it would in the United States, Canada, or Europe. The Company’s failure to possess, obtain or maintain adequate protection of its intellectual property rights for any reason in these jurisdictions could have a material adverse effect on its business, results of operations and financial condition.
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Furthermore, infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and the Company may not have the financial and human resources to defend itself against any infringement suits that may be brought against EEG. Litigation can also distract management from day-to-day operations of the business.
In addition, the Company’s business is dependent in part on the intellectual property of third-parties. For example, the Company licenses intellectual property from third parties for use in its gaming products. The future success of the Company may depend upon its ability to obtain licenses to use new and existing intellectual property and its ability to retain or expand existing licenses for certain products. If the Company is unable to obtain new licenses or renew or expand existing licenses, it may be required to discontinue or limit its use of such products that use the licensed marks and its financial condition, operating results or prospects may be harmed.
The failure to enforce and maintain our intellectual property rights could enable others to use trademarks used by our business which could adversely affect the value of the Company.
The success of our business depends on our continued ability to use our existing tradenames in order to increase our brand awareness. Argyll owns a European Union registered trademark for its SportNation brand, and Esports Entertainment Malta owns European Union registered trademarks for its Lucky Dino brands. As of the date hereof, we do not have any federally registered trademarks owned by us in relation to the Vie.gg brand, but we plan to pursue registered trademarks for Vie.gg and the Esports Entertainment Group. The unauthorized use or other misappropriation of any of the foregoing trademarks or tradenames could diminish the value of our business which would have a material adverse effect on our financial condition and results of operation.
Compromises of the Company’s systems or unauthorized access to confidential information or EEG’s customers’ personal information could materially harm EEG’s reputation and business.
EEG collects and stores confidential, personal information relating to its customers for various business purposes, including marketing and financial purposes, and credit card information for processing payments. For example, the Company handles, collects and stores personal information in connection with its online gaming products. The Company may share this personal and confidential information with vendors or other third parties in connection with processing of transactions, operating certain aspects of EEG’s business or for marketing purposes. The Company’s collection and use of personal data is governed by federal, state and provincial laws and regulations as well as the applicable laws and regulations in other countries in which it operates. Privacy law is an area that changes often and varies significantly by jurisdiction. EEG may incur significant costs in order to ensure compliance with the various privacy requirements. In addition, privacy laws and regulations may limit EEG’s ability to market to its customers.
EEG intends to assess and monitor the security of collection, storage and transmission of customer information on an ongoing basis. EEG intends to utilize commercially available software and technologies to monitor, assess and secure its network. However, the systems currently intended for transmissions and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and controlled by the payment card industry, not EEG. Although EEG intends to take steps designed to safeguard its customers’ confidential personal information, its network and other systems and those of third parties, such as service providers, could be compromised by a third-party breach of EEG’s system’s security or that of a third-party provider or as a result of purposeful or accidental actions of third parties, EEG’s employees or those employees of a third party. Advances in computer and software capabilities and encryption technology, new tools and other developments may increase the risk of such a breach. As a result of any security breach, customer information or other proprietary data may be accessed or transmitted by or to a third party. Despite these measures, there can be no assurance that EEG is adequately protecting its customers’ information.
Any loss, disclosure or misappropriation of, or access to, customers’ or other proprietary information or other breach of EEG’s information security could result in legal claims or legal proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, including for failure to protect personal information or for misusing personal information, which could disrupt EEG’s operations, damage its reputation and expose it to claims from its customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have a material adverse effect on EEG’s business, revenues, financial conditions and operations.
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Service interruptions of internet service providers could impair the Company’s ability to carry on its business.
Most of the Company’s customers will rely on internet service providers to allow the Company’s customers and servers to communicate with each other. If internet service providers experience service interruptions, communications over the internet may be interrupted and impair the Company’s ability to carry on business. In addition, the Company’s ability to process e-commerce transactions depends on bank processing and credit card systems. In order to prepare for system problems, the Company intends to continuously seek to strengthen and enhance its planned facilities and the capability of its system infrastructure and support. Nevertheless, any system failure as a result of reliance on third parties, including network, software or hardware failure, which causes a delay or interruption in the Company’s online services and products and e-commerce services, could have a material adverse effect on the Company’s business, revenues, operating results and financial condition.
There is a risk that the Company’s network systems will be unable to meet the growing demand for its online products.
The growth of internet usage has caused frequent interruptions and delays in processing and transmitting data over the internet. There can be no assurance that the internet infrastructure or the Company’s own network systems will be able to meet the demand placed on it by the continued growth of the internet, the overall online gaming and interactive entertainment industry and the Company’s customers.
The internet’s viability as a medium for products and services offered by the Company could be affected if the necessary infrastructure is not sufficient, or if other technologies and technological devices eclipse the internet as a viable channel.
End-users of the Company’s products and services will depend on internet service providers and the Company’s system infrastructure (or those of its licensed partners) for access to the Company’s or its licensees’ products and services. Many of these services have experienced service outages in the past and could experience service outages, delays and other difficulties due to system failures, stability or interruption.
Systems, network or telecommunications failures or cyber-attacks may disrupt the Company’s business and have an adverse effect on EEG’s results of operations.
Any disruption in the Company’s network or telecommunications services could affect the Company’s ability to operate its games and online offerings, which would result in reduced revenues and customer down time. The Company’s network and databases of business or customer information, including intellectual property, trade secrets, and other proprietary business information and those of third parties EEG utilizes, will be susceptible to outages due to fire, floods, power loss, break-ins, cyber-attacks, hackers, network penetration, data privacy or security breaches, denial of service attacks and similar events, including inadvertent dissemination of information due to increased use of social media. Despite implementation of network security measures and data protection safeguards by EEG, including a disaster recovery strategy for back office systems, the Company’s servers and computer resources will be vulnerable to viruses, malicious software, hacking, break-ins or theft, third-party security breaches, employee error or malfeasance, and other potential compromises. Disruptions from unauthorized access to or tampering with the Company’s computer systems, or those of third parties EEG utilizes, in any such event could result in a wide range of negative outcomes, including devaluation of the Company’s intellectual property goodwill and/or brand appeal, increased expenditures on data security, and costly litigation, and can have a material adverse effect on the Company’s business, revenues, reputation, operating results and financial condition.
Malfunctions of third-party communications infrastructure, hardware and software expose Esports to a variety of risks Esports cannot control.
Our business will depend upon the capacity, reliability and security of the infrastructure owned by third parties over which our offerings would be deployed. Esports has no control over the operation, quality or maintenance of a significant portion of that infrastructure or whether or not those third parties will upgrade or improve their equipment. Esports depends on these companies to maintain the operational integrity of our connections. If one or more of these companies is unable or unwilling to supply or expand our levels of service in the future, our operations could be adversely impacted. Also, to the extent the number of users of networks utilizing our future products and services suddenly increases, the technology platform and secure hosting services which will be required to accommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions or increases in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of the networks to users. In addition, users depend on real-time communications; outages caused by increased traffic could result in delays and system failures. These types of occurrences could cause users to perceive that our products and services do not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners and customers.
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Risks Related to Our Common Stock
The trading price of our Class A common stock has been, and will likely continue to be, volatile and you could lose all or part of your investment.
The trading price of our Class A common stock has been, and will likely continue to be, volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our Class A common stock and our Class A common stock may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of our Class A common stock may include:
| ● | actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; | |
| ● | changes in the market’s expectations about our operating results; | |
| ● | success of competitors; | |
| ● | lack of adjacent competitors; | |
| ● | our opening results failing to meet the expectation of securities analysts or investors in a particular period; | |
| ● | changes in financial estimates and recommendations by securities analysts concerning DraftKings or the industries in which we operate in general; | |
| ● | our ability to market new and enhanced products and services on a timely basis; | |
| ● | commencement of, or involvement in, litigation involving us; | |
| ● | changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; | |
| ● | the volume of shares of our Class A common stock by our directors, executive officers or significant stockholder or the perception that such sales could occur; and | |
| ● | general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. |
Broad market and industry factors may materially harm the market price of our Class A common stock irrespective of our operating performance. The stock market in general, and The Nasdaq Stock Market, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the affected companies. The trading prices and valuations of these stocks, and of our Class A common stock, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our Class A common stock also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
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We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and stock price, which could cause you to lose some or all of your investment.
We may be forced to write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in losses. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject. Accordingly, a stockholder could suffer a reduction in the value of their shares.
The coverage of our business or our Class A common stock by securities or industry analysts or the absence thereof could adversely affect our securities and trading volume.
The trading market for our Class A common stock is influenced in part by the research and other reports that industry or securities analysts publish about us or our business or industry from time to time. We do not control these analysts, or the content and opinions included in their reports. Analysts who publish information about our securities may have had relatively little experience with our company given our history, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If analysts do cover us and one or more of them downgrade our securities, or if they issue other unfavorable commentary about us or our industry or inaccurate research, our stock price would likely decline. Furthermore, if one or more of these analysts cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets. Any of the foregoing would likely cause our stock price and trading volume to decline.
We currently do not intend to pay dividends on our common stock. As a result, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We currently do not expect to declare or pay dividends on our common stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare or pay dividends on our common stock. As a result, your only opportunity to achieve a return on your investment will be if the market price of our common stock appreciates and you sell your shares at a profit.
You may experience dilution of your ownership interest due to the future issuance of additional shares of our common stock.
We are in a capital intensive business and we do not have sufficient funds to finance the growth of our business or to support our projected capital expenditures. As a result, we will require additional funds from future equity or debt financings, including sales of preferred shares or convertible debt, to complete the development of new projects and pay the general and administrative costs of our business. We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of holders of our common stock. We are currently authorized to issue 500,000,000 shares of common stock and 10,000,000 shares of preferred stock. Additionally, the Board may subsequently approve increases in authorized common stock. The potential issuance of such additional shares of common or preferred stock or convertible debt may create downward pressure on the trading price of our common stock. We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in future public offerings or private placements for capital raising purposes or for other business purposes. The future issuance of a substantial number of common shares into the public market, or the perception that such issuance could occur, could adversely affect the prevailing market price of our common shares. A decline in the price of our common shares could make it more difficult to raise funds through future offerings of our common shares or securities convertible into common shares.
Our amended and restated certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval by our stockholders, which could have an anti-takeover effect and could adversely affect holders of our common stock.
Our authorized capital includes preferred stock issuable in one or more series. Our board has the authority to issue preferred stock and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of those shares without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of additional preferred stock, while providing desirable flexibility in connection with possible financings and acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the voting power of our outstanding voting securities, which could deprive our holders of common stock of a premium that they might otherwise realize in connection with a proposed acquisition of our company.
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Efforts to remediate our material weakness and comply with the applicable provisions of Section 404 of the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock.
Under current SEC rules, we have been required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, and related rules and regulations of the SEC. We will be required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. This process may result in a diversion of management’s time and attention and may involve significant expenditures. We have not maintained internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404 of the Sarbanes-Oxley Act of 2002. The rules governing the standards that must be met for our evaluation management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We might encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. If we cannot remediate our material weakness or favorably assess the effectiveness of our internal control over financial reporting, investors could lose confidence in our financial information and the price of our common stock could decline.
Anti-takeover provisions in our charter documents and Nevada law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock and warrants.
We are a Nevada corporation and the anti-takeover provisions of the Nevada Revised Statutes may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:
| ● | authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt; | |
| ● | provide that vacancies on our board of directors, including newly created directorships, may be filled by a majority vote of directors then in office; | |
| ● | place restrictive requirements (including advance notification of stockholder nominations and proposals) on how special meetings of stockholders may be called by our stockholders; do not provide stockholders with the ability to cumulate their votes; and | |
| ● | provide that our board of directors or a majority of our stockholders may amend our bylaws. |
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Item 1B. Unresolved Staff Comments.
None.
We relocated our executive and business offices to Block 6, Triq Paceville, Saint Julians, Malta, STJ 3109 effective August 19, 2021. The terms of the lease require annual rent of €83,000 with respect to the first year, with the rent increasing by 4% in each of the subsequent year for a term of 5 years. Prior to the relocation, our executive and business offices were located at 170 Pater House, Psaila Street, Birkirkara, Malta, BKR 9077 where we sub-leased approximately 150 square feet of property. We have also entered into a lease in Hoboken New Jersey effective September 1, 2021 that serves as the headquarters for our gaming operations in the United States.
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.
On August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit against the Company alleging that it had breached its obligations related to an 8% convertible promissory note dated June 3, 2016 and common stock purchase warrants of the same date. On April 30, 2021, a Settlement Agreement was entered into with Tangiers for an undisclosed amount. The Company has recorded a liability for the amount of the settlement in accounts payable and accrued expenses at June 30, 2021. The amount of the settlement was not material to the consolidated financial statements of the Company.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. With the exception of the foregoing, we are currently not involved in any litigation that we believe 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 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Common Stock and Unit A Warrants are quoted for trading on Nasdaq under the symbols “GMBL”, and “GMBLW”, respectively.
As of October 11, 2021, 21,985,172 shares of our common stock were issued and outstanding.
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Approximate Number of Equity Security Holders
As of October 11, 2021, there were approximately 138 holders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividend Policy
To date, we have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. The declaration and payment of dividends on the common stock is at the discretion of our Board and will depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our Board may deem relevant. We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying dividends on our common stock in the foreseeable future.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is VStock Transfer, LLC with an address at 18 Lafayette Pl, Woodmere, NY 11598.
Rule 10B-18 Transactions
During the fiscal year ended June 30, 2021, there were no repurchases of the Company’s common stock by the Company.
Recent Sales of Unregistered Securities
During the three months ended June 30, 2021, the Company issued 73,698 shares for services. These securities discussed in this Item 5 were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.
Item 6. Selected Financial Data.
Not applicable.
Item 7. 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. As the Company’s acquisition of ggCircuit, Helix, Lucky Dino, EGL, FLIP and Argyll took place during the fiscal year ended June 30, 2021, this Management Discussion and Analysis of Financial Condition and Results of Operations speaks only to the historical operations of the Company during the 2021 fiscal year end and the Company’s historical business prior such acquisitions. 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 genre’s such as real-time strategy, fighting, first-person shooter and multiplayer online battle arena games. As of June 30, 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.
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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”).
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. |
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. We intend to launch this platform, which was previously licensed in Curacao, live in the state prior to December 31, 2021, 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. In accordance with standard practice, prior to our CSIE licensure we will request approval to operate pursuant to a transactional waiver order issued by the New Jersey DGE. However, there is no assurance that the “live” date will be met as there are numerous technology and other approvals required before going “live”. See Item IA, Risk Factors,
In total, we 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 is focus is on providing esports entertainment experiences to gamers through a combination of 1) in-person experiences (at Helix Centers), 2) online tournaments (through recently acquired EGL tournament platform), and 3) player-vs-player wagering (through our soon-to-be-released LANDuel product). In order to provide exposure for 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, 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.
We have financed operations primarily through the sale of equity securities and short-term debt. Until revenues are sufficient to meet our needs, we will continue to attempt to secure financing through equity or debt securities.
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Results of Operations
Comparison on Year ended June 30, 2021 and 2020
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. Material changes in line items in our Statement of Operations for the year ended June 30, 2021 as compared to the same period last year, are discussed below. The financial data is at the consolidated level and reported in U.S. Dollar ($).
Revenue
Revenue for the year ended June 30, 2021 and 2020 totalled $16.8 million and zero, respectively. The revenue for the year ended June 30, 2021 is primarily attributable to the acquisitions of Argyll and Lucky Dino.
Cost of Revenue
Cost of revenue for the year ended June 30, 2021 and 2020 totalled $7.9 million and zero, respectively. The cost of revenue for the year ended June 30, 2021 primarily includes $5.2 million for payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $2.2 million for the game provider expenses and $0.5 million for other direct expenses related to the delivery of services.
Sales and Marketing
Sales and marketing expense for the year ended June 30, 2021 totalled $10.0 million, an increase of $9.7 million over the $0.3 million recorded for the year ended June 30, 2020. The increase was primarily attributable to $7.2 million in affiliate costs related to iGaming services, $2.3 million for sponsorship agreements with professional sports clubs and our service partners, and $0.2 million for other advertising and promotion expenses including event promotion.
General and Administrative
General and administrative expense for the year ended June 30, 2021 totalled $24.6 million, an increase of $20.9 million over the $3.7 million recorded for the year ended June 30, 2020. The increase was primarily attributable to increases in payroll costs of $6.3 million, costs of acquisitions of $3.5 million, professional fees, including accounting and legal expenses of $3.9 million, depreciation and acquisition related intangibles of $3.4 million, share-based compensation related expenses of $2.5 million, and $1.3 related to other general and administrative cost including incremental costs for information technology related disbursements.
Other Expenses
Other expense decreased $1.9 million from $6.3 million for the year ended June 30, 2020 to $4.4 million for the year ended June 30, 2021. The other expense for the year ended June 30, 2020 results primarily from the settlement of debt and related financial instruments, such as derivative liabilities and warrants, that were converted to equity in connection with our public offering and uplisting to the NASDAQ. The other expense for the year ended June 30, 2021 primarily included a charge of $4.7 million related to the revaluation of the warrant liability recorded in connection with the acquisition of Argyll through issuance of common stock, a charge of $1.7 million related to the settlement of the contingent consideration liability for the FLIP and EGL acquisitions through the issuance of common stock, and interest expense of $0.7 million related primarily to the Senior Convertible Note. This was partially offset by a benefit of $3.2 million related to the revaluation of Series A and Series B warrants issued in connection with the Senior Convertible Note dated June 2, 2021.
Income Tax
The income tax benefit for the year ended June 30, 2021 was $3.8 million. The income tax expense recognized for the year ended June 30, 2020 was immaterial. The income tax benefit recorded for the year ended June 30, 2021 results primarily from the release of valuation allowance of $4.1 million that followed an assessment of the realizability of our deferred tax assets subsequent to the completion of the Argyll, EGL, GGC and Helix acquisitions. It is anticipated that our deferred tax assets will be realized through future reversal of deferred tax liabilities. The income tax benefit was offset by income tax expense related to one of our foreign subsidiaries as well as the estimated exposure for accrued interest and penalties that may be imposed related to tax filings.
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Capital Resources and Liquidity
Liquidity and Going Concern
The Company must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the consolidated financial statements included in this report are issued. The evaluation of going concern under the accounting guidance requires significant judgment. The Company must consider it has historically incurred losses and negative cash flows in recent years as it has prepared to grow its esports business through acquisition and new venture opportunities. The Company must also consider its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits. As of June 30, 2021, the Company had approximately $19.9 million of available cash on-hand. On October 12, 2021, one business day preceding this filing, the Company had approximately $2.4 million of available cash on-hand, with the decrease in the available cash balance resulting primarily from the cash payment of €13,000,000 (equivalent to $15,346,019 using exchange rates on the date of acquisition) on July 13, 2021 to acquire the Bethard Business (discussed in Note 19 – Subsequent Events). 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. These conditions were determined to raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial statements.
In determining whether there is substantial doubt about the Company’s ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes are currently available to fund its operations and drive future growth that include (i) the ability to access capital using the at-the-money (“ATM”) equity offering program available to the Company whereby the Company may sell up to approximately $20,000,000 shares of its common stock (discussed in Note 19 – Subsequent Events), (ii) the ability to sell shares of common stock of the Company through a shelf registration statement on Form S-3 (File No. 333-252370) declared effective by the Securities and Exchange Commission (SEC) on February 5, 2021, and (iii) the ability to raise additional financing from other sources. These plans were however determined to require the Company to place reliance on several factors as described above, and therefore were not 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 year ended June 30, 2021 and 2020 are shown below:
| 2021 | 2020 | |||||||
| Cash used in operating activities | $ | 18,883,006 | $ | 2,269,652 | ||||
| Cash used in investing activities | $ | 56,133,256 | $ | 500,000 | ||||
| Cash provided by financing activities | $ | 86,356,201 | $ | 15,079,547 | ||||
At June 30, 2021, we had total current assets of $29.7 million and total current liabilities of $12.2 million. Net cash used in operating activities for the year ended June 30, 2021 was $18.9 million, which includes a net loss of $26.4 million, offset by non-cash adjustments of $7.3 million principally related to non-cash expenses for share based compensation expense of $4.1 million, amortization and depreciation of $3.4 million, amortization of the right of use asset of $0.2 million, amortization of debt discount $0.5 million, loss on change in fair value of warrant liability of $1.5 million and loss on change in fair value of contingent consideration of $1.7 million, offset by a non-cash benefit for deferred income taxes related to a change in valuation allowance of $4.1 million. The change in net working capital items resulted in a use of cash of $0.2 million primarily related to increase in the receivables reserved from users account of $2.3 million, prepaid expense and other current assets of $2.2 million and account receivables of $0.1 million, other non-current assets $0.2 million, deferred revenue $0.1 million, and operating lease liability $0.1 million. This was offset by an increase in accounts payable and accrued expenses of $4.3 million and liabilities to customers of $0.7 million.
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Net cash used in investing activities for the year ended June 30, 2021 totalled $56.1 million principally related to the cash payments for acquisitions that included $28.9 million for Lucky Dino ($30.1 million net of cash acquired of $1.2 million), $15.0 million for ggCircuit ($14.9 million net of cash acquired of $0.1 million), $10.0 million for Helix ($9.9 million net of cash acquired of $0.1 million), $0.7 million for Argyll ($0.6 million net of cash acquired of $0.1 million), $0.6 million for EGL ($0.5 million net of cash acquired of $0.1 million and further increased by $0.1 million representing additional contingent Holdback Consideration paid in cash), $0.1 million for FLIP, as well as purchased intangible assets and equipment of $0.8 million.
Net cash provided by financing activities for the year ended June 30, 2021 totalled $86.4 million that included the net proceeds of $27.3 million that had been raised from the issuance of common stock as well as net proceeds of $26.6 million from the exercise of stock options and warrants for shares of common stock. The Company also received net proceeds of $32.5 million (gross proceeds of $35.0 million less debt issuance costs of $2.5 million) from the issuance of the Senior Convertible Note dated June 2, 2021 that was offset by the repayment of a note payable of $0.1 million.
Senior Convertible Note
On June 2, 2021 the Company issued a Senior Convertible Note in the principal amount of $35,000,000 million with the Company receiving proceeds at issuance of $32.5 million, net of debt issuance costs of $2.5 million. The Senior Convertible Note matures on June 2, 2023, at which time the Company is required to repay the original principal balance and a “minimum return” equal to 6% of any outstanding principal. The aggregate principal of the Senior Convertible Note repayable at maturity is $37,100,000 and the Senior Convertible Note accrues interest at rate of 8% per annum payable in cash monthly. The Senior Convertible Note was issued with 2,000,000 Series A Warrants and 2,000,000 Series B Warrants . On the date of issuance, the Company recorded the fair value of the Series A Warrants and Series B Warrants as a discount to the Senior Convertible Note totaling $26,680,000. The debt discount is being amortizing to interest expense over the term of the Senior Convertible Note using the effective interest method. The obligation resulting from the issuance of the Series A Warrants and Series B Warrants was determined to qualify for liability classification on the consolidated balance sheet. See below for further discussion of the Series A Warrants and Series B Warrants.
The Senior Convertible Note is convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $17.50 per share. The conversion amount is calculated as the principal balance identified for conversion plus a minimum return of 6% on such principal balance. At any time after issuance, the Company has the option, subject to certain conditions, to redeem some or all of outstanding principal, inclusive of any minimum return due to the holder based on the number of days the principal is outstanding.
The Senior Convertible Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue, or issue any variable rate securities, the holder of the Senior Convertible Note has the additional right to substitute such variable price (or formula) for the conversion price. If the holder were to substitute a floor price of $2.1832 as the variable price, the Company would be required to settle in cash any difference between the market value of the shares subject to conversion at the floor price and the market value of the shares using the variable price, excluding any reference to the floor. The holder of the Senior Convertible Note also has the right to have the Company redeem all or a portion of the Senior Convertible Note at a redemption price equal to 106% of the portion of the Senior Convertible Note being redeemed should the Company provide notice of incurring additional debt.
If an event of default occurs, the holder of the Senior Convertible Note has the right to alternate conversion (“Alternate Conversion”) and may elect to convert the Senior Convertible Note, inclusive of a 15% premium payable in a cash due such an acceleration of the applicable principal, at a price (“Alternate Conversion Price”) equal to the greater of the floor price of $2.1832 or a price derived from the volume weighted average price of the Company’s common stock at the time of Alternate Conversion. If the Alternate Conversion were to include the floor price of $2.1832 as the Alternate Conversion Price, the Company would be required to settle in cash any difference between the market value of the shares subject to the Alternate Conversion using the floor price and the market value of the shares using the Alternate Conversion Price, excluding any reference to the floor.
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In connection with an event of default, the holder may require the Company to redeem in cash any or all of the Senior Convertible Note. The redemption price will equal 115% of the outstanding principal of the Convertible Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or an amount equal to market value of the shares of the Company’s common stock underlying the Convertible Note, as determined in accordance with the Convertible Note, if greater. The noteholder will not have the right to convert any portion of a Senior Convertible Note, to the extent that, after giving effect to such conversion, the holder, together with certain related parties, would beneficially own in excess of 4.99% of the shares of our common stock outstanding immediately after giving effect to such conversion. The holder may from time to time increase this limit to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase.
In addition, unless obtain approval is obtained from the Company’s stockholders as required by Nasdaq, the Company is prohibited from issuing any shares of common stock upon conversion of the Senior Convertible Note or otherwise pursuant to the terms of the Senior Convertible Note, if the issuance of such shares of common stock would exceed 19.99% of the Company’s outstanding shares of common stock, or otherwise exceed the aggregate number of shares of common stock which the Company may issue without breaching our obligations under the rules and regulations of Nasdaq.
In connection with a change of control, as defined in the Senior Convertible Note, the holder may require the Company to redeem all or any portion of the Senior Convertible Note. The redemption price per share will equal the greatest of (i) 115% of the outstanding principal of the Senior Convertible Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, (ii) 115% of the market value of the shares of our common stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note, and (iii) 115% of the aggregate cash consideration that would have been payable in respect of the shares of the Company’s common stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note.
The Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. We also will be subject to certain financial covenants relating to available cash, ratio of outstanding indebtedness to market capitalization and minimum cash flow. The Company is also subject to financial covenants as it relates minimum revenues commencing June 30, 2022.
The Company evaluated its compliance with the debt covenants in the Senior Convertible Note as of June 30, 2021 and the period from July 1, 2021 through October 13, 2021 and determined that it had not maintained compliance with certain covenants in the Senior Convertible Note. The Company therefore requested and received a waiver 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 existing lien on the shares of Prozone Limited obtained in the acquisition of the Bethard Business (see discussion of the acquisition of the Bethard Business as a subsequent event in Note 19) and (iii) any known breach which would result from the issuances of up to 200,000 shares common stock in connection with the Company’s proposed purchase of certain equity interests in Game Fund Partners Group LLC (as further discussed as a subsequent event in Note 19). In addition, the Company requested and received an amendment to the Senior Convertible Note wherein the permitted ratio of outstanding debt to market capitalization was increased temporarily from 25% to 35% through December 25, 2021.
In consideration for the waiver, the Company agreed to permit the immediate conversion of up to $7,500,000 of the outstanding balance of the Senior Convertible Note at the Alternate Conversion Price into shares of common stock of the Company. In the event of default following December 25, 2021, the holder may exercise any and all rights available to it following such a default that includes redemption of the Senior Convertible Note for cash. The holder may also choose to convert any outstanding indebtedness in the form of the Alternate Conversion Price as provided in the Senior Convertible Note, subject to the terms and conditions contained therein, until such time as the Company is in compliance with the above-mentioned Sections.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires our management to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on management’s historical and industry experience and on various other assumptions that are believed to be reasonable under the circumstances. On a regular basis, we evaluate these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our estimates, and such differences could be material.
A full discussion of our significant accounting policies is contained in Note 2 to our consolidated financial statements, which is included in Item 8 – “Financial Statements and Supplementary Data” of this report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our financial results. These estimates require our most difficult, subjective or complex judgments because they relate to matters that are inherently uncertain. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.
Revenue recognition
Revenue and Cost Recognition
The revenue of the Company is currently generated from online casino and sports betting (referred to herein as “iGaming” revenue), as well from the provision of esports gaming, event and team management services. The amount of revenue is recognized by the Company 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.
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.
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 statement of operations.
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Esports Gaming Service 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 esports 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 food and beverages 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.
The Company may further provide 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 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 may further enter 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.
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 our overall pricing objectives, taking into consideration 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.
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 or online. The revenue generated from esports event management services is generally earned on a fixed fee basis per event. The esports team services offering 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.
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.
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Contract Liabilities
Liabilities to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities. The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users is based on the estimated fair value of the loyalty point incentive available to the user.
The Company also records payments received in advance of performance under an esports gaming services contract or event management or team services contract as deferred revenue.
Business combinations
The Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Impairment of Goodwill and long-lived assets
Goodwill is not amortized but rather it is tested at least annually for impairment, 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. Goodwill is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test.
The Company performs a quantitative impairment test for goodwill utilizing the two-step approach. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average costs of capital, and future economic and market conditions. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired and an impairment charge will be recorded to reduce the reporting unit to fair value. There was no goodwill recorded by the Company during the year ended June 30, 2020. There was no impairment of goodwill for the year ended June 30, 2021.
Equipment and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of future undiscounted cash flows are determined through estimated disposition date of the asset. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. An estimation of future cash flows requires significant judgment as the Company makes assumptions about future revenues and market conditions. Since the determination of future cash flows is an estimate of future performance, there may be impairments recognized in future periods in the event future cash flows do not meet expectations. The Company recorded an impairment of intangible assets of $67,132 during the year ended June 30, 2020. There was no impairment of long-lived assets identified for the year ended June 30, 2021.
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Derivative financial instruments
The Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives. The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to 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 consolidated statements of operations. Refer to Note 18 for additional disclosures related to the change in fair value of derivative liabilities.
Off Balance Sheet Arrangements
None.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 8. Financial Statements and Supplementary Data.
See financial statements included in Item 15 “Exhibits, Financial Statement Schedules” of this annual report.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. As further discussed below, we have identified material weaknesses in the effectiveness, design and operation of our disclosure controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and includes those policies and procedures that:
| 1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| 2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| 3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
The Company’s management, including the chief executive officer and chief financial officer, do not expect that its disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
As of June 30, 2021, management has not completed an effective assessment of the Company’s internal controls over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework. Management has concluded that, during the period covered by this report, our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting.
| 1. | We did not perform an ongoing and/or separate evaluation to determine whether the components of internal control are present and functioning within the period under audit; |
| 2. | We did not have sufficient period-end financial reporting controls in place as it relates to segregation of duties, reviews of completed or non-recurring transactions, and procedures for preparing the financial statements and disclosures. |
| 3. | We did not have sufficient controls in place as it relates to information technology (“IT”) controls and IT technology controls were not evaluated to determine operating effectiveness. |
This annual report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered independent public accounting firm pursuant to rules of the SEC that permit the us to provide only the management’s report in this annual report.
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As previously reported in the Company’s Current Report on Form 8-K dated and filed on May 28,2021, the Company entered into a Securities Purchase Agreement with an institutional investor (the “Investor”) pursuant to which it sold a Senior Convertible Note, with an initial principal amount of $35 million (the “Senior Convertible Note”). The loan documents contained 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. Such documents also contained financial covenants relating to available cash, the Company’s ratio of debt to market capitalization and minimum cash flow relating to minimum revenue.
The Company evaluated its compliance with it’s the debt covenants as of June 30, 2021 and the period from July 1, 2021 through October 13, 2021 and determined that it had not maintained compliance with certain covenants in the Senior Convertible Note. The Company therefore requested and received a waiver (the “October 2021 Waiver”) 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 existing lien on the shares of Prozone Limited (see discussion of acquisition of the Bethard Business as a subsequent event in Note 19) and (iii) any known breach which would result from the issuances of up to 200,000 shares Common Stock in connection with the Company’s proposed purchase of certain equity interests in Game Fund Partners Group LLC (as further discussed as a subsequent event in Note 19). In addition, the Company requested and received an amendment to the Senior Convertible Note wherein the permitted ratio of outstanding debt to market capitalization was increased temporarily from 25% to 35% through December 25, 2021.
In consideration for the October 2021 Waiver, the Company agreed to permit the immediate conversion of up to $7,500,000 of the outstanding balance of the Senior Convertible Note at the Alternate Conversion Price into shares of common stock of the Company. In the event of default following December 25, 2021, the holder may exercise any and all rights available to it following such a default that includes redemption of the Senior Convertible Note for cash. The holder may also choose to convert any outstanding indebtedness in the form of the Alternate Conversion Price as provided in the Senior Convertible Note, subject to the terms and conditions contained therein, until such time as the Company is in compliance with the above-mentioned Sections.
The summary of the October 2021 Waiver is qualified in its entirety by reference to the forms of such agreements, which are filed as exhibits to this Annual Report and incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
The names of our executive officers and directors and their age, title, and biography as of October 13, 2021 are set forth below. Our officers and directors serve until their respective successors are elected and qualified.
| Name | Age | Position(s) | ||
| Grant Johnson | 60 | President,
Secretary/ Treasurer, Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors | ||
| Daniel Marks | 42 | Chief
Financial Officer (Principal Financial Officer) (Principal Accounting Officer) and Director | ||
| John Brackens | 40 | Chief Information Officer & Chief Technology Officer | ||
| Damian Mathews | 49 | Director | ||
| Chul Woong Lim | 38 | Director | ||
| Alan Alden | 58 | Director | ||
| Warwick Bartlett | 74 | Director | ||
| Mark Nielsen | 45 | Director | ||
Stuart Tilly Adrien Lefevre |
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Chief Legal Officer Chief Risk & Compliance Officer |
The following noteworthy experience, qualifications, attributes and skills for each Board member, together with the biographical information for each person described below, led to our conclusion that the person should serve as a director in light of our business and structure:
Grant Johnson
Mr. Johnson has been the Chief Executive Officer of the Company since 2013. From 2007 to 2013, Mr. Johnson advised several development stage companies as a sales management and business development consultant. From 2003 to 2007, Mr. Johnson was co-founder, President, Chief Operating Officer and a Director of Swiss Medica Inc., a US publicly listed company which manufactured and sold nutraceutical products online. From 2000 to 2003, Mr. Johnson was founder, President, Chief Executive Officer and a Director of Healthnet International Inc., a US publicly listed company which sold nutraceutical products online. From early 1996 to 1999, Mr. Johnson was Vice President of Starnet Communications International, Inc. and Softec Systems Inc., a market leader in the B2B sector of the online gambling industry. Mr. Johnson obtained his Bachelor of Arts degree in economics and history from the University of Western Ontario in Canada.
Daniel Marks
Mr. Marks combines over twenty (20) years of experience of senior management in online gambling and corporate banking. From 2016 through the present, Mr. Marks has served as Chief Financial Officer of Argyll Entertainment AG, an online gambling operator licensed in the UK and Ireland. From 2014 to 2016, he was Chief Financial Officer for Large and Mid-Market Corporates for HSBC, North America, a British multinational banking and financial services organization. From 2008 through 2014, Mr. Marks held multiple financial and operational leadership roles, including Chief Operating Officer for UK Coverage at Barclays plc, a British multinational investment bank and financial services company. He has an undergraduate degree from the University of Bristol, UK, and is a CIMA qualified accountant.
John Brackens
Mr. Brackens combines over 12 years of experience in information technology senior management following a 4-year career leading customer experience teams. Previously, he had been involved in five organizations within the game industry holding positions including Chief Operating Officer, Treasurer, Foreign Director, and Network Operations Manager. From 2018 through January 2019, Mr. Brackens was the Operations Director for Carte Blanche Entertainment, Inc., an iGaming company. From 2016 to 2017, he was Chief Operating Officer for Sparkjumpers Pte Ltd., a company involved in video game development and eSports tournament events. From January 2014 to January 2016, he was Manager of Network Operations of Activision Blizzard - Demonware an entertainment company that focused on AAA game development. Mr. Brackens studied Electrical Engineering at Arizona State University. On September 26, 2019, Mr. Brackens was appointed chief technology officer of the Company.
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Damian Mathews
Mr. Mathews combines over 25 years of experience in senior finance positions within investment management, banking and accounting. Previously, he had been involved with the Qatar and Abu Dhabi Investment Company (a sovereign wealth fund owned investment company) as Chief Financial Officer from 2014 to 2020. From 2012 to 2014 he was a Director of his own consultancy business, NZ Pacific Investments, in New Zealand. From 2009 to 2012 he held senior management positions including General Manager Finance (New Zealand); Head of Finance and Operations Americas (United States); and Head of Change Management (Australia) at Commonwealth Bank of Australia Group. From 2007 to 2008 Damian was a Director in Product Control at ABN Amro bank in London. From 2002 to 2006 he held various senior financial controller positions at Royal Bank of Scotland Group in London. From 1998 to 2002 he was an Assistant Vice President at Credit Suisse First Boston investment bank in London and the Bahamas. From 1994 to 1998, he was an Assistant Manager at KPMG accountants in London. He has a joint honors undergraduate degree in Economics and Politics from the University of Bristol in the United Kingdom and is a fellow of the Institute of Chartered Accountants in England and Wales.
Chul Woong Lim
Since June 2018 Mr. Lim has been Director of Global Business for Loud Communications based in Seoul, South Korea. Between 2014 and 2018 Mr. Lim was the Secretary General of the International e-Sports Federation (IeSF) based in Seoul, South Korea where he was responsible for relations with 47 national federations, international sports authorities, and global partners, in addition to organizing and operating the eSports World Championship and other international esports tournaments. During 2010, Mr. Lim was Deputy Manager of Sports Marketing with FIRSONS Inc., a Seoul, South Korea based sports events marketing firm. Mr. Lim was one of our Directors between January 30, 2015 and October 26, 2016. Mr. Lim received a B.S. in Physical Education from Seoul National University.
Alan Alden
Mr. Alden has been a specialist in advising remote gaming companies located in Malta since 2000, when he advised the first remote gaming companies as the Senior Manager of Enterprise Risk Services at Deloitte & Touche (Malta). In 2006, Mr. Alden established Kyte Consultants Ltd, a company that specialized in the remote gaming and payment card sectors, to assist companies located in Malta. In 2009, Mr. Alden became a founding director in Contact Advisory Services Ltd, a licensed Company Service Provider (CSP) that offers a complete service to its customers, from company incorporation, to licensing for gaming and financial institutions. Since 2010, Mr. Alden has served as the General Secretary of the Malta Remote Gaming Council. Mr. Alden is a Certified Information Systems Security Professional (“CISSP”) and a Certified Information Systems Auditor (“CISA”). Mr. Alden was also the founding President of the ISACA Malta Chapter between 2005 and 2008. In 2015, Mr. Alden became a Part Time Lecturer on IT Auditing at the University of Malta.
Warwick Bartlett
Mr. Bartlett combines over fifty (50) years of experience in the gaming industry. From 1999 through the present, Mr. Bartlett has served as Chief Executive Officer of Global Betting & Gaming Consultants Ltd, a company that provides data and market reports for the global gambling industry. From 1989 to 2019, Mr. Bartlett served on the board of directors of Cashline Pawnbrokers Ltd. From 2002 to 2013, Mr. Bartlett served as Non-Executive Chairman of the Association of British Bookmakers a trade organization for betting shop operators in the United Kingdom which represents its members and their interests through legislative advocacy and media relations. From 2004 to 2010, Mr. Bartlett served as Member of the Horserace Betting Levy Board a UK statutory body that was established by the Betting Levy Act 1961. From 1992 to 2000, Mr. Bartlett served as Chairman of the British Betting Office Association.
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Mark Nielsen
Mr. Neilsen co-founded ggCircuit, LLC in 2017, a cloud based esports software solution for LAN centers around the world. At ggCircuit Mark was the Chief Marketing Officer and then Chief Operating Officer before it was purchased by Esports Entertainment Group, Inc. Mr. Neilsen founded and now serves as the Chief Evangelist for Nieley, LLC, a B2B sales, marketing and operations support agency for the games industry. Mr. Nielsen is also the founder and President of iGames, Inc., which builds and manages gaming based communities. One of iGames first projects was supporting over 1000 LAN centers and executing over 200 tournaments including the official Halo National Championships. Mr. Neilsen has lead iGames to power some of the largest gaming communities for clients such as Alienware Arena and the Intel Gaming Access Program, reaching more than 100 million monthly participants. Prior to iGames, Mark served in similar evangelical roles at Intel, Silicon Graphics, Inc, 3D graphics pioneer Rendition and GIobal VR. He holds a BA in Business Administration-Finance from California Polytechnic State University (Cal Poly) at San Luis Obispo, where he was also a 4-time All-American tennis player voted “Best All-Around Athlete” of the school and a winner of National Tennis Magazine’s prestigious Arthur Ashe Leadership Award.
Stuart Tilly
Mr. Tilly combines over 15 years of experience in the online gaming industry having previously trained and qualified as a Solicitor. Previously, he had been involved in several online gaming companies, holding positions including Founder and Chief Executive Officer, Chief Legal Officer and Non-Executive Director and board member. From 2016 through 2020, Stuart was the Chief Executive Officer for Argyll Entertainment AG, a UK licensed online sports betting and gaming company. From 2014 to 2020, he was also Founder and Chief Executive Officer of Flip Sports Limited, a mobile games development company. From 2012 to 2016 he was Founder and Executive Director of iGaming Counsel, a legal and commercial advisory firm to the online gaming industry. From 2005 to 2012 he held senior legal positions in the online gaming industry. Stuart was also a founding member of the International Social Games Association, an industry trade body for the social gaming industry and a non-executive advisor to Game Sparks Limited, a games platform as a service company. He has a law degree from the University of Exeter and an LPC Masters Degree from Nottingham Trent Law School. Stuart trained and qualified as a solicitor at Magic Circle law firm, Allen & Overy LLP.
Adrien Lefèvre
Mr. Lefèvre combines over 10 years of experience in Compliance and senior management. Previously, he had been involved in over 10 organizations within the game industry holding positions including Chief Risk & Compliance Officer, Group Secretary, Legal Officer, Compliance Officer, Risk Officer and Consultant. From 2019 through June 2020, he was a consultant for various B2B, and B2C I-gaming companies involved in multiple jurisdictions and gaming verticals. From 2016 through January 2019, Mr. Lefèvre was the Multigroup Ltd, Chief Risk & Compliance Officer and Group Secretary, a subsidiary of 500.com Ltd, an iGaming B2B & B2C company specialized in Secondary Lottery. From 2015 to 2016, he held the position of Compliance Officer with GVC Holdings and Videoslots Ltd. From 2010 to 2015, he was Compliance Analyst and Executive Escalation Specialist at PayPal Europe Services Ltd. Mr. Lefèvre holds a postgraduate in Financial Services Law, Regulation and Compliance from London Metropolitan University. On July 1st, 2020, Mr. Lefèvre was appointed Chief Risk & Compliance Officer of the Company
Warwick Bartlett, Damian Mathews, Chul Woong Lim and Alan Alden are independent directors as that term is defined in Section 5605(a)(2) of the Nasdaq Stock Market rules.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Section 16(a) Beneficial Owner Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a). To the Company’s knowledge, based solely on a review of reports furnished to it, for the year ended June 30, 2021, all of the Company’s officers, directors and ten percent holders have made the required filings other than Mr. Lefèvre’ Form 3 upon his becoming an executive officer.
Board Composition and Director Independence
Our Common Stock and warrants are listed on The NASDAQ Capital Market. Under the rules of NASDAQ, “independent” directors must make up a majority of a listed company’s board of directors. In addition, applicable NASDAQ rules require that, subject to specified exceptions, each member of a listed company’s audit and compensation committees be independent within the meaning of the applicable NASDAQ rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act.
Our board of directors consists of 7 members. The directors will serve until our next annual meeting and until their successors are duly elected and qualified. The Company defines “independent” as that term is defined in Rule 5605(a)(2) of the Nasdaq Stock Market rules.
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In making the determination of whether a member of the board is independent, our board considers, among other things, transactions and relationships between each director and his immediate family and the Company, including those reported under the caption “Related Party Transactions.” The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. On the basis of such review and its understanding of such relationships and transactions, our board affirmatively determined that Damian Mathews, Chul Woong Lim, Alan Alden and Warwick Bartlett are qualified as independent and do not have any material relationships with us that might interfere with his exercise of independent judgment.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee has its own charter, which is available on our website at www.esportsentertainmentgroup.com. Each of the board committees has the composition and responsibilities described below.
Members will serve on these committees until their resignation or until otherwise determined by our Board of Directors.
Damien Matthews, Chul Woong Lim, Warwick Bartlett and Alan Alden are our independent directors within the meaning of the NASDAQ Stock Market rules.
The members of each committee are, as follows:
Audit Committee: Damien Matthews, Alan Alden and Warwick Bartlett with Mr. Matthews serving as the Chairman. Our Board has determined the Mr. Matthews is currently qualified as an “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K.
Compensation Committee: Alan Alden, Chul Woong Lim, and Warwick Bartlett. Mr. Alden serves as Compensation Committee Chairman.
Nominating and Governance Committee: Warwick Bartlett, Alan Alden and Damian Matthews. Mr. Bartlett serves as Chairman of the Nominating and Governance Committee.
Audit Committee
The Audit Committee oversees our accounting and financial reporting processes and oversee the audit of our consolidated financial statements and the effectiveness of our internal control over financial reporting. The specific functions of this Committee include, but are not limited to:
| ● | selecting and recommending to our board of directors the appointment of an independent registered public accounting firm and overseeing the engagement of such firm; | |
| ● | approving the fees to be paid to the independent registered public accounting firm; | |
| ● | helping to ensure the independence of the independent registered public accounting firm; | |
| ● | overseeing the integrity of our financial statements; | |
| ● | preparing an audit committee report as required by the SEC to be included in our annual proxy statement; | |
| ● | resolving any disagreements between management and the auditors regarding financial reporting; | |
| ● | reviewing with management and the independent auditors any correspondence with regulators and any published reports that raise material issues regarding the Company’s accounting policies; | |
| ● | reviewing and approving all related-party transactions; and | |
| ● | overseeing compliance with legal and regulatory requirements. |
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Compensation Committee
Our Compensation Committee assists the board of directors in the discharge of its responsibilities relating to the compensation of the board of directors and our executive officers.
The Committee’s compensation-related responsibilities include, but are not limited to:
| ● | reviewing and approving on an annual basis the corporate goals and objectives with respect to compensation for our Chief Executive Officer; | |
| ● | reviewing, approving and recommending to our board of directors on an annual basis the evaluation process and compensation structure for our other executive officers; |
| ● | determining the need for and the appropriateness of employment agreements and change in control agreements for each of our executive officers and any other officers recommended by the Chief Executive Officer or board of directors; | |
| ● | providing oversight of management’s decisions concerning the performance and compensation of other company officers, employees, consultants and advisors; | |
| ● | reviewing our incentive compensation and other equity-based plans and recommending changes in such plans to our board of directors as needed, and exercising all the authority of our board of directors with respect to the administration of such plans; | |
| ● | reviewing and recommending to our board of directors the compensation of independent directors, including incentive and equity-based compensation; and | |
| ● | selecting, retaining and terminating such compensation consultants, outside counsel or other advisors as it deems necessary or appropriate. |
Nominating and Corporate Governance Committee
The purpose of the Nominating and Corporate Governance Committee is to recommend to the board nominees for election as directors and persons to be elected to fill any vacancies on the board, develop and recommend a set of corporate governance principles and oversee the performance of the board.
The Committee’s responsibilities include:
| ● | recommending to the board of directors nominees for election as directors at any meeting of stockholders and nominees to fill vacancies on the board; | |
| ● | considering candidates proposed by stockholders in accordance with the requirements in the Committee charter; | |
| ● | overseeing the administration of the Company’s code of business conduct and ethics; | |
| ● | reviewing with the entire board of directors, on an annual basis, the requisite skills and criteria for board candidates and the composition of the board as a whole; | |
| ● | the authority to retain search firms to assist in identifying board candidates, approve the terms of the search firm’s engagement, and cause the Company to pay the engaged search firm’s engagement fee; | |
| ● | recommending to the board of directors on an annual basis the directors to be appointed to each committee of the board of directors; | |
| ● | overseeing an annual self-evaluation of the board of directors and its committees to determine whether it and its committees are functioning effectively; and | |
| ● | developing and recommending to the board a set of corporate governance guidelines applicable to the Company. |
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The Nominating and Corporate Governance Committee may delegate any of its responsibilities to subcommittees as it deems appropriate. The Nominating and Corporate Governance Committee is authorized to retain independent legal and other advisors, and conduct or authorize investigations into any matter within the scope of its duties.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code is available on our corporate website at www.esportsentertainmentgroup.com. We expect that any amendments to such code, or any waivers of its requirements, will be disclosed on our website.
Board Diversity
We seek diversity in experience, viewpoint, education, skill, and other individual qualities and attributes to be represented on our Board of Directors. We believe directors should have various qualifications, including individual character and integrity; business experience; leadership ability; strategic planning skills, ability, and experience; requisite knowledge of our industry and finance, accounting, and legal matters; communications and interpersonal skills; and the ability and willingness to devote time to our company. We also believe the skill sets, backgrounds, and qualifications of our directors, taken as a whole, should provide a significant mix of diversity in personal and professional experience, background, viewpoints, perspectives, knowledge, and abilities. Nominees are not to be discriminated against on the basis of race, religion, national origin, sex, sexual orientation, disability, or any other basis proscribed by law. The assessment of prospective directors is made in the context of the perceived needs of our Board of Directors from time to time.
All of our directors have held high-level positions in business or professional service firms and have experience in dealing with complex issues. We believe that all our directors are individuals of high character and integrity, are able to work well with others, and have committed to devote sufficient time to the business and affairs of our company. In addition to these attributes, the description of each director’s background set forth above indicates the specific qualifications, skills, perspectives, and experience necessary to conclude that each individual should continue to serve as a director of our company.
Board and Committee Meetings
Our Board of Directors held ten formal board meetings and four formal Audit Committee meetings during year ended June 30, 2021. Our Board of Directors held one formal board meetings and one formal Audit Committee meetings during year ended June 30, 2020.
Annual Meeting Attendance
We encourage each of our directors to attend annual meetings of stockholders. To that end, and to the extent reasonably practicable, we will schedule a meeting of our Board of Directors on the same day as our annual meeting of stockholders.
Disclosure of Commission Position on Indemnification of Securities Act Liabilities
Our directors and officers are indemnified as provided by the Nevada corporate law and our bylaws. We have agreed to indemnify each of our directors and certain officers against certain liabilities, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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We have been advised that in the opinion of the SEC indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction. We will then be governed by the court’s decision.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| ● | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
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Item 11. Executive Compensation.
The following table summarizes information concerning the compensation awarded to, earned by, or paid to, our Chief Executive Officer (Principal Executive Officer or PEO) and our two most highly compensated executive officers other than the Principal Executive Officer during fiscal years 2021 and 2020 (collectively, the “Named Executive Officers”) who served in such capacities.
| Name and Principal Position | Year | Salary | Bonus | Stock Awards(1) | Option Awards(1) | Other Annual Compensation | All Other Compensation | Total | ||||||||||||||||||||||||
| Grant Johnson, | 2021 | $ | 300,000 | — | 92,000 | 276,000 | — | 14,800 | $ | 682,800 | ||||||||||||||||||||||
| CEO and President(2) | 2020 | $ | 150,000 | — | — | — | — | — | $ | 150,000 | ||||||||||||||||||||||
| John | 2021 | $ | 207,400 | — | 52,794 | 184,000 | — | — | $ | 444,194 | ||||||||||||||||||||||
Brackens CTO(3) | 2020 | $ | 94,000 | — | 83,645 | — | — | — | $ | 177,645 | ||||||||||||||||||||||
| Stuart | ||||||||||||||||||||||||||||||||
| Tilly, | 2021 | $ | 320,013 | — | 23,000 | 46,000 | — | — | $ | 389,013 | ||||||||||||||||||||||
| Chief Legal Counsel (4) | 2020 | $ | 11,510 | — | — | — | — | — | $ | 11,510 | ||||||||||||||||||||||
| Daniel Marks, | 2021 | $ | 216,000 | — | 23,000 | 69,000 | — | — | $ | 308,000 | ||||||||||||||||||||||
| CFO(5) | 2020 | $ | 9,000 | — | — | — | — | — | $ | 9,000 | ||||||||||||||||||||||
| (1) | The fair value of options granted computed in accordance with ASC718 on the date of grant. |
| (2) | Annual salary of $300,000. During the year ended June 30, 2021, the Chief Executive Officer (CEO) was issued 20,000 shares of common stock at $4.60 granted price, and 60,000 stock options at $4.82 granted price. All other compensation includes $4,800 for office rent reimbursement and $10,000 for car allowance. |
| (3) | Annual salary of approximately $207,000. Mr. John Brackens was appointed as the Company’s Chief Technology Officer (CTO) on September 20, 2019. During the year ended June 30, 2021, Mr. John Brackens was issued 300 shares, 7,500 shares and 2,367 shares of common stock at $4.25, $4.60 and $7.19 granted price, respectively. Mr. John Brackens was issued 40,000 stock options at $4.82 granted price. |
| (4) | Annual salary of approximately $320,000. Mr. Stuart Tilly was appointed as the Company’s Chief Legal Counsel on June 15, 2020. Mr. Stuart Tilly is compensated through a legal consultancy agreement that requires payments of £18,000 per month to his law firm, and he also receives $500 per month through an employment agreement as Legal Counsel and Company Secretary. During the year ended June 30, 2021, Mr. Stuart Tilly was issued 5,000 shares of common stock at $4.60 granted price, and 10,000 stock options at $4.82 granted price. |
| (5) | Annual salary of $216,000. Mr. Daniel Marks was appointed as the Company’s Chief Financial Officer (CFO) on June 15, 2020. During the year ended June 30, 2021 the CFO was issued 5,000 shares of common stock at $4.60 granted price, and 15,000 stock options at $4.82 granted price. |
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Employment Agreements
Grant Johnson
On June 1, 2017, we entered into an Employment Agreement with Grant Johnson to serve as our Chief Executive, President, Financial and Accounting Officer. The agreement provides for an annual salary of $150,000. On September 29, 2020, we entered into an Amended and Restated Employment Agreement with Grant Johnson to serve as our Chief Executive Officer (the “Johnson Employment Agreement”). We will continue to employ Mr. Johnson for the period beginning retroactively on May 1, 2020 (the “Commencement Date”) and ending on January 31, 2025, (the “Initial Term”). The Initial Term shall be automatically renewed for successive consecutive one (1) year periods (each, a “Renewal Term” and the Initial Term and Renewal Term are collectively referred to as the “term of employment”) thereafter unless either party sends written notice to the other party, not more than 270 days and not less than 180 days before the end of the then-existing term of employment, of such party’s desire to terminate the Johnson Employment Agreement at the end of the then-existing term, in which case the Johnson Employment Agreement will terminate at the end of the then-existing term.
The Johnson Employment Agreement provides for an annual salary of $300,000 (the “Base Salary”). In addition to the Base Salary, Mr. Johnson may receive a cash bonus up to 150% of the Base Salary determined by the relationship between our annual performance and an annual target performance set each year by mutual agreement between the Board of Directors.
Mr. Johnson participates in the executive stock option plan consistent with other C-level officers. In addition, the Mr. Johnson shall receive 100,000 shares of our common stock for each stock or asset acquisition consummated during the term of his employment that increases the gross revenues of the Company by $10,000,000 or more, as determined by the auditors and the Board of Directors. He will also be issued 200,000 of our common stock if we reach positive cash flow EBIDTA, as determined our auditors and the Board of Directors. Mr. Johnson will further receive a common stock issuance of 200,000 shares if our market capitalization exceeds $500,000,000 for a period of 30 consecutive trading days. In addition, the Mr. Johnson will receive a 200,000 common stock issuance if our market capitalization exceeds $1,000,000,000 for a period of 30 consecutive trading days. Further, Mr. Johnson will receive an issuance of 200,000 shares of common stock if our market capitalization exceeds $1,500,000,000 for a period of 30 consecutive trading days. Mr. Johnson will also be entitled receive an additional 100,000 shares of common stock for each additional $100,000,000 increase in market capitalization thereafter, provided that such increase is sustained for a period of 30 consecutive trading days.
Mr. Johnson is entitled to receive various employee benefits generally made available to other C-level officers and senior managers of the Company. If the Company were to terminate Mr. Johnson’s employment without cause, Mr. Johnson would be entitled to receive all compensation earned but unpaid through the date of termination and a severance payment equal to two (2) years’ worth of his then-existing Base Salary and previous years’ bonus.
John Brackens
On May 9, 2019, the Company entered into an employment agreement with Mr. John Brackens to serve as the Company’s Chief Information with a salary of $120,000 per annum. On September 20, 2019, the Company entered in a new employment agreement with Mr. Brackens to update Mr. Brackens position with the Company as its Chief Technology Officer. Under this amended agreement, Mr. Brackens was to receive an initial base salary of $120,000 per annum with his salary increased to $144,000 per annum upon the Company’s completion of financing in excess of $5,000,000. On May 1, 2020, the Company further amended the employment agreement with Mr. Brackens to update Mr. Bracken’s salary to $144,000 per annum. On February 22, 2021 the employment agreement with Mr. Brackens was amended further to increase Mr. Bracken’s salary effective from March 1, 2021 to approximately $200,000 payable in U.S. dollars and Euro.
The employment agreement with Mr. Brackens is for one year and is automatically extended for an additional one year term unless the Company or Mr. Brackens provides written notice within 60 days notice prior to the end of the current employment term. Mr. Brackens is eligible to earn an annual employee stock option bonus in such amount, if any, as determined in the sole discretion of the Board. The employment agreement with Mr. Brackens may be terminated with or without cause. Upon termination Mr. Brackens’ employment because of disability, the Company shall pay or provide Mr. Brackens (i) any unpaid base fee and any accrued vacation through the date of termination; (ii) any unpaid annual bonus accrued with respect to the fiscal year ending on or preceding the date of termination; (iii) reimbursement for any unreimbursed expenses properly incurred through the date of termination; and (iv) any Accrued Benefits. Upon the termination of Mr. Brackens’ employment because of death, Mr. Brackens’ estate shall be entitled to any Accrued Benefits. Upon the termination Mr. Brackens’ employment by the Company for cause or by either party in connection with a failure to renew the employment agreement, the Company shall pay Mr. Brackens any Accrued Benefits.
| 58 |
Daniel Marks
On June 11, 2020, Mr. Marks entered into an engagement agreement with the Company. The Engagement Agreement is for a term of one year (the “Initial Term”) and shall be automatically extended for additional terms of successive one-year periods (the “Additional Term”) unless the Company or Mr. Marks gives at least 30 days written notice prior to the expiration of the Initial Term or each Additional Term. Mr. Marks is to receive a base salary of $18,000 per month. Mr. Marks is eligible to earn an annual employee stock option bonus in such amount, if any, as determined in the sole discretion of the Board. The Engagement Agreement may be terminated with or without cause. The Company can terminate Mr. Marks without cause at any time during the first ninety (90) days of the Initial Term of the Engagement Agreement. Upon termination of Mr. Marks because of disability, the Company shall pay or provide to Mr. Marks (1) any unpaid salary and any accrued vacation through the date of termination; (2) any unpaid bonus accrued with respect to the fiscal year ending on or preceding the date of termination; (3) reimbursement for any unreimbursed expenses properly incurred through the date of termination; and (4) all other payments or benefits to which he may be entitled under the terms of any applicable employee benefit plan, program or arrangement.
As a full-time employee of the Company, Mr. Marks will be eligible to participate in all of the Company’s benefit programs.
Stuart Tilly
On June 11, 2020, Mr. Tilly entered into an engagement agreement with the Company to serve at the Chief Legal Counsel. The Company also entered into a consulting agreement with Mr. Tilly through the law firm Rivington Law, whereby Mr. Tilly provides additional legal and other professional services to the Company. Mr. Tilly receives $500 per month in his role as Chief Legal Counsel and £18,000 ($24,842 translated using the exchange rate in effect at June 30, 2021) pursuant to the consulting agreement.
In his role as Chief Legal Counsel, Mr. Tilly is entitled to discretionary cash bonuses as determined from time to time by the Board or Compensation Committee as well as participation in any executive stock option plan consistent with other C-level officers. Either party may terminate the engagement agreement upon 60 days written notice.
The Company or Mr. Tilly may terminate the consulting agreement upon six months written notice . Under the consulting agreement, the Company may, at is sole discretion, terminate the agreement immediately by paying all amounts that otherwise would have been due owing during the notice period for termination. On the date of termination, for any reason whatsoever, Mr. Tilly will only be entitled to any outstanding fees or consideration earned and owed though the date of such termination.
Outstanding Equity Awards at June 30, 2021
The following table summarizes the outstanding equity award holdings held by our named executive officers and directors at June 30, 2021.
| Name | Shares
issuable upon exercise of options | Option exercise price ($) | Option expiration date | |||||||
| Alan Alden (1) | 20,000 | $ | 4.82 | January 7, 2026 | ||||||
| Damien Matthews (2) | 20,000 | $ | 4.82 | January 7, 2026 | ||||||
| Chul Wong Lim (3) | 20,000 | $ | 4.82 | January 7, 2026 | ||||||
| Warwick Bartlett (4) | 20,000 | $ | 4.82 | January 7, 2026 | ||||||
| Grant Johnson, Chief Executive Officer | 60,000 | $ | 4.82 | January 7, 2026 | ||||||
| Stuart Tilly, Chief Legal Counsel | 10,000 | $ | 4.82 | January 7, 2026 | ||||||
| Daniel Marks, Chief Financial Officer | 15,000 | $ | 4.82 | January 7, 2026 | ||||||
| John Brackens, Chief Technology Officer | 40,000 | $ | 4.82 | January 7, 2026 | ||||||
| Adrien Lefevre, Chief Compliance Officer | 10,000 | $ | 4.82 | January 7, 2026 | ||||||
| (1) | Mr. Alden was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and Chair of the Compensation committee as from October 1, 2020. |
| 59 |
| (2) | Mr. Matthews was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and Chair of the Audit committee as from October 1, 2020. |
| (3) | Mr. Lim was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and a member of the Compensation committee as from October 1, 2020. |
| (4) | Mr. Bartlett was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and Chair of the Governance committee as from October 1, 2020. |
Stock Incentive Plans
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 1,500,000 shares. Each year on January 1, for a period of up to nine years, the maximum number of shares authorized for issuance under the 2020 is automatically increased by 233,968 shares. At June 30, 2021, there was a maximum of 1,733,968 shares of common stock authorized for issuance under the 2020 Plan. There were no additional equity awards eligible for issuance from the 2017 Stock Incentive Plan that had been adopted by the Company on August 1, 2017. The outstanding stock options granted under the 2017 Plan were transferred to the 2020 Plan. As of June 30, 2021, there were 1,281,959 shares of common stock available for future issuance under the 2020 Plan.
Incentive Stock Options
All of our employees are eligible to be granted Incentive Stock Options pursuant to the 2020 Plan as may be determined by our Board of Directors which administers the Plan.
Options granted pursuant to the 2020 Plan terminate at such time as may be specified when the option is granted.
The total fair market value of the shares of common stock (determined at the time of the grant of the option) for which any employee may be granted options which are first exercisable in any calendar year may not exceed $100,000.
In the discretion of the Board of Directors, options granted pursuant to the 2020 Plan may include instalment exercise terms for any option such that the option becomes fully exercisable in a series of cumulating portions. The Board of Directors may also accelerate the date upon which any option (or any part of any option) is first exercisable. However, no option, or any portion thereof may be exercisable until one year following the date of grant. In no event shall an option granted to an employee then owning more than l0% of our common stock be exercisable by its terms after the expiration of five years from the date of grant, nor shall any other option granted pursuant to 2020 Plan be exercisable by its terms after the expiration of ten years from the date of grant.
Non-Qualified Stock Options
Our employees, directors and officers, and consultants or advisors are eligible to be granted Non-Qualified Stock Options pursuant to 2020 Plan as may be determined by our Board of Directors which administers the Plan, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with a capital-raising transaction or promoting our common stock.
Options granted pursuant to 2020 Plan terminate at such time as may be specified when the option is granted.
In the discretion of the Board of Directors options granted pursuant to the Plan may include instalment exercise terms for any option such that the option becomes fully exercisable in a series of cumulating portions. The Board of Directors may also accelerate the date upon which any option (or any part of any option) is first exercisable. In no event shall an option be exercisable by its terms after the expiration of ten years from the date of grant.
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Stock Bonuses
Our employees, directors and officers, and consultants or advisors are eligible to receive a grant of our shares, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with a capital-raising transaction or promoting our common stock. The grant of the shares rests entirely with our Board of Directors which administers the Plan. It is also left to the Board of Directors to decide the type of vesting and transfer restrictions which will be placed on the shares.
Employee Pension, Profit Sharing or other Retirement Plan
We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although we may adopt one or more of such plans in the future.
Directors’ Compensation
The table below shows the compensation paid to our non-executive directors during the year ended June 30, 2021.
| Name | Year | Fees
Earned or Paid in Cash | Stock Awards(1) | Option Awards(2) | Total | |||||||||||||||
| Chul Woong Lim (3) | 2021 | $ | 20,000 | $ | — | $ | 64,079 | $ | 84,079 | |||||||||||
| 2020 | $ | 20,000 | $ | — | $ | — | $ | 20,000 | ||||||||||||
| Alan Alden (4) | 2021 | $ | 20,000 | $ | — | $ | 64,079 | $ | 84,079 | |||||||||||
| 2020 | $ | 20,000 | $ | 20,000 | $ | — | $ | 40,000 | ||||||||||||
| Warwick Bartlett (5) | 2021 | $ | 20,000 | $ | — | $ | 64,079 | $ | 84,079 | |||||||||||
| 2020 | $ | 5,000 | $ | — | $ | — | $ | 5,000 | ||||||||||||
| Damian Mathews (6) | 2021 | $ | 20,000 | $ | — | $ | 64,079 | $ | 84,079 | |||||||||||
| 2020 | $ | 1,667 | $ | — | $ | — | $ | 1,667 | ||||||||||||
| (1) | The fair value of stock issued for services computed in accordance with ASC718 on the date of grant. |
| (2) | The fair value of options granted computed in accordance with ASC718 on the date of grant. |
| (3) | Mr. Lim was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and a member of the Compensation committee as from October 1, 2020. |
(4)
(5) |
Mr. Alden was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and Chair of the Compensation committee as from October 1, 2020. Mr. Bartlett was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and Chair of the Governance committee as from October 1, 2020. |
| (6) | Mr. Matthews was appointed as a Non-Executive Director of Esports Entertainment Group, Inc. and Chair of the Audit committee as from October 1, 2020. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following tables set forth certain information regarding our voting shares beneficially owned as of October 11, 2021 and is based on 21,985,172 shares issued and outstanding, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of Common Stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the tables for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of these tables, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock that such person has the right to acquire within 60 days of October 11, 2021. For purposes of computing the percentage of outstanding shares of our Common Stock held by each person or group of persons, any shares that such person or persons has the right to acquire within 60 days of October 11, 2021 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise indicated, each of the shareholders named in the table below, or his or her family members, has sole voting and investment power with respect to such shares of our Common Stock. Except as otherwise indicated, the address of each of the shareholders listed below is: Block 6, Triq Paceville, St. Julians, Malta, STJ 3109.
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The following shows the stock ownership of our officers, directors and any persons known to us who owns more than 5% of our common stock as of October 11, 2021.
| Name and Address of Beneficial Owner | Number | Percent | ||||||
Grant Johnson(1) 1370 Pilgrims Way | 3,444,134 | 15.25 | % | |||||
Daniel Marks (2) 121 Lockwood Road | 119,439 | * | ||||||
John Brackens (3) The Terraces, Triq is-Simar, Apt.7A, Xemxija St Paul’s Bay, Malta SPB9026 | 89,092 | * | ||||||
Chul Woong Lim (4) 204-804 Susaek Rd. | 70,780 | * | ||||||
Damian Mathews (5) 69 De Luen Avenue | 58,000 | * | ||||||
Stuart Tilly (6) 87 Luton Road | 111,388 | * | ||||||
| Warwick Bartlett (7) | ||||||||
| Rose Cottage, 28 Bowling Green Road Castletown, Isle of Man, British Isles, IM9 1EB | 49,500 | * | ||||||
Alan Alden (8) 202, Yucca, Swieqi Road | 54,762 | * | ||||||
| Adrien Lefevre (9) | ||||||||
| 31 Dudley Road, Kingston upon Thames | ||||||||
| Surrey, KT12UN UK | 36,660 | * | ||||||
| Mark Nielsen (10) | ||||||||
| 5271 E Sagewood Dr, Boise | ||||||||
| Indiana, 83716 | 25,000 | * | ||||||
| All Officers and Directors as a group (ten persons) | 4,058,755 | 16.2 | % | |||||
| * | less than 1% |
| (1) | Mr. Grant Johnson and Next Generation Holdings Trust, controlled by Grant Johnson currently hold 3,353,334 shares of common stock and 90,800 options to purchase shares of common stock currently exercisable. |
| (2) | Includes 73,639 shares of common stock and 45,800 options to purchase shares of common stock currently exercisable. |
| (3) | Includes 18,292 shares of common stock and 70,800 options to purchase shares of common stock currently exercisable. |
| (4) | Includes 20,780 shares of common stock and 50,000 options to purchase shares of common stock currently exercisable. |
| (5) | Includes 8,000 shares of common stock and 50,000 options to purchase shares of common stock currently exercisable. |
| (6) | Includes 75,588 shares of common stock and 35,800 options to purchase shares of common stock currently exercisable. |
| (7) | Includes 4,500 shares of common stock and 45,000 options to purchase shares of common stock currently exercisable. |
| (8) | Includes 4,762 shares of common stock and 50,000 options to purchase shares of common stock currently exercisable. |
| (9) | Includes 5,860 shares of common stock and 30,800 options to purchase shares of common stock currently exercisable. |
| (10) | Includes 25,000 options to purchase shares of common stock currently exercisable. |
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions
Our Company’s policy with regard to related party transactions is for the Board as a whole to approve any material transactions involving our directors, executive officers or holders of more than 5% of our outstanding capital stock.
The Company incurs home office expenses allowances of $4,800 per year charged by the President of the Company for use of a home office for him and an employee of the Company. As of June 30, 2021, the Company did not have a balance payable to the President related to rent payments.
The Company has entered into a consulting agreement with its Chief Legal Counsel through the law firm Rivington Law resulting in monthly payments of £18,000 ($24,842 translated using the exchange rate in effect at June 30, 2021) for legal and other professional services provided through the consulting agreement.
Item 14. Principal Accounting Fees and Services.
Audit Fees. The aggregate fees billed by our independent registered public accounting firm, for professional services rendered for the audit of our annual financial statements for the years ended June 30, 2021 and 2020, including review of our interim financial statements were $104,250 and $84,350, respectively.
Audit Related Fees. We incurred fees to our independent registered public accounting firm of $282,404 and $53,850 for audit related fees during the fiscal years ended June 30, 2021 and 2020, respectively, which related to filings with the SEC and audits of acquisitions by the Company during the year ended June 30, 2021.
Tax and Other Fees. We did not incur fees to our independent registered public accounting firm for tax and other services during the fiscal years ended June 30, 2021 and 2020.
The Audit Committee pre-approves all auditing services and all permitted non-auditing services (including the fees and terms thereof) to be performed by our independent registered public accounting firm.
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Item 15. Exhibits, Financial Statement Schedules.
| (a) | The following documents are filed as part of this Annual Report on Form 10-K: |
| 1. | Financial Statements: |
Our financial statements and the Report of Independent Registered Public Accounting Firm are included herein on page F-1.
| 2. | Financial Statement Schedules: |
The financial statement schedules are omitted as they are either not applicable or the information required is presented in the financial statements and notes thereto on page F-1.
| 3. | Exhibits: |
INDEX TO EXHIBITS
| 64 |
| 65 |
| * | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
| 66 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Esports Entertainment Group, Inc. | ||
| Date: October 13, 2021 | By: | /s/ Grant Johnson |
| Grant Johnson | ||
Chief Executive Officer, and Chairman of the Board of Directors (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Grant Johnson | Chief Executive Officer, Secretary, and | October 13, 2021 | ||
| Grant Johnson | Chairman of the Board of Directors (Principal Executive Officer) |
|||
| /s/ Daniel Marks | Chief Financial Officer | October 13, 2021 | ||
| Daniel Marks | (Principal Accounting Officer and Principal Financial Officer) |
|||
| /s/ Damian Mathews | Director | October 13, 2021 | ||
| Damian Mathews | ||||
| /s/ Chul Woong Lim | Director | October 13, 2021 | ||
| Chul Woong Lim | ||||
| /s/ Alan Alden | Director | October 13, 2021 | ||
| /s/ Warwick Bartlett | Director | October 13, 2021 | ||
| /s/ Mark Nielsen | Director | October 13, 2021 |
| 67 |
ESPORTS ENTERTAINMENT GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| 68 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Esports Entertainment Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Esports Entertainment Group Inc. (the “Company”) as of June 30, 2021, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the year ended June 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s significant accumulated deficit as of June 30, 2021, and recurring losses from operations and negative cash flows from operating activities, as well as the uncertainty related to the Company’s ability to comply with the financial covenants of its senior convertible note, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Refer to the Critical Audit Matter titled “Liquidity – Assessing the Company’s Ability to Continue as a Going Concern”, below.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-1 |
Accounting for Business Combinations
Description of the Matter
As described in Note 3 to the financial statements, the Company entered into six business combination transactions during the year ended June 30, 2021. The Company accounted for these acquisitions in accordance with ASC Topic 805, Business Combinations, which required the Company to exercise judgment and make estimates and assumptions based on available information regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets. Estimates and assumptions that the Company makes in estimating the fair value of the identifiable intangible assets include future cash flows that they expect to generate from the acquired assets.
We identified the determination of fair values of certain identifiable intangible assets as a critical audit matter. The principal considerations for our determination included the following: (i) changes in the key assumptions that could have a significant impact on the fair value of the intangible assets acquired, (ii) subjectivity and judgment required to determine significant unobservable inputs and assumptions utilized by the Company in determining the fair value of the intangible assets acquired, specifically projected revenue growth rates, discount rates, and cost to recreate, and (iii) appropriateness of various valuation methodologies used to determine the fair value of the intangible assets acquired. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
| ● | Assessing the reasonableness of projected revenue growth rates, projected profit margins: (i) evaluating historical performance of the target entity and, (ii) assessing financial projections against industry metrics and peer-group companies. |
| ● | Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of discount rates incorporated into the various valuation methodologies, and (ii) assessing the appropriateness of various valuation methodologies utilized by management to determine the fair values of the intangible assets acquired. |
Convertible Note Payable and Warrants
Description of the Matter
As described in Note 12 to the financial statements, the Company issued a convertible note with detachable warrants that required management to assess whether the detachable warrants should be accounted for as a liability and whether the conversion feature of the convertible debt required bifurcation and separate valuation as a derivative liability. The conversion feature was deemed to be immaterial; however, the detachable warrants were concluded to be accounted for as a liability instrument. In determining the proper classification of the detachable warrants, an evaluation of their features, including their settlement terms, is required in order to conclude whether the warrants should be accounted for as a liability. The valuation methodology used in determining the fair value of the warrant liability included inputs subject to management’s judgment, including the estimate of volatility and discount rate.
| F-2 |
We identified the accounting for the convertible note and detachable warrants, and the valuation of the warrant liability as a critical audit matter due to the complexity and judgment involved in evaluating the features of the instruments and in applying the accounting framework and judgments made by management in estimating the fair value of the warrant liability. This required a high degree of auditor judgment and an increased level of effort when performing audit procedures, including the involvement of valuation professionals with specialized skills and knowledge.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
| ● | Evaluating the reasonableness of management’s interpretation of the terms of the convertible note and warrants and the appropriateness of management’s application of the authoritative accounting guidance. |
| ● | Testing the accuracy of the source data used by management in the valuation by comparing it to the agreements, share price, volatility, and risk-free rate. |
| ● | Utilizing personnel with specialized skills and knowledge in valuation approach and methodologies to assist in: (i) assessing the appropriateness of the methodology used in estimating the fair value of the warrant liability; and (ii) evaluating the reasonableness of certain significant assumptions, such as volatility and discount rates. |
Liquidity – Assessing the Company’s Ability to Continue as a Going Concern
Description of the Matter
The disclosure related to the Company’s liquidity and its ability to continue as a going concern for the twelve months from the issuance of these financial statements are described in Note 2 of the financial statements. The evaluation of the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and execution uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgement and assumptions in estimating these cash flows. Refer to the “Substantial Doubt about the Company’s Ability to Continue as a Going Concern”, above.
How We Addressed the Matter in Our Audit
We reviewed forecasted information, assessed reasonableness of the forecasted operating results and uses and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the financial statement issuance date. This testing included inquiries with management, comparison of prior period forecasts to actual results, assessment of available financing, evaluation of compliance with future debt covenants, consideration of positive and negative evidence impacting management’s forecasts, market and industry factors.
| /s/ Friedman LLP | |
| We have served as the Company’s auditor since 2020. | |
| Marlton, New Jersey | |
| October 13, 2021 | |
| F-3 |
| F-4 |
Esports Entertainment Group, Inc.
Consolidated Balance Sheets
| June 30, 2021 | June 30, 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 19,917,196 | $ | 12,353,307 | ||||
| Restricted cash | 3,443,172 | - | ||||||
| Accounts receivable, net | 136,681 | - | ||||||
| Receivables reserved for users | 2,290,105 | - | ||||||
| Other receivables | 658,745 | - | ||||||
| Deposit on business acquisition | - | 500,000 | ||||||
| Prepaid expenses and other current assets | 3,264,344 | 263,345 | ||||||
| Total current assets | 29,710,243 | 13,116,652 | ||||||
| Equipment, net | 726,942 | 8,041 | ||||||
| Operating lease right-of-use asset | 1,272,920 | - | ||||||
| Intangible assets, net | 45,772,555 | 2,000 | ||||||
| Goodwill | 40,937,370 | - | ||||||
| Other non-current assets | 1,315,009 | 6,833 | ||||||
| TOTAL ASSETS | $ | 119,735,039 | $ | 13,133,526 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 8,458,689 | $ | 811,549 | ||||
| Liabilities to customers | 3,057,942 | - | ||||||
| Deferred revenue | 22,110 | - | ||||||
| Liabilities to be settled in stock | - | 927,855 | ||||||
| Current portion of notes payable and other long-term debt | 223,217 | - | ||||||
| Operating lease liability - current | 414,215 | - | ||||||
| Total current liabilities | 12,176,173 | 1,739,404 | ||||||
| Senior convertible note, net of unamortized discount | 6,302,504 | - | ||||||
| Notes payable and other long-term debt | 221,300 | - | ||||||
| Warrant liability | 23,500,000 | - | ||||||
| Deferred income taxes | 1,870,861 | - | ||||||
| Operating lease liability - non-current | 878,809 | - | ||||||
| Total liabilities | 44,949,647 | 1,739,404 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock $0.001 par value; 10,000,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock $0.001 par value; 500,000,000 shares authorized, 21,896,145 and 11,233,223 shares issued and outstanding as of June 30, 2021 and June 30, 2020, respectively | 21,896 | 11,233 | ||||||
| Additional paid-in capital | 122,341,002 | 31,918,491 | ||||||
| Accumulated deficit | (46,908,336 | ) | (20,535,602 | ) | ||||
| Accumulated other comprehensive loss | (669,170 | ) | - | |||||
| Total stockholders’ equity | 74,785,392 | 11,394,122 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 119,735,039 | $ | 13,133,526 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
Esports Entertainment Group, Inc.
Consolidated Statements of Operations
| Year Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net revenue | $ | 16,783,914 | $ | - | ||||
| Operating costs and expenses: | ||||||||
| Cost of revenue | 7,861,317 | - | ||||||
| Sales and marketing | 10,038,524 | 322,517 | ||||||
| General and administrative | 24,610,511 | 3,727,198 | ||||||
| Total operating expenses | 42,510,352 | 4,049,714 | ||||||
| Operating loss | 25,726,438 | 4,049,714 | ||||||
| Other income (expense): | ||||||||
| Interest expense | (698,973 | ) | (1,995,458 | ) | ||||
| Net amortization of debt discount and premium on convertible debt | - | (1,156,877 | ) | |||||
| Change in fair value of derivative liabilities | - | (2,432,302 | ) | |||||
| Change in fair value of warrant liability | (1,549,924 | ) | - | |||||
| Change in fair value of contingent consideration | (1,748,607 | ) | - | |||||
| Loss on extinguishment of debt | - | (2,795,582 | ) | |||||
| Gain on warrant exchange | - | 1,894,418 | ||||||
| Other non-operating income (loss), net | (460,328 | ) | 186,498 | |||||
| Total other expense | (4,457,832 | ) | (6,299,303 | ) | ||||
| Loss before income taxes | 30,184,270 | 10,349,017 | ||||||
| Income tax benefit (expense) | 3,811,536 | (2,398 | ) | |||||
| Net loss | $ | 26,372,734 | $ | 10,351,415 | ||||
| Basic and diluted loss per common share | $ | (1.68 | ) | $ | (1.50 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 15,723,618 | 6,880,321 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Esports Entertainment Group, Inc.
Consolidated Statements of Comprehensive Loss
| Year Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | 26,372,734 | $ | 10,351,415 | ||||
| Other comprehensive loss: | ||||||||
| Foreign currency translation loss | 669,170 | - | ||||||
| Total comprehensive loss | $ | 27,041,904 | $ | 10,351,415 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
Esports Entertainment Group, Inc.
Consolidated Statements of Changes in Stockholders Equity (Deficit)
For the Years Ended June 30, 2021 and 2020
| Additional | Accumulated other | |||||||||||||||||||||||
| Common Stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | Deficit | loss | Total | |||||||||||||||||||
| Balance as at July 1, 2019 | 5,849,821 | $ | 5,850 | $ | 5,185,379 | $ | (10,184,187 | ) | $ | - | $ | (4,992,958 | ) | |||||||||||
| Common stock and warrants issued for cash, net of costs | 1,980,000 | 1,980 | 6,769,460 | - | - | 6,771,440 | ||||||||||||||||||
| Common stock issued upon the exercise of over-allotment, net of costs | 209,400 | 209 | 823,550 | - | - | 823,759 | ||||||||||||||||||
| Common stock issued upon the exercise of warrants, net of costs | 1,543,396 | 1,543 | 6,637,739 | - | - | 6,639,282 | ||||||||||||||||||
| Common stock issued upon the conversion of debt | 1,217,241 | 1,217 | 4,137,373 | - | - | 4,138,590 | ||||||||||||||||||
| Reclassification of derivative liability upon conversion of debt | - | - | 4,793,462 | - | - | 4,793,462 | ||||||||||||||||||
| Common stock issued for waiver agreement | 5,435 | 5 | 26,897 | - | - | 26,902 | ||||||||||||||||||
| Reclassification of derivative liability on warrants upon removal of derivative feature | - | - | 221,222 | - | - | 221,222 | ||||||||||||||||||
| Common stock issued for warrant exchange | 288,722 | 289 | 1,688,735 | - | - | 1,689,024 | ||||||||||||||||||
| Common stock and warrants issued for services | 25,556 | 26 | 57,974 | - | - | 58,000 | ||||||||||||||||||
| Non-cash warrant exercise | 53,028 | 53 | 1,222,549 | - | - | 1,222,602 | ||||||||||||||||||
| Stock based compensation | 60,624 | 61 | 354,151 | - | - | 354,212 | ||||||||||||||||||
| Net loss | - | - | - | (10,351,415 | ) | - | (10,351,415 | ) | ||||||||||||||||
| Balance as at July 1, 2020 | 11,233,223 | 11,233 | 31,918,491 | (20,535,602 | ) | - | 11,394,122 | |||||||||||||||||
| Stock issued for Argyll acquisition | 650,000 | 650 | 3,801,850 | - | - | 3,802,500 | ||||||||||||||||||
| Stock issued for FLIP acquisition | 187,616 | 188 | 2,217,433 | - | - | 2,217,621 | ||||||||||||||||||
| Stock issued for EGL acquisition | 355,620 | 356 | 2,791,127 | - | - | 2,791,483 | ||||||||||||||||||
| Stock issued for ggCircuit acquisition | 830,189 | 830 | 9,272,381 | - | - | 9,273,211 | ||||||||||||||||||
| Stock issued for Helix acquisition | 528,302 | 528 | 5,900,605 | - | - | 5,901,133 | ||||||||||||||||||
| Common stock issued in equity financing, net of issuance costs | 2,000,000 | 2,000 | 27,338,000 | - | - | 27,340,000 | ||||||||||||||||||
| Stock options and warrant exercises | 5,508,500 | 5,509 | 34,059,351 | - | - | 34,064,860 | ||||||||||||||||||
| Stock issued for services | 602,695 | 602 | 4,024,144 | - | - | 4,024,746 | ||||||||||||||||||
| Stock based compensation | - | - | 1,017,620 | - | - | 1,017,620 | ||||||||||||||||||
| Foreign exchange translation | - | - | - | - | (669,170 | ) | (669,170 | ) | ||||||||||||||||
| Net loss | - | - | - | (26,372,734 | ) | - | (26,372,734 | ) | ||||||||||||||||
| Balance as at June 30, 2021 | 21,896,145 | $ | 21,896 | $ | 122,341,002 | $ | (46,908,336 | ) | $ | (669,170 | ) | $ | 74,785,392 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-8 |
Esports Entertainment Group, Inc.
Consolidated Statements of Cash Flows
| For the Years Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (26,372,734 | ) | $ | (10,351,415 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization and depreciation | 3,416,252 | 20,631 | ||||||
| Right-of-use asset amortization | 162,545 | - | ||||||
| Stock-based compensation | 4,129,726 | 1,614,236 | ||||||
| Deferred income taxes | (4,136,258 | ) | - | |||||
| Amortization of debt discount | 467,504 | 1,156,887 | ||||||
| Non-cash interest expense | - | 1,995,458 | ||||||
| Change in fair value of warrant liability | 1,549,924 | - | ||||||
| Change in fair value of contingent consideration | 1,748,607 | - | ||||||
| Change in the fair value of derivative liabilities | - | 2,432,302 | ||||||
| Loss on extinguishment of debt | - | 2,795,582 | ||||||
| Gain on warrant exchange | - | (1,894,418 | ) | |||||
| Other non-cash charges, net | 2,460 | (186,456 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 76,040 | - | ||||||
| Receivables reserved for users | (2,260,031 | ) | - | |||||
| Other receivables | 10,477 | - | ||||||
| Prepaid expenses and other current assets | (2,246,119 | ) | (123,831 | ) | ||||
| Other non-current assets | (220,329 | ) | - | |||||
| Accounts payable and accrued expenses | 4,312,871 | 271,372 | ||||||
| Liabilities to customers | 672,403 | - | ||||||
| Deferred revenue | (83,339 | ) | - | |||||
| Operating lease liability | (108,363 | ) | - | |||||
| Other, net | (4,642 | ) | - | |||||
| Net cash used in operating activities | (18,883,006 | ) | (2,269,652 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash consideration paid for Lucky Dino, net of cash acquired | (28,930,540 | ) | - | |||||
| Cash consideration paid for ggCircuit | (14,993,977 | ) | - | |||||
| Cash consideration paid for Helix | (9,964,691 | ) | - | |||||
| Cash consideration paid for Argyll, net of cash acquired | (728,926 | ) | (500,000 | ) | ||||
| Cash consideration paid for EGL, net of cash acquired | (622,503 | ) | - | |||||
| Cash consideration paid for FLIP | (100,000 | ) | - | |||||
| Purchase of intangible assets | (730,234 | ) | - | |||||
| Purchases of equipment | (62,385 | ) | - | |||||
| Net cash used in investing activities | (56,133,256 | ) | (500,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from equity financing, net of issuance costs | 27,340,000 | 8,415,000 | ||||||
| Proceeds from exercise of stock options and warrants, net of issuance costs | 26,584,860 | 6,688,865 | ||||||
| Proceeds from issuance of Senior Convertible Note | 35,000,000 | - | ||||||
| Payment of debt issuance costs | (2,485,000 | ) | (1,844,268 | ) | ||||
| Proceeds from the exercise of over-allotments | - | 889,950 | ||||||
| Repayment of note payable | (83,659 | ) | - | |||||
| Proceeds from promissory convertible note | - | 1,160,000 | ||||||
| Repayment of promissory convertible note | - | (230,000 | ) | |||||
| Net cash provided by financing activities | 86,356,201 | 15,079,547 | ||||||
| Effect of exchange rate on changes in cash and restricted cash | (332,879 | ) | - | |||||
Net increase (decrease) in cash and restricted cash | 11,007,061 | 12,309,895 | ||||||
| Cash and restricted cash, beginning of year | 12,353,307 | 43,412 | ||||||
| Cash and restricted cash, end of year | $ | 23,360,368 | $ | 12,353,307 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-9 |
A reconciliation of cash and restricted cash to the consolidated balance sheets follows:
| June 30, 2021 | June 30, 2020 | |||||||
| Cash | $ | 19,917,196 | $ | 12,353,307 | ||||
| Restricted cash | 3,443,172 | - | ||||||
| $ | 23,360,368 | $ | 12,353,307 | |||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| CASH PAID FOR: | ||||||||
| Interest | $ | 226,517 | $ | - | ||||
| Income taxes | $ | 23,433 | $ | - | ||||
| SUPPLEMENTAL DISLCOSURE OF NON-CASH FINANCING ACTIVITIES: | ||||||||
| Fair value of warrants issued as debt discount on Senior Convertible Note | $ | 26,680,000 | $ | - | ||||
| Common stock issued for ggCircuit | $ | 9,273,211 | $ | - | ||||
| Common stock issued for Helix | $ | 5,901,133 | $ | - | ||||
| Common stock issued for Argyll | $ | 3,802,500 | $ | - | ||||
Fair value of warrants issued for Argyll acquisition | $ | 2,750,076 | $ | - | ||||
| Settlement of Argyll acquisition warrant liability for common stock | $ | 7,480,000 | $ | - | ||||
| Common stock issued for EGL at closing | $ | 2,193,833 | $ | - | ||||
| Settlement of EGL contingent holdback consideration in common stock | $ | 597,650 | $ | - | ||||
| Common stock issued for FLIP acquisition at closing | $ | 411,817 | $ | - | ||||
| Settlement of FLIP contingent consideration in common stock | $ | 500,000 | $ | - | ||||
| Right-of-use assets and liabilities acquired through operating leases | $ | 1,408,942 | $ | - | ||||
| Equipment acquired through finance lease | $ | 117,979 | ||||||
| Share settlement of liabilities to be settled in stock account | $ | 927,855 | $ | - | ||||
| Extinguishment of derivative liability associated with extinguishment of convertible notes | $ | - | $ | 6,219,785 | ||||
| Extinguishment of debt discount associated with extinguishment of convertible notes | $ | - | $ | 1,909,280 | ||||
| Debt discount and derivative liability associated with amended and restated note | $ | - | $ | 1,394,798 | ||||
| Increase in principal amount of convertible debt associated with amended and restated note | $ | - | $ | 660,000 | ||||
| Derivative liability associated with convertible notes entered into | $ | - | $ | 1,136,231 | ||||
| Debt discount associated with convertible notes | $ | - | $ | 1,276,000 | ||||
| Extinguishment of derivative liability associated with cashless warrant exercise | $ | - | $ | 1,222,602 | ||||
| Extinguishment of derivative liability associated with warrant exchange | $ | - | $ | 3,583,442 | ||||
| Extinguishment of derivative liability upon exchange of warrants | $ | - | $ | 221,222 | ||||
| Original issuance discount of convertible notes | $ | - | $ | 116,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-10 |
Esports Entertainment Group, Inc.
Notes to the Consolidated Financial Statements
June 30, 2021
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, 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, completed the acquisition of the operating assets and specified liabilities that comprise the online gaming operations of Lucky Dino Gaming Limited, a company registered in Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered in Estonia (collectively referred to as “Lucky Dino”).
On June 1, 2021, the Company also acquired Helix Holdings, LLC (“Helix”) and ggCircuit, LLC (“GGC”). Helix is an owner and operator of esports centers that provide esports programming and gaming infrastructure and is also the owner of the Genji Analytics, an analytics platform, and LANduel, a proprietary player-versus-player wagering platform. GGC is a business-to-business software company that provides cloud-based management for gaming centers, a tournament platform and integrated wallet and point-of-sale solutions. On July 13, 2021, the Company completed its acquisition of the online casino and sports book business operating under the brand of Bethard (referred to herein as “Bethard”). The acquisition of Bethard is discussed further in Note 19, Subsequent Events.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported results of operations or total assets, liabilities and stockholders’ equity. The Company reclassified sales and marketing expenses on its consolidated statements of operations from general and administrative expenses. The amounts previously reported in other income, impairment of intangible assets, gain on settlement of debt and foreign exchange loss were also reclassified to other non-operating income (loss) on the consolidated statements of operations and comprehensive loss. The prior year amounts reported as taxes payable, due to officers and equity to be issued were classified to accounts payable and accrued expenses for the current year presentation on the consolidated balance sheets.
| F-11 |
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the 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 accounting for business combinations, including estimating contingent consideration and allocating purchase price, 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 consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The evaluation of going concern under the accounting guidance requires significant judgment. The Company must consider it has historically incurred losses and negative cash flows in recent years as it has prepared to grow its esports business through acquisition and new venture opportunities. The Company must also consider its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits. As of June 30, 2021, the Company had approximately $19.9 million of available cash on-hand. On October 12, 2021, one business day preceding this filing, the Company had approximately $2.4 million of available cash on-hand, with the decrease in the available cash balance resulting primarily from the cash payment of €13,000,000 (equivalent to $15,346,019 using exchange rates on the date of acquisition) on July 13, 2021 to acquire the Bethard Business (discussed in Note 19 – Subsequent Events). 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. These conditions were determined to raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial statements.
In determining whether there is substantial doubt about the Company’s ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes are currently available to fund its operations and drive future growth that include (i) the ability to access capital using the at-the-money (“ATM”) equity offering program available to the Company whereby the Company may sell up to approximately $20,000,000 shares of its common stock (discussed in Note 19 – Subsequent Events), (ii) the ability to sell shares of common stock of the Company through a shelf registration statement on Form S-3 (File No. 333-252370) declared effective by the Securities and Exchange Commission (SEC) on February 5, 2021, and (iii) the ability to raise additional financing from other sources. These plans were however determined to require the Company to place reliance on several factors as described above, and therefore were not sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern.
COVID-19
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 from April 2020 through June 2020. The cancelation of major sports events had a significant short-term negative effect on betting activity globally. As a result, iGaming and event operators faced major short-term losses in betting volumes. 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 the Company’s ability to manage and operate the day-to-day functions of the business. Management has been able to operate in a virtual setting. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm the business over the long term. Travel restrictions impacting people can restrain the ability to operate, but at present we do not expect these restrictions on personal travel to be material to the Company’s operations or financial results.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption and reduced operations. 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.
Cash and Cash Equivalents
Cash includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months or less. As of June 30, 2021 and June 30, 2020 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. The Company’s cash is held with financial institutions, and the account balances may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit at times. Accounts are insured by the FDIC up to $250,000 per financial institution. There have been no losses recognized on cash balances held at these financial institutions.
| F-12 |
Restricted Cash
Restricted cash includes cash reserves maintained for compliance with gaming regulations that require adequate liquidity to satisfy cash amounts available to users. At June 30, 2021, restricted cash includes amounts due to users of $1,812,168 as required by the Malta Gaming Authority and $1,631,004 representing cash amounts available to users in other jurisdictions.
Accounts Receivable
Accounts receivable is comprised of the amounts billed to customers principally for esport event and team management services. Accounts receivable is recorded net of an allowance for credit losses. The Company performs ongoing credit evaluations for its customers and determines the amount of the allowance for credit losses upon considering such factors as historical losses, known disputes or collectability issues, the age of a receivable balance as well as current economic conditions. Bad debt expense is recorded to maintain the allowance for credit losses at an appropriate level and changes in the allowance for credit losses are included in general and administrative expense in the consolidated statements of operations. At June 30, 2021 and 2020, the allowance for credit losses was not significant to the consolidated financial statements of the Company.
Receivables Reserved for Users
User deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded as a receivable reserved for users on the consolidated balance sheets. An allowance for doubtful accounts may be established if it is determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance for doubtful accounts is recognized as a loss within general and administrative expenses in the consolidated statements of operations. The allowance for doubtful accounts is not material to the consolidated financial statements.
Equipment
Equipment is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:
| Computer Equipment | Up to 5 years |
| Furniture and fixtures | Up to 7 years |
| Leasehold improvements | Shorter of the remaining lease term or estimated life of the improvement |
The estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period. The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the consolidated statement of operations.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
| F-13 |
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 at least annually for impairment, 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. Goodwill is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test.
The Company performs a quantitative impairment test for goodwill utilizing the two-step approach. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average costs of capital, and future economic and market conditions. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired and an impairment charge will be recorded to reduce the reporting unit to fair value. There was no goodwill recorded by the Company during the year ended June 30, 2020. There was no impairment of goodwill for the year ended June 30, 2021.
Intangible assets
Intangible assets with determinable lives consist of player relationships, developed software, tradename and gaming licenses. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful lives of 5 years for player relationships and developed software, 10 years for tradename and 2 years for gaming licenses. The Company also capitalizes internal-use software costs such as external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software project and continues during the application development stage. Capitalization ceases when the software has been tested and is ready for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred.
Impairment of Long-Lived Assets
Equipment and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of future undiscounted cash flows are determined through estimated disposition date of the asset. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. An estimation of future cash flows requires significant judgment as the Company makes assumptions about future revenues and market conditions. Since the determination of future cash flows is an estimate of future performance, there may be impairments recognized in future periods in the event future cash flows do not meet expectations. The Company recorded an impairment of intangible assets of $67,132 during the year ended June 30, 2020. There was no impairment of long-lived assets identified for the year ended June 30, 2021.
Liabilities to Customers
The Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings and player losses.
| F-14 |
Jackpot Provision
The jackpot provision liability is an estimate of the amount due to players for jackpot winnings. The jackpot liability is accrued monthly based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming casino machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be paid out randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount that varies across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot and therefore the winning of a jackpot affects other players on the network of participating iGaming casino machines. Jackpot winnings reduce revenue at the time the entity has the obligation to pay the jackpot, which occurs when the jackpot is won by the player.
Leases
The Company leases for office space through operating lease agreements that were a result of its acquisitions of Argyll, and Lucky Dino. The Company also leases properties and equipment, through its acquisition of Helix, that provide customers with in-person gaming experiences. The Company measures an operating lease right-of-use (“ROU”) asset and liability, as well as a finance lease asset and liability, based on the present value of the future minimum lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and non-lease components of the agreement, as well as any variable rent payments that depend on an index, initially measured using the index at the lease commencement date.
The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of less than 12 months (“short-term leases”) are not recognized on the consolidated balance sheets. The rent expense for short-term leases is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S. GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback years, existing taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.
Derivative Instruments
The Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives. The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
| F-15 |
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 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 consolidated statements of operations. Refer to Note 18 for additional disclosures related to the change in fair value of derivative liabilities.
Fair Value Measurements
Fair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third is considered unobservable:
| Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company adjusts contingent consideration resulting from a business combination, as well as derivative financial instruments and warrant liabilities to fair value on a recurring basis. The fair value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been determined to approximate carrying amounts due to the short maturities of these instruments. The Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.
Earnings Per Share
Basic net income or loss per share is computed by dividing net income or loss attributable to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.
The following securities were excluded from weighted average diluted common shares outstanding because their inclusion would have been antidilutive.
| 2021 | 2020 | |||||||
| Common stock options | $ | 474,676 | $ | 51,942 | ||||
| Common stock warrants | 5,350,558 | 5,264,592 | ||||||
| Common stock issuable upon conversion of Senior Convertible Note | 2,120,000 | — | ||||||
| Total | $ | 7,954,234 | $ | 5,316,534 | ||||
| F-16 |
Comprehensive Loss
Comprehensive loss consists of the net loss for the year and foreign currency translation adjustments related to the effect of foreign exchange on the value of assets and liabilities. The net translation loss for the year is included in the consolidated statements of comprehensive loss.
Foreign Currency
The transaction currencies of the Company include the U.S. dollar, British Pound and Euro. The reporting currency of the Company is the U.S. Dollar. Assets and liabilities of the Company’s foreign operations with functional currencies other than the U.S. dollar are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency. The Company recorded a foreign exchange transaction loss for the year ended June 30, 2021 of $440,452. The foreign exchange transaction gains and losses for the year ended June 30, 2020 were not material. Transaction gains and losses are reported within other non-operating income (loss) on the consolidated statements of operations.
Stock-based Compensation
The Company periodically issues stock-based compensation to employees, directors, contractors and consultants for services rendered. Stock-based compensation granted to employees and non-employee directors includes grants of restricted stock and employee stock options that are measured and recognized based on their fair values determined on the grant date. The award of restricted stock and stock options, which are generally time vested, are measured at the grant date fair value and charged to earnings on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common stock over the term of the equity award. The fair value of restricted stock is determined by the closing market price of our common stock on the date of grant. The compensation cost for service-based stock options granted to consultants is measured at the grant date, based on the fair value of the award, and is expensed on a straight-line basis over the requisite service period (the vesting period of the award).
Sales and Marketing
Sales and marketing expenses are comprised primarily of advertising costs that include online search advertising and placement, including advertising with affiliates for the online betting and casino operations, as well as other promotional expenses paid to third parties, including expenses related to sponsorship agreements. Advertising expense for the years ended June 30, 2021 and 2020 was $10,038,524 and $322,517, respectively.
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 Topic 606 – Revenue from Contracts with Customers (“Topic 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 are subject to value added tax (“VAT”) in most 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.
| F-17 |
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 statement of operations.
Esports Gaming Service 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 esports 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 food and beverages 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.
The Company may further provide 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.
| F-18 |
The Company may further enter 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 our overall pricing objectives, taking into consideration 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.
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 or online. The revenue generated from esports event management services is generally earned on a fixed fee basis per event. The esports team services offering 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 profit sharing arrangements 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.
| F-19 |
Contract Liabilities
Liabilities to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities. The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users is based on the estimated fair value of the loyalty point incentive available to the user.
The Company also records payments received in advance of performance under an esports gaming services contract or event management or team services contract as deferred revenue.
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance in the first quarter of its fiscal 2021. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
Recently Issued Accounting Standards
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. For public business entities, it is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. ASU 2019-12 is effective for the Company beginning on July 1, 2021. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. ASU 2020-06 is effective for the Company beginning on July 1, 2022. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
| F-20 |
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. ASU 2016-13 is effective for the Company beginning on July 1, 2023. The Company is currently evaluating the impact that the adoption of this guidance will have on its 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 Company beginning after December 15, 2022; and aligns with the effective date of ASU 2016-13. Early adoption is permitted. ASU 2017-04 is effective for the Company beginning on July 1, 2023. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.
Note 3 – Business Acquisitions
Acquisition of GGC
On June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of GGC. The total consideration paid at closing was $24,273,211, with $14,100,000 paid in cash at closing and $900,000 paid through application of loans receivable from GGC, inclusive of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advanced as loans receivable was $14,993,977 after adjustment for cash acquired of $6,023). The Company also issued 830,189 shares common stock at closing using a value per share $13.25 pursuant to the GGC Purchase Agreement. The fair value of the share consideration paid at closing was determined to be $9,273,211 using the closing share price of the Company on the date of acquisition.
The loans receivable applied toward the purchase consideration had originated during the negotiation to purchase GGC, whereby the Company had advanced an aggregate of $600,000 to GGC during 2020 in the form of loans (“GGC Loans”). Upon execution of the purchase agreement to acquire GGC, the Company paid GGC an additional $600,000 to be used for operating expenses pending the closing of the GGC acquisition (“GGC Operating Expense Payments”). The Company had recorded these advances totaling $1,200,000 as loans receivable at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase consideration for the GGC Loans and GGC Operating Expense Payments if the acquisition of GGC were to close by April 30, 2021. If acquisition of GGC were to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward the purchase price for the GGC Loans, and a credit toward the purchase price equal to 60% of the GGC Operating Expense Payments. If the acquisition closed after May 14, 2021, the Company was to receive full credit toward the purchase price for the GGC Loans, and a credit toward the purchase price equal to 50% of the GGC Operating Expense Payments. The acquisition did not close by May 14, 2021, and therefore the Company had forgiven 50% of the GGC Operating Expense Payments or $300,000 and applied the remaining balance of the total loans receivable, or $900,000 toward the purchase price of GGC.
A summary of the purchase consideration follows:
| Cash paid at closing | $ | 14,100,000 | ||
| Loans receivable applied toward purchase consideration | 900,000 | |||
| Share consideration issued at closing | 9,273,211 | |||
| Total purchase price consideration | $ | 24,273,211 |
The allocation of assets acquired and liabilities assumed follows:
| Cash | $ | 6,023 | ||
| Accounts receivable | 102,701 | |||
| Prepaid expenses and other current assets | 97,083 | |||
| Equipment | 7,704 | |||
| Intangible assets | 16,300,000 | |||
| Goodwill | 11,445,832 | |||
| Accounts payable and accrued expenses | (263,132) | |||
| Deferred tax liability | (3,423,000 | ) | ||
| Total | $ | 24,273,211 |
| F-21 |
The acquired intangible assets, useful life and fair value determined at the acquisition date follows:
| Useful Life (years) | Fair Value | |||||
| Tradename | 10 | $ | 2,600,000 | |||
| Developed technology | 5 | 13,300,000 | ||||
| Customer relationships | 5 | 400,000 | ||||
| Total | $ | 16,300,000 | ||||
The results of operations of GGC are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since the date of acquisition. The goodwill recorded in the GGC acquisition is not deductible for tax purposes. Transaction related expenses were $801,317 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated statements of operations. The transaction expenses incurred for the GGC acquisition include a charge of $300,000 related to the forgiveness of the GGC Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the GGC operations prior to closing that were not eligible to be applied toward the purchase consideration.
Acquisition of Helix
On June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of Helix. The total consideration paid at closing was $17,000,000, with $9,400,000 paid in cash and $600,000 paid through application of loans receivable from Helix, inclusive of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advances as loans receivable was $9,964,691 after adjustment for cash acquired of $35,309). The Company also issued 528,302 shares of common stock at closing using a value per share of $13.25 pursuant to the Helix Purchase Agreement. The fair value of the share consideration paid at closing to be $5,901,133 using the closing share price of the Company on the date of acquisition.
The loans receivable applied toward the purchase consideration had originated during the negotiation to purchase Helix, whereby the Company had advanced an aggregate of $400,000 to Helix during 2020 and 2021 in the form of loans (“Helix Loans”). Upon execution of the purchase agreement to acquire Helix, the Company paid Helix an additional $400,000 to be used for operating expenses pending the closing of the Helix acquisition (“Helix Operating Expense Payments”). The Company had recorded these advances totaling $800,000 as loans receivable at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase consideration for the Helix Loans and Helix Operating Expense Payments if the acquisition of Helix were to close by April 30, 2021. If acquisition of Helix were to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward the purchase price for the Helix Loans, and a credit toward the purchase price equal to 60% of the Helix Operating Expense Payments. If the acquisition closed after May 14, 2021, the Company was to receive full credit toward the purchase price for the Helix Loans, and a credit toward the purchase price equal to 50% of the Helix Operating Expense Payments. The acquisition did not close by May 14, 2021, and therefore the Company had forgiven 50% of the Helix Operating Expense Payments or $200,000 and applied the remaining balance of the total loans receivable, or $600,000 toward the purchase price of Helix.
A summary of the purchase consideration follows:
| Cash paid at closing | $ | 9,400,000 | ||
| Loans receivable applied toward purchase consideration | 600,000 | |||
| Share consideration issued at closing | 5,901,133 | |||
| Total purchase price consideration | $ | 15,901,133 |
The allocation of assets acquired and liabilities assumed follows:
| Cash | $ | 35,309 | ||
| Accounts receivable | 3,054 | |||
| Prepaid expenses and other current assets | 76,933 | |||
| Equipment | 643,537 | |||
| Operating lease right-of-use asset | 803,503 | |||
| Intangible assets | 3,600,000 | |||
| Goodwill | 12,393,591 | |||
| Other non-current assets | 31,014 | |||
| Deferred revenue | (9,036 | ) | ||
| Deferred income taxes | (756,000 | ) | ||
| Operating lease liability | (803,503 | ) | ||
| Long-term debt | (117,270 | ) | ||
| Total | $ | 15,901,133 |
| F-22 |
The acquired intangible assets, useful lives fair value determined at the acquisition date follows:
| Useful Life (years) | Fair Value | |||||
| Tradename | 10 | $ | 800,000 | |||
| Developed technology | 5 | 2,800,000 | ||||
| Total | $ | 3,600,000 | ||||
The results of operations of Helix are in the consolidated financial statements of the Company for the year ended June 30, 2021 since the date of acquisition. The goodwill recorded in the Helix acquisition is not deductible for tax purposes. Transaction related expenses were $604,603 for the year ended June 30, 2021 are included in general and administrative expenses in the consolidated statements of operations. The transaction expenses incurred for the Helix acquisition include a charge of $200,000 related to the forgiveness of Helix Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the Helix operations prior to closing that were not eligible to be applied toward the purchase consideration.
Acquisition of Lucky Dino
On March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming casino operations of Lucky Dino for cash paid at closing €25,000,000 ($30,133,725 using exchange rates in effect at the acquisition date), or with net cash paid being €24,001,795 ($28,930,540 using exchange rates in effect at the acquisition date) after adjustment for cash acquired of €998,205 ($1,203,185 using exchange rates in effect at the acquisition date). The acquisition of Lucky Dino was funded with available cash on hand.
The allocation assets acquired and liabilities assumed follows:
| Restricted cash | $ | 1,203,185 | ||
| Other receivables | 131,111 | |||
| Equipment | 13,765 | |||
| Operating lease right-of-use asset | 371,898 | |||
| Intangible assets | 19,100,000 | |||
| Goodwill | 10,541,217 | |||
| Other non-current assets | 37,840 | |||
| Accounts payable and accrued expenses | (319,149 | ) | ||
| Liabilities to customers | (574,244 | ) | ||
| Operating lease liability | (371,898 | ) | ||
| Total | $ | 30,133,725 |
The acquired intangible assets, useful lives and fair value determined at the acquisition date follows:
| Useful Life (years) | Fair Value | |||||
| Tradename | 10 | $ | 2,100,000 | |||
| Gaming licenses | 2 | 800,000 | ||||
| Developed technology | 5 | 5,500,000 | ||||
| Player relationships | 5 | 10,700,000 | ||||
| Total | $ | 19,100,000 | ||||
The results of operations of Lucky Dino are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since the date of acquisition. The goodwill recorded in the Lucky Dino acquisition is deductible for tax purposes. Transaction related expenses were $1,280,766 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated statements of operations.
| F-23 |
Acquisition of EGL
On January 21, 2021, the Company acquired all the issued and outstanding share capital of EGL for total purchase consideration of $2,975,219. The total purchase consideration included $481,386 of cash paid at closing, (net cash paid at closing being $477,350 after adjustment for cash acquired of $4,036), and the issuance of 292,511 shares of common stock with a fair value of $2,193,833 as determined using the closing share price on the date of acquisition. The purchase consideration also included an estimate of $300,000 for contingent consideration (“Holdback Consideration”) payable by the Company in cash and share consideration based on the progress of EGL towards the achievement of certain revenue targets based on the ability of EGL to achieve certain revenue targets by May 16, 2021. The Holdback Consideration was settled by the Company for $145,153 paid in cash, (increasing the total cash paid for EGL to $622,503), and through issuance of 63,109 shares of common stock with a fair value of $597,650, as determined using the closing price on the date of settlement. The incremental consideration paid in excess of the amount estimated at Holdback Consideration of $442,803 was recorded to change in fair value of contingent consideration within the statement of operations for the year ended June 30, 2021.
The terms of the EGL purchase agreement may further require the Company to pay an additional $2,750,000 (equivalent to approximately £2,000,000 of purchase price using exchange rates at the acquisition date) in contingent earnout consideration (“Earnout Consideration”) if EGL is to achieve an earnings benchmark on the 18 month anniversary of the closing date. On the date of acquisition, the Company determined that the likelihood of a payout of the Earnout Consideration was remote and therefore did not assign a value to the Earnout Consideration on the date of acquisition. This considers the Earnout Consideration benchmark increases during the earnout period for amounts invested by the Company in the operations of EGL. The Earnout Consideration benchmark used to determine the minimum threshold for payment of additional purchase consideration payable by the Company also increases should there be an increase in the value of the share consideration that was issued by the Company on the date of acquisition.
A summary of the purchase consideration follows:
| Cash paid at closing | $ | 481,386 | ||
| Share consideration issued at closing | 2,193,833 | |||
Holdback Consideration | 300,000 | |||
| Total purchase price consideration | $ | 2,975,219 |
The allocation of assets acquired and liabilities assumed follows:
| Cash | $ | 4,036 | ||
| Accounts receivable | 141,031 | |||
| Other receivables | 32,923 | |||
| Equipment | 11,274 | |||
| Intangible assets | 1,371,789 | |||
| Goodwill | 1,978,668 | |||
| Other non-current assets | 5,382 | |||
| Accounts payable and accrued expenses | (118,157 | ) | ||
| Deferred revenue | (95,062 | ) | ||
| Notes payable | (68,589 | ) | ||
| Deferred income taxes | (288,076 | ) | ||
| Total | $ | 2,975,219 |
The acquired intangible assets, useful lives and fair value at the acquisition date follows:
| Useful Life (years) | Fair Value | |||||
| Tradename | 10 | $ | 411,537 | |||
| Developed technology | 5 | 823,073 | ||||
| Customer relationships | 5 | 137,179 | ||||
| Total | $ | 1,371,789 | ||||
| F-24 |
The following table summarizes the change in fair value of the Holdback Consideration that was settled by the Company through the payment of cash and issuance of common stock:
| Fair value of contingent share consideration at January 21, 2021 | $ | 300,000 | ||
| Change in fair value contingent consideration | 442,803 | |||
| Payment of Holdback Consideration in cash | (145,153 | ) | ||
| Stock issued of Holdback Contingent in shares | (597,650 | ) | ||
| Fair value of contingent share consideration at June 30, 2021 | $ | — |
The results of operations of EGL are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since the date of acquisition. The goodwill recorded in the EGL acquisition is not deductible for tax purposes. Transaction related expenses were immaterial for the year ended June 30, 2021.
Acquisition of Argyll
On July 31, 2020, the Company acquired Argyll, an online casino and sportsbook operator for total purchase consideration $7,802,576. The purchase consideration includes $1,250,000 in cash comprised of a cash deposit of $500,000 that had been paid during the year ended June 30, 2020, as well as cash paid at closing of $750,000 (net cash paid being $728,926 in fiscal 2021 after adjustment for cash acquired of $21,074). The purchase consideration also includes the issuance of 650,000 shares of common stock with a fair value of $3,802,500 and the issuance of warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share during a term of three years.
A summary of the purchase consideration follows:
| Cash paid | $ | 1,250,000 | ||
| Share consideration issued at closing | 3,802,500 | |||
| Fair value of warrants issued at closing | 2,750,076 | |||
| Total purchase price consideration | $ | 7,802,576 |
The allocation of assets acquired and liabilities assumed follows:
| Cash | $ | 21,074 | ||
| Receivables reserved for users | 27,777 | |||
| Other receivables | 605,898 | |||
| Prepaid expenses and other current assets | 413,441 | |||
| Equipment | 70,712 | |||
| Operating lease right-of-use asset | 373,016 | |||
| Intangible assets | 7,333,536 | |||
| Goodwill | 4,143,224 | |||
| Other non-current assets | 1,130,034 | |||
| Accounts payable and accrued expenses | (2,471,244 | ) | ||
| Liabilities to customers | (1,737,106 | ) | ||
| Notes payable | (327,390 | ) | ||
| Operating lease liability | (240,353 | ) | ||
| Deferred income taxes | (1,540,043 | ) | ||
| Total | $ | 7,802,576 |
The acquired intangible assets, useful lives and a fair value at the acquisition date follows:
| Useful Life (years) | Fair Value | |||||
| Tradename | 10 | $ | 1,440,516 | |||
| Gaming licenses | 2 | 916,692 | ||||
| Player interface | 5 | 2,226,252 | ||||
| Player relationships | 5 | 2,750,076 | ||||
| Total | $ | 7,333,536 | ||||
| F-25 |
The results of operations of Argyll are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since the date of acquisition. During the year ended June 30, 2021, the Company recorded a measurement period adjustment to reduce the preliminary purchase consideration by $2,738,095 as the Company updated the fair value of the warrants issued using a Monte Carlo simulation. The Company also recorded a measurement period adjusted to update the preliminary purchase price allocation based on final allocation of fair value to identifiable intangible assets. The goodwill is not deductible for tax purposes. Transaction related expenses were immaterial for the year ended June 30, 2021.
Acquisition of Flip
On September 3, 2020 the Company acquired the software development operations of Flip Sports Limited (“FLIP”) for cash of $100,000, share consideration of $411,817 resulting from the issuance 93,808 shares of common stock by the Company at the share price on the date of acquisition, and contingent share consideration payable based on the retention of certain key FLIP employees and having an estimated fair value of $500,000 on the date of acquisition. The contingent share consideration was settled on March 3, 2021 through the issuance of 93,808 shares of common stock have a market value on the date of settlement of $1,805,804, resulting in the recognition of $1,305,804 as the change in fair value of contingent consideration in the consolidated statement of operations for the year ended June 30, 2021.
A summary of the purchase consideration follows:
| Cash | $ | 100,000 | ||
| Share consideration issued at closing | 411,817 | |||
| Contingent share consideration | 500,000 | |||
| Total purchase price consideration | $ | 1,011,817 |
The allocation to the assets acquired follows:
| Intangible assets (developed software) | $ | 550,000 | ||
| Goodwill | 461,817 | |||
| Total purchase price consideration | $ | 1,011,817 |
The developed software was determined to have an estimated useful life of 5 years. During the year ended June 30, 2021, the Company recorded a measurement period adjustment of $88,183 to reduce the amount of goodwill due to a decrease in the fair value of the purchase share consideration issued at closing. The following table summarizes the change in fair value of the FLIP contingent share consideration that was settled by the Company through the issuance of common stock:
| Fair value of contingent share consideration at September 3, 2020 | $ | 500,000 | ||
| Change in fair value contingent consideration | 1,305,804 | |||
| Stock issued settlement of contingent share consideration (March 3, 2021) | (1,805,804 | ) | ||
| Fair value of contingent share consideration at June 30, 2021 | $ | — |
The results of operations of FLIP are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since the date of acquisition. The goodwill recorded in the FLIP acquisition is deductible for tax purposes. Transaction related expenses for FLIP were not material to the consolidated statement of operations.
| F-26 |
Pro Forma Operating Results
The following table summarizes pro forma results of operations for the year ended June 30, 2021 and 2020 as if the Argyll, Lucky Dino, EGL, ggCircuit and Helix have been acquired on July 1, 2019. The results of operations of FLIP were excluded due to immateriality. The pro forma results of operations for the year ended June 30, 2021 and 2020 were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had these acquisitions been made as of July 1, 2019 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.
Pro Forma (unaudited) for the year ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net revenue | $ | 36,748,329 | $ | 35,321,912 | ||||
| Net loss | $ | (37,776,598 | ) | $ | (20,556,084 | ) | ||
| Net loss per common share, basic and diluted | $ | (2.06 | ) | $ | (1.84 | ) | ||
The pro forma operating results of operations for the year ended June 30, 2021 and 2020 include amortization of intangibles, depreciation of equipment and cash proceeds made available through the issuance of equity to facilitate the acquisitions.
Note 4 – Other Receivables
The components of other receivables follows:
| June 30, 2021 | ||||
| Marketing receivables from revenue partners | $ | 233,725 | ||
| Receivable from revenue sharing arrangement | 137,461 | |||
| Other | 287,559 | |||
| Other receivables | $ | 658,745 | ||
At June 30, 2020, there were no amounts recorded as other receivables.
Note 5 – Prepaid Expenses and Other Current Assets
The components of prepaid expenses and other current assets follow:
| June 30, 2021 | June 30, 2020 | |||||||
| Prepaid marketing costs | $ | 1,727,669 | $ | — | ||||
| Prepaid insurance | 175,620 | 159,941 | ||||||
| Prepaid equity | — | 100,000 | ||||||
| Other prepaid operating costs | 1,361,055 | 3,404 | ||||||
| Prepaid expenses and other current assets | $ | 3,264,344 | $ | 263,345 | ||||
Note 6 – Equipment
The components of equipment follow:
| June 30, 2021 | June 30, 2020 | |||||||
| Computer equipment | $ | 258,049 | $ | 14,450 | ||||
| Furniture and equipment | 249,070 | 20,241 | ||||||
| Leasehold improvements | 221,787 | — | ||||||
| Finance lease asset | 117,979 | — | ||||||
| Equipment, at cost | 846,885 | 34,691 | ||||||
| Accumulated depreciation and finance lease amortization | (119,943 | ) | (6,650 | ) | ||||
| Equipment, net | $ | 726,942 | $ | 8,041 | ||||
During the years ended June 30, 2021 and 2020, the Company recorded total depreciation expense and finance lease amortization of $111,380 and $8,537, respectively.
| F-27 |
Note 7 – Goodwill and Intangible Assets
A summary of the changes in the balance of goodwill follows:
| Fiscal 2021 | ||||
| Goodwill, balance at beginning of year | $ | — | ||
| Acquisitions | 40,964,350 | |||
| Foreign currency translation | (26,890 | ) | ||
| Goodwill, balance at end of year | $ | 40,937,370 | ||
The intangible asset balance was not material to the consolidated financial statements at June 30, 2020. The intangible amounts comprising the intangible asset balance at June 30, 2021 follows:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Tradename | $ | 7,396,804 | $ | (257,018 | ) | $ | 7,139,786 | |||||
| Developed technology and software | 25,231,659 | (1,242,605 | ) | 23,989,054 | ||||||||
| Gaming licenses | 1,752,612 | (573,876 | ) | 1,178,736 | ||||||||
| Player relationships | 13,956,083 | (1,253,135 | ) | 12,702,948 | ||||||||
| Internal-use software | 777,171 | (15,140 | ) | 762,031 | ||||||||
| Total | $ | 49,114,329 | $ | (3,341,774 | ) | $ | 45,772,555 | |||||
During the year ended June 30, 2021, the Company recorded amortization expense for its intangible assets of $3,304,872. During the year ended June 30, 2020, the Company recorded an impairment associated with the website asset of $67,132. There was no impairment of intangibles assets recorded by the Company during the year ended June 30, 2021.
The estimated future amortization related to definite-lived of intangible assets, including amortization related to the preliminary allocation of fair value to the intangible assets of ggCircuit and Helix, follows:
| Fiscal 2022 | $ | 9,569,242 | ||
| Fiscal 2023 | 9,032,065 | |||
| Fiscal 2024 | 8,729,635 | |||
| Fiscal 2025 | 8,729,635 | |||
| Fiscal 2026 | 6,192,914 | |||
| Thereafter | 3,519,064 | |||
| Total | $ | 45,772,555 |
Note 8 – Other Non-Current Assets
The components of other non-current assets follows:
| June 30, 2021 | June 30, 2020 | |||||||
| Deposit for gaming duties | $ | 755,474 | $ | — | ||||
| iGaming deposits with service providers | 434,738 | — | ||||||
| Rent deposit | 91,253 | — | ||||||
| Other | 33,544 | 6,833 | ||||||
| Other non-current assets | $ | 1,315,009 | $ | 6,833 | ||||
| F-28 |
Note 9 – Account Payable and Accrued Expenses
The components of account payable and accrued expenses follows:
| June 30, 2021 | June 30, 2020 | |||||||
| Trade accounts payable | $ | 2,609,212 | $ | 499,343 | ||||
| Accrued marketing | 1,582,470 | — | ||||||
| Accrued payroll and benefits | 1,093,263 | 96,500 | ||||||
| Accrued professional and other expenses | 2,451,366 | 181,940 | ||||||
| Accrued jackpot liabilities | 432,504 | — | ||||||
| Accrued legal settlement (Note 13) | 289,874 | — | ||||||
| Related party payable | — | 21,658 | ||||||
| Total | $ | 8,458,689 | $ | 811,549 | ||||
Note 10 – Related party transactions
The Company reimburses the Chief Executive Officer for office rent and related expenses. During the year ended June 30, 2021, the Company incurred charges of $4,800 from the Chief Executive Officer for office expense reimbursement. As of June 30, 2021, there were no amounts payable to the Chief Executive Officer. As of June 30, 2020, there was $21,658 payable to the Chief Executive Officer for office expense reimbursement and for business expenses.
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. During the year ended June 30, 2021 and 2020 the Company expensed approximately $96,020 and $43,107, respectively, in accordance with these agreements.
The Company has retained legal and corporate secretarial services from a member of Board of Directors through a consultancy agreement dated August 1, 2020 and an employment agreement dated June 15, 2020. The legal consultancy agreement requires payments of £18,000 ($24,842 translated using the exchange rate in effect at June 30, 2021) per month to the law firm that is controlled by this member of the Board of Directors. The individual also receives payroll of $500 per month through the employment agreement as Legal Counsel and Company Secretary.
Note 11 – Leases
The consolidated balance sheet allocation of assets and liabilities related to operating and finance leases follow:
| Consolidated Balance Sheet Caption | June 30, 2021 | |||||
| Assets: | ||||||
| Operating lease assets | Operating lease right-of-use assets | $ | 1,272,920 | |||
| Finance lease assets | Equipment, net | 114,540 | ||||
| Total lease assets | $ | 1,387,460 | ||||
| Liabilities: | ||||||
| Current: | ||||||
| Operating lease liabilities | Operating lease liability - current | $ | 414,215 | |||
| Finance lease liabilities | Current portion of long-term debt | 50,702 | ||||
| Long-term: | ||||||
| Operating lease liabilities | Operating lease liability - non-current | 878,809 | ||||
| Finance lease liabilities | Long-term debt | 63,161 | ||||
| Total lease liabilities | $ | 1,406,887 | ||||
The operating lease expense and finance lease expense for the year ended June 30, 2021 were $156,543 and $2,039, respectively. The rent expense for short-term leases was not material to the consolidated financial statements.
| F-29 |
Weighted average remaining lease terms and discount rates follow:
| June 30, 2021 | ||||
| Weighted Average Remaining Lease Term (Years): | ||||
| Operating leases | 4.11 | |||
| Finance leases | 2.50 | |||
| Weighted Average Discount Rate: | ||||
| Operating leases | 6.82 | % | ||
| Finance leases | 8.00 | % | ||
The future minimum lease payments at June 30, 2021 follows:
| Operating Lease | Finance Lease | |||||||
| Fiscal 2022 | $ | 481,072 | $ | 50,702 | ||||
| Fiscal 2023 | 313,065 | 50,702 | ||||||
| Fiscal 2024 | 323,065 | 25,352 | ||||||
| Fiscal 2025 | 233,417 | — | ||||||
| Fiscal 2026 | 76,396 | — | ||||||
| Thereafter | 58,564 | — | ||||||
| Total lease payments | 1,485,579 | 126,756 | ||||||
| Less: imputed interest | 192,556 | 12,893 | ||||||
| Present value of lease liabilities | $ | 1,293,023 | $ | 113,863 | ||||
Note 12 – Long-term Debt
Notes Payable and other long term debt
The components of notes payable and other long-term follows:
| Notes payable | $ | 330,654 | ||
| Finance lease obligation (See Note 11) | 113,863 | |||
| 444,517 | ||||
| Less current portion of notes payable and long-term debt | (223,217 | ) | ||
| Notes payable and other long-term debt | $ | 221,300 |
The Company assumed a note payable of £250,000 (equivalent to $327,390) in connection with its acquisition of Argyll on July 31, 2021. The term loan was issued on April 30, 2020 and has a maturity of 3 years, bears interest at 3.49% per annum over the Bank of England base rate, and is secured by the assets and equity of Argyll. The monthly principal and interest payments on the notes payable commenced in June 2021 and continue for two years through May 2023. The principal balance of the notes payable at June 30, 2021 was £239,583 ($330,654 using exchange rates at June 30, 2021). Interest expense on the notes payable was $962 for the year ended June 30, 2021.
The Company assumed a note payable of £50,000 (equivalent to $68,589) in connection with the acquisition of EGL on January 21, 2021. The loan allowed for a drawdown period of up to 60 days following the loan acceptance date and EGL had elected to borrow the total amount available under the loan facility. The Company repaid the principal amount of £50,000 of this sterling term loan facility (equivalent to $69,257) on March 31, 2021. The loan did not accrue interest at the time of the repayment.
| F-30 |
Senior Convertible Note
On June 2, 2021 the Company issued a Senior Convertible Note in the principal amount of $35,000,000 million with the Company receiving proceeds at issuance of $32.5 million, net of debt issuance costs of $2.5 million. The Senior Convertible Note matures on June 2, 2023, at which time the Company is required to repay the original principal balance and a “minimum return” equal to 6% of any outstanding principal. The aggregate principal of the Senior Convertible Note repayable at maturity is $37,100,000 and the Senior Convertible Note accrues interest at rate of 8% per annum payable in cash monthly. The Senior Convertible Note was issued with 2,000,000 Series A Warrants and 2,000,000 Series B Warrants . On the date of issuance, the Company recorded the fair value of the Series A Warrants and Series B Warrants as a discount to the Senior Convertible Note totaling $26,680,000. The debt discount is being amortizing to interest expense over the term of the Senior Convertible Note using the effective interest method. The obligation resulting from the issuance of the Series A Warrants and Series B Warrants was determined to qualify for liability classification on the consolidated balance sheet. See below for further discussion of the Series A Warrants and Series B Warrants.
The Senior Convertible Note is convertible, at the option of the holder, into shares of the Company’s common stock at a conversion price of $17.50 per share. The conversion amount is calculated as the principal balance identified for conversion plus a minimum return of 6% on such principal balance. At any time after issuance, the Company has the option, subject to certain conditions, to redeem some or all of outstanding principal, inclusive of any minimum return due to the holder based on the number of days the principal is outstanding.
The Senior Convertible Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue, or issue any variable rate securities, the holder of the Senior Convertible Note has the additional right to substitute such variable price (or formula) for the conversion price. If the holder were to substitute a floor price of $2.1832 as the variable price, the Company would be required to settle in cash any difference between the market value of the shares subject to conversion at the floor price and the market value of the shares using the variable price, excluding any reference to the floor. The holder of the Senior Convertible Note also has the right to have the Company redeem all or a portion of the Senior Convertible Note at a redemption price equal to 106% of the portion of the Senior Convertible Note being redeemed should the Company provide notice of incurring additional debt.
If an event of default occurs, the holder of the Senior Convertible Note has the right to alternate conversion (“Alternate Conversion”) and may elect to convert the Senior Convertible Note, inclusive of a 15% premium payable in a cash due such an acceleration of the applicable principal, at a price (“Alternate Conversion Price”) equal to the greater of the floor price of $2.1832 or a price derived from the volume weighted average price of the Company’s common stock at the time of Alternate Conversion. If the Alternate Conversion were to include the floor price of $2.1832 as the Alternate Conversion Price, the Company would be required to settle in cash any difference between the market value of the shares subject to the Alternate Conversion using the floor price and the market value of the shares using the Alternate Conversion Price, excluding any reference to the floor.
In connection with an event of default, the holder may require the Company to redeem in cash any or all of the Senior Convertible Note. The redemption price will equal 115% of the outstanding principal of the Convertible Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or an amount equal to market value of the shares of the Company’s common stock underlying the Convertible Note, as determined in accordance with the Convertible Note, if greater. The noteholder will not have the right to convert any portion of a Senior Convertible Note, to the extent that, after giving effect to such conversion, the holder, together with certain related parties, would beneficially own in excess of 4.99% of the shares of our common stock outstanding immediately after giving effect to such conversion. The holder may from time to time increase this limit to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase.
In addition, unless obtain approval is obtained from the Company’s stockholders as required by Nasdaq, the Company is prohibited from issuing any shares of common stock upon conversion of the Senior Convertible Note or otherwise pursuant to the terms of the Senior Convertible Note, if the issuance of such shares of common stock would exceed 19.99% of the Company’s outstanding shares of common stock, or otherwise exceed the aggregate number of shares of common stock which the Company may issue without breaching our obligations under the rules and regulations of Nasdaq.
In connection with a change of control, as defined in the Senior Convertible Note, the holder may require the Company to redeem all or any portion of the Senior Convertible Note. The redemption price per share will equal the greatest of (i) 115% of the outstanding principal of the Senior Convertible Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, (ii) 115% of the market value of the shares of our common stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note, and (iii) 115% of the aggregate cash consideration that would have been payable in respect of the shares of the Company’s common stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note.
| F-31 |
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. We also will be subject to certain financial covenants relating to available cash, ratio of outstanding indebtedness to market capitalization and minimum cash flow. The Company is also subject to financial covenants as it relates minimum revenues commencing June 30, 2022.
The Company evaluated its compliance with the debt covenants in the Senior Convertible Note as of June 30, 2021 and the period from July 1, 2021 through October 13, 2021 and determined that it had not maintained compliance with certain covenants in the Senior Convertible Note. The Company therefore requested and received a waiver 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 existing lien on the shares of Prozone Limited obtained in the acquisition of the Bethard Business (see discussion of the acquisition of the Bethard Business as a subsequent event in Note 19) and (iii) any known breach which would result from the issuances of up to 200,000 shares common stock in connection with the Company’s proposed purchase of certain equity interests in Game Fund Partners Group LLC (as further discussed as a subsequent event in Note 19). In addition, the Company requested and received an amendment to the Senior Convertible Note wherein the permitted ratio of outstanding debt to market capitalization was increased temporarily from 25% to 35% through December 25, 2021.
In consideration for the waiver, the Company agreed to permit the immediate conversion of up to $7,500,000 of the outstanding balance of the Senior Convertible Note at the Alternate Conversion Price into shares of common stock of the Company. In the event of default following December 25, 2021, the holder may exercise any and all rights available to it following such a default that includes redemption of the Senior Convertible Note for cash. The holder may also choose to convert any outstanding indebtedness in the form of the Alternate Conversion Price as provided in the Senior Convertible Note, subject to the terms and conditions contained therein, until such time as the Company is in compliance with the above-mentioned Sections.
Warrants
The Company issued 2,000,000 Series A Warrants and 2,000,000 Series B Warrants to the holder of the Series Convertible Note. The Series A warrants may be exercised at any time after issuance for one share of common stock of the Company at an exercise price of $17.50. The Series B Warrants may only be exercised to the extent that the indebtedness owing under the Senor Convertible Note is redeemed. As a result, for each share of common stock determined to be issuable upon a redemption of principal of the Senior Convertible Note, one Series B Warrant will vest and be eligible for exercise at an exercise price of $17.50. The Series A Warrants and B Warrants are callable by the Company should the volume weighted average share price of the Company exceed $32.50 for each of 30 consecutive trading days following the date such warrants become eligible for exercise. The Series A Warrants and Series B Warrants also contain a beneficial ownership limitation of 4.99% which may be increased or decreased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase.
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 at fair value on the issuance date with subsequent changes in fair value reflected in earnings. On the date of issuance, the Company determined the total fair value of the Series A Warrants and Series B Warrants to be $26,680,000, with a fair value of $15,320,000 determined for the Series A Warrants and a fair value of $11,360,000 determined for the Series B Warrants. The Company recorded a gain resulting from the change in fair value of the Series A Warrants and Series B warrants of $3,180,000 for the period from the issuance date through June 30, 2021. Refer to Note 18 for additional disclosures related to the change in the fair value of the warrant liabilities.
The proceeds from the issuance of the Senior Convertible Note were allocated to the Series A and Series B Warrants using the with-and-without method. Under this method, the Company first allocated the proceeds from the issuance of the Senior Convertible Note to the Series A Warrants and Series B Warrants based on their initial fair value measurement, and then allocated the remaining proceeds to the Senior Convertible Note. The debt discount on the Senior Convertible Note is being amortized over its term of two years. The Company recorded $467,503 to interest expense for amortization of the debt discount for the period from the issuance date through June 30, 2021. The Company recorded total interest expense of $693,059 for period from the issuance date through June 30, 2021.
The maturities of long-term debt follows:
| Fiscal 2022 | $ | 223,217 | ||
| Fiscal 2023 | 37,334,193 | |||
| Total before unamortized discount | 37,557,410 | |||
| Less: unamortized discount and issuance costs | (30,810,389 | ) | ||
| Total debt | $ | 6,747,021 |
Note 13 – Public Offering and Conversion of Debt
On April 16, 2020, the Company closed its public offering (“April Offering”) in which it sold 1,980,000 units consisting of one share of common stock and two warrants (“Unit A Warrant” and “Unit B Warrant”, and collectively with the common stock the “Units”) at the public offering price of $4.25 per share. The Units were offered and sold to the public pursuant to the registration statement on Form S-1 filed by the Company with the Securities and Exchange Commission on May 2, 2019, as amended, which became effective on April 14, 2020. In connection with the April Offering, the Company (i) received net proceeds of $6,771,440, after deducting underwriting discounts, commissions and offering fees, (ii) issued 1,217,241 shares of common stock and 2,434,482 warrants with an exercise price of $4.25 per share upon the conversion of $4,138,585 of the Company’s convertible debt and accrued interest, (iii) recorded $4,793,462 of additional paid in capital in connection with the extinguishment of the Company’s derivative liability associated with the convertible debt, and (iv) paid $125,000 of principal on convertible debt and recognized a gain on settlement of debt of $153,401 upon extinguishment of a derivative liability attributed to the convertible debt.
| F-32 |
In connection with the April Offering, the Company entered into an underwriting agreement (the “Underwriting Agreement”) dated April 14, 2020 that granted a 45-day option to purchase up to 297,000 additional shares of Common Stock, and/or 297,000 Unit A Warrants, and/or 297,000 Unit B Warrants, or any combination thereof, to cover over-allotments, if any. Pursuant to the Underwriting Agreement, the underwriters exercised the over-allotment option to purchase 209,400 additional Unit A Warrants and 209,400 additional Unit B Warrants at a price of $0.01 for each of the Unit A and Unit B Warrants. The Company received net proceeds of $823,759 from the exercise of the over-allotment option granted to the underwriters.
The April Offering also resulted in the conversion of the outstanding debt obligations of the Company into shares of common stock and warrants to purchase shares of common stock of the Company. The outstanding debt obligations that were settled upon conversion included the Secured Convertible note dated November 13, 2018 as well as the bridge notes issued by the Company in connection with the private placement offerings, as discussed further below.
Conversion of $2,200,000 Secured Convertible Note
On November 13, 2018 the Company issued face value $2,200,000 Senior Convertible Notes (“2018 Senior Convertible Notes”) at a 10% original issue discount together with 244,445 warrants for net proceeds received of $2,000,000 (herein referred to as the “November 2018 Offering”). The cash paid for financing costs by the Company was $336,193. The 2018 Senior Convertible Notes were secured by the assets of the Company and accrued interest at 5% per annum, payable in cash at maturity. The principal on the 2018 Senior Convertible was convertible into shares of common stock of the Company at the option of the holder upon issuance at a conversion price of $9.00 per share, subject to adjustment for reorganization events and subsequent sales by the Company of its common stock at a price per share below $9.00. The 2018 Senior Convertible Notes also contained certain traditional default provisions that were linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company had concluded that the 2018 Senior Convertible Notes contained an embedded conversion option that was indexed to the Company’s stock which contain an optional cash settlement feature. The embedded conversion option was determined to be a derivative and was recognized as a liability at fair value at inception and further adjusted based on changes in fair value through earnings at each reporting period.
The warrants issued with the 2018 Senior Convertible Notes were exercisable at a price of $11.25 through November 13, 2021,subject to adjustment for reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25.The Company had concluded that these warrants issued contained an optional cash settlement feature. Therefore, these warrants were recognized as a liability at fair value at inception and further adjusted based on changes in fair value through earnings at each reporting period.
The Company also issued 48,889 warrants its placement agents warrants to purchase its common stock in connection with the November 2018 Offering. The warrants were exercisable until December 12, 2023 at a price of $11.25 per share, subject to adjustment for reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25. The Company had initially concluded that these warrants contained an optional cash settlement feature. Therefore, these warrants were recognized as a liability at fair value at inception and further adjusted based on changes in fair value through earnings at each reporting period. During the year ended June 30, 2020, the placement agent warrants were exchanged and replaced with new warrants whereby their derivative feature was removed. Upon replacement, the warrants were adjusted to fair value and the derivative feature was recorded as additional paid in capital in the amount of $221,222.
On July 17, 2019, the Company and the investors to the November 2018 Offering (“Investors”) entered into Waiver Agreements (the “July 2019 Waiver Agreements”). Pursuant to the terms of the July 2019 Waiver Agreements, the Investors waived the exercise of remedies with regard to certain breaches of agreements and any and all events of defaults between the Company and the Investors. In consideration for the Investors entrance into the July 2019 Waiver Agreements, the Company increased the principal amount of each note issued in the November 2018 Offering by 30%, in the form of an Amended and Restated Senior Secured Convertible Promissory Note (the “Amended and Restated Notes”). Additionally, for its role as lead investor, facilitator and negotiating the terms of the 2019 Waiver Agreements, the Company issued to Cavalry Fund I LP warrants to purchase 3,333 shares of Common Stock exercisable on or after October 1, 2019 for a term of three (3) years from such date at an exercise price of $11.25 per share (the “Cavalry Warrant”).
| F-33 |
The Company evaluated the debt modification for the Amended and Restated Notes in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment as the 10% cash flow test was met. As a result, the $2,200,000 Secured Convertible Note was written off and the Amended and Restated Notes were recorded at fair value as of July 17, 2019. On July 17, 2019 the Company wrote off the remaining principal balance of $2,200,000 and recorded the Amended and Restated Notes at fair value in the amount of $4,476,412. On July 17, 2019, of the $4,476,412 fair value, $2,860,000 represents the face amount of the Amended and Restated Note and $1,616,412 represents the deemed premium paid for the Amended and Restated Notes which was recorded as additional debt principal to be amortized over the remaining life of the Amended and Restated Notes.
On November 19, 2019, the Company and the Investors had entered into subsequent waiver agreements (the “November 2019 Waiver Agreements”). Pursuant to the terms of the November 2019 Waiver Agreement, the Investors agreed to waive the exercise of remedies with regard to any and all events of default between the Company and the Investors, and the Investors agreed to extend the maturity of the Amended and Restated Note until February 14, 2020. In consideration for the November 2019 Waiver Agreements, the Company issued 5,435 shares of common stock and recorded $26,902 as interest expense. The Company also accelerated the remaining amortization of the July 17, 2019 premium on November 19, 2019. As of March 31, 2020, the Investors verbally agreed to extend the maturity date until the filing of the Company’s registration statement, which was filed on April 15, 2020.
In consideration for the Investors entrance into the November 2019 Waiver Agreements, the Company has agreed to issue to each Investor an additional warrant to purchase such number of shares of the Company’s Common Stock equal to 5% of the warrants initially issuable to such Investor in the November 13, 2018 Offering, as amended. These additional warrants had an exercise price of $11.25 per share and were substantially the same as the warrants issued in the November 13, 2018 Offering, except that they contained no cashless provision, ratchet provision or piggyback registration provisions.
The Company evaluated the debt modification for the Amended and Restated Notes in accordance with ASC 470-50 and concluded that the debt did not qualify for debt extinguishment as the 10% cash flow test was not met. As a result, the additional warrants issued in connection with the waiver were fair valued and recorded as a debt discount, and are being amortized to interest expense over the remaining term of the debt. In addition, the Company incurred $50,000 of deferred financing fees in connection with the modification and expensed the fees to interest expense immediately.
The Amended and Restated Notes were mandatorily converted in full on April 15, 2020 upon the consummation of the Company’s public offering of its securities and simultaneous listing on the Nasdaq Capital Market. The Company accrued interest at the default interest rate, which was recorded as a gain on extinguishment of debt upon conversion as no default interest was called. For the year ended June 30, 2020, the Company recorded a reduction to amortization expense in the amount of $1,616,412 for the amortization of the deemed premium and a loss on extinguishment of debt in the amount of $2,795,582.
Private Placement Offerings
On August 14, 2019 and August 29, 2019, the Company consummated the initial closings (“Initial Closings”) of a private placement offering (“Private Offerings”) whereby the Company entered into those certain securities purchase agreement (the “August 2019 Purchase Agreements”) with seven accredited investors (the “August Investors”). Pursuant to the August 2019 Purchase Agreements, the Company issued the August Investors those certain convertible promissory notes (the “August Convertible Promissory Notes”) in the aggregate principal amount of $522,500 (including a 10% original issue discount) and warrants (the “August Investor Warrants”) to purchase 58,057 shares of the Company’s common stock for aggregate gross proceeds of $475,000.
On October 11, 2019 and December 16, 2019, Company consummated additional closings of the Private Offerings whereby the Company entered into certain securities purchase agreement accredited investors (the “Q2 Closings”). Pursuant to the Q2 Closings, the Company issued the investors those certain convertible promissory notes (the “Q2 Promissory Notes”) in the aggregate principal amount of $753,500 (including a 10% original issue discount) and to purchase 83,722 shares of the Company’s common stock for aggregate gross proceeds of $685,000.
| F-34 |
The August Convertible Promissory Notes and Q2 Promissory Notes, together and in the aggregate the (“Bridge Notes”) accrued interest at a rate of 5% per annum and were initially convertible into shares of the Company’s common stock at a conversion price of $9.00 per share, subject to adjustment (the “Conversion Price”). The Bridge Notes also contained a mandatory conversion mechanism whereby unpaid principal and accrued interest on the Bridge Notes, upon the closing of a Qualified Offering (as defined therein) converts into the securities offered in such a Qualified Offering at the lower of (i) the Conversion Price and (ii) 80% of the offering price in the Qualified Offering. The Bridge Notes contain customary events of default (each an “Event of Default”) and mature on August 14, 2020, August 29, 2020, October 16, 2020 and December 6, 2020. If an Event of Default occurs, the outstanding principal amount of the Bridge Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Bridge Notes will become, at the holder’s election, immediately due and payable in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means the sum of 130% of the outstanding principal amount of the Bridge Notes plus accrued and unpaid interest, including default interest of 18% per year, and all other amounts, costs, expenses and liquidated damages due in respect of the Bridge Notes.
Pursuant to the Bridge Notes, each investor was entitled to 100% warrant coverage, such that investor in the Bridge Notes received the same number of warrants to purchase shares of Common Stock as is the number of shares of Common Stock initially issuable upon conversion of the Bridge Notes as of the date of issuance. The warrants issued in accordance with the Bridge Notes were exercisable at a price of $11.25 per share, subject to adjustment from the date of issuance through August 14, 2022, August 29, 2022, October 11, 2022 and December 16, 2022.
Joseph Gunnar & Co., LLC (the “Placement Agent”) acted as placement agent for the Offerings and received cash compensation of $85,000 and warrants to purchase 20,778 shares of the Company’s common stock, at an initial exercise price of $11.25 per share, subject to adjustment (“Agent Warrants”). The Agent Warrants may be exercised on a “cashless” basis and expire August 14, 2024 and August 29, 2024.
The Bridge Notes were mandatorily converted in full on April 15, 2020 upon the consummation of the April Offering.
Note 14 – 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 $516,000 in cash and $230,000 in common stock during the period from October 1, 2019 to June 30, 2022. On August 6, 2020, the Company entered into an amended and restated sponsorship agreement (“Amended Sponsorship Agreement”) with the Team that included cash payments totaling $2,545,000 and the issuance of common stock totaling $825,0000 for the term of the agreement ending January 31, 2023. The cost of the sponsorship arrangement with the Team is recorded to sales and marketing expense on the consolidated statements of operations over the term of the Amended Sponsorship Agreement. During the year ended June 30, 2021, the Company has recorded $1,217,357 in sales and marketing expense related to the Team sponsorship. The amount accrued in accounts payable and accrued expenses on the consolidated balance sheets for the Team sponsorship was $180,696 at June 30, 2021. As of June 30, 2021, the commitments under this agreement are estimated at $1,375,000 for the year ended June 30, 2022, and $750,000 for the year ended June 30, 2023.
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 is set as the earlier of launch date of the online gaming service being offered in New Jersey, or March 31, 2021. The Company determined the commencement date of the arrangement to be March 31, 2021. The Bally’s agreement extends for 10 years from the date of commencement requiring the Company to pay $1,250,000 and issue 10,000 shares of common stock on each annual anniversary date. The Company also paid the $1,550,000 on June 11, 2021, and issue 50,000 shares of common stock on July 1, 2021 in connection with the commencement of the arrangement. During the year ended June 30, 2021, the Company has recorded $357,167 in sales and marketing expense and has further recorded an asset of $1,142,833 at June 30, 2021 in prepaid expenses and other current assets on the consolidated balance sheets. As of June 30, 2021, the commitments under this agreement are estimated at $1,250,000 and 10,000 shares of common stock for the year ended June 30, 2022 through the year ended June 30, 2030.
| F-35 |
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. At June 30, 2021, the commitments under these agreements are estimated at $1,654,813 for the year ended June 30, 2022, $1,718,903 for the year ended June 30, 2023, $1,1,282,508 for year ended June 30, 2024, $908,423 for the year ended June 30, 2025 and $459,756 for the year ended June 30, 2026.
Contingencies
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. At June 30, 2021, the Company has recorded a liability for the amount awarded in arbitration in accounts payable and accrued expenses in the consolidated balance sheet. The Company paid $294,051 to settle the arbitration award, inclusive of accrued interest, on August 24, 2021.
On August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit against the Company alleging that it had breached its obligations related to an 8% convertible promissory note dated June 3, 2016 and common stock purchase warrants of the same date. On April 30, 2021, a Settlement Agreement was entered into with Tangiers for an undisclosed amount. The amount of the settlement was not material to the consolidated financial statements of the Company.
Note 15 – 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 revenues and long-lived assets of Argyll, EGL and Lucky Dino 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.
The Company did not record revenue during the year ended June 30, 2020. A disaggregation of revenue by type of service for the year ended June 30, 2021 follows:
| Fiscal 2021 | ||||
| Online betting and casino revenues | $ | 15,824,054 | ||
| Esport service revenues | 959,860 | |||
| Total | $ | 16,783,914 | ||
A summary of revenue by geography follows for the year ended June 30, 2021 follows:
| Fiscal 2021 | ||||
| United States | $ | 671,519 | ||
| International | 16,112,395 | |||
| Total | $ | 16,783,914 | ||
A summary of long-lived assets by geography follows:
| June 30, 2021 | June 30, 2020 | |||||||
| United States | $ | 48,144,926 | $ | 1,189 | ||||
| International | 41,942,870 | 15,685 | ||||||
| Total | $ | 90,087,796 | $ | 16,874 | ||||
| F-36 |
Note 16 – Equity
Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock with a par value of $0.001 per share. There were no preferred shares issued and outstanding at June 30, 2021 and June 30, 2020.
Common Stock
The following is a summary of common stock issuances for the year ended June 30, 2021:
| ● | On February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors resulting in the raise of $30,000,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 2,000,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share at a price of $15.00 per Share. The offering was consummated on February 16, 2021, at which time the Company received net proceeds of $27,340,000. |
| ● | On July 31, 2020, the Company issued 650,000 shares of common stock as a component of the purchase consideration for Argyll. The Company recorded the issuance of these shares at fair value in the amount of $3,802,500. During the year ended June 30, 2021, the Company also issued 1,000,000 shares of common stock in connection with the exercise of warrants that were included as a component of the purchase consideration paid for Argyll. The warrants entitled the holder to purchase one share of common stock at $8.00 per share. The Company recorded the issuance of these shares at the settlement date fair value of $15,480,000 comprised of $8,000,000 of cash received from the exercise, and non-cash settlement of the warrant liability totalling $7,480,000. The warrant liability established on the date of acquisition of Argyll was $2,750,076 and subsequently increased to the settlement date fair value by recording a charge of $4,729,924 in the statement of operations for the year ended June 30, 2021. Refer to discussion of the Argyll acquisition at Note 3. |
| ● | During the year ended June 30, 2021, the Company issued a total of 187,616 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 $2,217,621, which includes the initial issuance of 93,808 shares of common stock at a fair value of $411,817 on September 3, 2020, and the subsequent issuance of 93,808 shares of common stock on March 3, 2021 at a fair value of $1,805,804 in settlement of contingent purchase consideration. Refer to discussion of the FLIP acquisition at Note 3. |
| ● | On January 21, 2021 the Company issued 292,511 shares of common stock as a component of the purchase consideration for EGL. The Company recorded the issuance of these shares at fair value in the amount of $2,193,833. On May 21, 2021, the Company issued an additional 63,109 shares of common stock with a fair value of $597,650 to settle contingent holdback purchase consideration for the EGL acquisition. Refer to discussion of the EGL acquisition at Note 3. |
| ● | On June 1, 2021 the Company issued 830,189 shares of common stock with a fair value of $9,273,211 in connection with the acquisition of ggCircuit, LLC. |
| ● | On June 1, 2021 the Company issued 528,302 shares of common stock with a fair value of $5,901,133 in connection with the acquisition of Helix Holdings, LLC. |
| ● | During the year ended June 30, 2021, the Company issued 5,503,167 shares of common stock for the exercise of warrants with a weighted average exercise price of $4.86 per share or $26,737,849 in the aggregate. The warrants issued for shares of common stock in the statement of stockholders equity (deficit) also includes the cash received of $8,000,000 from the exercise of warrants issued in the acquisition of Argyll, and the non-cash settlement of the related warrant liability of $7,480,000, discussed above. The Company recorded issuance costs of $197,627 related to the issuance of warrants during the year ended June 20, 2021. |
| F-37 |
| ● | During the year ended June 30, 2021, the Company issued 5,333 shares of common stock from the exercise of stock options with a weighted average exercise price of $8.37 per share or $44,637 in the aggregate. |
| ● | During the year ended June 30, 2021, the Company issued 602,695 shares of its common stock for services rendered with a weighted average fair value of $4,024,746 per share or $6.68 in the aggregate. |
The following is a summary of common stock issuances for the year ended June 30, 2020:
| ● | On January 17, 2020 the Company entered into Exchange Agreements with eighteen of its investors whereby the investors agreed to exchange warrants to purchase an aggregate of 288,722 shares of common stock for 288,722 shares of the Company’s common stock (the “Warrant Exchange”). The Company recorded $1,894,418 as a gain on Warrant Exchange which represents the difference in the fair value of the exchanged warrants in the amount of $3,583,442 and the fair value of the common stock issued in the amount of $1,689,024. The Exchange Agreements were entered into in order to extinguish the derivative liability associated with the warrants. |
| ● | On October 8, 2019, the Company issued 41,780 shares of its common stock upon the exercise of 79,444 warrants in a cashless exercise. |
| ● | On October 9, 2019, the Company issued 11,248 shares of its common stock upon the exercise of 21,389 warrants in a cashless exercise. |
| ● | During the year ended June 30, 2020, the Company issued 44,445 shares of common stock from the exercise of warrants with a weighted average exercise price of $2.25 per share or $100,000 in the aggregate. |
| ● | During the year ended June 30, 2020, the Company issued 8,889 shares of its common stock for services rendered with a weighted average fair value of $6.52 per share or $58,000 in the aggregate. |
| ● | During the year ended June 30, 2020, the Company issued 16,667 shares of common stock related to a consulting agreement dated June 4, 2019. The Company recorded these shares at fair value in the amount of $200,000. |
| ● | During the year ended June 30, 2020, the Company issued 5,435 shares of its common stock upon entering waiver agreements. In consideration for the investors entrance into the waiver agreements, the Company issued to each investor an additional warrant to purchase such number of shares of the Company’s Common Stock equal to 5% of the warrant shares initially issuable to such investor under the warrant issued to such investor in the November 13, 2018 offering, as amended. The additional warrant has an exercise price of $11.25 per share. |
Common Stock Warrants
On April 16, 2020, the Company closed an offering, (“April 2020 Offering”), in which it sold 1,980,000 units consisting of one share of common stock and one Unit A Warrant and one Unit B Warrant, for a total of 3,960,000 warrants, with each warrant entitling the holder to purchase one share of common stock price at $4.25 per share. The Company issued an additional 209,400 Unit A Warrants and 209,400 additional Unit B Warrants to the underwriter pursuant to an over-allotment option (“Over-allotment”) each entitling the holder to purchase one share of common stock at $0.01 per share. There were 1,136,763 of Unit A Warrants outstanding at June 30, 2021. The Unit B Warrants expired one year from the date of issuance on April 19, 2021 and there were no Unit B Warrants outstanding at June 30, 2021.
In connection with the April 2020 Offering the Company also issued 1,217,241 shares of common stock and 2,434,482 warrants (“Conversion Warrants”) to purchase one share of common stock at $4.25 per share upon the conversion of $4,138,585 of the Company’s convertible debt and accrued interest. There were 40,582 Unit A Conversion Warrants outstanding at June 30, 2021. The Unit B Conversion Warrants have been fully exercised for shares of common stock.
| F-38 |
On July 31, 2020, the Company issued 1,000,000 warrants in connection with the acquisition of Argyll with an exercise price of $8.00. These warrants were exercised during the year ended June 30, 2021 as described above. On June 2, 2021, the Company issued 2,000,000 Series A Warrants and 2,000,000 Series B Warrants with an exercises price of $17.50 to the holders of the Senior Convertible Note. There were no Series A Warrants exercised during the year ended June 30, 2021. The Series B Warrants may not be exercised until there is a redemption of principal under the Senior Convertible Note. The Series B Warrants were not exercisable at June 30, 2021.
A summary of the warrant activity follows:
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Intrinsic Value | |||||||||||||
| Outstanding, July 1, 2019 | 727,779 | $ | 6.30 | 2.09 | $ | 2,563,939 | ||||||||||
| Issued | 6,570,302 | 4.44 | ||||||||||||||
| Exercised | (1,674,542 | ) | 4.59 | |||||||||||||
| Exchanged | (288,722 | ) | 11.25 | |||||||||||||
| Forfeited or cancelled | (70,225 | ) | 3.12 | |||||||||||||
| Outstanding, June 30, 2020 | 5,264,592 | 4.28 | 0.86 | 14,654,296 | ||||||||||||
| Issued | 5,603,674 | 14.38 | ||||||||||||||
| Exercised | (5,503,167 | ) | 4.88 | |||||||||||||
| Forfeited or cancelled | (14,541 | ) | 4.25 | |||||||||||||
| Outstanding, June 30, 2021 | 5,350,558 | $ | 14.19 | 3.14 | $ | 8,743,588 | ||||||||||
There were 3,350,558 warrants exercisable at June 30, 2021 with a weighted average exercise price of $12.21. The intrinsic value of the warrants exercised during the years ended June 30, 2021 and 2020 was $33,029,828 and $4,561,472, respectively
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 1,500,000 shares. Each year on January 1, for a period of up to nine years, the maximum number of shares authorized for issuance under the 2020 is automatically increased by 233,968 shares. At June 30, 2021, there was a maximum of 1,733,968 shares of common stock authorized for issuance under the 2020 Plan. There were no additional equity awards eligible for issuance from the 2017 Stock Incentive Plan that had been adopted by the Company on August 1, 2017. The outstanding stock options granted under the 2017 Plan were transferred to the 2020 Plan. As of June 30, 2021, there were 1,281,959 shares of common stock available for future issuance under the 2020 Plan.
A summary of the Company’s stock option activity is as follows:
Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding, June 30, 2020 and July 1, 2019 | 51,942 | $ | 10.50 | |||||
| Granted | 436,400 | 4.96 | ||||||
| Exercised | (5,333 | ) | 8.37 | |||||
| Cancelled | (8,333 | ) | 7.09 | |||||
| Outstanding, June 30, 2021 | 474,676 | 5.49 | ||||||
As of June 30, 2021, the weighted average remaining life of the options outstanding was 4.37 years. As of June 30, 2021, there were 147,376 stock options that were available for exercise. The aggregate intrinsic value of options outstanding at June 30, 2021 was $2,537,975.
Stock Based Compensation
During the year ended June 30, 2021 and 2020, the Company recorded stock-based compensation expense of $4,129,726 and $1,614,236, 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 audited condensed consolidated statements of operations.
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The Company had previously recognized stock-based compensation expense of $927,855 during its year ended June 30, 2020 related to the issuance of 117,450 shares of common stock for services rendered, comprised of 1,333 shares granted to management, 16,966 shares granted to employees, and 99,151 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 June 30, 2021, unamortized stock compensation for stock options was $598,105 with a weighted-average recognition period of 0.60 years. The options granted during the year ended June 30, 2021 were valued using the Black-Scholes option pricing model using the following weighted average assumptions:
The Year Ended June 30, 2021 | ||||
| Expected term, in years | 2.76 | |||
| Expected volatility | 132.60 | % | ||
| Risk-free interest rate | 0.32 | % | ||
| Dividend yield | — | |||
| Grant date fair value | $ | 3.41 | ||
Note 17 – Income Taxes
The income (loss) before income taxes follows:
| Fiscal 2021 | Fiscal 2020 | |||||||
| United States | $ | (19,987,348 | ) | $ | (10,242,024 | ) | ||
| International | (10,196,922 | ) | (106,993 | ) | ||||
| Total loss before income taxes | $ | (30,184,270 | ) | $ | (10,349,017 | ) | ||
The provision (benefit) from income taxes follows:
| Fiscal 2021 | Fiscal 2020 | |||||||
| Current: | ||||||||
| Federal | $ | 300,000 | $ | 2,398 | ||||
| State | — | — | ||||||
| Foreign | 24,722 | — | ||||||
| Total current | 324,722 | 2,398 | ||||||
| Deferred: | ||||||||
| Federal | (4,136,258 | ) | — | |||||
| State | — | — | ||||||
| Foreign | — | — | ||||||
| Total deferred | (4,136,258 | ) | — | |||||
| Income tax provision (benefit) | $ | (3,811,536 | ) | $ | 2,398 | |||
During the year ended June 30, 2021, the Company recorded a deferred tax liability in connection with its acquisitions of Argyll, EGL, Helix and ggCircuit. These acquisitions impacted the Company’s estimate of realizability of its deferred tax assets and resulted in a reduction to the valuation allowance of $4,136,256 during the year ended June 30, 2021. There was no tax benefit recognized during the year ended June 30, 2020 as the Company did not yet have revenue generating operations and maintained a valuation allowance equal to the balance of its deferred tax assets
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The reconciliation of the expected tax expense (benefit) based on U.S. federal statutory rate of 21% with the actual expense follows:
| Fiscal 2021 | Fiscal 2020 | |||||||
| U.S. federal statutory rate | $ | (6,338,697 | ) | $ | (2,173,293 | ) | ||
| Change in valuation allowance | 1,133,233 | 863,264 | ||||||
| Foreign tax rate and other foreign tax | (150,274 | ) | (5,953 | ) | ||||
| Non-deductible warrant revaluations | 325,484 | |||||||
| Non-deductible revaluation of contingent consideration | 367,207 | |||||||
| Change in fair value of derivatives | — | 510,783 | ||||||
| Debt restructure | — | 797,981 | ||||||
| Acquisition costs | 521,235 | — | ||||||
| Other | 330,276 | 9,616 | ||||||
| Income tax provision | $ | (3,811,536 | ) | $ | 2,398 | |||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities consist of the following:
| Fiscal 2021 | Fiscal 2020 | |||||||
| Assets: | ||||||||
| Net operating losses | $ | 9,728,136 | $ | 1,864,962 | ||||
| Nonqualified stock options | 382,974 | 187,209 | ||||||
| Stock compensation payable | — | 190,370 | ||||||
| Depreciation and amortization | 452,388 | — | ||||||
| Other | 26,264 | — | ||||||
| Gross deferred tax assets | 10,589,762 | 2,242,541 | ||||||
| Deferred tax liabilities | ||||||||
| Acquired intangible assets | (5,593,787 | ) | — | |||||
| Net deferred tax assets | 4,995,975 | 2,242,541 | ||||||
| Valuation allowance | (6,866,836 | ) | (2,242,541 | ) | ||||
| Deferred tax liabilities, net | $ | (1,870,861 | ) | $ | — | |||
The Company has net deferred tax assets of $3,722,926 at June 30, 2021 for which there is no valuation allowance. The Company anticipates its deferred tax assets will be realized through the future reversal of existing temporary differences recorded as deferred tax liabilities. Should the Company determine that it would not be able to realize the remaining deferred tax assets in the future, an adjustment to the valuation allowance would be recorded in the period of determination. The need to maintain a valuation allowance against the Company’s deferred tax assets may cause greater volatility to our effective tax rate.
At June 30, 2021, the Company had estimated federal net operating loss carry forwards of $19.7 million that may be offset against future taxable income subject to limitation under IRC Section 382. The total federal net operating losses include $2.8 million of benefit that begins to expire in 2032, with the remaining federal net operating losses having no expiration. At June 30, 2021, the Company had net operating loss carryforwards related to its foreign operations in Malta of $2.0 million and the United Kingdom of $4.5 million that do not expire, as well as net operating loss carryforwards for Switzerland $19.9 million that can be carried forward for 7 years. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryovers and carrybacks to offset taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Due to historical losses, the net operating loss carryback provision of the CARES Act is would not yield a material benefit to the Company.
The Company applied the “more-likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits as of June 30, 2021 and June 30, 2020, respectively. The Company records interest and penalties, if any, for uncertain tax positions, in income tax expense. The Company believes any estimated accrued interest and penalties that may be imposed related to tax filings are not material to the consolidated financial statements for the year ended June 30, 2021.
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Note 18 – Fair Value Measurements
The following financials instruments were measured at fair value on a recurring basis:
| June 30, 2021 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Warrant liability (Senior Convertible Note) | $ | 23,500,000 | $ | - | $ | - | $ | 23,500,000 | ||||||||
There were no assets or liabilities measured at fair value on a recurring basis at June 30, 2020 as derivative liabilities and warrant liabilities were settled in connection with the public offering and conversion of debt discussed in Note 13. A summary of the changes in Level 3 financial instruments follows:
| Balance at June 30, 2019 | $ | 4,655,031 | ||
| Change due to warrant exercise | (1,222,602 | ) | ||
| Change due to extinguishment of debt | (1,426,323 | ) | ||
| Change due to acquired amended and restated note | 2,504,127 | |||
| Change due to issuance of warrants | 1,851,892 | |||
| Change in fair value of derivative liabilities | (2,134,592 | ) | ||
| Change in fair value of warrant liabilities | (297,706 | ) | ||
| Change due to redemption of convertible debt | (196,297 | ) | ||
| Change due to extinguishment of warrant liabilities upon Warrant Exchange | (3,583,442 | ) | ||
| Change due to extinguishment of derivative liabilities upon conversion of notes | (4,793,462 | ) | ||
| Change due to extinguishment of derivative upon exchange of derivative warrants | (221,222 | ) | ||
| Balance at June 30, 2020 | — | |||
| Fair value of warrants issued for Argyll acquisition (“Argyll Warrant Liability”) (Note 3) | 2,750,076 | |||
| Revaluation of Argyll warrant liability for warrants issued in Argyll Acquisition (Note 16) | 4,729,924 | |||
| Settlement of Argyll warrant liability (Note 16) | (7,480,000 | ) | ||
| Issuance of Series A and Series B warrants with Senior Convertible Note (Note 12) | 26,680,000 | |||
| Revaluation of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | (3,180,000 | ) | ||
| Balance at June 30, 2021 | $ | 23,500,000 |
The warrants outstanding at June 30, 2021 issued with the Senior Convertible Note were valued using a Monte Carlo based valuation model with the following assumptions:
| June 30, 2021 | ||||
| Contractual term, in years | 2.00 – 4.00 | |||
| Expected volatility | 120% – 140 | % | ||
| Risk-free interest rate | 0.24% – 0.65 | % | ||
| Dividend yield | — | |||
| Conversion / exercise price | $ | 17.50 | ||
Note 19 – Subsequent Events
Equity Issuances
Subsequent to June 30, 2021 and through October 11, 2021, 2021, the Company issued 78,527 shares for services.
On October 1, 2021, the Company issued a total of 1,121,150 stock options to employees and non-employer directors with an exercise price of $6.71 under the 2020 Equity and Incentive Plan. During the period from July 1, 2021 through October 11, 2021, the Company issued 10,500 shares of common stock from stock option exercises with a weighted average exercise price $4.82.
Bethard Acquisition
On July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited that provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses to customers in Sweden, Spain, Malta and Ireland (“Bethard Business”). The initial payment of purchase consideration for the Bethard Business of €17,000,000 (equivalent to $20,067,871 using exchange rates in effect at the acquisition date) includes €13,000,000 (equivalent to $15,346,019 using exchange rates in effect at the acquisition date) that was paid in cash at closing, and €4,000,000 (approximately $4,721,852 using exchange rates in effect at the acquisition date) that was initially payable in cash by October 1, 2021 pursuant an amendment agreement dated July 12, 2021, and subsequently extended to October 14, 2021 (“Additional Payment Due Date”) pursuant to a second amendment agreement (“Bethard Second Amendment Agreement”). The Company is also required to pay additional cash purchase consideration during the 24 month period following the acquisition date equal to 15% of net gaming revenue until the Additional Payment Due Date, with the percentage then decreasing to 10% - 12% of net gaming revenue during subsequent months. The total purchase consideration also includes a payment of up to €7,600,000 (equivalent to $8,971,519 using exchange rates in effect at the acquisition date) of contingent share consideration should a specific ambassador agreement be successfully assigned to Bethard business following the acquisition date.
The acquisition was the Bethard Business was completed pursuant to the terms of the purchase agreement dated May 25, 2021 whereby the Company acquired the outstanding share capital, of Prozone Limited that had previously received the assets of the Bethard Business in a pre-closing restructuring by the seller.
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The preliminary estimate of the purchase consideration follows pending the completion of the valuation of contingent consideration:
| Cash paid at closing | $ | 15,346,019 | ||
| Cash consideration payable by October 14, 2021 (Additional Payment Due Date) | 4,721,852 | |||
| Contingent cash consideration | 7,500,000 | |||
| Contingent share consideration | 2,242,880 | |||
| Total purchase price consideration | $ | 29,810,751 |
The preliminary estimated contingent cash consideration assumes a cash payment equal to 15% of net gaming revenue for the Bethard Business through the Additional Payment Due Date as set forth through the Second Payment Due Date estimated to be approximately four months, then reverting to 12% thereafter for the remainder of a two-year period following the acquisition date. The preliminary estimated contingent cash consideration is calculated using the applicable percentages applied to projected net gaming revenue of the Bethard Business at the date of acquisition.
The preliminary estimated contingent share consideration “assumes” in an adjusted payout of the contingent share consideration as there is currently no indication the ambassador agreement will be successfully assigned to the Company. The sellers of the Bethard Business have 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 €422,222 (equivalent to $498,417 using exchange rates in effect at the acquisition date) for each month the contract is not assigned to the Company through the 24 month anniversary. The share consideration included in the total estimated preliminary purchase consideration are estimated using the exchange rates at the date of acquisition. The share consideration is not payable until the 24 month anniversary following the acquisition of the Bethard Business and therefore the contingent share consideration is classified as a noncurrent liability.
A preliminary purchase price allocation for the Bethard Business has not yet been performed as the acquisition was only recently completed. However, the Company anticipates the purchase price to be allocated to intangible assets and goodwill. Transaction related expenses incurred for the acquisition of the Bethard Business are estimated to total $765,863, with $750,113 incurred during the year ended June 30, 2021 and $15,750 incurred during the three months ended September 30, 2021. Transaction expenses are recorded in general and administrative expenses in the consolidated statements of operations.
Pro Forma Operating Results
The following table summarizes pro forma results of operations for the year ended June 30, 2021 and 2020 as if the Bethard Business had been acquired on July 1, 2019. The pro forma results of operations for the year ended June 30, 2021 and 2020 were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had these acquisitions been made as of July 1, 2019 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.
Pro Forma (unaudited) for the year ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net revenue | $ | 27,217,991 | $ | 32,482,076 | ||||
| Net loss | $ | (13,677,602 | ) | $ | (13,251,236 | ) | ||
| Net loss per common share, basic and diluted | $ | (0.87 | ) | $ | (1.93 | ) | ||
The pro forma operating results of operations for the year ended June 30, 2021 and 2020 include amortization of intangibles, depreciation of equipment and cash proceeds made available through the issuance of equity to facilitate the acquisitions.
At-the Market Equity Offering Program
On September 3, 2021, the Company entered “at the market” equity offering program (“ATM”) to sell up to an aggregate of $20,000,000 of common stock. The shares are being issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252370) and the Company filed a prospectus supplement, dated September 3, 2021 with the SEC in connection with the offer and sale of the shares pursuant to the Equity Distribution Agreement with the broker. The Company has sold 1,250 shares through the ATM subsequent to June 30, 2021.
Investment in Game Fund Partners LLC
The Company has signed a partnership agreement with Game Fund Partners LLC to become a part of their Venture Capital Arm and a new planned $300,000,000 game fund. As part of the new multi-year agreement, the Company will initially invest approximately $2,000,000 million dollars of EEG shares into 20% of the General Partnership of the fund and will become part of the management and investment committee that manages an investment fund focused on joint projects and investment vehicles to fuel growth in the areas of gaming, data, blockchain, online gaming, and joint casino hotel investments. The Company has agreed to contribute 100,000 shares to the fund during the period in which the fund receives total capital commitments of $100,000,000. The Company has agreed to contribute an additional 100,000 shares to the fund during the period in which the fund reaches total capital commitments of $200,000,000. As of October 13, 2021, the Company has not contributed any shares of its common stock to the fund.
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Services Agreement, Loan Agreement and Put-Agreement with Metaverse Partners LP
Services Agreement
On October 12, 2021, the Company entered into a services agreement with Metaverse Partners, LP, a Delaware limited partnership (“Metaverse”), pursuant to which Metaverse will subcontract the performance of certain services and obligations by Metaverse related to Club Contracts (as defined herein) to the Company. Various member teams of the National Football League and other sporting clubs (the “Clubs”), may enter into one or more agreements (each a, “Club Contract”) with Metaverse that licenses the right to use certain names, trademarks, service marks, logos and colors of that Club (the ‘Club Marks”) in connection with Metaverse’s sales, marketing, planning, hosting, and execution of certain products and services in the live online gaming tournament broadcast, including in person white label or co-branded gaming events in the esports gaming industry. The services to be provided by the Company under the Services Agreement (the “Services”), which are intended to satisfy Metaverse’s obligations under the Club Contracts and give rise to certain rights in favor of the Company, will include technical and operation support services as it relates to the esports gaming industry and the management of video game tournament sponsorships and will be provided by the Company on an exclusive basis and in accordance with the terms of the Agreement and each Club Contract.
In connection with the provision of the Services, the Company has agreed to maintain all permits, licenses, certifications, regulatory approvals rights, and authorizations necessary to perform the Services, including all such rights, authorizations, and licenses to the Company’s technology (inclusive of all Company software, hardware, networks, IT systems, data, and other intellectual property used by the Company in connection with its performance of the Services) and any other third-party software, data, or other intellectual property utilized by the Company in providing the Services.
Subject to the terms of the Agreement and the applicable Club Contract, and to the extent permitted under the applicable Club Contract, Metaverse will allow the Company to use the applicable Club Marks for the term of the Agreement solely to the extent necessary to enable the Company to perform its obligations under the Agreement and in each case subject to Metaverse’s prior, written approval, which approval may be conditioned upon the applicable Club’s approval.
The Agreement has an initial term of two years (the “Initial Term”). At the end of the Initial Term and each extension, the Agreement automatically extends on the same terms for an additional 1-year period unless either party provides the other with at least 30 days’ prior written notice of its intent to not extend the term of the Agreement. Notwithstanding the foregoing, Metaverse may terminate the Agreement for cause and effective as of the date specified in such notice if the Company commits any material breach of the Agreement that is not reasonably capable of being cured or, if curable, that the Company fails to cure within thirty days of its receipt of written notice thereof.
Under the Services Agreement, the Company is entitled to receive 100% of the revenue from each Club in consideration of the Services performed; provided that, if there are opportunities for additional revenue under the Club Contracts that the Company isn’t currently performing or pursuing, Metaverse will receive 100% of such revenue.
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Loan Agreement
Concurrently with and in consideration of the execution of the Agreement, Metaverse agreed to make to the Company, one or several loans, to be used by the Company for operational purposes, in the aggregate principal amount of at least $15,000,000 and up to $25,000,000 (collectively and each individually, the “Loan”) pursuant to that certain Loan Agreement dated October 12, 2021 by and between Metaverse and the Company, (the “Loan Agreement Pursuant to the terms of the Loan Agreement, Metaverse is to make a $15,000,000 loan to the Company (the “Initial Loan”) and committed to make an additional loan to the Company in the amount of $10,000,000 (the “Second Loan”). In connection with the Initial Loan, the Company signed a promissory note to Metaverse dated October 12, 2021 in the principal amount of $15,000,000 (the “Initial Loan Note”). The Second Loan. If applicable, will be on the same terms as the Initial Loan in all material respects, will be reflected by a promissory note (the “Second Loan Note”) that will be identical, in all material respects to the Initial Loan Note and will be due and payable at the same time as the Initial Loan Note.
The principal amount of the Initial Loan and, as applicable, the Second Loan and the amount of all interest accrued under the Initial Note and, as applicable, the Second Note will together become immediately due and payable within fifteen calendar days following any of the enumerated events of default set forth in the Loan Agreement.
Upon (i) full repayment of the amounts due under the Loan Agreement and the applicable notes and the performance by the Company of all of its other obligations under the Loan Agreement , or (ii) exercise in full of either the “Put Right” or the “Call Right” or payment in full of the “Cash Alternative Amount” under that certain Put-Call Option Agreement, dated October 12, 2021, among the Company, Metaverse and the limited partners of Metaverse (the “Put-Call Option Agreement”), except as otherwise provided in the Loan Agreement and the other loan documents, the Company will thereupon automatically be fully, finally, and forever released and discharged from any claim, liability, or obligation in connection with the Loan Agreement and the other loan documents.
The Initial Loan Note and, if applicable, the Second Loan Note will bear interest at the rate of 8% per year and will mature on October 12, 2023 (the “Maturity Date”). Subject to acceleration, upon an event of default, interest on the Initial Loan Note and, if applicable, the Second Loan Note is due and payable on October 12, 2022, April 12, 2023 and on the Maturity Date and principal on the Initial Loan Note and, if applicable, the Second Loan Note is due on the Maturity Date.
Put-Call Option Agreement
On October 12, 2021, the Company, Metaverse and the limited partners of Metaverse entered into a Put-Call Option Agreement (the “PCO Agreement”) under which the limited partners of Metaverse (the “Limited Partners”) can, under certain circumstances, require the Company to purchase their interests in Metaverse and the Company can, under certain circumstances, require the Limited Partners to sell their interests in Metaverse to the Company. Subject to the terms and conditions of the PCO Agreement, beginning on the date that is two years after the date of the PCO Agreement (the “Put Commencement Date”) and ending on the date that is two years and ten business days after the date of the PCO Agreement, a majority in interest of the Limited Partners, acting with the written consent of the general partner of Metaverse (the “Put Limited Partners”), have the right (the “Put Right”), but not the obligation, to cause the Company to purchase all of the Limited Partners’ interests in Metaverse in exchange for the applicable number of Consideration Shares (as defined herein) being issued to each Limited Partner (the “Put”), and have the right to require that each other Limited Partner (collectively, the “Non-Put Limited Partners”) participate in and be otherwise bound to the Put. Notwithstanding the foregoing, in the event that the Company’s common stock (or any class of securities inro which such common stock has been converted) is suspended from trading on, or removed or delisted from, either the Nasdaq Stock Market or the NYSE for longer than thirty consecutive days, the Put Limited Partners have the right to exercise the Put Right beginning on the date of such event and ending on the date that is two years and ten business days after the date of this Agreement, regardless if such date is before the Put Commencement Date (the “Accelerated Put Commencement Date”).
In the event the Put Limited Partners exercises the Put Right, the consideration for which the Company will be required to purchase the Metaverse limited partnership interests from all of the Limited Partners will consist of a number of shares of common stock of the Company equal to the amount determined by the following calculation (issuable to each Limited Partner, the “Consideration Shares”):
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Consideration Shares equals Base Capital divided by Company Price Per Share.
For purposes of the PCO Agreement, (i) “Base Capital” equals, as of the date of the Put Exercise or Call Exercise Notice, as applicable, the applicable Limited Partner’s (A) capital contribution plus (B) an amount equal to an 8% per annum cumulative preferred return, compounded annually, on the amount of such Limited Partner’s capital contribution minus (C) any distributions received pursuant to the Metaverse Partnership Agreement and (ii) “Company Price Per Share” equals the lesser of: (X) $20.00 and (Y) 80% of the 30-day volume weighted average of the closing sales prices of the Company’s common stock for such day on all domestic securities exchanges on which the Company’s common stock may be listed as of the date of the Put Commencement Date, Accelerated Put Commencement Date or Call Commencement Date, as applicable.
The closing of the sale of the Metaverse limited partnership interests pursuant to the Put Right will take place no later than 60 days following receipt by the Company of a put exercise notice (the “Put Right Closing Date”). Within thirty days after the Put Right Closing Date, the Company will file with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-3 (or, if not available, on Form S-1) registering the resale of the applicable Consideration Shares, and the Company will use its commercially reasonable efforts to have such registration statement declared effective as soon as practicable after the filing thereof. In the event such registration statement is not filed within thirty days after the Put Right Closing Date or is not declared effective within 120 days of the Put Right Closing Date, each Limited Partner will have the right, but not the obligation, to exchange such Limited Partner’s Consideration Shares for such Limited Partner’s Cash Alternative Amount (as defined below).
If (i) the Company fails to deliver the Consideration Shares to the applicable Limited Partner within 60 days following the receipt by the Company of the put exercise notice or (ii) as of the Put Right Closing Date, the class of shares of which the Consideration Shares are a part is no longer eligible for trading on either the Nasdaq Stock Market or the NYSE (such event, a “Put Failure Event”), the Company will deliver, within ten business days of such Put Failure Event, to each Limited Partner an amount in cash equal to the result of dividing such Limited Partner’s Base Capital by 0.8 (such amount, the “Cash Alternative Amount”), with such payment to be made by wire transfer of immediately available funds.
Subject to the terms and conditions of the PCO Agreement, beginning on the date that is two years after the date of the PCO Agreement (the “Call Commencement Date”) the Company has the right (the “Call Right”), but not the obligation, to cause all of the Limited Partners to sell all of their interests in Metaverse to the Company. In the event the Company exercises the Call Right, the consideration for which Limited Partners will be required to sell their interests in Metaverse will be in the form of the Company issuing to each Limited Partner the number of Consideration Shares calculated in accordance with the formula set forth above.
The closing of the sale of the Metaverse interests pursuant to the Call Right will take place no later than 60 days following receipt by the Limited Partners of a call exercise notice (the “Call Right Closing Date”). Within thirty days after the Call Right Closing Date, the Company will file with the SEC a registration statement on Form S-3 (or, if not available, on Form S-1) registering the resale of the applicable Consideration Shares, and the Company will use its commercially reasonable efforts to have such registration statement declared effective as soon as practicable after the filing thereof. In the event such registration statement is not filed within thirty days after the Call Right Closing Date or is not declared effective within 120 days of the Call Right Closing Date, each Limited Partner will have the right, but not the obligation, to exchange such Limited Partner’s Consideration Shares for such Limited Partner’s Cash Alternative Amount.
If the Company fails to deliver the Consideration Shares to the applicable Limited Partners within 60 days following the delivery by the Company of the call exercise notice or (ii) as of the Call Right Closing Date, the class of shares of which the Consideration Shares are a part is no longer eligible for trading on either the Nasdaq Stock Market or the NYSE (such event, a “Call Failure Event”), the Company will deliver, within ten business days of such Call Failure Event, to each Limited Partner an amount in cash equal such Limited Partner’s Cash Alternative Amount.
| F-46 |