UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 001-39262
ESPORTS ENTERTAINMENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Block 6, Triq Paceville
St. Julians, Malta, STJ 3109
(Address of principal executive offices) (Zip Code)
3562713 1276
(Registrant’s telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to Section 15(d) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock | GMBL | OTC Pink | ||
| Common Stock Purchase Warrants | GMBLW | OTC Pink | ||
| 10.0% Series A Cumulative Redeemable Convertible Preferred Stock | GMBLP | OTC Pink | ||
| Common Stock Purchase Warrants | GMBLZ | OTC Pink |
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 ☐
Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive DataFileData File required to be submitted and posted 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 and post such files). Yes [ ] ☒ No [X]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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 transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of December 31, 2017, the registrant had 82,713,592March 26, 2024, there were shares of common stock, $0.001 par value $0.001 issued and outstanding.
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PART 1. FINANCIAL STATEMENTS
ESPORTS ENTERTAINMENT GROUP, INC.
(formerly VGambling Inc.)
Quarterly Report on Form 10-Q
DECEMBER
For the Quarter ended December 31, 20172023
(Unaudited)
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| i |
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
Esports Entertainment Group, Inc.
(formerly VGambling Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
| December 31, 2023 | June 30, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 1,101,731 | $ | 1,745,298 | ||||
| Restricted cash | 2,350,231 | 168,304 | ||||||
| Accounts receivable, net | 72,919 | 93,871 | ||||||
| Receivables reserved for users | 445,988 | 831,942 | ||||||
| Other receivables | 293,874 | 497,603 | ||||||
| Prepaid expenses and other current assets | 402,390 | 706,030 | ||||||
| Total current assets | 4,667,133 | 4,043,048 | ||||||
| Equipment, net | - | 20,013 | ||||||
| Operating lease right-of-use asset | 43,305 | 85,517 | ||||||
| Intangible assets, net | 2,893,971 | 13,324,627 | ||||||
| Goodwill | - | 4,491,223 | ||||||
| Other non-current assets | - | 136,863 | ||||||
| TOTAL ASSETS | $ | 7,604,409 | $ | 22,101,291 | ||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 8,488,120 | $ | 7,106,194 | ||||
| Liabilities to customers | 270,931 | 664,313 | ||||||
| Deferred revenue | 1,267,682 | 989,027 | ||||||
| Derivative liability | 2,356,698 | - | ||||||
| Operating lease liability – current | 49,500 | 95,903 | ||||||
| Total current liabilities | 12,432,931 | 8,855,437 | ||||||
| Warrant liability | 86,250 | 365,726 | ||||||
| Deferred income taxes | - | - | ||||||
| Total liabilities | 12,519,181 | 9,221,163 | ||||||
| Commitments and contingencies (Note 10) | - | - | ||||||
| Mezzanine equity: | ||||||||
| 10% Series A cumulative redeemable convertible preferred stock, $ par value, authorized, shares issued and outstanding, aggregate liquidation preference $9,262,326 at December 31, 2023 and $9,195,450 at June 30, 2023 | 8,306,371 | 8,083,869 | ||||||
| Series B redeemable preferred stock, $ par value, authorized, shares issued and outstanding, December 31, 2023 and June 30, 2023 | - | - | ||||||
| Series C Convertible Preferred Stock, $par value, authorized, shares issued and outstanding, aggregate liquidation preference $4,405,831 at December 31, 2023 | 3,524,665 | - | ||||||
| Redeemable Convertible Preferred Stock | 3,524,665 | - | ||||||
| Total Mezzanine equity | 11,831,036 | 8,083,869 | ||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock $ par value; shares authorized | - | - | ||||||
| Series C Convertible Preferred Stock, $par value, authorized, shares issued and outstanding, aggregate liquidation preference $18,506,798 at June 30, 2023 | - | 14,805,438 | ||||||
| Series D Convertible Preferred Stock, $ par value, authorized, shares issued and outstanding, aggregate liquidation preference $5,244,520 at December 31, 2023 and shares issued and outstanding, aggregate liquidation preference $5,421,245 at June 30, 2023 | 2,495,617 | 2,618,389 | ||||||
| Preferred Stock value | 2,495,617 | 2,618,389 | ||||||
| Common stock $ par value; shares authorized, and shares issued and outstanding as of December 31, 2023 and June 30, 2023, respectively | 1,146 | 9 | ||||||
| Additional paid-in capital | 188,472,019 | 173,465,492 | ||||||
| Accumulated deficit | (203,272,130 | ) | (181,425,905 | ) | ||||
| Accumulated other comprehensive loss | (4,442,460 | ) | (4,667,164 | ) | ||||
| Total stockholders’ equity (deficit) | (16,745,808 | ) | 4,796,259 | |||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 7,604,409 | $ | 22,101,291 | ||||
SeeThe accompanying notes toare an integral part of these unaudited condensed consolidated financial statementsstatements.
| 1 |
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Condensed Consolidated StatementStatements of Operations
(Unaudited)
|
| Three Months Ended December 31, 2017 |
| Three Months Ended December 31, 2016 |
| Six Months Ended December 31, 2017 |
| Six Months Ended December 31, 2016 |
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Revenue | $ | - | $ | - | $ | - | $ | - |
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Directors compensation |
| 66,245 |
| 21,250 |
| 124,067 |
| 46,250 |
Consulting fees |
| 128,183 |
| 189,750 |
| 269,297 |
| 236,000 |
General and administrative |
| 485,928 |
| 15,078 |
| 813,420 |
| 35,445 |
Professional fees |
| 11,521 |
| 8,806 |
| 59,745 |
| 28,347 |
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Total Operating Expenses |
| 691,877 |
| 234,884 |
| 1,266,529 |
| 346,042 |
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Non-operating gain (loss) |
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Interest expense |
| - |
| (21,430) |
| - |
| (42,860) |
Foreign exchange gain (loss) |
| - |
| 140 |
| (376) |
| 184 |
Loss on Debt Settlement |
| - |
| - |
| - |
| - |
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Net Loss | $ | (691,877) | $ | (256,174) | $ | (1,266,905) | $ | (388,718) |
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Net Loss Per Share – Basic and Diluted | $ | (0.01) | $ | (0.00) | $ | (0.02) | $ | (0.01) |
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Weighted Average Shares Outstanding |
| 76,431,148 |
| 70,229,520 |
| 76,431,148 |
| 70,333,961 |
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenue | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenue | 688,532 | 2,371,655 | 1,290,558 | 6,122,071 | ||||||||||||
| Sales and marketing | 658,846 | 1,843,557 | 1,571,942 | 4,288,892 | ||||||||||||
| General and administrative | 4,784,053 | 7,559,402 | 10,971,889 | 17,030,436 | ||||||||||||
| Asset impairment charges | 12,981,142 | 16,135,000 | 12,981,142 | 16,135,000 | ||||||||||||
| Total operating expenses | 19,112,573 | 27,909,614 | 26,815,531 | 43,576,399 | ||||||||||||
| Operating loss | (16,530,546 | ) | (21,500,209 | ) | (21,543,687 | ) | (27,561,730 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | - | (971,374 | ) | - | (2,029,782 | ) | ||||||||||
| Change in fair value of derivative liability | (536,698 | ) | 8,324,802 | (536,698 | ) | 8,599,666 | ||||||||||
| Change in fair value of warrant liability | 74,111 | 2,571,732 | 279,476 | 5,022,288 | ||||||||||||
| Loss on contingent consideration | - | (3,044,019 | ) | - | (2,864,551 | ) | ||||||||||
| Other non-operating income (loss) | (54,940 | ) | 486,386 | (45,316 | ) | 532,836 | ||||||||||
| Total other income (expense), net | (517,527 | ) | 7,367,527 | (302,538 | ) | 9,260,457 | ||||||||||
| Loss before income taxes | (17,048,073 | ) | (14,132,682 | ) | (21,846,225 | ) | (18,301,273 | ) | ||||||||
| Income tax benefit (expense) | - | - | - | - | ||||||||||||
| Net loss | $ | (17,048,073 | ) | $ | (14,132,682 | ) | $ | (21,846,225 | ) | $ | (18,301,273 | ) | ||||
| Dividend on 10% Series A cumulative redeemable convertible preferred stock | (133,752 | ) | (200,628 | ) | (334,380 | ) | (401,256 | ) | ||||||||
| Undeclared dividend on 10% Series A cumulative redeemable convertible preferred stock | (66,876 | ) | - | (66,876 | ) | - | ||||||||||
| Accretion of 10% Series A cumulative redeemable convertible preferred stock to redemption value | (78,184 | ) | (75,258 | ) | (155,626 | ) | (149,802 | ) | ||||||||
| Accretion of the discount on Series C convertible preferred stock | (1,820,000 | ) | - | (1,820,000 | ) | - | ||||||||||
| Dividend on Series C convertible preferred stock | (125,459 | ) | - | (380,982 | ) | - | ||||||||||
| Dividend on Series D convertible preferred stock | (87,282 | ) | - | (174,607 | ) | - | ||||||||||
| Deemed dividend on accretion of Series D Convertible Preferred Stock to redemption value | (24,741 | ) | - | (24,741 | ) | - | ||||||||||
| Deemed dividend on make whole provision on Series C Convertible Preferred Stock | (1,046,341 | ) | - | (4,805,990 | ) | - | ||||||||||
| Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock | (10,979,863 | ) | - | (20,362,772 | ) | - | ||||||||||
| Net loss attributable to common stockholders | $ | (31,410,571 | ) | $ | (14,408,568 | ) | $ | (49,972,199 | ) | $ | (18,852,331 | ) | ||||
| Net loss per common share: | ||||||||||||||||
| Basic and diluted loss per common share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
SeeThe accompanying notes toare an integral part of these unaudited condensed consolidated financial statementsstatements.
| 2 |
Esports Entertainment Group, Inc.
(formerly VGambling Inc.)Condensed Consolidated Statements of Comprehensive Loss
Consolidated Statement(Unaudited)
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | (17,048,073 | ) | $ | (14,132,682 | ) | $ | (21,846,225 | ) | $ | (18,301,273 | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation gain | 559,946 | 2,536,663 | 224,704 | 10,185 | ||||||||||||
| Total comprehensive loss | $ | (16,488,127 | ) | $ | (11,596,019 | ) | $ | (21,621,521 | ) | $ | (18,291,088 | ) | ||||
The accompanying notes are an integral part of Cash Flowsthese unaudited condensed consolidated financial statements.
|
| Six Months Ended December 31, 2017 |
| Six Months Ended December 31, 2016 |
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Cash flows from operating activities |
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Net loss | $ | (1,266,905) | $ | (388,718) |
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Items not requiring an outlay of funds: |
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Amortization |
| 14,246 |
| - |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock option |
| 487,873 |
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Stock issuance for service |
| 55,000 |
| 137,500 |
Accretion expense |
| - |
| - |
Changes in operating assets and liabilities: |
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Accounts receivable |
| (37,737) |
| - |
Accounts payable |
| 23,342 |
| 6,903 |
Accrued liabilities |
| 3,109 |
| 39,670 |
Prepaid expenses |
| 2,796 |
| 83,000 |
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Net cash used in operating activities |
| (718,276) |
| (81,205) |
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Cash flows from investing activities |
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Purchase of computer software |
| (73.959) |
| - |
Website development |
| (7,036) |
| - |
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Net cash provided (used) by investing activities |
| (80,995) |
| - |
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Cash flows from financing activities |
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Proceeds from issuance of common stock |
| 680,916 |
| 32,475 |
Due to related parties |
| (898) |
| 6,533 |
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Net cash provided (used) by financing activities |
| 680,018 |
| 39,008 |
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Net increase/ (decrease) in cash | $ | (119,253) | $ | (42,197) |
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Cash, beginning of period | $ | 546,110 | $ | 47,922 |
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Cash, end of period | $ | 426,857 | $ | 5,725 |
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Supplemental Disclosures |
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Interest paid | $ | - | $ | - |
Income taxes paid | $ | - | $ | - |
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Significant Non-Cash Investing and Financing Activities: |
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Conversion of convertible notes to stock | $ | - | $ | - |
Additional paid-in capital increased due to forgiveness of related party |
| - |
| - |
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See accompanying notes to consolidated financial statements | ||||
| 3 |
Esports Entertainment Group, Inc.
(Formerly VGamblingCondensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity (Deficit)
For the Three and Six Months Ended December 31, 2023 and 2022 (Unaudited)
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | loss | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Shareholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10% Series A Cumulative Redeemable | Series B | Series C | Series C | Series D | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock | Redeemable Preferred Stock | Convertible Preferred Stock | Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional paid-in | Accumulated | other comprehensive | Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | loss | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as at July 1, 2023 | 835,950 | $ | 8,083,869 | - | $ | - | - | $ | - | 14,601 | $ | 14,805,438 | 4,300 | $ | 2,618,389 | 9,460 | $ | 9 | $ | 173,465,492 | $ | (181,425,905 | ) | $ | (4,667,164 | ) | $ | 4,796,259 | ||||||||||||||||||||||||||||||||||||
| Common stock and warrants issued in equity financing | - | - | - | - | - | - | - | - | - | - | 2,500 | 3 | 193,497 | - | - | 193,500 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of pre funded warrants | - | - | - | - | - | - | - | - | - | - | 10,420 | 10 | 806,490 | - | - | 806,500 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs for 10% Series A cumulative redeemable convertible preferred stock | - | 77,442 | - | - | - | - | - | - | - | - | - | - | (77,442 | ) | - | - | (77,442 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | - | - | - | - | - | - | - | - | - | (200,628 | ) | - | - | (200,628 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Series C Convertible Preferred Stock and Series D Convertible Preferred Stock dividends | - | - | - | - | - | - | - | 255,523 | - | 87,325 | - | - | (342,848 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend on make whole provision on Series C | - | - | - | - | - | 3,759,649 | - | - | - | - | (3,759,649 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversions of the Convertible preferred stock | - | - | - | - | - | - | (10,382 | ) | (12,406,014 | ) | - | - | 124,792 | 125 | 12,405,889 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Delay Payment for Series D Convertible Preferred Stock | - | - | - | - | - | - | - | - | - | - | 25 | - | 1,935 | - | - | 1,935 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | - | - | - | - | - | 21,078 | - | - | 21,078 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | - | - | - | - | - | - | - | - | (335,242 | ) | (335,242 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (4,798,152 | ) | - | (4,798,152 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | 835,950 | $ | 8,161,311 | - | $ | - | - | $ | - | 4,219 | $ | 6,414,596 | 4,300 | $ | 2,705,714 | 147,197 | $ | 147 | $ | 182,513,814 | $ | (186,224,057 | ) | $ | (5,002,406 | ) | $ | 407,808 | ||||||||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | 78,184 | - | - | - | - | - | - | - | - | - | - | (78,184 | ) | - | - | (78,184 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | - | - | - | - | - | - | - | - | - | (133,752 | ) | - | - | (133,752 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Undeclared dividend on 10% Series A cumulative redeemable convertible preferred stock | - | 66,876 | - | - | - | - | - | - | - | - | - | - | (66,876 | ) | - | - | (66,876 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Series C Convertible Preferred Stock and Series D Convertible Preferred Stock dividends | - | - | - | - | - | - | - | 125,459 | - | 87,282 | - | - | (212,741 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend on make whole provision on Series C | - | - | - | - | - | - | - | 1,046,341 | - | - | - | - | (1,046,341 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversions of the Convertible preferred stock | - | - | - | - | - | - | (2,444 | ) | (4,061,731 | ) | - | - | 401,711 | 402 | 4,061,329 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series D Convertible Preferred Stock and payment of dividend | - | - | - | - | - | - | - | - | (312 | ) | (322,120 | ) | - | - | - | - | - | (322,120 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend on accretion of redemption value and issuance costs for Series D Convertible Preferred Stock | - | - | - | - | - | - | - | - | - | 24,741 | - | - | (24,741 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Delay Payment for Series D Convertible Preferred Stock | - | - | - | - | - | - | - | - | - | - | 627 | 1 | 10,143 | - | - | 10,144 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Reclass of Series C Convertible Preferred Stock and Series D Convertible Preferred Stock to Mezzanine Equity | - | - | - | - | 1,775 | 3,524,665 | (1,775 | ) | (3,524,665 | ) | - | - | - | - | - | - | - | (3,524,665 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Bifurcation of derivative | - | - | - | - | - | (1,820,000 | ) | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of discount on Series C Convertible Preferred Stock | - | - | - | - | - | 1,820,000 | - | - | - | - | - | - | (1,820,000 | ) | - | - | (1,820,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs | - | - | - | - | - | - | - | - | - | - | 515,394 | 515 | 5,248,371 | - | - | 5,248,886 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | - | - | - | - | - | 21,078 | - | - | 21,078 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock due to the reverse stock split round-up | - | - | - | - | - | - | - | - | - | - | 81,051 | 81 | (81 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 559,946 | 559,946 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (17,048,073 | ) | - | (17,048,073 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | 835,950 | $ | 8,306,371 | - | $ | - | 1,775 | $ | 3,524,665 | - | $ | - | 3,988 | $ | 2,495,617 | 1,145,980 | $ | 1,146 | $ | 188,472,019 | $ | (203,272,130 | ) | $ | (4,442,460 | ) | $ | (16,745,808 | ) | |||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2022 | 835,950 | $ | 7,781,380 | - | $ | - | - | $ | - | - | $ | - | - | $ | - | 1,024 | $ | 1 | $ | 144,915,095 | $ | (149,140,426 | ) | $ | (7,376,114 | ) | $ | (11,601,444 | ) | |||||||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | 74,544 | - | - | - | - | - | - | - | - | - | - | (74,544 | ) | - | - | (74,544 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | - | - | - | - | - | - | - | - | - | (200,628 | ) | - | - | (200,628 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and warrants issued in equity financing, net of issuance costs | - | - | - | - | - | - | - | - | - | - | 750 | 1 | 1,568,129 | - | - | 1,568,130 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | - | - | - | - | - | 921,991 | - | - | 921,991 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | - | - | - | - | - | - | - | - | (2,526,478 | ) | (2,526,478 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (4,168,591 | ) | - | (4,168,591 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as at September 30, 2022 | 835,950 | $ | 7,855,924 | - | $ | - | - | $ | - | - | $ | - | - | $ | - | 1,774 | $ | 2 | $ | 147,130,043 | $ | (153,309,017 | ) | $ | (9,902,592 | ) | $ | (16,081,564 | ) | |||||||||||||||||||||||||||||||||||
| Balance | 835,950 | $ | 7,855,924 | - | $ | - | - | $ | - | - | $ | - | 1,774 | $ | 2 | $ | 147,130,043 | $ | (153,309,017 | ) | $ | (9,902,592 | ) | $ | (16,081,564 | ) | ||||||||||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | 75,258 | - | - | - | - | - | - | - | - | - | - | (75,258 | ) | - | - | (75,258 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | - | - | - | - | - | - | - | - | (200,628 | ) | - | - | (200,628 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from issuance of Series B redeemable preferred stock | - | - | 100 | 1,000 | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and pre-funded warrants issued in equity financing, net of issuance costs | - | - | - | - | - | - | - | - | - | 177 | - | 2,146,685 | - | - | 2,146,685 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued on exercise of Pre-funded warrants | - | - | - | - | - | - | - | - | - | - | 165 | - | 6,566 | - | - | 6,566 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | - | - | - | - | - | - | - | - | - | 2,536,663 | 2,536,663 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (14,132,682 | ) | - | (14,132,682 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 835,950 | $ | 7,931,182 | 100 | $ | 1,000 | - | $ | - | - | $ | - | - | $ | - | 2,116 | $ | 2 | $ | 149,007,408 | $ | 167,441,699 | $ | (7,365,929 | ) | $ | (25,800,218 | ) | ||||||||||||||||||||||||||||||||||||
| Balance | 835,950 | 7,931,182 | 100 | 1,000 | - | - | - | - | 2,116 | 2 | 149,007,408 | 167,441,699 | (7,365,929 | ) | (25,800,218 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Esports Entertainment Group, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| 2023 | 2022 | |||||||
| Six Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (21,846,225 | ) | $ | (18,301,273 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Asset impairment charges | 12,981,142 | 16,135,000 | ||||||
| Amortization and depreciation | 2,163,005 | 3,788,874 | ||||||
| Right-of-use asset amortization | 42,410 | 44,819 | ||||||
| Bad debt expense | 324,558 | - | ||||||
| Stock-based compensation | 42,156 | 921,991 | ||||||
| Change in fair value of warrant liability | (279,476 | ) | (5,022,288 | ) | ||||
| Change in fair value of contingent consideration | - | 2,864,551 | ||||||
| Change in fair value of derivative liability | 536,698 | (8,599,666 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 20,952 | (575,781 | ) | |||||
| Receivables reserved for users | 388,401 | 284,610 | ||||||
| Other receivables | 19,587 | (577,026 | ) | |||||
| Prepaid expenses and other current assets | 333,965 | 251,743 | ||||||
| Other non-current assets | - | 288,658 | ||||||
| Accounts payable and accrued expenses | 1,355,659 | 1,844,155 | ||||||
| Liabilities to customers | (393,574 | ) | (2,342,854 | ) | ||||
| Deferred revenue | 278,655 | 515,236 | ||||||
| Operating lease liability | (46,403 | ) | (61,727 | ) | ||||
| Net cash used in operating activities | (4,078,490 | ) | (8,540,978 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of intangible assets | (62,790 | ) | - | |||||
| Purchase of equipment | - | (3,321 | ) | |||||
| Net cash used in investing activities | (62,790 | ) | (3,321 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from equity financing, net of issuance costs | 193,500 | 9,001,103 | ||||||
| Proceeds from the exercise of pre-funded warrants | 806,500 | 6,566 | ||||||
| Proceeds from issuance of Series B redeemable preferred stock | - | 1,000 | ||||||
| Redemption of Series D redeemable preferred stock, net of issuance costs | (322,120 | ) | - | |||||
| Payment of dividends on 10% Series A cumulative redeemable convertible preferred stock | (334,380 | ) | (401,256 | ) | ||||
| Issuance of common stock under the ATM, net of issuance costs | 5,248,886 | - | ||||||
| Repayment of senior convertible note | - | (2,778,427 | ) | |||||
| Repayment of notes payable and finance leases | - | (36,746 | ) | |||||
| Net cash provided by financing activities | 5,592,386 | 5,792,240 | ||||||
| Effect of exchange rate on changes in cash and restricted cash | 87,254 | (697,641 | ) | |||||
| Net decrease in cash and restricted cash | 1,538,360 | (3,449,700 | ) | |||||
| Cash and restricted cash, beginning of period | 1,913,602 | 4,809,808 | ||||||
| Cash and restricted cash, end of period | $ | 3,451,962 | $ | 1,360,108 | ||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| December 31, 2023 | December 31, 2022 | |||||||
| Cash | $ | 1,101,731 | $ | 682,378 | ||||
| Restricted cash | 2,350,231 | 677,730 | ||||||
| Cash and restricted cash | $ | 3,451,962 | $ | 1,360,108 | ||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| June 30, 2023 | June 30, 2022 | |||||||
| Cash | $ | 1,745,298 | $ | 2,517,146 | ||||
| Restricted cash | 168,304 | 2,292,662 | ||||||
| Cash and restricted cash | $ | 1,913,602 | $ | 4,809,808 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Esports Entertainment Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| December 31, 2023 | December 31, 2022 | |||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| CASH PAID FOR: | ||||||||
| Interest | $ | - | $ | 2,013,588 | ||||
| Income taxes | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: | ||||||||
| Accretion of 10% Series A cumulative redeemable convertible preferred stock | $ | 155,626 | $ | 149,802 | ||||
| Undeclared dividend on 10% Series A cumulative redeemable convertible preferred stock | $ | 66,876 | $ | - | ||||
| Conversion of Series C Convertible Preferred Stock to common stock | $ | 16,467,745 | $ | - | ||||
| Common Stock issued to settle registration rights delay fee | $ | 12,078 | $ | - | ||||
| Accretion of the discount on Series C convertible preferred stock | $ | 1,820,000 | $ | - | ||||
| Bifurcation of derivative | $ | 1,820,000 | $ | - | ||||
| Accretion of Series D convertible preferred stock issuance costs | $ | 24,741 | $ | - | ||||
| Series C Convertible Preferred Stock dividends and Series D Convertible Preferred Stock dividends | $ | 555,589 | $ | - | ||||
| Deemed dividend on make whole provision on Series C and Series D Convertible Preferred Stock | $ | 4,805,990 | $ | - | ||||
| Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock | $ | 20,362,772 | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
Esports Entertainment Group, Inc.
Notes to theUnaudited Condensed Consolidated Financial Statements
1. Note 1 – Nature of Operations and Continuance of Business
Esports Entertainment Group, Inc. (formerly VGambling Inc.) (the “Company”) was incorporatedformed in the state of Nevada on July 22, 2008.2008 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 May 20, 2013,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. On July 31, 2020, the Company entered intocommenced revenue generating operations with the acquisition of LHE Enterprises Limited, a Share Exchange Agreement with H&H Arizona Corporation,holding company for Argyll Entertainment (“Argyll”), an Antiguaonline sportsbook and Barbuda corporation which is in the business of internet gambling.
casino operator. On May 10, 2010,January 21, 2021, the Company completed its merger with Dongke Pharmaceuticals Inc.acquisition of Phoenix Games Network Limited, the holding company for the Esports Gaming League (“EGL”), and provider of event management and team services, including live and online events and tournaments. On March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming operations of Lucky Dino Gaming Limited, a Delaware company registered in accordance with the Share Exchange Agreement. PursuantMalta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered in Estonia (collectively referred to the Share Exchange Agreement,as “Lucky Dino”). On June 1, 2021, the Company acquired all of the outstanding capital stockggCircuit, LLC (“GGC”). GGC is a business-to-business software company that provides cloud-based management for gaming centers, a tournament platform and ownership interests of Dongke from the Dongke shareholders. In exchange for their interests, the Company issued to Donke shareholders an aggregate of 1,941,818 shares of the Company’s common stock. The reverse merger was cancelled on April 30, 2013,integrated wallet and 26,700,000 shares were returned to treasure.
point-of-sale solutions. On May 20, 2013, the Company entered into a Share Exchange Agreement with H&H Arizona Corporation. Under the terms of the agreement,July 13, 2021, the Company acquired allBethard Group Limited’s business-to-consumer operations that included the online casino and sports book business operating under the brand of Bethard (“Bethard”). Bethard’s operations provided sportsbook, casino, live casino and fantasy sport betting services.
In the prior year ended June 30, 2023, the Company completed a series of independent transactions to streamline its operations to reduce operating losses and to increase its focus on core businesses. The Company closed its Argyll operations on December 8, 2022 by surrendering its UK license and deconsolidated its Argyll operating entities due to liquidation and loss of control of the outstanding capital stockentities, with Argyll Entertainment being deconsolidated on March 27, 2023 and ownership interestsArgyll Productions being deconsolidated on June 9, 2023. The Company sold its Spanish iGaming operations on January 18, 2023, sold the Bethard business on February 24, 2023 and exited the EGL business as of H&H Arizona CorporationJune 30, 2023. The core businesses of the Company include Lucky Dino of EEG iGaming and GGC of EEG Games (see Reportable Segments).
On February 13, 2024, the Company announced it was voluntarily delisting from the H&H Arizona shareholders. In exchange for the interest,Nasdaq Capital Markets, LLC (“Nasdaq”). On February 16, 2024, the Company issued to the H&H Arizona shareholders 50,000,000 sharesreceived notice from Nasdaq that it was being suspended on Nasdaq on opening of the Company’s common stock.trading on February 21, 2024. As a result of the consummationsuspension, on February 21, 2024 the Company began trading on the Over the Counter Market (the “OTC”). The Company is currently trading on the “Pink Market” of the Exchange Agreement, H&H Arizona became the Company’s wholly-owned subsidiary and the Company’s operating entity.
H&H Arizona Corporation is treated as the “accounting acquirer” in the accompanying financial statements. In the transaction,OTC. On February 27, 2024, the Company issued 50,000,000 common sharesfiled a Form 25 with the SEC to effect the shareholdersdelisting of H&H Arizona Corporation; such shares represented, immediately followingits securities from Nasdaq. At the transaction, 79%time of announcing its delisting and suspension the Company was not in compliance with the minimum of $2,500,000 stockholders’ equity requirement (the “Equity Rule”), as set forth in Nasdaq Listing Rules 5550(a)(2) and 5550(b)(1). The Company is now subject to listing requirements of the outstanding sharesOTC and expects to be trading on the OTCQB tier level of the Company. The transaction was accounted for as a “reverse merger” and a reverse recapitalization and the issuancesOTC upon filing of common stock were recorded as a reclassification between paid-in-capital and par value of Common Stock.this report.
On April 18, 2017, the majority of the shareholders of the Company’s common stock voted to approve a change of the name of the Company from VGambling Inc. to Esports Entertaiment Group, Inc.
2. Note 2 – Summary of Significant Accounting Policies
a) Basis of Presentationpresentation and principles of consolidation
The accompanying unaudited interimcondensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Accordingly, they do not include allPursuant to the rules and regulations of the SEC, certain information and footnotes required byfootnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP for complete financial statements.have been omitted. The unaudited interimcondensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement offairly state the results for the interim periods presented. Unaudited interimInterim results are not necessarily indicative of the results for the full fiscal year. TheseThe unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual period ended June 30, 2017 and notes thereto contained.
2023. The Company'sunaudited condensed consolidated financial statements are prepared using the accrual method of accounting. These consolidated statements include the accounts of the Company and its subsidiaries Esports Services Antigua Ltd., Vie Esports Services B.V., and Esport Services (Malta) Limited.wholly owned subsidiaries. All significantmaterial intercompany transactions and balances have been eliminated. eliminated in consolidation.
Effective February 22, 2023, the Company completed a one-for-one-hundred (1-for-100) reverse stock split of the Company’s issued and outstanding common stock (the “Reverse Stock Split February 2023”). Effective December 22, 2023, the Company completed a one-for-four-hundred (1-for-400) reverse stock split of the Company’s issued and outstanding common stock (the “Reverse Stock Split December 2023”). The Reverse Stock Split January 2023 and the Reverse Stock Split December 2023 are together referred to as the “Reverse Stock Splits”. All references to shares of the Company’s common stock in the unaudited condensed consolidated financial statements and related notes refer to the number of shares of common stock after giving effect to the Reverse Stock Splits and are presented as if the Reverse Stock Splits had occurred at the beginning of the earliest period presented.
Reportable Segments
The Company has electedoperates two complementary business segments:
EEG iGaming
EEG iGaming includes the Company’s iGaming casino and other functionality and services for iGaming customers. Currently, the Company operates the business to consumer segment primarily in Europe. iDefix, proprietary technology acquired in connection with the acquisition of Lucky Dino, is a June 30 year-end.Malta Gaming Authority (“MGA”) licensed iGaming platform with payments, payment automation manager, bonusing, loyalty, compliance and casino integrations that services Lucky Dino.
Alongside the esports focused platform, EEG owns and operates five online casino brands of Lucky Dino Gaming Limited and Hiidenkivi Estonia OU, its wholly-owned subsidiary (collectively referred to as “Lucky Dino”), licensed by the MGA on its in-house built iDefix casino-platform. We currently hold one Tier-1 gambling license in Malta. Our Lucky Dino business provides a foothold in mature markets in Europe into which we believe we can cross-sell our esports offerings.
EEG Games
EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of: (1) our proprietary infrastructure software, GGC, which underpins our focus on esports and is a leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, and (2) the creation of esports content for distribution to the betting industry. Currently, we operate our esports EEG Games business in the United States and Europe.
These segments consider the organizational structure of the Company and the nature of financial information available and are reviewed by the chief operating decision maker to assess performance and make decisions about resource allocations.
| 7 |
2.Summary of Significant Accounting Policies (Continued)
b) Use of Estimates and Assumptions
PreparationThe preparation of theunaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United StatesU.S. GAAP requires management to make estimates and assumptions that affect certainthe reported amounts of assets and disclosures. Accordingly, actualliabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation and recoverability of goodwill and intangible assets.
c) CashLiquidity and Cash EquivalentsGoing Concern
The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
d) Income Taxes
The Company accounts for income taxes under ASC 740 "Income Taxes," which codified SFAS 109, "Accounting for Income Taxes" and FIN 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between theaccompanying unaudited condensed consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740,Company have been prepared assuming the effect on deferred tax assets and liabilitiesCompany will continue as a going concern. The going concern basis of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than notpresentation assumes that the Company will not realize tax assets through future operations.
e) Net Loss per Share
Net income (loss) per common share is computed pursuant to ASC Topic 260 “Earnings per Share.” ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement.
Basic loss per share includes no dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive loss per share reflects the potential dilution of securities that could sharecontinue in the losses of the Company. Because the Company does not have any potentially dilutive securities, the accompanying presentation is only of basic loss per share.
f) Foreign Currency Translation
The Company’s functional and reporting currency is the US dollar. Foreign exchange items are translated to US dollars in accordance with ASC 830, “Foreign Currency Translation Matters”, using the exchange rate prevailing at the balance sheet date. Monetary assets and liabilities are translated using the exchange rate at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income.
g) Share Based Expenses
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Based Compensation, and ASC 505-50, Equity Based Payments to Non-Employees, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
h) Beneficial Conversion Feature
From time to time, the Company may issue convertible notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists onoperation one year after the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.
i) Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact itsthese unaudited condensed consolidated financial statements are issued and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3. Going Concern
These financial statements have been prepared on a going concern basis, which implies the Company will continuebe able to realize itits assets and discharge its liabilities and commitments in the normal course of business. During
The Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one year from the period ended December 31, 2017, thedate of issuance of these unaudited condensed consolidated financial statements.
The Company considered that it had an accumulated deficit of $3,041,065. $203,272,130 as of December 31, 2023 and that it has had a history of recurring losses from operations and recurring negative cash flows from operations as it has prepared to grow its esports business through acquisition and new venture opportunities. At December 31, 2023, the Company had $1,101,731 of available cash on-hand and net current liabilities of $7,765,798. Net cash used in operating activities for the six months ended December 31, 2023 was $4,078,490, which includes a net loss of $21,846,225.
The Company is licensed to conduct online gambling. The continuationalso considered its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits.
In determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern, is dependent upon the continued financial support fromCompany may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes, depending on market conditions, may be available to fund its shareholders, the abilityoperations and drive future growth, which includes:
| (i) | approximately $1,400,000 of net proceeds from the Secured Note with the holder of the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock (the “Holder”, discussed further below); | |
| (ii) | the potential expected proceeds from future offerings, where the amount of the offering has not yet been determined; and | |
| (iii) | the ability to raise additional financing from other sources. |
These above plans are likely to require the Company to obtain necessary equity financingplace reliance on several factors, including favorable market conditions, to continue operations, andaccess additional capital in the attainmentfuture. These plans were therefore determined not to be sufficient to overcome the presumption of profitable operations. These factors raise substantial doubt regardingabout the Company’s ability to continue as a going concern. TheseThe unaudited condensed consolidated financial statements do not includereflect any adjustments that might result from the outcome of this uncertainty.
The amount of available cash on hand on March 26, 2024, one business day preceding this filing, was approximately $1,300,000.
| 8 |
Restricted Cash
Restricted cash includes cash reserves maintained for compliance with gaming regulations that require adequate liquidity to satisfy the Company’s liabilities to customers and amounts held in escrow related to the recoverability and classificationexecution of recorded asset amounts and classification of liabilitiesthe an escrow agreement (as defined in Note 12) with an independent third-party escrow agent, that might be necessary should the Company be unable to continue as a going concern.
4. Acquisition of H&H Arizona Corporation and Recapitalization
On May 20, 2013, the Companywas entered into concurrent with a Share Exchange Agreement with H&H Arizona Corporation. Undersettlement agreement, dated October 6, 2023 (as defined in Note 12), pursuant to which Redemption Proceeds (as defined in Note 12) received from each closing of “at the terms of the agreement, the Company acquired all of the outstanding capital stock and ownership interests of H&H Arizonamarket” sales from the H&H Arizona shareholders. In exchange for the interest, the Company issued to the H&H Arizona shareholders 50,000,000 shares of the Company’s common stock. AsEquity Distribution Agreement (as defined in Note 12) were deposited into a result of the consummation of the Exchange Agreement, H&H Arizona became the Company’s wholly-owned subsidiary and the Company’s operating entity.
5. Related Party Transactions
a) During the period ended December 31, 2017 and 2016, the Company incurred salary of $60,000 and $30,000 to the President of the Company, respectively.non-interest bearing escrow account. As of December 31, 20172023, there was $54,409 and $2,295,822, for liabilities to customers and deposited in the non-interest bearing escrow account, respectively and as of June 30, 2017,2023, there was $168,304 for liabilities to customers.
Derivative financial instruments
The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required (Note 9). The Company can make an accounting policy election on the allocation order and choose the policy that management determines is most favorable. The Company elected to reclassify outstanding instruments based on allocating the unissued shares to contracts with the latest inception date resulting in the contracts with the earliest inception date being recognized as liabilities first.
The Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of those contracts qualify as derivatives (Note 9). The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability in the balance sheet. In the event the fair value is recorded as a liability (Note 14), the change in fair value is recorded in the statements of operations as other income or expense (Note 14).
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with their host instrument. The Company records the fair value of the remaining embedded derivative at each balance sheet date and records the change in the fair value of the remaining embedded derivative as other income or expense in the consolidated statements of operations.
Basic income (loss) per share is calculated using the two-class method. Under the two-class method, basic income (loss) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period excluding the effects of any potentially dilutive securities. Diluted income (loss) per share is computed similar to basic income (loss) per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential common shares had been issued if such additional common shares were dilutive. Diluted income (loss) per share includes the effect of potential common shares, such as the Company’s preferred stock, notes, warrants and stock options, to the extent the effect is dilutive. As the Company owed $331had net losses for all the periods presented, basic and $1,229 todiluted loss per share are the President, respectively.same, and additional potential common shares have been excluded, as their effect would be anti-dilutive.
| 9 |
b) DuringThe following securities were excluded from weighted average diluted common shares outstanding for the three and six months ended December 31, 2017,2023 and 2022 because their inclusion would have been antidilutive:
December 31, 2023 | December 31, 2022 | |||||||
| Common stock options | 75 | 20 | ||||||
| Common stock warrants | 4,938 | 1,406 | ||||||
| Common stock issuable upon conversion of senior convertible note | - | 369 | ||||||
| 10% Series A cumulative redeemable convertible preferred stock | 842,030 | 835,950 | ||||||
| Common stock issuable on conversion of Series C convertible preferred stock | 991,467 | - | ||||||
| Common stock issuable on conversion of Series D convertible preferred stock | 1,178,553 | - | ||||||
| Common stock issuable on conversion of Series D convertible preferred stock issuable from exercise of Series D preferred stock warrants issued in the Series D convertible preferred stock offering | 1,209,564 | - | ||||||
| Total | 4,226,627 | 837,745 | ||||||
| Anti-dilutive securities | 4,226,627 | 837,745 | ||||||
The table includes the Company incurred rentnumber of $1,292 (2016 - $2,274)shares of common stock potentially issuable upon a conversion of the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock into shares of common stock. The table also includes any shares of common stock that would be issuable upon conversion of the Series D Preferred Stock issuable upon exercise of the preferred warrants issued in the Series D Convertible Preferred Stock offering.
Recently Adopted Accounting Pronouncements
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 PresidentCECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the Company.
c) On January 30, 2015loss 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. The Company appointed Chul Woong “Alex” Lim as a Director of the Corporation. Mr. Lim will be paid $20,000 per year for serving as a director. Mr. Lim left the Companyadopted this standard as of July 1, 2023. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In October 26, 2016.2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. The Company owed $NIL to Mr. Lim as of September 30, 2017. The Company paid $5,000guidance is effective for his director’s service for the year ended June 30, 2017.
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
5. Related Party Transactions (Continued)
d) On March 9, 2015 the Company appointed Yan Rozum as a Director of the Corporation. Mr. Rozum will be paid $20,000 per year for serving as a director. The Company owed $30,000 to Mr. Rozum as offiscal years beginning after December 31, 2017 ($25,000 as of June 30, 2017). The Company issued 111,250 shares for $45,000 for director’s services.
e) On October 26, 2016 the Company appointed David Watt as a Director of the Corporation. Mr. Watt will be paid $25,000 per year for serving as a director. The Company owed $7,357 to Mr. Watt as of December 31, 2017 ($1,107 as of June 30, 2017). The Company issued 29,190 shares for $12,352 for Director’s services.
6. Convertible promissory notes
On June 3, 2016, the Company entered into a convertible promissory note agreement with an arms-length individual whereby the Company has borrowed $60,000. The convertible note15, 2022 and early adoption is issued by discounts of $5,000 and the company paid finder’s fee of $5,000.
The note is interest bearing at 8% per annum commencing June 3, 2016, if the note was paid off in full within 90 days following the Effective Date, the interest would be waived.permitted. The Company is obligatedcurrently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements. The Company adopted this standard as of July 1, 2023. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
Recently Issued Accounting Standards
In December 2023, the FASB issued ASU 2023-09, Income Taxes—Income Taxes (Topic 740): Improvements to repayIncome Tax Disclosures (“ASU 2023-09”). ASU 2023-09 modifies the principal with any interest by March 3, 2017 (the “maturity date”). Inrules on income tax disclosures to enhance the eventtransparency and decision-usefulness of default, additional interest will accrue from the date of the event of default atincome tax disclosures, particularly in the rate equalreconciliation table and disclosures about income taxes paid. The amendments are intended to the lower of 18% per annum or the highest rate permitted by law.
This Note will become effective only upon the execution by both parties,address investors’ requests for income tax disclosures that provide more information to help them better understand an entity’s exposure to potential changes in tax laws and the Irrevocable Transfer Agent Instructionsensuing risks and delivery ofopportunities and to assess income tax information that affects cash flow forecasts and capital allocation decisions. The guidance also eliminates certain existing disclosure requirements related to uncertain tax positions and unrecognized deferred tax liabilities. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024. All entities are required to apply the initial payment of consideration byguidance prospectively but have the Holder (the “Effective Date”).
As an investment incentive, the Company issued 427,777 five-year cashless warrants, exercisable at $0.14 per share. The exercisable warrants were cancelled, and the Company settled the warrants with 230,300 common shares.
option to apply it retrospectively. Early adoption is permitted. The Company assessedis currently evaluating the termsimpact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements.
In June 2022, the convertible debentureFASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in accordance with 470-20-55, Debt with Conversion and Other Options. On issuance, the Company recognized $38,432 forAccounting Standards Codification Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the incentive warrants as additional paid-in capital based on the relative fair valuessale of the convertible debenturean equity security and the incentive warrants. In addition, the Company assessed whether there was a beneficial conversion feature associated with the convertible debenture and recognize a debt discount of $11,568introduces new disclosure requirements for the fullequity securities subject to contractual sale restrictions that are measured at fair value of the convertible debenturein accordance with a corresponding adjustment to additional paid-in capital. The debt discount will be accreted over the term of the debenture. During the year ended June 30, 2017, the Company amortized $60,000 (2016 - $nil) of the debt discount to interest expense.
7. Commitments
Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company signed a three-year lease agreement with Caribbean Developments (Antigua) Ltd. To rent a commercial space starting May 1, 2017 terminatingis currently evaluating the impact that the adoption of this guidance will have on April 30, 2020.its unaudited condensed consolidated financial statements.
| 10 |
Yea Year 1 | $ | 20,974 |
Yea Year 2 |
| 20,974 |
Yea Year 3 |
| 17,478 |
| $ | 59,426 |
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8. Common Stock
a) On July 27, 2015, 60,000 common shares were issued at a price of $0.10 per share to a non- related shareholder.
b) On August 24, 2015, 106,000 common shares were issued at a fair value of $21,200 for consulting services.
c) On March 14, 2016, 60,000 common shares were issued at a fair value of $12,000 for consulting services.
d) On March 14, 2016, 200,000 common shares were issued at a fair value of $40,000 for director fees.
e) On April 7, 2016, 266,666 common shares were issued at a price of $0.15 per share to non-related shareholders.
f) On June 30, 2016, 466,680 common shares were issued at a price of $0.15 per share to non-related shareholders.
g) On June 30, 2016, 300,000 common shares were issued at a fair value of $60,000 for a prepayment for advertising service for the term of July 15, 2016 to July 15, 2017.
h) On September 21, 2016, 200,000 common shares were issued at a price of $0.15 per share to non-related shareholders. Company paid stock issuance cost of $7,526. Also, the Company issued 200,000 warrants to an investor, exercisable at $0.15 per share. The warrant is exercisable before December 1, 2019.
i) On November 30, 2016, 66,680 common shares were issued at a price of $0.15 per share to non-related shareholders. Also the Company issued 66,680 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before December 31, 2019.
j) On December 31, 2016, 550,000 common shares were issued at a fair value of $137,500 for consulting services.
k) On Feb 21, 2017, 100,000 common shares were issued at a price of $0.15 per share to non-related shareholders. Also the Company issued 100,000 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before February 28, 2020
l) On March 1, 2017, 100,000 common shares were issued at a fair value of $25,000 for director fees.
m) On March 8, 2017, the Company issued 360,000 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before March 8, 2022.
n) On March 31, 2017, 4,136,667 common shares were issued at a price of $0.15 per share to non-related shareholders. Also the Company issued 4,136,667 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before March 31, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement with 30 days notice at a price of $0.05 per warrant.
o) On April 1, 2017, 400,000 common shares were issued at a fair value of $60,000 for service.
p) On April 1, 2017, 2,896,857 common shares were issued at a price of $0.15 per share to non-related shareholders. Also, the Company issued 2,896,857 warrants to investors, exercisable at $0.15 per share. The warrant is exercisable before April 1, 2020.
q) On April 22, 2017, the Company issued 92,000 common shares to non-related investors at $0.25 per share.
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8. Common Stock (continued)
r) On May 16, 2017, 600,000 common shares were issued at a price of $0.25 per share to non-related shareholders. Also the Company issued 600,000 warrants to investors, exercisable at $0.25 per share. The warrant is exercisable before May 16, 2020. The warrants are callable by the issuer any time after 12 months from the date the equity investment is completed with 30 days notice at a price of $0.05 per warrant.
s) On May 24, 2017, 250,000 common shares were issued for compensation of fundraising. The Company recorded common stock and paid in additional capital of $250.
t) On June 30, 2017, 40,440 common shares were issued at a fair value of $32,352 for directors’ fee.
u) On June 26, 2017 the Company adopted an Employee Stock Incentive Plan. The Plan is intended to encourage ownership of Shares by Employees and directors of and certain Consultants to the Company and its Affiliates in order to attract and retain such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The number of Shares which may be issued fromFrom time to time, pursuant to this Plan shall be 2,500,000 shares. On August 1, 2017,new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company granted 521,500 options to 7 persons.
v) On July 5, 2017, the Company signed a subscription agreement with a non-related investor to issue 800,000 common shares at $0.25 per share, and 800,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 5, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
w) On July 6, 2017, the Company signed a subscription agreement with a non-related investor to issue 40,000 common shares at $0.25 per share, and 40,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 6, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
x) On July 16, 2017, the Company signed a subscription agreement with a non-related investor to issue 100,000 common shares at $0.25 per share, and 100,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 16, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
y) On July 17, 2017, the Company signed a subscription agreement with a non-related investor to issue 400,000 common shares at $0.25 per share, and 400,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 17, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
z) On July 17, 2017, the Company signed a subscription agreement with a non-related investor to issue 100,000 common shares at $0.25 per share, and 100,000 warrants exercisable at $0.25 per share. The warrant is exercisable before July 17, 2020. The warrants are callable by the issuer any time after 12 months from the date the Company signed the subscription agreement.
aa) On July 19, 2017, the Company issued 200,000 common shares at $0.15 per share, and 200,000 warrants exercisable at $0.15 per share in exchange for services. The warrant is exercisable before July 18, 2020. The warrants are callable by the issuer any time after 12 months from the date the equity investment is completed with 30 days notice at a price of $0.05 per warrant.
bb) On July 20, 2017, the Company issued 100,000 common shares at $0.25 per share, and 100,000 warrants exercisable at $0.25 per share in exchange for services. The warrant is exercisable before July 19, 2020. The warrants are callable by the issuer any time after 12 months from the date the equity investment is completed with 30 days notice at a price of $0.05 per warrant.
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8. Common Stock (continued)
cc) On July 24, 2017, the Company signed a subscription agreement with a non-related investor to issue 5,000 common shares at $0.50 per share, and 5,000 warrants exercisable at $2.00 per share. The warrant is exercisable before July 23, 2018.
dd) On August 1, 2017, the Company granted stock options to certain Directors and employeesadopts as of the Company. The stock options have an exercise price of $1.25. 213,667 stock options will vest on August 1, 2018, 100,000 stock options will vest on August 1, 2019, and 207,833 stock options will fully vest on August 1, 2020.
ee) On August 8, 2017, the Company signed a subscription agreement with a non-related investor to issue 10,000 common shares at $1.25 per share, and 10,000 warrants exercisable at $2.00 per share. The warrant is exercisable before February 8, 2019.
ff) On August 27, 2017, the Company signed a subscription agreement with a non-related investor to issue 300,000 common shares at $0.25 per share.
gg) On September 7, 2017, the Company signed a subscription agreement with a non-related investor to issue 20,000 common shares at $1.25 per share, and 20,000 warrants exercisable at $4.00 per share. The warrant is exercisable before March 6, 2019.
hh) On September 21, 2017, the Company issued 156,667 common shares when the holder of 166,667 cashless warrants were exercised.
ii) On September 25, 2017, the Company signed a subscription agreement with a non-related investor to issue 4,000 common shares at $1.25 per share, and 4,000 warrants exercisable at $2.00 per share, and 4,000 piggyback warrants exercisable at $4.00 per share. The warrant is exercisable before September 24, 2018 and the piggyback warrant is exercisable before September 24, 2019.specified effective date. The Company diddoes not receive $5,000believe 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 – Other Receivables
The components of other receivables are as follows:
Schedule of Other Receivables
| December 31, 2023 | June 30, 2023 | |||||||
| Indirect taxes | $ | 147,019 | $ | 21,024 | ||||
| Other | 146,855 | 476,579 | ||||||
| Other receivables | $ | 293,874 | $ | 497,603 | ||||
Note 4 – Prepaid Expenses and recorded $5,000Other Current Assets
The components of prepaid expenses and other current assets are as subscription receivablefollows:
Schedule of Prepaid Expenses and Other Current Assets
| December 31, 2023 | June 30, 2023 | |||||||
| Prepaid marketing costs | $ | 14,264 | $ | 53,365 | ||||
| Prepaid insurance | 281,532 | 265,974 | ||||||
| Prepaid gaming costs | 25,934 | 375,082 | ||||||
| Other | 80,660 | 11,609 | ||||||
| Prepaid expenses and other current assets | $ | 402,390 | $ | 706,030 | ||||
Note 5 – Equipment
The components of equipment are as follows:
Schedule of September 30, 2017. The company received $30,000 in October 2017.Equipment
| December 31, 2023 | June 30, 2023 | |||||||
| Computer equipment | $ | - | $ | 36,630 | ||||
| Furniture and equipment | - | 35,943 | ||||||
| Equipment, at cost | 72,573 | |||||||
| Accumulated depreciation | - | (52,560 | ) | |||||
| Equipment, net | $ | - | $ | 20,013 | ||||
jj) On September 26, 2017, the Company issued 416,500 common shares at $0.15 per shareDepreciation expense was $3,535 and $13,899 for the 416,500 warrants were exercised.
kk) On September 29, 2017, the Company signed a subscription agreement with a non-related investor to issue 16,000 common shares at $1.25 per share,three months ended December 31, 2023 and 16,000 warrants exercisable at $2.00 per share,2022 and 16,000 piggyback warrants exercisable at $4.00 per share. The warrant is exercisable before September 28, 2018$8,757 and the piggyback warrant is exercisable before September 28, 2019. The Company did not receive $20,000 and recorded $20,000 as subscription receivable as of September 30, 2017. The Company received $20,000 in October 2017.
ll) On September 30, 2017, the Company signed a subscription agreement with a non-related investor to issue 44,800 common shares at $1.25 per share. The Company did not receive $56,000 and recorded $56,000 as subscription receivable as of September 30, 2017. The company received $56,000 in October 2017.
mm) On October 17, 2017, the Company issued 66,667 common shares at $0.15 per share for the 66,667 warrants were exercised.
nn) On November 7, 2017, the Company signed a subscription agreement with a non-related investor to issued 15,500 common shares at $0.25 per share.
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
Notes to the Consolidated Financial Statements
8. Common Stock (continued)
Stock Purchase Warrant
The following table summarizes all warrant activities$36,312 for the six months ended December 31, 2017:2023 and 2022, respectively. All Equipment depreciation expense was for the EEG iGaming segment.
|
| Shares |
| Weighted-Average Exercise Price Per Share | Remaining term | Intrinsic value | |
Outstanding, June 30, 2017 |
| 8,360,204 |
| 0.16 | 3.67 year | $6,688,163 | |
Granted |
| 1,890,000 |
| 0.25 |
|
| |
Granted |
| 31,000 |
| 2.00 |
|
| |
Granted |
| 24,000 |
| 4.00 |
|
| |
Exercised |
| (649,834) |
| - |
|
| |
Expired |
| - |
| - |
|
| |
Outstanding and Exercisable at December 31, 2017 |
| 9,655,370 |
| 0.17 | 3.16 year | $8,979,494 | |
During the three and six months ended December 31, 2023, the Company recognized a total impairment charge of $13,192 on its Equipment long-lived assets. All Equipment asset impairment charges were for the EEG iGaming segment. There were no impairment charges on Equipment long-lived assets identified for the three and six months ended December 31, 2022.
9. Stock Options
| 11 |
Note 6 – Goodwill and Intangible Assets
A summary of the changes in the balance of goodwill by segment is as follows:
Schedule of Goodwill
| EEG iGaming | EEG Games | Total | ||||||||||
| Goodwill, balance as of June 30, 2023 | $ | 3,511,391 | $ | 979,832 | $ | 4,491,223 | ||||||
| Foreign currency translation | 44,949 | - | 44,949 | |||||||||
| Asset impairment charges | (3,556,340 | ) | (979,832 | ) | (4,536,172 | ) | ||||||
| Goodwill, balance as of December 31, 2023 | $ | - | $ | - | $ | - | ||||||
At December 31, 2023, the Company concluded that impairment indicators existed considering that the Company delisted from Nasdaq, had management changes in the EEG iGaming segment and continued to see revenues decline in the EEG iGaming segment and they were significantly down from levels seen in the previous year and in the previous quarters and EEG Games segment was not performing at the level previously expected. This, the decline in the Company’s stock price and other factors were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment.
The Company performed its impairment tests on its long-lived assets, including its definite-lived intangible assets using an undiscounted cash flow analysis to determine if the cash flows expected to be generated by the asset groups over the estimated remaining useful life of the primary assets were sufficient to recover the carrying value of the asset groups, which were determined to be at the business component level. Based on the circumstances described above as of December 31, 2023, the Company determined that the EEG Games asset group was recoverable under the undiscounted cash flow recoverability test but the EEG iGaming asset group was not recoverable. Accordingly, the Company estimated the fair value of its EEG iGaming individual long-lived assets to determine if any asset impairment charges were present. The Company’s estimation of the fair value of the definite-lived intangible assets considering the current results and impacts expected from the delisting from Nasdaq and concluded that the fair values of the EEG iGaming intangibles were no longer recoverable and recognized impairment totaling $1,380,280 for tradename, $2,546,981 for developed technology and software, $4,252,423 for player relationships and $252,094 for internal-use software. The table below reflects the adjusted gross carrying amounts for these intangible assets. There were no asset impairment charges for long-lived assets, including definite-lived intangible assets, for the three and six months ended December 31, 2022.
| 12 |
Further, in accordance with ASC 350, for goodwill, the Company performed a goodwill impairment test, which compared the estimated fair value of each reporting unit to its respective carrying values. The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flows analysis. The results of the impairment test performed as of December 31, 2023, indicated that the carrying value of the iGaming and GGC reporting units exceeded their estimated fair values determined by the Company. At December 31, 2023, the Company recognized goodwill impairments of $3,556,340 for the iGaming Malta reporting unit of the EEG iGaming segment, and $979,832 for the GGC reporting unit, in the EEG Games segment, totaling $4,536,172 in asset impairment charges in the unaudited condensed consolidated statements of operations. This impaired all the remaining goodwill of the Company.
Similarly, at December 31, 2022, the Company recognized goodwill impairments of $14,500,000 for the iGaming Malta reporting unit of the EEG iGaming segment, and goodwill of $1,635,000 for the GGC reporting unit, in the EEG Games segment, totaling $16,135,000 in asset impairment charges in the unaudited condensed consolidated statements of operations.
In total, as described in detail above, the Company recorded $12,967,950 of goodwill and intangible asset impairment charges for the three and six months ended December 31, 2023 and $16,135,000 of goodwill asset impairment charges for the three and six months ended December 31, 2022.
The assumptions used in the cost and undiscounted and discounted cash flow analyses require significant judgment, including judgment about appropriate growth rates, and the amount and timing of expected future cash flows. The Company’s forecasted cash flows were based on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions used in the cash flows were revenue growth rates, operating expenses and gross margins and the discount rates in the discounted cash flows. The assumptions used consider the current early growth stage of the Company. The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its procedures for estimating future cash flows for each reporting unit, asset group and intangible asset are reasonable and consistent with current market conditions as of the testing date. If the markets that impact the Company’s business continue to deteriorate, the Company could recognize further long-lived asset impairment charges.
The table below reflects the adjusted gross carrying amounts for these intangible assets. The intangible amounts comprising the intangible asset balance are as follows:
Schedule of Intangible Assets
| December 31, 2023 | June 30, 2023 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Tradename | $ | 900,333 | (171,882 | ) | 728,451 | $ | 2,801,963 | $ | (566,501 | ) | $ | 2,235,462 | ||||||||||||
| Developed technology and software | 3,400,333 | (1,428,140 | ) | 1,972,193 | 9,240,018 | (3,757,061 | ) | 5,482,957 | ||||||||||||||||
| Gaming licenses | - | - | - | 724,431 | (724,431 | ) | - | |||||||||||||||||
| Player relationships | 333,334 | (140,007 | ) | 193,327 | 10,022,587 | (4,621,655 | ) | 5,400,932 | ||||||||||||||||
| Internal-use software | - | - | - | 226,438 | (21,162 | ) | 205,276 | |||||||||||||||||
| Total | $ | 4,634,000 | (1,740,029 | ) | 2,893,971 | $ | 23,015,437 | $ | (9,690,810 | ) | $ | 13,324,627 | ||||||||||||
During the three months and six months ended December 31, 2023, the Company recorded amortization expense for its intangible assets of $1,072,521 and $2,154,248, respectively. The amortization for EEG iGaming segment was $823,945 and $1,657,097, and for the EEG Games segment was $248,576 and $497,151, for the three and six months ended December 31, 2023, respectively. During the three months and six months ended December 31, 2022, the Company recorded amortization expense for its intangible assets of $1,912,257 and $3,752,562, respectively. The amortization for EEG iGaming segment was $1,663,671 and $3,255,411, and for the EEG Games segment was $248,586 and $497,151, for the three and six months ended December 31, 2022, respectively.
The estimated future amortization related to definite-lived intangible assets is as follows:
Schedule of Future Amortization of Intangible Assets
| Remainder of Fiscal 2024 | $ | 497,149 | ||
| Fiscal 2025 | 994,298 | |||
| Fiscal 2026 | 919,625 | |||
| Fiscal 2027 | 98,218 | |||
| Fiscal 2028 | 98,218 | |||
| Thereafter | 286,463 | |||
| Total | $ | 2,893,971 |
| 13 |
Note 7 – Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as follows:
Schedule of Account Payable and Accrued Expenses
| December 31, 2023 | June 30, 2023 | |||||||
| Trade accounts payable | $ | 4,512,575 | $ | 4,469,927 | ||||
| Accrued marketing | 2,012,710 | 1,054,085 | ||||||
| Accrued payroll and benefits | 303,035 | 298,636 | ||||||
| Accrued gaming liabilities | 123,243 | 145,393 | ||||||
| Accrued professional fees | 480,000 | 286,314 | ||||||
| Accrued jackpot liabilities | - | 91,892 | ||||||
| Accrued legal settlement (Note 10) | 450,000 | - | ||||||
| Accrued other liabilities | 606,557 | 759,947 | ||||||
| Total | $ | 8,488,120 | $ | 7,106,194 | ||||
Note 8 – Related Party Transactions
The Company’s Chief Executive Officer owns less than 5% of Oddin.gg, a vendor of the Company, that was owed $0 and $47,895 by the Company as of December 31, 2023 and June 30, 2023, respectively. The Company incurred no cost of revenue to Oddin.gg for the three and six months ended December 31, 2023 and $43,107 and $72,107 cost of revenue for the three and six months ended December 31, 2022. On August 1,October 3, 2023, the Company signed an agreement to integrate the Oddin.gg esports iFrame solution that is expected to allow the Company to offer esports wagering to its iGaming customers. The integration of the Oddin.gg’s esports iFrame solution has been completed by the Company and is expected to be utilized towards the end of fiscal 2024. The agreement requires the Company to pay Oddin.gg a revenue share based on the net gaming revenues generated from esports wagering.
The Company reimbursed the former Chief Executive Officer for office rent and related expenses. The Company incurred charges owed to the former Chief Executive Officer for office expense reimbursement of $0 and $1,200 for the three and six months ended December 31, 2022, respectively. The former Chief Executive Officer was terminated by the Board from his position as Chief Executive Officer on December 3, 2022. The former Chief Executive Officer resigned from the Board on December 23, 2022. Other than the remaining amount of the legal settlement of $450,000 (as described in Note 10), there were no amounts payable to the former Chief Executive Officer as of December 31, 2023 and June 30, 2023.
On May 4, 2017, the Company entered into a services agreement and a referral agreement with Contact Advisory Services Ltd., an entity that is partly owned by a member of the Board of Directors. The Company incurred general and administrative expenses of $8,130 and $12,194 for three and six months ended December 31, 2023, respectively, and $1,339 and $4,274 for three and six months ended December 31, 2022, respectively, in accordance with these agreements. As of December 31, 2023 and June 30, 2023, there was approximately $10,263 and $12,700 amounts payable to Contact Advisory Services Ltd, respectively.
The Company’s Chief Operating Officer was previously its former Chief Financial Officer and Chief Operating Officer and his services as the former Chief Financial Officer and Chief Operating Officer were previously retained through a consultancy agreement dated April 2, 2022 and an employment agreement dated April 2, 2022. The Company remitted monthly payments to its former Chief Financial Officer of NZD 36,995 ($23,524 translated using the exchange rate in effect at June 30, 2022) under the consultancy agreement and $500 per month under the employment agreement. In connection with this appointment the Company provided a one-time issuance of shares of Common Stock to the former Chief Financial Officer and Chief Operating Officer. The former Chief Financial Officer and Chief Operating Officer resigned from his roles on December 31, 2022, and the consultancy agreement and employment agreement were terminated. He later rejoined the Company as the Chief Operating Officer on May 29, 2023 under a new employment agreement and subsequently has announced his resignation from his position as Chief Operating Officer, effective April 30, 2024, and will remain in his position as a member of the Company’s Board of Directors.
| 14 |
Note 9 – Debt
Senior Convertible Note
In the year ended June 30, 2022, on February 22, 2022, the Company exchanged the existing senior convertible note (the “Old Senior Convertible Note”) with a remaining principal of $29,150,001, with the Senior Convertible Note in the aggregate principal of $35,000,000.
On September 19, 2022 as part of the Company’s September 2022 Offering (defined below) of shares of common stock and warrants to purchase common stock, the Company remitted to the Holder an amount of $2,778,427 from the proceeds reducing the Senior Convertible Note principal balance to $32,221,573.
On December 19, 2022, as part of the Registered Direct Offering (Note 12) the Company paid the Holder an amount equal to $1,073,343 for interest due and interest prepaid through February 28, 2023.
On January 27, 2023, the Company received the written consent of the Holder to lower the conversion price of the Senior Convertible Note to 90% of the lowest volume-weighted average price (“VWAP”) (as defined in the Senior Convertible Note) of the Common Stock for a trading day during the five (5) consecutive trading day period ending, and including, the applicable date that the conversion price is lowered for purposes of a conversion, in accordance with Section 7(g) of the Senior Convertible Note (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events during such measuring period) until further written notice to the Holder from the Company. From January 27, 2023 through April 28, 2023, the date of the Senior Convertible Note was converted to Series C Convertible Preferred Stock, pursuant to the debt for equity exchanges, and after increasing the Senior Convertible Note by $2,950,010, for fees of $450,010 and converted accrued liabilities of $2,500,000 pursuant to an amendment and waiver dated February 16, 2023 (the “Amendment”) related to the sale of the Bethard Business, the Holder exchanged $19,261,583 in aggregate principal amount of the Senior Convertible Note for an aggregate of shares of our common stock, at the lowered conversion prices (the “Exchanges”) and recorded a loss on extinguishment of the Senior Convertible Note of $3,616,372 related to the conversions. Following the Exchanges and the impact of the Amendment, $15,910,000 in aggregate principal amount of the Senior Convertible Note remained outstanding until April 28, 2023, when it was converted to the Series C Convertible Preferred Stock.
Senior Convertible Note Make-Whole Derivative Liability
Prior to the conversion of the Senior Convertible Note into the Series C Convertible Preferred Stock on April 28, 2023, the make-whole provision in the Senior Convertible Note was a derivative liability. This considered that the Company had obtained debt waivers from the Holder for its breaches of debt covenants. The Company’s historical stock price had also traded at levels significantly in excess of the Conversion Floor Price.
On April 28, 2023, the date of the conversion of the Senior Convertible Note into the Series C Convertible Preferred Stock the derivative liability was eliminated and no balance is recorded in the unaudited condensed consolidated balance sheet at December 31, 2023 and June 30, 2023. The Company recognized a gain in the Change in fair value of derivative liability on Senior Convertible Note of $8,324,802 and $8,599,666 as a gain in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022. No amounts were recognized in the three months ended December 31, 2023 due to the elimination of the derivative liability.
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock Make-Whole Derivative Liability Warrants
The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. The Company can make an accounting policy election on the allocation order and choose the policy that management determines is most favorable. The Company elected to reclassify outstanding instruments based on allocating the unissued shares to contracts with the latest inception date resulting in the contracts with the earliest inception date being recognized as liabilities first. Due to the issuances of shares during the three months ended December 31, 2023, and the lack of authorized and unissued shares available, the Company was required to assess its classification of its equity instruments during this period. On December 5, 2023 the Company determined it did not have enough authorized and unissued shares to satisfy the Series C Convertible Preferred Stock and using the last contract entered into sequencing election. Due to this the amounts of the carrying amounts of the Series C Convertible Preferred Stock was reclassed to Mezzanine equity in the balance sheet and the Company determined that a derivative related to the conversion feature was required. This was recorded at fair value using a Monte-Carlo method with assumptions that will fluctuate based on the Company’s share price, market capitalization, assets carrying value, and the Company’s estimates of the discount rate, risk-free rate, remaining term of the conversion features and credit and non-performance risk. The valuations are derived from techniques which utilize inputs, certain of which are significant and unobservable, that result in classification of the change of control redemption liabilities as Level 3 fair value measurements and as such recorded a derivative liability of $1,820,000 on December 5, 2023 on the initial recognition the derivative liability. The fair value of the derivative liability was $2,356,698 on December 31, 2023, with $536,698 (Note 14) recorded as a change in fair value of derivative liability in the unaudited condensed consolidated statement of operations. The Series D Convertible Preferred Stock, Series D Preferred Warrants and Series D Common Warrants were not reclassified as they were limited to the 9.99% beneficial owner cap per the Series D Convertible Preferred Stock Certificate of Designations at December 31, 2023, and therefore the Company had authorized and unissued shares to cover the contracted number. See Note 14 for further discussion of the fair value determined for the derivative liability for the period ended December 31, 2023.
September 2022 Warrants
On September 19, 2022, the Company completed, an equity offering in which it sold units at $ consisting of one share of Common Stock and one warrant for a total of 750 September 2022 Warrants with an exercise price of $10,000 (the “September 2022 Offering”). The Company also sold a further September 2022 Warrants in an overallotment with an exercise price of $10,000 issued to the underwriters of the offering on September 19, 2022.
The September 2022 Warrants may be exercised at any time after issuance for one share of Common Stock of the Company at an exercise price of $10,000. The September 2022 Warrants also contain a beneficial ownership limitation of 4.99% which may be increased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase. The warrants are not callable by the Company.
The Company determined the September 2022 Warrants should be classified as a liability as the warrants are redeemable for cash in the event of a fundamental transaction, as defined in the Warrant Agreement, pursuant to which the September 2022 Warrants were purchased, which includes a change in control. The Company has recorded a liability for the September 2022 Warrants at fair value on the issuance date with subsequent changes in fair value reflected in earnings. On September 19, 2022, the date of the Common Stock issuance, the Company determined the total fair value of the September 2022 Warrants to be $5,286,288. On December 31, 2023 and June 30, 2023, the Company determined the total fair value of the September 2022 Warrants to be $0 and $251,876, respectively. The change in fair value of the September 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2023 were gains of $22,361 and $251,876, respectively. The change in fair value of the September 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022 were gains of $1,536,732 and $3,018,834, respectively. See Note 14 for additional disclosures related to the change in the fair value of the warrant liabilities.
| 15 |
March 2022 Warrants
On March 2, 2022, the Company completed the March 2022 Offering, an equity offering in which it sold units at $ consisting of one share of Common Stock and one warrant for a total of 375 March 2022 Warrants with an exercise price of $40,000. The Company also sold a further 56 March 2022 Warrants in an overallotment with an exercise price of $40,000 issued to the underwriters of the offering on April 1, 2022.
The March 2022 Warrants may be exercised at any time after issuance for one share of Common Stock of the Company at an exercise price of $40,000. The March 2022 Warrants are callable by the Company should the volume weighted average share price of the Company exceed $120,000 for each of 20 consecutive trading days following the date such warrants become eligible for exercise. The March 2022 Warrants also contain a beneficial ownership limitation of 4.99% which may be increased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase.
The Company determined the March 2022 Warrants should be classified as a liability as the warrants are redeemable for cash in the event of a fundamental transaction, as defined in the Common Stock Purchase Warrant Agreement pursuant to which the March 2022 Warrants were purchased, which includes a change in control. The Company has recorded a liability for the March 2022 Warrants at fair value on the issuance date with subsequent changes in fair value reflected in earnings. On March 2, 2022, the date of the Common Stock issuance, the Company determined the total fair value of the March 2022 Offering Warrants to be $9,553,500 and on the date of the Common Stock issuance, the Company determined the total fair value of the April 2022 Overallotment to be $607,500. On December 31, 2023 and June 30, 2023, the Company determined the total fair value of the March 2022 Warrants to be $86,250 and $113,850, respectively. The change in fair value of the March 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2023, were gains of $51,750 and $27,600, respectively. The change in fair value of the March 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022, were gains of $1,035,000 and $1,897,500, respectively. See Note 14 for additional disclosures related to the change in the fair value of the warrant liabilities.
Series A and Series B Warrants
On June 2, 2021, the Company issued 50 Series A Warrants and 50 Series B Warrants (the Series B Warrants expired June 2, 2023) to the holder of the Old Senior Convertible Note. The Exchange Agreement pursuant to which the Old Senior Convertible Note was exchanged for the Senior Convertible Note, the Note to Preferred Stock Exchange Agreement and conversion to the Series C Convertible Preferred Stock did not impact the Series A Warrants and Series B Warrants previously issued and outstanding. The Series A Warrants may be exercised at any time after issuance for one share of Common Stock of the Company at an exercise price of $700,000. The Series A Warrants are callable by the Company should the volume weighted average share price of the Company exceed $1,300,000 for each of 30 consecutive trading days following the date such warrants become eligible for exercise. The Series A Warrants also contain a beneficial ownership limitation of 4.99% which may be increased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase.
| 16 |
The Company determined the Series A and Series B Warrants should be classified as a liability as the warrants are redeemable for cash in the event of a fundamental transaction, as defined in the Senior Convertible Note, which includes a change in control. The Company has recorded a liability for the Series A Warrants and Series B Warrants at fair value on the issuance date with subsequent changes in fair value reflected in earnings. At December 31, 2023 and June 30, 2023, the Company determined the total fair value of the Series A Warrants to be $0 (Series B Warrants expired June 2, 2023). There was no change in the fair value of the Series A Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2023. The change in fair value of the Series A Warrants and Series B Warrants liability recorded in the unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2022 was a gain of $105,953. See Note 14 for additional disclosures related to the change in the fair value of the warrant liabilities.
Note 10 – Commitments and contingencies
Commitments
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 Corporation was March 31, 2021. The Company paid $1,550,000 and issued shares of Common Stock in connection with the commencement of the arrangement. The Bally’s Corporation agreement extends for 10 years from July 1, 2021, the date of commencement, requiring the Company to pay $1,250,000 and issue share of Common Stock on each annual anniversary date. As of December 31, 2023, the future annual commitments by the Company under this agreement are estimated at $1,250,000 and share of Common Stock payable each year through the year ended June 30, 2030. During each of the three and six months ended December 31, 2023 and 2022, the Company recorded $342,333 and $684,665, respectively, in sales and marketing expense for its arrangement with Bally’s Corporation. There was approximately $1,928,000 and $1,250,000 in accounts payable and accrued expenses in the unaudited condensed consolidated financial statements outstanding and payable to Bally’s Corporation as of December 31, 2023 and June 30, 2023, respectively. On October 28, 2022, the Company determined that it would close down its vie.gg New Jersey operations and exit its transactional waiver from the New Jersey Division of Gaming Enforcement. On September 28, 2023, the Company entered into an online wagering and services agreement with Delasport Limited that has an initial term of 18 months with subsequent annual renewals. The agreement has annual commitment of approximately $385,000.
| 17 |
The Company has signed a subscription and operating agreement with Game Fund Partners LLC to support the development of a planned $300,000,000 game fund. Under the agreements, the Company will initially invest approximately $ of Company shares into % of the general partnership of the fund, and the Company will become part of the management and investment committee that manages an investment fund focused on joint projects and investment vehicles to fuel growth in the areas of gaming, data, blockchain, online gaming, and joint casino hotel investments. The Company has agreed to contribute 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 shares to the fund during the period in which the fund reaches total capital commitments of $. As of December 31, 2023, the Company has not contributed any shares of its Common Stock to the fund.
In the ordinary course of business, the Company enters into multi-year agreements to purchase sponsorships with professional teams as part of its marketing efforts to expand competitive esports gaming. During the three and six months ended December 31, 2023, the Company recorded $90,544 and $181,088, respectively, and during the three and six months ended December 31, 2022, the Company recorded $578,498 and $816,183, respectively, in sales and marketing expense for these arrangements. As of December 31, 2023, the commitments under these agreements are estimated at approximately $159,000 for the remainder of the year ending June 30, 2024 and approximately $225,000 for the year ended June 30, 2025.
Contingencies
On November 7, 2023, the Company entered into a confidential settlement agreement and general release (the “Legal Settlement Agreement”) with Grant Johnson, the former Chairman of the board of directors and Chief Executive Officer of the Company, with respect to all disputes and pending litigation between the Company and Mr. Johnson. Pursuant to the Legal Settlement Agreement, the parties have agreed to settle and resolve any and all disputes between the parties, including without limitation, disputes arising out of or relating to the following litigation:
| (i) | A complaint filed on December 23, 2022 by Mr. Johnson against the Company in the United States District Court for the Southern District of New York; | |
| (ii) | an amended complaint filed on February 28, 2023 by Mr. Johnson against the Company; and | |
| (iii) | a counterclaim filed on May 24, 2023 by the Company against Mr. Johnson (together with (i) and (ii) above, the “Actions”). |
Pursuant to the Legal Settlement Agreement, Mr. Johnson and the Company settled the Actions and provided a general release of all claims, whether or not raised in the pending litigation, and included mutual non-disparagement agreements. No party admitted any liability by entering into the Legal Settlement Agreement. Pursuant to the Legal Settlement Agreement, the Company has agreed to make an aggregate payment of $500,000 in cash to Mr. Johnson (which among includes attorneys’ fees and costs), comprised of an initial payment of $50,000 beginning approximately thirty (30) days after the signing of the Legal Settlement Agreement, with subsequent payments of $50,000 due on each subsequent thirtieth (30th) day of each month thereafter until fully paid. The case regarding the above Actions and settlement is captioned Grant Johnson v. Esports Entertainment Group, Inc. 1:22-cv-10861 (SDNY). As of December 31, 2023, the Company has recorded $450,000 as a liability in accounts payable and other accrued expenses in the unaudited condensed consolidated balance sheet and an expense of $0 and $500,000 for the three and six months ended December 31, 2023, in general and administrative expenses in the unaudited condensed consolidated statement of operations.
On March 31, 2022, the Company filed a statement of claim against Metaverse Partners for breach of contract, fraud and defamation. The Company seeks damages in an amount to be determined at the upcoming hearing, but not less than $50,000 plus interest at the statutory rate, and an order directing the defendant to discontinue their extortion and defamation. Subsequently, on May 17, 2022, Metaverse Partners filed counterclaims in arbitration against the Company and former CEO for breach of contract, fraud and defamation claiming damages of not less than $5,000,000. The Company and Metaverse Partners have agreed to an arbitration hearing to take place in June 2024 to resolve any potential disputes pursuant to previous dealings between the companies. At this time we are unable to reasonably estimate a potential liability, if any, and expect to vigorously defend on this matter.
The Company at times may be involved in pending or threatened litigation relating to claims arising from its operations in the normal course of business. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time.
In determining the appropriate level of specific liabilities, if any, the Company considers a case-by-case evaluation of the underlying data and updates the Company’s evaluation as further information becomes known. Specific liabilities are provided for loss contingencies to the extent the Company concludes that a loss is both probable and estimable. Other than related to the Legal Settlement Agreement discussed above, the Company did not have any liabilities recorded for loss contingencies as of December 31, 2023 and June 30, 2023. However, the results of litigation are inherently unpredictable, and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on the Company’s financial position, results of operations or liquidity.
Other than as discussed above, the Company is currently not involved in any other litigation that it believes could have a material adverse effect on the Company’s financial condition or results of operations.
| 18 |
Note 11 – 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 Sports Limited (“FLIP”), EGL, Lucky Dino, and GGC. The Company acquired Bethard in July 2021 adding to its revenue generating operations. The revenues and long-lived assets of Lucky Dino, Argyll (until November 30, 2022 when no further bets were taken as part of the winding down of the Argyll operations), Bethard (until February 2023 when the operations of Bethard were sold), EGL (until disposed of on June 30, 2023), have been identified as the international operations as they principally service customers in Europe, inclusive of the United Kingdom. The revenues and long-lived assets of GGC principally service customers in the United States. The Company’s remaining businesses of Lucky Dino and GGC are the primary revenue generators for fiscal 2024.
A disaggregation of revenue by type of service for the three and six months ended December 31, 2023 and 2022 is as follows:
Schedule of Disaggregated by Revenue
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Online betting and casino revenues | $ | 1,840,958 | $ | 5,538,486 | $ | 3,797,007 | $ | 14,133,832 | ||||||||
| Esports and other revenues | 741,069 | 870,919 | 1,474,837 | 1,880,837 | ||||||||||||
| Total | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Revenue | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
A summary of revenue by geography follows for the three and six months ended December 31, 2023 and 2022 is as follows:
Schedule of Revenues with Customers and Long-lived Assets by Geographical Area
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| United States | $ | 741,069 | $ | 581,501 | $ | 1,474,837 | $ | 1,394,381 | ||||||||
| International | 1,840,958 | 5,827,904 | 3,797,007 | 14,620,288 | ||||||||||||
| Total | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Revenue | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
The Company’s revenue from EEG iGaming is principally recognized at the point in time when gaming occurs. The Company’s EEG Games revenue is recognized at a point in time for hardware and equipment and consulting services typically when a customer obtains control or receives the service and over time for subscriptions, maintenance, licensing and event management using the input method of time lapsed to measure the progress toward satisfying the performance obligation. A summary of revenue by recognized at point in time or over time is for the three months ended December 31, 2023 and 2022 is as follows:
Schedule of Company’s Revenue Recognized at Point in Time or Over Time
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Point in time | $ | 2,021,898 | $ | 6,154,472 | $ | 4,254,047 | $ | 15,380,944 | ||||||||
| Over time | 560,129 | 254,933 | 1,017,797 | 633,725 | ||||||||||||
| Total | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Revenue | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
The deferred revenue balances were as follows:
Schedule of Deferred Revenue
| December 31, 2023 | December 31, 2022 | |||||||
| Deferred revenue, beginning of the year | $ | 989,027 | $ | 575,097 | ||||
| Deferred revenue, end of the period | $ | 1,267,682 | $ | 1,090,333 | ||||
| Revenue recognized in the six months ended from amounts included in deferred revenue at the beginning of the year | $ | 451,098 | $ | 428,107 | ||||
| Deferred revenue | $ | 451,098 | $ | 428,107 | ||||
The majority of the deferred revenue at December 31, 2023 is expected to be recognized over the twelve months ending December 31, 2024.
A summary of long-lived assets by geography at December 31, 2023 and June 30, 2023 is as follows:
Schedule of Long-lived Assets Geography
| December 31, 2023 | June 30, 2023 | |||||||
| United States | $ | 2,893,971 | $ | 5,146,469 | ||||
| International | 43,305 | 12,911,774 | ||||||
| Total | $ | 2,937,276 | $ | 18,058,243 | ||||
| Long-lived assets | $ | 2,937,276 | $ | 18,058,243 | ||||
| 19 |
Note 12 – Equity
Common Stock
The following is a summary of common stock issuances for the six months ended December 31, 2023:
| ● | During the six months ended December 31, 2023, on August 15, 2023, the Company entered into a securities purchase agreement with the Holder (the “RD SPA”). The RD SPA related to an offering of (a) shares of our common stock, $ par value per share, for a price of $ per share, directly to the Holder and (b) pre-funded warrants to purchase 10,420 shares of our common stock at a price of $77.40 per warrant, directly to the Holder (the “RD Pre-funded Warrants”), with all but $ per warrant prepaid to the Company at the closing of the offering. The RD Pre-funded Warrants were exercisable immediately upon issuance. The exercise price of each RD Pre-funded Warrant was $77.40 per share of common stock, of which $ was prepaid. The offering closed on August 15, 2023. On August 16, 2023 all the Pre-funded Warrants were exercised. The RD SPA included the Holder waiving its rights to require the Company to cause a Subsequent Placement Optional Redemption (as defined in each of the Series C Convertible Preferred Stock Certificate of Designations (the “Series C Certificate of Designations”) and Series D Convertible Preferred Stock Certificate of Designations (the “Series D Certificate of Designations) (together the “Preferred Stock Certificates of Designations”) using the gross proceeds from the sale of the shares of common stock and warrants (including from the exercise thereof) and its rights to participate in an Eligible Subsequent Placement (as defined in each of the Preferred Stock Certificates of Designations) pursuant to Section 7(b) of the Preferred Stock Certificates of Designations, but only with respect to the offering and sale of the Securities contemplated by the RD SPA. As a result, the Company did not make any payments from the gross proceeds to the Holder. The gross proceeds from the issuance and sale of the shares of common stock were $193,500 and RD Pre-funded Warrants, were $806,500, before deducting the estimated offering expenses payable by the Company. |
| ● | From July 1, 2023, through December 31, 2023, the Holder exchanged $16,309,814 in Series C Convertible Preferred Stock and $157,931 in accrued dividends, for shares of our common stock at conversion prices equal to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of our common stock for a trading day during the ten consecutive trading day period ending, and including, the applicable date that the conversion price was lowered for purposes of a conversion, or the floor price then in effect. The reduction in the Series C Convertible Preferred Stock was offset by the aggregate Alternate Conversion Floor Amount of $4,805,990 and additional accrued dividends of $223,050 over the same period. Under the Settlement Agreements, dated August 15, 2023 (the “August 2023 Settlement Agreement”), as described below and October 6, 2023 (the “October 2023 Settlement Agreement”), between the Company and the Holder, in the event that the conversion price then in effect, as may be adjusted under the Settlement Agreements, is greater than 90% of the lowest VWAP of the common stock during the ten consecutive trading day period ending and including the trading day of an applicable conversion notice, the accrued and unpaid dividends on the outstanding shares of preferred stock shall automatically increase, pro rata, by the applicable Alternate Conversion Floor Amount (as defined in the Preferred Stock Certificates of Designations) or, at the Company’s option, the Company shall deliver the applicable Alternate Conversion Floor Amount to the holder on the applicable date of conversion. The Company’s shares of common stock issued in connection with these conversions were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued to an existing Holder of the Company’s securities without commission or additional consideration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act. As of December 31, 2023, the following these conversions, the number Series C Convertible Preferred Stock shares outstanding reduced to from at June 30, 2023, and $3,524,665 in aggregate amount of the Series C Convertible Preferred Stock remained outstanding. |
| ● | During the six months ended December 31, 2023, per the August 2023 Settlement Agreement entered into with the Holder for the Company to issue common stock in partial settlement of the Registration Rights Fees payable (“RRA Fees”) under the Registration Rights Agreement (the “Series D RRA”), in connection with a delay in the filing of a registration statement for the purpose of registering the resale of the common stock issuable under the Holder’s Series D Convertible Preferred Stock and common warrants, despite the Company’s best efforts to avoid such delay, the Company agreed to initially issue shares at $ per share in partial settlement of RRA Fees. Further, on October 6, 2023, the Company entered into the separate October 2023 Settlement Agreement with the Holder for the Company to issue common stock in partial settlement of the RRA Fees by the Company under the Series D RRA, and replacing the August 2023 Settlement Agreement. As of December 31, 2023, the Company was obligated to pay to the Holder a Registration Delay Payment of approximately $119,500, (subject to increase with respect to any additional RRA Fees that may accrue, from time to time, under the Series D RRA and subject to decrease in accordance with the October 2023 Settlement Agreement as described below). The Company agreed to issue an additional shares at $ per share on October 6, 2023, (“Continued Settlement Price Per Share”) in partial settlement of RRA Fees. The Company further agreed to settle an additional $1,000 (or such other amount as the parties shall mutually agree) (“Further Settlements”) on each seven day anniversary of the October 2023 Settlement Agreement (or another date mutually agreed between the parties), until the earlier of (i) the date that the parties mutually terminate the October 2023 Settlement Agreement in writing, and (ii) such time as the remaining balance of the RRA Fees are paid in full, as applicable, to satisfy up to the remaining balance of the RRA Fees at a price per share equal to the lower of (1) 90% of the lowest VWAP per share of the common stock during the ten consecutive trading day period ending and including the trading day immediately preceding the additional share settlement, and (2) the Continued Settlement Price Per Share. As part of the settlement, the Holder also agreed to continue to waive, in part, applicable antidilution provisions within the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock such that the issuances of any settlement shares in accordance with the October 2023 Settlement Agreement shall not result in a Conversion Price for the applicable Conversion Amount (as such terms are defined in the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock) subject to such conversion less than the lesser of (A) the Conversion Price then in effect (without giving effect to any adjustments to the Conversion Price arising solely as a result of the issuances of the settlement shares under the October 2023 Settlement Agreement) and (B) the greater of (x) the Conversion Price then in effect (after giving effect to all adjustments to the Conversion Price (including, without limitation, such adjustments arising as a result of the issuances of the settlement shares under the October 2023 Settlement Agreement)) and (y) 90% of the lowest VWAP of the common stock during the ten consecutive trading day period ending and including such applicable conversion date under the terms of the Series C Convertible Preferred Stock or Series C Convertible Preferred Stock, as applicable. The October 2023 Settlement Agreement further provides that, notwithstanding anything in the applicable Preferred Stock Certificates of Designations to the contrary, with respect to any given conversion of any Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, to the extent such Conversion Price, as so adjusted, is greater than 90% of the lowest VWAP of the common stock during the ten (10) consecutive trading day period ending and including the trading day of the applicable conversion notice, a Conversion Floor Price Condition (as defined in the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock) shall be deemed to have occurred with respect to such conversion of the Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, as applicable. During the six months ended December 31, 2023, in addition to the issuances on August 17, 2023, and on October 6, 2023, as part of the Further Settlements, the Company issued shares at $ per share on November 3, 2023, shares at $ per share on November 10, 2023, shares at $ per share on November 17, 2023, shares at $per share on November 24, 2023, shares at $ per share December 1, 2023 at 90% of the lowest VWAP per share of the common stock during the ten consecutive trading day period ending and including the trading day immediately preceding the additional share settlement. Due to the down round price protection provision on the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, the Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price in effect prior to the Further Settlements for both the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock to the conversion price as defined above, of $20,362,772 based on the incremental value to the Holder due to the conversion price reduction. This incremental value is presented on the unaudited condensed consolidated statement of operations as an addition to the net loss available to common stockholders of $10,979,863 and $20,362,772 in the three and six months ending December 31, 2023, respectively. The incremental value was determined by computing the additional shares the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock that would be received based on the conversion price reduction multiplied by the estimated fair value of common stock of $77.40 as of August 17, 2023, $38.60 as of October 6, 2023, $24.00 as of November 3, 2023, $17.04 as of November 10, 2023, $11.92 as of November 17, 2023, $10.88 as of November 24, 2023, $7.44 as of December 1, 2023. |
| 20 |
As discussed below, the Company obtained a partial waiver of the Holder’s Redemption Amounts, for the six months ended December 31, 2023, the Company sold an aggregate of shares through “at the market” (or “ATM”) sales (“ATM Sales”) for gross proceeds of $5,452,460. The net proceeds from these ATM Sales under the ATM equity offering program of approximately $5,248,886 were allocated 50% to the Company, and 50% to the Holder, pursuant to the October Settlement Agreement. Fees paid to the agent related to these ATM Sales were approximately $203,574. As of December 31, 2023, there were $2,295,822 of Redemption Proceeds (as defined below) instructed for deposit into the Escrow Account for the Holder. During the three and six months ended December 31, 2023, there was $322,120 of the Redemption Proceeds (as defined below) disbursed from the Escrow Account to the Holder for redemption of $321,048 of Series D Convertible Preferred Stock and $1,072 in accrued dividends for shares of Series D Convertible Preferred Stock. As of December 31, 2023, the following these conversions, the number Series D Convertible Preferred Stock shares outstanding reduced to from at June 30, 2023, and $4,189,754 in aggregate amount of the Series D Convertible Preferred Stock remained outstanding. Subsequent to December 31, 2023, the remaining $2,295,822 of the Redemption Proceeds (as defined below) disbursed from the Escrow Account to the Holder for redemption of $2,237,643 of Series D Convertible Preferred Stock and $58,179 in accrued for shares of Series D Convertible Preferred Stock. | |
| During the six months ended December 31, 2023, in connection with the rounding up from the Reverse Stock Split December 2023, the Company issued shares of common stock at par value. |
The following is a summary of Common Stock issuances for the six months ended December 31, 2022:
| ● | During the six months ended December 31, 2022, as part of the September 2022 Offering, the Company sold units at $, consisting of one share of Common Stock and one warrant with an exercise price of $10,000, for gross proceeds of $7,536,000. The Company recorded the issuance of these shares at a fair value of $1,568,130 comprised of $6,854,418 of cash received from the offering equal to the gross proceeds, net of $681,582 issuance costs, and net of the fair value of the September 2022 Warrant liability of $5,286,288, calculated on issuance. The proceeds from the offering were designated for general working capital and to pay to the Holder of the Senior Convertible Note an amount of $2,778,427, including $2,265,928 equal to 50% of the gross proceeds over $2,000,000 following the payment of 7% in offering fees including underwriting discounts and $512,500 equal to the Holders participation in the September 2022 Offering, that was applied as a reduction of principal (see Note 9). |
| ● | During the six months ended December 31, 2022, as part of the December Registered Direct Offering, the Company sold: (a) shares of Common Stock to the Holder (the “Registered Direct Shares”) and (b) Pre-funded Warrants to purchase 447 shares of our common stock at a price of $3,748 per warrant (the “Pre-funded Warrants”), directly to the Holder, with all but $ per warrant prepaid to the Company at the closing. The Company recorded the issuance of these shares at a fair value of $2,316,686 comprised of $2,316,686 of cash received from the offering equal to the gross proceeds, net of $170,001 issuance costs, $2,146,685. The Company remitted approximately $1,073,343 to the Holder to be applied to accrued interest and future interest payments under the Senior Convertible Note. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $1,073,343. The Holder redeemed 165 of the Pre-funded warrants through December 31, 2022 for additional net proceeds of $6,566. Subsequent to December 31, 2022, the remaining 282 outstanding Pre-funded warrants were redeemed for net proceeds of $11,284. |
Equity Distribution Agreement
On September 15, 2023, the Company entered into an Equity Distribution Agreement with Maxim Group LLC (“Maxim Group”) under which the Company sold, from time to time at its sole discretion, shares of the Company’s common stock, par value $ per share, with aggregate gross sales proceeds of up to $7,186,257 through an ATM equity offering program under which Maxim Group acted as sales agent.
Under the Equity Distribution Agreement, the Company set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitations on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. Subject to the terms and conditions of the Equity Distribution Agreement, Maxim Group sold the shares by methods deemed to be an ATM equity offering as defined in Rule 415 promulgated under the Securities Act, including by means of ordinary brokers’ transactions at market prices, in block transactions or as otherwise agreed by Maxim and us.
The Equity Distribution Agreement provided that Maxim Group was entitled to compensation for its services equal to 3.0% of the gross proceeds of any shares of common stock sold through Maxim Group under the Equity Distribution Agreement. The Company had no obligation to sell any shares under the Equity Distribution Agreement, and could have at any time suspended solicitation and offers under the Equity Distribution Agreement.
The shares were issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252370) and its registration on Form S-3 MEF (File No. 333-274542). The Company filed a prospectus supplement, dated September 15, 2023, with the SEC in connection with the offer and sale of the shares pursuant to the Equity Distribution Agreement (the “Prospectus Supplement”).
The Equity Distribution Agreement contained customary representations, warranties and agreements of the Company and customary conditions to completing future sale transactions, indemnification rights and obligations of the parties and termination provisions.
As part of the filing of the Equity Distribution Agreement, the Company entered into a waiver agreement (“EDA Waiver”) on September 15, 2023, with the Holder of the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock, as a condition to filing the registration statement on Form S-3 MEF on September 15, 2023 and the prospectus supplement on September 15, 2023 for the “at the market” offering. The EDA Waiver allowed the Company to proceed with the initial filing of such registration statement and prospectus supplement with the SEC and not with respect to (x) any subsequent amendment or supplement thereto, (y) the issuance and sale of any of the Company’s securities contemplated by thereby or (z) any future Subsequent Placement (as defined in the Securities Purchase Agreement, dated April 30, 2023, among the Company and the buyers named therein).
The Company is unable to further use the ATM facility due to its voluntary delisting and suspension from Nasdaq and subsequent trading on the “Pink Market” of the OTC.
The Company also entered into a waiver agreement (“October 2023 Waiver”) on October 6, 2023, with the Holder, as a condition to access any net proceeds from the future sale of shares of common stock under the Company’s previously announced ATM equity offering program pursuant to a prospectus supplement that was filed with the SEC on September 15, 2023. The Holder agreed to partially waive its rights to ATM proceeds under the terms of a Subsequent Placement Optional Redemption, as defined in each of the Preferred Stock Certificates of Designations, but only with respect to sales under the ATM equity offering program (“ATM Sales”) and not with respect to any other future Subsequent Placement (as defined in each of the Preferred Stock Certificates of Designations) and, further, only to the extent of a waiver that provide that 50% of the net proceeds from ATM Sales (after deducting the agent’s commissions pursuant to the ATM offering and other reasonable and customary offering expenses) be retained by the Company and the remaining 50% of the net proceeds from ATM Sales be used by the Company to redeem first, the outstanding shares of Series D Convertible Preferred Stock and second, the outstanding shares of Series C Convertible Preferred Stock (“Redemption Proceeds”), unless the Holder elects to change such allocations (or waive such redemption, in whole or in part, with respect to one or more ATM Sales) as evidenced by a written notice to the Company (“Subsequent Placement Limited Waiver”). Concurrent with the execution of the October 2023 Settlement Agreement, the Company executed an escrow agreement (“Escrow Agreement”) with an independent third-party escrow agent (“Escrow Agent”), pursuant to which Redemption Proceeds received from each closing of ATM Sales shall be promptly deposited into a non-interest bearing escrow account (“Escrow Account”) and disbursed to the Holder under the terms and conditions contained in the August 2023 Settlement Agreement and the Escrow Agreement.
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Common Stock Warrants and Preferred Stock Warrants
On August 15, 2023, as described above, the Company closed the August RD SPA agreement with the Holder. The August RD SPA relates to the offering of
| (i) | shares of our common stock, $ par value per share, for a price of $ per share, directly to the Holder, and | |
| (ii) | pre-funded warrants to purchase shares of our Common Stock at a price of $ per warrant, directly to such Holder, with all but $ per warrant prepaid to the Company at the closing of the offering. The August RD Pre-funded Warrants were exercisable immediately upon issuance and were entirely exercised on August 16, 2023 at $77.40 per share of common stock, of which $ was prepaid. |
On May 22, 2023, as described below, the Company closed the issuance of the Series D Convertible Preferred Stock, that included the issuance of
| (i) | shares of Series D Convertible Preferred Stock for a price of $ per share, | |
| (ii) | Common Warrants to purchase 3,583 shares of our common stock at a price of $ per share (the “Series D Common Warrants”), and | |
| (iii) | preferred warrants to purchase 4,300 shares of our Series D Convertible Preferred Stock at a price of $ per share, |
for total gross proceeds to the Company of $4,300,000 before deducting underwriting discounts and commissions of $341,000, for net proceeds of $3,959,000, with the Series D Preferred Warrants to purchase the Series D Convertible Preferred Stock as a potential source of additional funds.
A summary of the common stock warrant activity follows:
Schedule of Warrant Activity
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Intrinsic Value | |||||||||||||
| Outstanding, June 30, 2022 | ||||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited or cancelled | ) | |||||||||||||||
| Outstanding June 30, 2023 | ||||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited or cancelled | ||||||||||||||||
| Outstanding December 31, 2023 | ||||||||||||||||
Common Stock Options
On September 10, 2020, the Board adopted the 2020 Equity and Incentive Plan (the “2020 Plan”) that provides for the issuance of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to officers, employees, directors, consultants, and other key persons. Under the 2020 Plan, the maximum number of shares of Common Stock authorized for issuance was shares. At December 31, 2023, there was a maximum of 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 (the “Plan”) wherebythat had been adopted by the Company on August 1, 2017. The outstanding stock options granted under the 2017 Stock Incentive Stock Options issued to employees, officers, and directorsPlan were transferred to the Company to not exceed 2,500,000 stock options2020 Plan. As of whichDecember 31, 2023, there were shares of Common Stock available for future issuance under the purchase price of the stock options shall not be less than 100% of the fair market value of the Company’s common stock and the period for exercising the stock options not exceed 10 years2020 Plan. On January 3, 2023, separate from the date of grant. The Option price per share with respect to each option shall be determined by the Committee for non-qualified stock options.
During the period ended September 30, 2017,2020 Plan, the Company issued 716,500an award of 63 time-based stock options to employees and officersthe Chief Executive Officer with an exercise price of the Company.$ per option. The Chief Executive Officer’s stock options are exercisable at $1.25 per share for a period of five years, andwill vest in equal quarterly installments over a one-year period of onesubject to three years fromhis continued employment with the date of grant.Company on the applicable vesting dates.
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Schedule of Stock Option Activity
| Number of options | Weighted average exercise price $ | Aggregate intrinsic value $ |
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Outstanding, June 30, 2017 | - | - | - |
Granted | 716,500 | 1.25 |
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Outstanding, December 31, 2017 | 716,500 | 1.25 | 0 |
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding, June 30, 2022 | 28 | $ | 49,440 | |||||
| Granted | 63 | 2,944 | ||||||
| Exercised | - | - | ||||||
| Cancelled | (14 | ) | 246,617 | |||||
| Outstanding, June 30, 2023 | 77 | $ | 49,552 | |||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Cancelled | (2 | ) | 270,059 | |||||
| Outstanding, September 30, 2023 | 75 | $ | 44,429 | |||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
| Outstanding, December 31, 2023 | 75 | $ | 44,429 | |||||
Additional information regarding stockAs of December 31, 2023, the weighted average remaining life of the options outstanding aswas years. There are options exercisable at December 31, 2017,2023, with a weighted average exercise price of $. As of December 31, 2023, there was no remaining unamortized stock compensation for stock options.
Preferred Stock
The Company is authorized to issue shares of blank check preferred stock.
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock
During the three and six months ended December 31, 2023, the Company recorded dividends in total of $212,741 and $555,589, and Alternate Conversion Floor Amounts (as defined in the Preferred Stock Certificates of Designations) of $1,046,341 and $4,805,990 for the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock, respectively. The Series C Convertible Preferred Stock, had a total value of $3,524,665 and $14,805,438, with cumulative dividends accrued, including the Alternative Conversion Floor Amounts (as defined in the Preferred Stock Certificates of Designations), in total of $1,749,665 and $204,414, and per share of $and $, as follows:of December 31, 2023 and June 30, 2023, respectively. The Series D Convertible Preferred Stock, had a total value of $4,189,753 and $4,337,267, with cumulative dividends accrued, (as defined in the Preferred Stock Certificates of Designations), in total of $201,753 and $37,267, and per share of $and $, as of December 31, 2023 and June 30, 2023, respectively.
| Outstanding and Not Vested | ||
Range of exercise prices $ | Number of shares | Weighted average remaining contractual life (years) | Weighted average exercise price $ |
1.25 | 716,500 | 4.6 | 1.25 |
Esports Entertainment Group, Inc.
(Formerly VGambling Inc.)
NotesThe incremental value of the Alternate Conversion Floor Amounts make whole provisions of $1,046,341 and $4,805,990, for the three and six months ended December 31, 2023, is presented on the unaudited condensed consolidated statement of operations as an addition to the Consolidated Financial Statementsnet loss available to common stockholders.
9.The August 2023 Settlement Agreement provided that, notwithstanding anything in the applicable Certificate of Designations for the Series C Convertible Preferred Stock Options (continued)or Certificate of Designations for the Series D Convertible Preferred Stock to the contrary, with respect to any given conversion of any Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, to the extent such conversion price, as so adjusted, is greater than % of the lowest VWAP of the Common Stock during the ten consecutive trading day period ending and including the trading day of the applicable conversion notice, a conversion floor price condition (as defined in the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock) shall be deemed to have occurred with respect to such conversion of the Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, as applicable.
As part of the August 2023 Settlement Agreement and the October 2023 Settlement Agreement and subsequent Further Settlements, the Company triggered the anti-dilution down round price protection provisions of the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock that allows for the conversion at the conversion price described above. Due to the down round price protection provision on the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, the Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price in effect prior to each settlement to the price of the settlement, as applicable, of $10,979,863 and $20,362,772based on the incremental value to the Holder due to the conversion price reduction, for the three and six months ended December 31, 2023. This incremental value is presented on the unaudited condensed consolidated statement of operations as an addition to the net loss available to common stockholders in the three months ended December 31, 2023. The incremental value was determined by computing the additional shares the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock that would be received based on the conversion price reduction multiplied by the estimated fair value of common stock of $77.40 as of August 17, 2023, $38.60 as of October 6, 2023, $24.00 as of November 3, 2023, $17.04 as of November 10, 2023, $11.92 as of November 17, 2023, $10.88 as of November 24, 2023, $7.44 as of December 1, 2023 (as described above).
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Registration Right Agreement
As discussed above, pursuant to a Series D RRA between the stock options granted was determined using the Black-Scholes option pricing model assuming no expected dividendsHolder and the following assumptions:Company, the Company granted certain registration rights to the Investor. The Series D SPA requires the Company to file a registration statement covering the resale of the shares of Common Stock underlying the shares of Series D Convertible Preferred Stock to be issued in the offering and the shares of common stock issued upon exercise of the Common Warrants. The Series D SPA also covers the conversion of any shares of Series D Convertible Preferred Stock issued upon exercise of the Series D Preferred Warrants. The Company was required to file the registration statement within 60 days from the closing of the transactions contemplated by the Series D SPA and cause the registration statement to be declared effective within 120 days after the closing of the transactions contemplated by the Securities Purchase Agreement. The Series D SPA contains mutual customary indemnification provisions among the parties and requires the Company to make certain cash payments in connection with the delay in the filing of a registration statement for the purpose of registering the resale of the common stock issuable under the Holder’s Series D Convertible Preferred Stock and common warrants, despite the Company’s best efforts.
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Stock-Based Compensation
During the periodthree and six months ended December 31, 2017,2023, the Company recorded stock-based compensation expense of $487,872,$ and $, respectively, for the amortization of stock options and the issuance of Common Stock to employees and contractors for services which has been recorded as salarygeneral and administrative expense in the statementunaudited condensed consolidated statements of operations. The scheduleDuring the three and six months ended December 31, 2022, the Company recorded stock-based compensation expense of vesting$ and $, respectively, for the amortization of stock options and stock-basedthe issuance of Common Stock to employees and contractors for services which has been recorded as general and administrative expense in the unaudited condensed consolidated statements of operations.
As of December 31, 2023, there was remaining unamortized stock compensation expensefor stock options. options were granted during the three or six months ended December 31, 2023.
Note 13 – Other Non-Operating Income (Loss), Net
Other non-operating income (loss), net, for the three and six months ended December 31, 2023 and 2022 was as follows:
Schedule of Other Non Operating Income Loss Net
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Foreign exchange gain (loss) | $ | (39,844 | ) | $ | 38,640 | $ | (11,702 | ) | $ | 49,494 | ||||||
| Other non-operating income (loss) | (15,096 | ) | 447,746 | (33,614 | ) | 483,342 | ||||||||||
| Total | $ | (54,940 | ) | $ | 486,386 | $ | (45,316 | ) | $ | 532,836 | ||||||
Note 14 – Fair Value Measurements
The following financial instruments were measured at fair value on a recurring basis:
Schedule of Fair Value of Financial Instruments
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liability for the March 2022 Warrants (Note 9) | $ | 86,250 | $ | 86,250 | $ | — | $ | — | ||||||||
| Liability for the September Warrants (Note 9) | $ | — | $ | — | $ | — | $ | — | ||||||||
| Derivative Liability (Note 9) | $ | 2,356,698 | $ | — | $ | — | $ | 2,356,698 | ||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| June 30, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liability for the March 2022 Warrants (Note 9) | $ | 113,850 | $ | 113,850 | $ | — | $ | — | ||||||||
| Liability for the September Warrants (Note 9) | $ | 251,876 | $ | — | $ | — | $ | 251,876 | ||||||||
| Liability | $ | 251,876 | $ | — | $ | — | $ | 251,876 | ||||||||
| 24 |
A summary of the changes in Level 3 financial instruments for the six months ended December 31, 2023 and the year ended June 30, 2023 is as follows:
Schedule of Changes in Level 3 Financial Instruments
Period-End Date | Number of Options Vested | Stock-based Compensation $ |
September 30, 2017 | - | 185,540 |
December 31, 2017 | - | 302,332 |
March 31, 2018 | - | 299,399 |
June 30, 2018 | - | 302,725 |
September 30, 2018 | 265,500 | 203,180 |
December 31, 2018 | 31,375 | 126,016 |
March 31, 2019 | 31,375 | 108,497 |
June 30, 2019 | 31,375 | 96,868 |
September 30, 2019 | 131,375 | 66,245 |
December 31, 2019 | 31,375 | 46,038 |
March 31, 2020 | 31,375 | 37,167 |
June 30, 2020 | 31,375 | 29,460 |
September 30, 2020 | 131,375 | 9,730 |
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|
| 716,500 | 1,813,197 |
| Warrant Liability | Contingent Consideration | Derivative liability | ||||||||||
| Balance at June 30, 2022 | 122,730 | 3,328,361 | 9,399,620 | |||||||||
| Fair value of the September 2022 Warrants (Note 9) | 5,286,288 | — | — | |||||||||
| Change in fair value of September 2022 Warrants (Note 9) | (5,034,412 | ) | — | — | ||||||||
| Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 9) | (122,730 | ) | — | — | ||||||||
| Change in fair value of Bethard contingent consideration liability | — | 2,864,551 | — | |||||||||
| Elimination of Bethard contingent consideration liability on sale of Bethard | — | (6,192,912 | ) | — | ||||||||
| Change in the fair value of the derivative liability (Note 9) | — | — | (9,399,620 | ) | ||||||||
| Balance at June 30, 2023 | 251,876 | $ | — | $ | — | |||||||
| Change in fair value of September 2022 Warrants (Note 9) | (229,515 | ) | — | — | ||||||||
| Balance at September 30, 2023 | $ | 22,361 | $ | — | $ | — | ||||||
| Change in fair value of September 2022 Warrants (Note 9) | (22,361 | ) | — | — | ||||||||
| Bifurcation of the derivative liability | — | — | 1,820,000 | |||||||||
| Change in the fair value of the derivative liability (Note 9) | — | — | 536,698 | |||||||||
| Balance at December 31, 2023 | $ | — | $ | — | $ | 2,356,698 | ||||||
The contingent consideration was settled on February 24, 2023, as part of the disposal of the Bethard Business and the derivative liability were eliminated on the April 28, 2023, on the conversion of the Senior Convertible Note to the Series C Convertible Preferred Stock (Note 9). A derivative liability was recorded on the Series C Convertible Preferred Stock as the Company did not have enough authorized and unissued shares to settle all the outstanding balance (Note 9).
10. Debt Forgiveness
The September 2022 Warrants were classified as Level 3 as they are plain vanilla warrants and are not callable by the Company (Note 9). The September 2022 Warrants were valued using a Black Scholes valuation model for the warrants outstanding at December 31, 2023 and June 30, 2023 with the following assumptions:
Accounts payableSchedule of Warrants Outstanding Fair Value Assumptions
| December 31, 2023 | June 30, 2023 | |||||||
| Contractual term, in years | ||||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | ||||||||
| Conversion / exercise price | $ | $ | ||||||
The March 2022 Warrants were classified as Level 1 as they are publicly traded. They are callable by the Company if certain criteria are met (Note 9). At December 31, 2023, the Company was reduced $NIL (2016 - $22,068 (20,000 Euro)) becausestill trading on the Nasdaq. The March 2022 Warrants outstanding at December 31, 2023 and June 30, 2023 were valued using the following assumptions:
| December 31, 2023 | June 30, 2023 | |||||||
| Contractual term, in years | ||||||||
| Active market | ||||||||
| Market price | $ | $ | ||||||
The Series A Warrants outstanding at December 31, 2023 and June 30, 2023 were valued using a Monte Carlo valuation model with the following assumptions:
| December 31, 2023 | June 30, 2023 | |||||||
| Contractual term, in years | ||||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | ||||||||
| Conversion / exercise price | $ | $ | ||||||
The Series B Warrants expired on June 2, 2023.
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The value of debt forgiven by an arm’s length company. the derivative liability on the Series C Preferred Stock at December 31, 2023 and December 5, 2023 was valued using a nonperformance risk adjusted Monte Carlo valuation model using total assets with the following valuation assumptions:
Schedule of Derivative Liability
| December 31, 2023 & December 5, 2023 | ||||
| Contractual term remaining, in years | 1.00 | |||
| Discount rate | 25.00 | % | ||
| Risk-free interest rate | 4.67 | |||
| Dividend rate | 8.00 | % | ||
| Dividend rate as of valuation date | 8.50 | % | ||
| Conversion / exercise price | $ | 7.00 | ||
The fair value of a derivative instrument in a liability position includes measures of the Company’s nonperformance risk. Significant changes in nonperformance risk used in the fair value measurement of the derivative liability may result in significant changes to the fair value measurement. The calculated make-whole liability may differ materially from the amount the Company may be required to pay under the Series C Preferred Stock.
The following is information relative to the Company’s derivative instruments in the unaudited condensed consolidated balance sheet as of December 31, 2023:
Schedule of Derivative Instruments in the Unaudited Condensed Consolidated Balance Sheet
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | December 31, 2023 | ||||
| Derivative liability on Series C Preferred Stock (Note 9) | Derivative liability | $ | 2,356,698 | |||
The effect of the derivative instruments on the unaudited condensed consolidated statements of operations is as follows:
| Amount of Loss Recognized in Income on Derivatives | ||||||||||
Derivatives Not Designated as Hedging Instruments | Location of Loss Recognized in Income on Derivatives | Three months ended December 31, 2023 | Six months ended December 31, 2023 | |||||||
| Derivative liability (Note 9) | Change in fair value of derivative liability (Note 9) | $ | 536,698 | $ | 536,698 | |||||
Assets Measured on a Nonrecurring Basis
Assets that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment. The Company’s estimates of fair value required it to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain.
The Company assesses the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates goodwill for impairment at least annually or when triggering events occur. The Company assesses the fair value of goodwill using the income approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant.
The Company uses undiscounted future cash flows of the asset or asset group for equipment and intangible assets. The Company estimated the fair value when conducting the long-lived asset impairment tests primarily using an income approach and used a variety of unobservable inputs and underlying assumptions consistent with those discussed above for purposes of the Company’s goodwill impairment test (See Note 5 and Note 6).
Note 15 – Segment Information
The Company operates its business and reports its results through two complementary operating and reportable segments: EEG iGaming and EEG Games, in accordance with ASC Topic 280, Segment Reporting.
EEG iGaming includes the Company’s iGaming casino. Currently, the Company operates the business to consumer segment primarily in Europe.
EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of: (1) our proprietary infrastructure software, GGC, which underpins our focus on esports and is a leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, and (2) the creation of esports content for distribution to the betting industry. Currently, we operate our esports EEG Games business in the United States and Europe.
Operating segments are components of the Company for which separate discrete financial information is available to and evaluated regularly by the chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The CODM assesses a combination of metrics such as revenue and Adjusted Segment EBITDA to evaluate the performance of each operating and reportable segment.
The Company utilizes Adjusted Segment EBITDA (as defined below) as its measure of the performance of its operating segments. The following table highlights the Company’s revenues and Adjusted Segment EBITDA for each reportable segment and reconciles Adjusted Segment EBITDA on a consolidated basis to net loss. Total capital expenditures for the Company were not material to the consolidated financial statements.
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A measure of segment liabilities has not been currently provided to the Company’s CODM and therefore is not shown below. Segment assets are shown due to the significant asset impairment charges recorded during the six months ended December 31, 2023. The following tables present the Company’s segment information:
Schedule of Segment Information
December 31, 2023 | June 30, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets: | ||||||||
| EEG iGaming | $ | 886,939 | $ | 15,275,501 | ||||
| EEG Games | $ | 3,048,490 | $ | 4,486,563 | ||||
| Other Corporate | $ | 3,668,980 | $ | 2,339,227 | ||||
| Total | $ | 7,604,409 | $ | 22,101,291 | ||||
| Total Assets | $ | 7,604,409 | $ | 22,101,291 | ||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| EEG iGaming segment | $ | 1,840,958 | $ | 5,538,486 | $ | 3,797,007 | $ | 14,133,832 | ||||||||
| EEG Games segment | $ | 741,069 | $ | 870,919 | $ | 1,474,837 | $ | 1,880,837 | ||||||||
| Total | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Adjusted EBITDA(1) (2) | ||||||||||||||||
| EEG iGaming segment | $ | (202,562 | ) | $ | (1,150,938 | ) | $ | (454,965 | ) | $ | (1,612,133 | ) | ||||
| EEG Games segment | $ | (109,175 | ) | $ | (561,742 | ) | $ | (210,642 | ) | $ | (1,108,538 | ) | ||||
| Total Adjusted EBITDA | $ | (311,737 | ) | $ | (1,712,680 | ) | $ | (665,607 | ) | $ | (2,720,671 | ) | ||||
| Adjusted for: | ||||||||||||||||
| Other corporate and overhead costs | $ | (2,116,384 | ) | $ | (1,744,816 | ) | $ | (5,149,367 | ) | $ | (3,914,445 | ) | ||||
| Interest expense | $ | - | $ | (971,374 | ) | $ | - | $ | (2,029,782 | ) | ||||||
| Change in fair value of derivative liability | $ | (536,698 | ) | $ | 8,324,802 | $ | (536,698 | ) | $ | 8,599,666 | ||||||
| Change in fair value of warrant liability | $ | 74,111 | $ | 2,571,732 | $ | 279,476 | $ | 5,022,288 | ||||||||
| Change in fair value of contingent consideration | $ | - | $ | (3,044,019 | ) | $ | - | $ | (2,864,551 | ) | ||||||
| Other non-operating income (loss), net | $ | (54,940 | ) | $ | 486,386 | $ | (45,316 | ) | $ | 532,836 | ||||||
| Depreciation and amortization | $ | (1,076,056 | ) | $ | (1,887,729 | ) | $ | (2,163,005 | ) | $ | (3,788,874 | ) | ||||
| Right of use asset amortization | $ | (24,149 | ) | $ | (19,984 | ) | $ | (42,410 | ) | $ | (44,819 | ) | ||||
| Asset impairment charges | $ | (12,981,142 | ) | $ | (16,135,000 | ) | $ | (12,981,142 | ) | $ | (16,135,000 | ) | ||||
| Stock-based Compensation | $ | (21,078 | ) | $ | - | $ | (42,156 | ) | $ | (921,991 | ) | |||||
| Legal Settlement | $ | - | $ | - | $ | (500,000 | ) | $ | - | |||||||
| Cost of acquisition | $ | - | $ | - | - | $ | (35,930 | ) | ||||||||
| Income tax benefit (expense) | $ | - | $ | - | $ | - | $ | - | ||||||||
| Net loss | $ | (17,048,073 | ) | $ | (14,132,682 | ) | $ | (21,846,225 | ) | $ | (18,301,273 | ) | ||||
| (1) | The Company has no intersegment revenues or costs and thus no eliminations required. |
| (2) | The Company defines Adjusted Segment EBITDA as earnings (loss) before, as applicable to the particular period, other corporate and overhead costs, interest expense; income taxes; depreciation and amortization, including right of use asset amortization; stock-based compensation; legal settlements; cost of acquisitions; asset impairment charges; loss on extinguishment of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair value of warrant liability; change in fair value of contingent consideration; and other non-operating income (loss), net, and certain other non-recurring, non-cash or non-core items (included in table above). |
Note 16 – Income Taxes
During the three and six months ended December 31, 2023, and the year ended June 30, 2023, the Company recorded no material current taxes, remained in a cumulative loss position in all jurisdictions, and maintained a full valuation allowance position against any deferred tax assets in the jurisdictions it operated in, thus recording no deferred tax benefits or expenses.
Note 17 – Subsequent Events
Series E Redeemable Preferred Stock
On January 5, 2024, the Company entered into a Subscription and Investment Representation Agreement with a member of management, pursuant to which the Company agreed to issue and sell one hundred () shares of the Company’s Series E Redeemable Preferred Stock, par value $ per share, for $ per share in cash (the “Series E Preferred Stock”). The sale closed on January 5, 2024.
On January 5, 2024, the Company filed a certificate of designations (the “Series E Certificate of Designations”) with the Secretary of State of Nevada, effective as gain of forgiveness.the time of filing, designating the rights, preferences, privileges and restrictions of the shares of Series E Preferred Stock. The Certificate of Designation provided that one hundred (100) shares of Series E Preferred Stock will have 6,000,000 votes each and will vote together with the outstanding shares of the Company’s common stock as a single class exclusively with respect to any proposal of an amendment to the Company’s articles of incorporation to increase the authorized shares of Common Stock (the “Authorized Share Increase Proposal”) or any proposal to adjourn the annual or special meeting related to an Authorized Share Increase Proposal, if applicable.
11. Subsequent Event
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Resignation of Chief Financial Officer, Chief Operating Officer and Chief People Officer
a)
On February 5, 20181, 2024, the Company, incorporated Esports Entertainment (Malta) Limited in Maltaconnection with cost reductions and streamlining of business operations at the Company, received notice from Michael Villani, Chief Financial Officer, Damian Mathews, Chief Operating Officer, and Jenny Pace, Chief People Officer of their resignations from their respective positions with the Company, effective April 30, 2024. Mr. Mathews shall remain in his position as a wholly owned subsidiary.member of the Company’s Board of Directors. The resignations of Mr. Villani, Mr. Mathews and Ms. Pace were not the result of any disagreements with the Company on any matter relating to the Company’s operations, policies, or practices.
Secured Note Purchase Agreement
On March 13, 2024, the Company announced that it had entered into an agreement, dated March 7, 2024 (the “Secured Note Purchase Agreement”) and a Secured Promissory Note Agreement (the “Secured Note Agreement”), with the holder of its Series C Preferred Stock and Series D Preferred Stock, for approximately $1,420,000 (the “Secured Note”). The key terms of the Secured Note Agreement include:
| ● | Security of the balance by a first priority security interest in all of the Company’s tangible and intangible personal property; | |
| ● | A maturity date of March 7, 2026; | |
| ● | Accrued interest to the outstanding principal balance of the Secured Note at a rate of 10% per annum. All interest shall be payable quarterly in-kind by adding the amount of accrued interest to the outstanding principal balance of the Secured Note on the last Business Day of each calendar quarter; |
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Agreement to Amend and Restate the Terms of the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock
On March 7, 2024, in connection with the Secured Note Agreement, the Company amended and restated its Series C Preferred Stock and Series D Preferred Stock Certificates of Designations (the “Preferred Stock CODs, as amended and restated”) to include the following key amendments:
| ● | A six month standstill on certain conversions through September 7, 2024; | |
| ● | After the standstill a limit on certain conversions to $150,000 per month; | |
| ● | Removal of the Floor Price and Conversion Floor Price Condition, as defined in the previous filed Preferred Stock CODs; | |
| ● | A Maturity Date of March 7, 2026, was added, at what time the Preferred Stock becomes redeemable for cash; | |
| ● | No dividends on the outstanding balances through the new Maturity Date unless there is a triggering event as defined in the Preferred Stock CODs, as amended and restated; | |
| ● | Amendments to the Subsequent Placement Optional Redemption, as defined in the Preferred Stock CODs, such that the first $10,000,000 raised by the Company, (including the $1,420,000 from the Secured Note), would be excluded from being used to repay down the Preferred Stock, per the terms of the Preferred Stock CODs, as amended and restated, if it is used on operating expenses in its ordinary course of business. |
The transactions contemplated by the Secured Note Purchase Agreement and the Secured Note Agreement and Preferred Stock CODs, as amended and restated, were approved by our Board of Directors.
The value of the Series C Preferred Stock and Series D Preferred Stock as of March 7, 2024, was $3,549,177 and $1,903,252, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This section of this report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like:such as, but not limited to, believe, expect, estimate, anticipate, intend, plan, project targets, likely, aim, will, would, could, 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 lookingforward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.
OverviewThese risks and uncertainties include those described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report and in our 2023 Annual Report on Form 10-K, including those described under “Risk Factors” therein, as may be updated in our filings we make with the SEC. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned to not place undue reliance on forward-looking statements, which reflect management’s view only as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, unless required by law.
Overview
Esports Entertainment Group, Inc., ("Esports Entertainment", "the Company", “our” or "we") was incorporated in Nevada on July 22, 2008. Esports Entertainment is a development-stage online gamblingskill-based, competitive, and 18+ gaming company and plans to offer wagering on esports events and the ability to participate in video game tournaments for real-money in a licensed and secure environment.
The online gambling market represents one of the fastest growing segments of the gambling industry. H2 Gambling Capital, a leading supplier of data and market intelligence on the global gambling industry, estimates the current size of the global online gambling market is in excess of US$50 billion. Source: H2 Gambling Capital, Global Online Gambling Report 2016.
The esports market represents the fastest growing sports market in the world. According to market research firm Newzoo, the global esports audience will reach 385 million in 2017, made up of 191 million esports enthusiasts and a further 194 million occasional viewers. The number of enthusiasts is expected to grow by 50% toward 2020, totaling 286 million. According to Fortune Magazine, the esports fan base will surpass the NFL by 2017. In 2016, there were 424 esports events with a prize pool above $5,000 worldwide. North America held the 28% of the events, followed by Western Europe with 26%, and Eastern Europe with 13%. Total esports prize money in 2016 reached $93.3 million, up from $61.0 million in 2015, or an increase of 52.9% year on year. For major esports events with prize pools above $5,000, total prize money reached $81.5 million, up from $54.7 million in 2015, or an increase of 49.0% year on year. Forbes magazine projects fans of esports will wager $23 billion by 2020.
Esports is the professionalizationorganized form of video games. Contrary to its name, esports does not involve video games of traditional sports suchgaming by professional players, playing individually or as football and basketball. Rather, esportsteams. Esports typically takes the form of organized, multiplayer video games that include genres such as real-time strategy, fighting, first-person shooter and multiplayer online battle arena games. The best-known example of an esports game among non-esports enthusiasts is Call of Duty. Currently, however, the two most successful esports games are Dota 2 and League of Legends (a multiplayer online battle arena game) and Counter Strike: Global Offensive (afirst-person shooter game). Other popular games include Smite, StarCraft II, Call of Duty¸ Heroes of the Storm, and Hearthstone. Esports also includes games which can be played, primarily by amateurs, in multiplayer competitions such as WII (Nintendo), and Halo (343 Industries).
Although official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a massive global surge in popularity with the rapid growth of online streaming over the last few years. The advent of online streaming technology has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously watched in person in stadiums (which are often sold out), as well as of online viewers
(which regularly exceed 1,000,000 for major tournaments). The impact has been so significant, that many video game developers now build features into their games designed to facilitate competition.
Esports Entertainment intends to offer esports enthusiasts from around the world, excluding the United States, the ability to wager on a wide variety of esports events. Esports Entertainment intends to offer users the opportunity to wager against other users utilizing a peer-to-peer wagering system with no risk to the Company. Esports Entertainment plans to generate revenue from fees charged to players based on a percentage of the amount wagered on an event. Esports Entertainment intends to offer spectators the ability to wager on all major professional esports events and a wide range of amateur esports events.
Esports Entertainment also intends to offer users from around the world, excluding 13 States within the United States, the ability to participate in online mobile and PC video game tournaments and win cash prizes. Participants will be able to enter and play against each other with prize money distributed to the last remaining competitors. Esports will collect a percentage of tournament entry fees and will not have any of its own capital at risk. Esports Entertainment intends to offer users a wide selection of video games of skill to be played online for real money in both small groups and major tournaments.
Esports Entertainment will not offer online users traditional casino style games such as poker, craps or slots, nor will it offer online wagering on traditional sporting events such as football or soccer. Esports Entertainment will be focused solely on offering online wagering on the widest range of esports events broadcast from around the world, as well as, hosting online video game tournaments for enthusiasts.
Given the global demand for live esports events, Esports Entertainment also intends to acquire the 62,000-square foot Grand Princess Casino in Antigua, for the purposes of converting it into an Esports Coliseum that will hold a variety of esports events such as: hosting spectators as they watch live esports events on the main floor; and hosting video game tournaments that provide visitors with the opportunity to participate in tournaments on the second floor.
Our initial plan to launch and operate our business involves two phases.
In the first phase, we intend to complete the development, testing and launching of our esports focused online gambling website. We estimate that the costs involved in completing the first phase will be approximately $2,000,000. Our sales and marketing efforts began in the third quarter of 2017. We intend to launch our online esports focused wagering website in the first quarter of 2018.
In the second phase, we intend to acquire, renovate, equip and operate our land based Esports Coliseum. We estimate the cost of acquiring and refurbishing the Grand Princess Casino in Antigua to be approximately $14,000,000. We further estimate the cost of equipping and operating the esports focused multi-purpose facility at approximately $6,000,000 to $8,000,000. We intend to acquire, renovate, equip and launch our esports focused multi-purpose facility in Antigua within twelve months of raising the necessary funds. We expect our sales and marketing efforts to begin within twelve months of the commencement of operations.
We currently have twelve full time and three-part time employees. If we are able to raise sufficient capital, we plan to hire additional employees by March 31, 2018.
To date, our operations have been limited to the design, develop and testing of our wagering systems. As of December 31, 2017, we have not commenced commercial operations. As of December 31, 2017, we have not generated any revenue from our operations.
Our executive and business offices are located at Commercial Centre, Jolly Harbour, St. Mary’s, Antigua and Barbuda. Our telephone number is (268) 562-1119.
Online Operations
Esports Entertainment intends to offer users from around the world, excluding the United States, the ability to wager on a wide variety of esports events. Esports event gambling involves spectators wagering online on the outcome of professional and amateur esporting events. Esports Entertainment intends to offer users the opportunity to wager against other users utilizing a peer-to-peer wagering system with no risk to the Company. Esports Entertainment intends to offer spectators the ability to wager on allMost major professional esports events and a wide range of amateur esports events that will beare broadcast live via streaming services including twitch.tv azubu.tv, ustream.tvand youtube.com. youtube.com.
Esports Entertainment currently expectsGroup (the “Company” or “EEG) is an esports-focused iGaming and entertainment company with a global footprint. EEG’s strategy is to launch onlinebuild and mobile versionsacquire betting and related platforms, and lever them into the rapidly growing esports vertical.
Basis of Presentation
We operate two complementary business segments: Our EEG iGaming business and our EEG Games business.
EEG iGaming
EEG iGaming includes the Company’s iGaming casino and other functionality and services for iGaming customers. Currently, the Company operates the business to consumer segment primarily in Europe. iDefix, proprietary technology acquired in connection with the acquisition of Lucky Dino, is an MGA licensed iGaming platform with payments, payment automation manager, bonusing, loyalty, compliance and casino integrations that services Lucky Dino.
EEG’s goal is to be a leader in the large and rapidly growing sector of esports event bettingreal-money wagering, offering fans the ability to wager on approved esports events in a licensed and secure environment. From February 2021, under the VIE brand beginningterms of our MGA license, we are now able to accept wagers from residents of over 180 jurisdictions including countries within the EU, Canada, New Zealand and South Africa, on our platform.
Alongside the esports focused platform, EEG owns and operates five online casino brands of Lucky Dino Gaming Limited and Hiidenkivi Estonia OU, its wholly-owned subsidiary (collectively referred to as “Lucky Dino”), licensed by the MGA on its in-house built iDefix casino-platform. We currently hold one Tier-1 gambling license in Malta. Our Lucky Dino business provides a foothold in mature markets in Europe into which we believe we can cross-sell our esports offerings.
EEG Games
EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of: (1) our proprietary infrastructure software, GGC, which underpins our focus on esports and is a leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, and (2) the first quartercreation of 2018.
Esports Entertainment also intendsesports content for distribution to offer users from around the world, excluding 13 States withinbetting industry. Currently, we operate our esports EEG Games business in the United States and Europe.
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Compliance with Listing Requirements
On February 13, 2024, the abilityCompany announced it was voluntarily delisting from the Nasdaq Capital Markets, LLC (“Nasdaq”). On February 16, 2024, the Company received notice from Nasdaq that it was being suspended on Nasdaq on opening of trading on February 21, 2024. As a result of the suspension, on February 21, 2024 the Company began trading on the Over the Counter Market (the “OTC”). The Company is currently trading on the “Pink Market” of the OTC. On February 27, 2024, the Company filed a Form 25 with the SEC to entereffect the delisting of its securities from Nasdaq. At the time of announcing its delisting and participatesuspension the Company was not in online video game tournamentscompliance with the minimum of $2,500,000 stockholders’ equity requirement (the “Equity Rule”), as set forth in Nasdaq Listing Rules 5550(a)(2) and win cash prizes. Participants will5550(b)(1). The Company is now subject to listing requirements of the OTC and expects to be abletrading on the OTCQB tier of the OTC upon filing of this report.
Key Performance Indicators
In the esports and gaming industry, revenue is driven by discretionary consumer spending. We have no way of determining why customers spend more or less money; therefore, we are unable to enterquantify a dollar amount for each factor that impacts our customers’ spending behaviors. However, some insight into the factors that we believe are likely to account for such changes and play against eachwhich factors may have a greater impact than others, include decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions, such as lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market and high fuel or other with prize money distributedtransportation costs. Such insights are based solely on our judgment and professional experience, and no assurance can be given as to the last remaining competitors. We will collect a tournament entry fee for scheduled tournaments and will not have anyaccuracy of our own capital at risk. Esports Entertainment intends to offer users a wide selection of video games of skill to be played online for real money in small groups to major tournaments. Users will be able to enter and participate in tournaments utilizing their PC, game console or mobile device. In video game tournaments, players play against each other in either ring games (i.e., games for cash on a hand-by-hand basis) or in tournaments (i.e., players play against each other for tournament chips with prize money distributed to the last remaining competitors) or variations thereof. Esports Entertainment collects a percentage of each pot (the “rake”) in ring games and a tournament entry fee for scheduled tournaments and sit and go tournaments, which do not put any of the Company’s own capital at risk. Esports Entertainment expects to launch online and mobile versions of tournament play, initially utilizing simple video games and later more complex video games, under the VIE brand beginning in the second half of 2018, globally.
Esports Entertainment has been issued a Client Provider Authorization Permit from the Kahnawake Gaming Commission in Canada. judgments. The computer servers and related equipment required for our esports gambling business will be located in the data center facilities on the Mohawk of Kahnawake Indian Reservation in Canada. Although this Permit allows Esports Entertainment’s wholly-owned subsidiary to conduct real-money online gambling and wagering activities on a global basis, Esports Entertainment believes that also operating from Curacao, in addition to from the Mohawk Indian Reservation in Canada, is more beneficial for the following reasons:
·
access to experienced staff
·
access to premium office space
·
lower operating costs
Accordingly, Esports Entertainment has been issued a Curacao eGaming License in Curacao in the Kingdom of the Netherlands. The License allows Esports Entertainment’s wholly-owned subsidiary to conduct real-money online gambling and wagering activities on a global basis from Curacao.
We have a Betting Gaming Platform Software Agreement with Swiss Interactive Software GmbH, a company controlled by Yan Rozum, onevast majority of our directors. Underrevenues is EEG iGaming revenue, which is highly dependent upon the Agreement, Swiss Interactive has agreed to grant Esports Entertainment an exclusive license to offer certain Swiss Interactive developed esports event wagering platforms for real money playnumber and wagering. volume and spending levels of customers.
Reportable Segments
We have agreements with a number of entities that allows us to process money transfers through the internet.
We will control the compliance, payments, customer service, marketing and other aspects of our business.
Land Based Operations
In December 2017, the Company made an offer to purchase the Grand Princess Casino, located in Jolly Harbor, Antigua, for $7,500,000 (US$). A condition of the purchase is the Company is required to pay a deposit of $750,000. While the Company continues to seek additional sources of equity capital, as ofAt December 31, 20172023, the Company has not yet paidtwo reportable segments: EEG iGaming and EEG Games, consistent with our reportable segments at June 30, 2023.
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Financial Highlights
The following tables set forth a summary of our financial results for the required deposit.periods indicated and are derived from our unaudited condensed consolidated financial statements for the three and six months ended December 31, 2023 and 2022, respectively:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenue | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Total operating expenses (excluding Asset impairment charges) | $ | 6,131,431 | $ | 11,774,614 | $ | 13,834,389 | $ | 27,441,399 | ||||||||
| Asset impairment charges | 12,981,142 | 16,135,000 | 12,981,142 | 16,135,000 | ||||||||||||
| Total other income (expense), net | $ | (517,527 | ) | $ | 7,367,527 | $ | (302,538 | ) | $ | 9,260,457 | ||||||
| Income tax expense | $ | - | $ | - | $ | - | $ | - | ||||||||
| Net loss | $ | (17,048,073 | ) | $ | (14,132,682 | ) | $ | (21,846,225 | ) | $ | (18,301,273 | ) | ||||
| Net loss attributable to common stockholders | $ | (31,410,571 | ) | $ | (14,408,568 | ) | $ | (49,972,199 | ) | $ | (18,852,331 | ) | ||||
In addition to the purchase price, the Company will also need approximately $5,000,000 to refurbish and renovate the facility plus $6,000,000 to $8,000,000 to purchase equipment and provide working capital during the start-up phase following its opening. The Company estimates the facility, if and when it begins operations, will have approximately 12 employees and will cost approximately $50,000 per month to operate. If the Company’s offerNon-GAAP Information
This report includes Adjusted EBITDA, which is accepted, and needed capitala non-U.S. GAAP (“U.S. GAAP” is raised, the Company estimates the esports casino will not begin operations until 12 months after the needed capital is raised.
The Grand Princess Casino will not be operateddefined as a traditional casino. Rather, it will host spectators as they watch live esports events on the main floor, as well as, provide visitors with the opportunity to participate in video game tournaments on the second floor, all under the Esports Coliseum brand.
A live esports event normally involves two or more professional teams which are contracted to participate. The sponsor of the event is typically required to pay the transportation and lodging expenses of the participating teams. The quality of teams participating is based on the cash prize offered to the winner. As a sponsor of the event, we will be a major contributor to the cash prize pool with the goal of making the prize pool as large as possible so as attract the highest quality teams.
The Grand Princess Casino consists of 62,000 square feet over three floors and will be rebranded as the Esports Coliseum.
Initially, the first floor of the Esports Coliseum will be used to host events arranged by existing and established esports tournament organizers. We intend to work with multiple esports tournament organizers and arrange for them to host one or a series of events at the Esports Coliseum. As a permanent esports event hosting facility, tournament organizers will benefit from the cost efficiency of not having to ship, assemble and then remove the equipment and services needed to host an esports event involving multiple teams, 1,500 spectators and broadcasting in a temporary facility. The Esports Coliseum plans to generate revenue from facilities rental to tournament organizersaccounting principles generally accepted in the formUnited States of a flat feeAmerica) financial performance measure that we use to supplement our results presented in accordance with U.S. GAAP. The presentation of this financial information is not intended to be considered in isolation or as a percentagesubstitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. The Company uses this non-U.S. GAAP financial measure for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that it provides useful information about operating results, enhances the overall understanding of ticket sales.
Ultimately, we also intendpast financial performance and future prospects, and allows for greater transparency with respect to organizekey metrics used by management in its financial and host our own esports events onoperational decision making. Adjusted EBITDA, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the first floorsame industry. We define Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense; income taxes; depreciation and amortization including right of the Esports Coliseum. We intend to negotiate with multiple video game publishers to secure the rights to their game software to enable us to host one or more esports events at the Esports Coliseum. Theuse asset amortization; stock-based compensation; cost of acquisitions; asset impairment charges; loss on extinguishment of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair value of warrant liability; change in fair value of contingent consideration; and other non-operating income (loss), net and certain other non-recurring, non-cash or non-core items, as described in the game software licensesreconciliation below, if not covered above.
Adjusted EBITDA excludes certain expenses that are negotiated individuallyrequired in accordance with U.S. GAAP because they are non-recurring items (for example, in the case of transaction-related costs), non-cash expenditures (for example, in the case of depreciation and can be based on a flat fee, as a percentageamortization, stock-based compensation, legal settlements, asset impairment charges, change in fair value of derivative liability and change in fair value of warrant liability), or are not related to our underlying business performance (for example, in the prize pool, as a percentagecase of ticket sales, or at no cost. We intendinterest income and expense and litigation settlement and related costs).
Segment Revenues and Adjusted EBITDA
The table below presents our Segment Revenues and Adjusted EBITDA reconciled to attract esports spectator demographic focused sponsors and advertisers to make financial contributes to the event prize pool. We intend to enter into agreements with the esports teams from around the world to have them participate in our events. The teams will have the opportunity to competenet loss, for the prize pool offered.periods indicated:
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| EEG iGaming segment | $ | 1,840,958 | $ | 5,538,486 | $ | 3,797,007 | $ | 14,133,832 | ||||||||
| EEG Games segment | $ | 741,069 | $ | 870,919 | $ | 1,474,837 | $ | 1,880,837 | ||||||||
| Total | $ | 2,582,027 | $ | 6,409,405 | $ | 5,271,844 | $ | 16,014,669 | ||||||||
| Net loss: | $ | (17,048,073 | ) | $ | (14,132,682 | ) | $ | (21,846,225 | ) | $ | (18,301,273 | ) | ||||
| Adjusted for: | ||||||||||||||||
| Interest expense | $ | - | $ | 971,374 | $ | - | $ | 2,029,782 | ||||||||
| Change in fair value of derivative liability | $ | 536,698 | $ | (8,324,802 | ) | $ | 536,698 | $ | (8,599,666 | ) | ||||||
| Change in fair value of warrant liability | $ | (74,111 | ) | $ | (2,571,732 | ) | $ | (279,476 | ) | $ | (5,022,288 | ) | ||||
| Change in fair value of contingent consideration | $ | - | $ | 3,044,019 | $ | - | $ | 2,864,551 | ||||||||
| Other non-operating income (loss), net | $ | 54,940 | $ | (486,386 | ) | $ | 45,316 | $ | (532,836 | ) | ||||||
| Depreciation and amortization | $ | 1,076,056 | $ | 1,887,729 | $ | 2,163,005 | $ | 3,750,447 | ||||||||
| Right of use asset amortization | $ | 24,149 | $ | 19,984 | $ | 42,410 | $ | 38,427 | ||||||||
| Asset impairment charges | $ | 12,981,142 | $ | 16,135,000 | $ | 12,981,142 | $ | 16,135,000 | ||||||||
| Stock-based compensation | $ | 21,078 | $ | - | $ | 42,156 | $ | 921,991 | ||||||||
| Legal settlements | $ | - | $ | - | $ | 500,000 | $ | - | ||||||||
| Cost of acquisition | $ | - | $ | - | $ | - | $ | 35,930 | ||||||||
| Income tax benefit | $ | - | $ | - | $ | - | $ | - | ||||||||
| Total Adjusted EBITDA | $ | (2,428,121 | ) | $ | (3,457,496 | ) | $ | (5,814,974 | ) | $ | (6,679,935 | ) | ||||
| Adjusted EBITDA(1) | ||||||||||||||||
| EEG iGaming segment | $ | (202,562 | ) | $ | (1,150,938 | ) | $ | (454,965 | ) | $ | (1,612,133 | ) | ||||
| EEG Games segment | $ | (109,175 | ) | $ | (561,742 | ) | $ | (210,642 | ) | $ | (1,108,538 | ) | ||||
| Other(2) | $ | (2,116,384 | ) | $ | (1,744,816 | ) | $ | (5,149,367 | ) | $ | (3,959,264 | ) | ||||
| Total Adjusted EBITDA | $ | (2,428,121 | ) | $ | (3,457,496 | ) | $ | (5,814,974 | ) | $ | (6,679,935 | ) | ||||
(1) We intend to broadcast globally all esports events live on multiple video streaming platforms, such as twitch.tvhave no intersegment revenues or costs and youtube.com. We intend to market the events primarily through online advertising on esports focused websitesthus no eliminations were required.
(2) Other comprises corporate and the websites andoverhead costs.
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social mediaResults of professional esports players and teams. We plan to generate revenue in the form of ticket sales, third party sponsorship and advertising fees, both at the Esports Coliseum and on online broadcasts of tournaments.Operations
The second floor of the Esports Coliseum will provide a tournament play area with space for up to 200 participants who will play video games among themselves. The tournament play area will be equipped with 200 gaming stations, each of which will include the latest in gaming hardware and accessories, a computer with a large monitor, desk and ergonomic chair. Participants will be able to enter and play against each other for tournament chips with prize money distributed to the last remaining competitors. We will collect a tournament entry fee for scheduled tournaments and will not have any of our own capital at risk. No spectator seating will be available on the second floor and the tournaments played on the second floor will not be broadcast.
The second floor will also host a full-service restaurant and lounge. A portion of the third floor is planned for a roof top patio bar area. The remainder of the third floor will be utilized for offices.
Sales and Marketing
We plan to:
·
implement an affiliate marketing program. Affiliate marketing is a type of performance-based marketing by which a business, such as ours, rewards affiliates for each customer brought by the affiliate's marketing efforts. Affiliate marketing is a very successful form of online marketing and is utilized by global leaders such as Amazon, Apple and all leading online gambling sites.
·
advertise and sponsor major professional esports events held in stadiums around the world that are broadcast online to a global audience.
·
utilize professional esports players and other celebrities, who have an interest in video games and esports, to generate new customers.
·
use a multimedia approach focusing on acquiring and retaining customers.
·
use online advertisements, paid search optimization, and various social media campaigns to increase our online presence and drive traffic to our website.
If we are able to acquire the Grand Princess Casino in Antigua, the Esports Entertainment brands will be featured prominently as a major sponsor of professional esports events held at the facility and broadcast globally.
Competition
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. Because many of these competitors focus on delivering one product, as opposed to a full suite of esports and video gambling products and services that Esports Entertainment intends to offer, the competitors may offer an equivalent or superior product to that of the Company. Esports Entertainment expects the number of companies offering products and services in each market segment to increase. Many of Esports Entertainment’s current and potential competitors, including but not limited to Unikrn, Skilz, bet365, William Hill, Betway, and Pinnacle Sports, have far greater resources than Esports Entertainment.
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 federal, state, provincial, tribal and foreign agencies (collectively, “gaming authorities”). Gambling laws require us to obtain licenses or findings of suitability from gaming authorities for Esports Entertainment, 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). 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 investigation. Gaming authorities have broad discretion in determining whether an applicant qualifies for licensing or should be found suitable. Gambling authorities generally look 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 and security of the applicant’s online real-money platform and gaming equipment and related software, as applicable, (iii) and, the past history 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 ours fails to qualify for a license or is found unsuitable (including due to the failure to submit the required documentation) by a gaming authority, we may deem it necessary, or be required to, sever our 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 us, 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. As a regulated entity, we will be required to maintain strong corporate governance standards and will be required to, among other things, maintain effective internal controls over our financial reporting and disclosure controls and procedures, maintain systems for accurate record keeping, file periodic reports with gaming authorities and maintain strict compliance with various laws and regulations applicable to our business.
We will work to obtain all permits, authorizations, registrations and/or licenses required in the jurisdictions in which we operate. We will have a zero-tolerance approach to money laundering, fraud and collusion and we will work with regulators and law enforcement globally in this area. We plan to have a dedicated compliance team that will work to ensure that we comply with all regulatory requirements under our licenses, as well as all applicable anti-money laundering, anti-fraud and anti-collusion rules and laws.
We will be dedicated to responsible gambling practices and will seek to provide our customers with the resources and services they need to play responsibly. These practices, resources and services are expected to include deposit limits, table and game play limits, voluntary restrictions on access and use of certain games, self-exclusion and cooling off periods, and voluntary permanent exclusions from our services, sites and applications.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The financial data is at the consolidated and reporting segment levels and reported in U.S. Dollars ($).
MaterialComparison of the three months ended December 31, 2023 and 2022
Net Revenue
Net revenue totaled $2.6 million in the three months ended December 31, 2023, a decrease of $3.8 million, or 59%, from the $6.4 million recorded in the three months ended December 31, 2022. The decrease is primarily attributable to the sale of the Bethard Business on February 24, 2023 and the wind down and eventual liquidation of the Argyll entities where revenue producing operations were ceased on December 8, 2022. The iGaming operations of Lucky Dino, Bethard and Argyll (before Bethard and Argyll were disposed of) were also impacted by worsening investment and market conditions and regulatory changes in the Finland and the UK from fiscal 2023, and the worsening investment and market conditions. The decrease in the iGaming segment revenue was $3.7 million, falling from $5.5 million to $1.8 million. Revenue in the EEG Games segment also decreased $0.1 million from $0.9 million to $0.8 million due to the timing of hardware installations.
Cost of Revenue
Cost of revenue totaled $0.7 million in the three months ended December 31, 2023, a decrease of $1.7 million, or 70%, from the $2.4 million recorded in the three months ended December 31, 2022. The decrease is primarily attributable to the previously mentioned disposals of the Bethard Business and the Argyll operating entities and the decrease in the iGaming operations of Lucky Dino in the EEG iGaming segment and includes corresponding EEG iGaming decreases in line itemswith revenue. The iGaming decreases include $1.0 million lower payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $0.2 million lower game provider expenses and $0.5 million lower other direct expenses related to the delivery of services.
Sales and Marketing
Sales and marketing expense totaled $0.7 million in our Statementthe three months ended December 31, 2023, a decrease of Operations$1.1 million, or 61%, compared to the $1.8 million recorded for the three months ended December 31, 2022. The decrease was primarily attributable to $1.1 million lower affiliate costs related to the EEG iGaming segment.
General and Administrative
General and administrative expense totaled $4.8 million for the three months ended December 31, 2023, a decrease of $2.8 million, or 37%, compared to the $7.6 million recorded for the three months ended December 31, 2022. The decrease was primarily attributable to decreases of $1.5 million in payroll costs, $0.8 million depreciation and amortization, and $0.3 million in information technology related costs from the EEG iGaming segment, decreases of $0.5 million in payroll costs and $0.1 million related to other general and administrative costs from the EEG Games segment, offset by a $0.4 million increase in other general and administrative costs in corporate expenses.
Asset Impairment Charges
At December 31, 2023, the Company concluded that impairment indicators existed considering that the Company delisted from Nasdaq, had management changes in the EEG iGaming segment and continued to see revenues decline in the EEG iGaming segment and that they were significantly down from levels seen in the previous year and in the previous quarters, and EEG Games was not performing at the level previously expected. This, the decline in the Company’s stock price and other factors were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. The Company recognized total asset impairment charges of $13.0 million, including $3.6 million of goodwill and $8.4 million of other intangible assets from the EEG iGaming segment and $1.0 million in of goodwill from the EEG Games. Further downturns in economic, regulatory and operating conditions could result in additional impairment in future periods.
During the three months ended December 31, 2022, the Company initiated a process to evaluate the strategic options for the EEG iGaming business and subsequent to the period end, the Company appointed a new CEO and a new CFO and on January 18, 2023 sold its EEG iGaming Spanish license. This and uncertainties caused by inflation and world instability were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. The Company recognized total goodwill asset impairment charges of $16.1 million, including asset impairment charges to the goodwill to the iGaming reporting unit of $14.5 million, which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1.6 million, which is part of the EEG Games segment.
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Other Income (expense)
Other income (expense), net decreased by $7.9 million from income of $7.4 million for the three months ended December 31, 2023 to an expense of $0.5 million for the three months ended December 31, 2023. The other expense for the three months ended December 31, 2023 resulted primarily from $0.5 million of expense from the recognition of the derivative liability related to the Series C Convertible Preferred Stock after the reclass to mezzanine equity caused by lack of authorized and unissued shares and $0.1 million other non-operating losses, offset by a $0.1 million gain from the fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $0.1 million for the September 2022 Warrants issued as part of the September 2022 Offering.
The other income (expense), net for the three months ended December 31, 2022 resulted primarily from $1.0 million of interest expense related to the Senior Convertible Note and $3.0 million for the change in the fair value of the contingent consideration due as part of the Bethard transaction from the prior year, offset by other income primarily made up of $8.3 million for the change in the fair value of the derivative liability on Senior Convertible Note due to its elimination on the exchange to Series C Convertible Preferred Stock, and $2.6 million from the reduction in fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $1.5 million for the September 2022 Warrants issued as part of the September 2022 Offering that decreased from the $3.8 million valued on issuance at September 30, 2022 to $2.3 million at December 31, 2022, a decrease of $1.0 million for the March 2022 Warrants from $1.2 million at June 30, 2022 to $0.2 million at December 31, 2022 and a decrease of $0.1 million in other warrants.
Comparison of the six months ended December 31, 2023 and 2022
Net Revenue
Net revenue totaled $5.3 million in the six months ended December 31, 2023, a decrease of $10.7 million, or 67%, from the $16.0 million recorded in the six months ended December 31, 2022. The decrease is primarily attributable to the sale of the Bethard Business on February 24, 2023 and the wind down and eventual liquidation of the Argyll entities where revenue producing operations were ceased on December 8, 2022. The iGaming operations of Lucky Dino, Bethard and Argyll (before Bethard and Argyll were disposed of) were also impacted by worsening investment and market conditions and regulatory changes in the Finland and the UK from fiscal 2023, and the worsening investment and market conditions. The decrease in the iGaming segment revenue was $10.3 million falling from $14.1 million to $3.8 million. Revenue in the EEG Games segment also decreased $0.4 million from $1.9 million to $1.5 million due to the disposal of EGL and the timing of hardware installations.
Cost of Revenue
Cost of revenue totaled $1.3 million in the six months ended December 31, 2023, a decrease of $4.8 million, or 79%, from the $6.1 million recorded in the six months ended December 31, 2022. The decrease is primarily attributable to the previously mentioned disposals of the Bethard Business and the Argyll operating entities and the decrease in the iGaming operations of Lucky Dino in the EEG iGaming segment and includes corresponding EEG iGaming decreases in line with revenue. The iGaming decreases include $3.2 million lower payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $0.5 million lower game provider expenses and $1.0 million lower other direct expenses related to the delivery of services. EEG Games also had a reduction in costs with $0.1 million lower hosting, hardware and equipment costs and other direct expenses.
Sales and Marketing
Sales and marketing expense totaled $1.6 million in the six months ended December 31, 2023, a decrease of $2.7 million, or 63%, compared to the $4.3 million recorded for the six months ended December 31, 2017 as compared2022. The decrease was primarily attributable to a $0.3 million reduction in marketing and $2.6 million lower affiliate costs related to the same period last year, are discussed below:EEG iGaming segment, offset by a $0.2 million increase in corporate expense driven by our service partners.
General and Administrative
Revenue
General and Expenses
We had no revenue from July 22, 2008 (inception) through December 31, 2017.
Our operating resultsadministrative expense totaled $11.0 million for the six months ended December 31, 2017, and the six months ended December 31, 2016 are summarized as follows.
Our operating expenses are classified into several categories:
· Directors Compensation
· Consulting Fees
· Professional Fees
· General and Administrative Expenses
Directors Compensation is comprised2023, a decrease of cash and stock fees paid$6.0 million, or 35%, compared to the Directors of the Company. These amounted to $124,067$17.0 million recorded for the six months ended December 31, 20172022. The decrease was primarily attributable to decreases of $2.7 million in payroll costs, $1.6 million depreciation and $46,250amortization, $0.9 million in information technology related costs and $0.3 million decrease related to other general and administrative cost from the EEG iGaming segment, decreases of $1.0 million in payroll costs and $0.2 million related to other general and administrative costs from the EEG Games segment, and $0.9 million decrease in share based compensation, $0.2 million decrease in payroll offset by $1.1 million increase related to the legal settlement with the former CEO and related legal costs, $0.4 million increase in other professional fees and $0.3 million increase in other general and administrative costs in corporate expenses.
Asset Impairment Charges
At December 31, 2023, the Company concluded that impairment indicators existed considering that the Company delisted from Nasdaq, had management changes in the EEG iGaming segment and continued to see revenues decline in the EEG iGaming segment and that they were significantly down from levels seen in the previous year and in the previous quarters and EEG Games was not performing at the level previously expected. This, the decline in the Company’s stock price and other factors were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. The Company recognized total asset impairment charges of $13.0 million, including $3.6 million of goodwill and $8.4 million of other intangible assets from the EEG iGaming segment and $1.0 million in of goodwill from the EEG Games. Further downturns in economic, regulatory and operating conditions could result in additional impairment in future periods.
During the six months ended December 31, 2022, the Company initiated a process to evaluate the strategic options for the EEG iGaming business and subsequent to the period end, the Company appointed a new CEO and a new CFO and on January 18, 2023 sold its EEG iGaming Spanish license. This and uncertainties caused by inflation and world instability were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. The Company recognized total goodwill asset impairment charges of $16.1 million, including asset impairment charges to the goodwill to the iGaming reporting unit of $14.5 million, which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1.6 million, which is part of the EEG Games segment.
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Other Income (expense)
Other income (expense), net decreased by $9.6 million from income of $9.3 million for the six months ended December 31, 2016. The increase2022 to an expense of $77,817 in Directors fees period over period is attributable primarily to the change in the Board members appointed during the year.
Consulting fees are comprised of cash and stock fees paid to Consultants to the Company. These amounted to $269,297$0.3 million for the six months ended December 31, 2017 and $236,0002023. The other expense for the six months ended December 31, 2016.2023 resulted primarily from $0.5 million of expense from the recognition of the derivative liability related to the Series C Convertible Preferred Stock after the reclass to mezzanine equity caused by lack of authorized and unissued shares and $0.1 million other non-operating losses, offset by a $0.3 million gain from the fair value of the warrant liability. The increasedriver of $33,297the change in Consulting fees overfair value of the prior period is attributed primarily to additional work being contracted out by the Company to third party consultants.
Professional Fees consist primarilywarrants was a decrease of our contracted accounting, legal and audit fees. These amounted to $59,745$0.3 million for the sixSeptember 2022 Warrants issued as part of the September 2022 Offering. This was offset by a $0.1 million other non-operating gains.
The other income (expense), net for the three months ended December 31, 20172022 results primarily from $2.0 million of interest expense related to the Senior Convertible Note and $28,347$2.9 million for the six months endedchange in the fair value of the contingent consideration due as part of the Bethard transaction from the prior year, offset by other income primarily made up of $8.6 million for the change in the fair value of the derivative liability on Senior Convertible Note due to its elimination on the exchange to Series C Convertible Preferred Stock, $5.0 million from the reduction in fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $3.0 million for the September 2022 Warrants issued as part of the September 2022 Offering that decreased from the $5.3 million valued on issuance at September 19, 2022 to $2.3 million at December 31, 2016. The increase2022, a decrease of $31,398 in professional fees period over period is attributable primarily to increases in accounting, legal and audit fees for preparation and review of our filings with the Securities & Exchange Commission (SEC) in the quarter.
General and Administrative Expenses refers to our salaries, occupancy costs, marketing costs, travel costs, office supplies, telephone expenses, bank charges, fees to process and file documents with the SEC, stock transfer fees, investors relations costs, corporate filing fees, and other administrative expenses. These amounted to $813,420$1.9 million for the six months endedMarch 2022 Warrants from $2.1 million at June 30, 2022 to $0.2 million at December 31, 20172022 and $35,445 for the six months ended December 31, 2016 respectively. a decrease of $0.1 million in other warrants.
Liquidity and Capital Resources
Liquidity and Going Concern
The increase of $777,975 in 2017 versus 2016 is attributable primarily to increased business development activities, and included the issuance of 300,000 shares of common stock in the amount of $55,000 for investor relations services and the granting of 521,500 options to employees and Directorsaccompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these unaudited condensed consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for stock based compensationa least one year from the date of $156,181.issuance of these unaudited condensed consolidated financial statements.
For the six months endingThe Company considered that it had an accumulated deficit of $203.3 million as of December 31, 2017 we incurred total operating expenses2023 and resulting net lossthat it has had a history of $1,266,529recurring losses from operations and $1,266,905 respectively,recurring negative cash flows from operations as it has prepared to grow its esports business through acquisition and for the six months endingnew venture opportunities. At December 31, 2016 we incurred total operating expenses2023, the Company had $1.1 million of available cash on-hand and resulting net losscurrent liabilities of $346,042 and $388,718 respectively.
Capital Resources and Liquidity
For the six months ended December 31, 2017,$7.8 million. Net cash used by operating activities was $718,276. Cash used byin operating activities for the six months ended December 31, 20162023 was $81,205. $4.1 million, which includes a net loss of $21.8 million.
The changeCompany also considered its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits.
In determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes, depending on market conditions, may be available to fund its operations and drive future growth, which includes:
| (i) | approximately $1.4 million of net proceeds from the Secured Note with the holder of the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock; | |
| (ii) | the potential expected proceeds from future offerings, where the amount of the offering has not yet been determined; and | |
| (iii) | the ability to raise additional financing from other sources. |
These above plans are likely to require the Company to place reliance on several factors, including favorable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.
The amount of available cash on hand on March 26, 2024, one business day preceding this filing, was approximately $1,300,000.
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The Company believes that its current level of cash is not sufficient to fund its operations and obligations without additional financing. Although the Company has financing available, as described above, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the Company and the esports and iGaming industry. The combination of these conditions was determined to raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of the unaudited condensed consolidated financial statements included in this report.
Our material cash requirements include sponsorships with professional teams and an online wagering and services agreement. The Company is expected to incur $0.5 million in sponsorship obligations with various sports teams, with $0.3 million being incurred within the next 12 months. The Company is also required to pay $1.25 million and issue 1 share of common stock annually under the Bally’s Corporation wagering and services agreement that extends for 10 years from July 1, 2021 and the Company has minimum annual commitments of approximately $0.4 million under the online wagering and services agreement with Delasport Limited that has an initial term of 18 months with subsequent annual renewals. Further, the Company is required to pay $0.05 million monthly for the first 9 months of the calendar year related to the legal settlement with the former CEO, until the remaining $0.45 million outstanding, as of December 31, 2023, is paid in full.
Net cash used byin operating activities was primarily due to the increase in the net loss during the period.
Cash used by investing activities duringfor the six months ended December 31, 20172023 was $80,995. Cash$4.1 million, which includes a net loss of $21.8 million, offset by net non-cash adjustments of $15.8 million and changes in operating assets and liabilities of $2.0 million.
Net cash used byin investing activities for the six months ended December 31, 2016 was $Nil. The change in cash
used in investing activities is due2023 totaled less than $0.1 million principally related to the cash used to purchase computer software and equipment during six months ended December 31, 2017.of intangible assets.
Net cash provided by financing activities for the six months ended December 31, 2017 was $680,018. Cash provided2023 totaled $5.6 million, which included $5.2 million from use of the ATM facility, $1.0 million in net proceeds from the August 15, 2023 offering of common stock and the exercise of the related warrants, offset by financing activities$0.3 million used to redeem part of the Series D Preferred Stock and $0.3 million for the payments of the dividends on the 10% Series A cumulative redeemable convertible preferred stock.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies to the unaudited condensed consolidated financial statements.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our unaudited condensed consolidated financial statements and the accompanying notes to unaudited condensed consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, including, with respect to the three months ended December 31, 2023, related regulatory and government mandates and restrictions. Actual results may differ from these estimates.
Our critical accounting estimates are those that are both material to the presentation of our financial condition and results of operations and require management’s most subjective and complex judgments. Other than as described below, there have been no material changes or updates to our critical accounting estimates during the six months ended December 31, 2016 was $39,008. 2023 as compared to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Derivative financial instruments
The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in cash provided by financing activitiesclassification between equity and liabilities (assets) is due primarilyrequired. The Company can make an accounting policy election on the allocation order and choose the policy that management determines is most favorable. The Company elected to reclassify outstanding instruments based on allocating the increaseunissued shares to contracts with the latest inception date resulting in cash received from the issuancecontracts with the earliest inception date being recognized as liabilities first.
The Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of shares duringthose contracts qualify as derivatives. The result of this accounting treatment is that the six-monthfair value of the embedded derivative is recorded at fair value each reporting period ended December 31, 2017.and recorded as a liability in the balance sheet. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.
At December 31, 2017 we had $426,857In circumstances where the embedded conversion option in cash, compareda convertible instrument is required to $5,725be 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 December 31, 2016.the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument. The Company records the fair value of the remaining embedded derivative at each balance sheet date and records the change in the fair value of the remaining embedded derivative as other income or expense in the consolidated statements of operations.
The cost to launch our wagering systemsfair value of the derivative liability is determined using the Monte-Carlo method and commence operations is estimated to be in approximately $2,000,000 over the next six months. In addition to the $8,000,000 purchase price, the Company will also need approximately $5,000,000 to refurbish and renovate the Grand Princess casino plus $6,000,000 to $8,000,000 to purchase equipmentCompany’s estimates for the casinodiscount rate, risk-free rate, remaining term of the conversion features and to provide working capital duringcredit and non-performance risk. The valuations are derived from techniques which utilize inputs, certain of which are significant and unobservable, that result in classification of the start-up phase following its opening. Our current cash holdings will not satisfy our capital requirements and we will require additional financing to pursue our planned business activities. We arederivative liability as Level 3 fair value measurements in the process of seeking equity financing to fund our operations over the next 12 months. If we are unsuccessful in raising additional equity capital we will then have to seek additional funds through debt financing, which would be highly difficult for a new development stage company to secure and, which may not even be available. However, if such financing were available, we would likely have to pay additional costs associated with high risk loans and be subject to an above market interest rate. At such time these funds are required, management would evaluate the terms of available debt financing and determine whether our business could sustain operations and growth and manage the debt load. If we cannot raise additional capital we would be required to cease operations. As a result, investors in our common stock may lose all of their investment.unaudited condensed consolidated financial statements.
Our auditor’s report on our June 30, 2017 financial statements expresses an opinion that substantial doubt exists as to whether we can continue as an ongoing business.
We believe that if sufficient capital is available, we will generate revenue within twelve months of raising the capital.
Other than the foregoing, we do not know of any trends that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Off Balance Sheet ArrangementArrangements
The company is dependent upon the sale of its common shares to obtain the funding necessary to carry its business plan.None.
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Other than the above described situation the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.As a “smaller reporting company” (as defined in Exchange Act Rule 12b-2), we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
An evaluation was carried outEvaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our management, including our PrincipalChief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report on Form 10-Q.report. For the reasons set forth below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2023. Disclosure controls and procedures areinclude, without limitation, controls and procedures designed with the objective of ensuringto ensure that information required to be disclosed by us in ourthe reports filedthat we file or submit under the Securities Exchange Act of 1934, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time periodperiods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executiveprincipal executive and Financial Officer,principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation,
Previously identified material weakness
During fiscal 2023, our managementChief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not operating effectively at a reasonable assurance level. The material weaknesses identified during management’s assessment included, but were not limited to, (a) not performing an ongoing and/or separate formal evaluation to determine whether the components of internal control are present and functioning within the period under audit; (b) not having sufficient period-end financial reporting controls in place as it relates to segregation of duties, reviews of certain completed or nonrecurring transactions, accounting for income taxes, and certain procedures for preparing the financial statements and disclosures; and (c) not having sufficient controls in place as it relates to information technology (“IT”) controls and that the IT technology controls were not formally evaluated to determine operating effectiveness, including the evaluation of system organization controls and related complementary user entity controls.
Remediation Plans and Actions
During the six months ended December 31, 2017,2023, and for fiscal 2024, we continue to work on implementing remediation initiatives in response to the previously identified material weakness, including, but not limited to, (a) revising the risk assessment to consider the significant changes in business composition and operations which occurred during the year ending June 30, 2023; (b) developing plans and templates for executing the design, documentation, and implementation of internal controls; (c) conducting training for process and control owners about the system of internal control and Sarbanes-Oxley (“SOX”) requirements and control design and execution best practices; (d) engaging and experienced income tax consultant to assist management; (e) reinforcing accountability and retaining required supporting control documentation, including the evaluation and implementation of a more controlled repository for retaining evidence; (f) implementing reporting tools and procedures for the monitoring of SOX compliance throughout the organization; (g) performing detailed analysis of segregation of duties to minimize duty conflicts where possible as well as properly mitigating risks of any unavoidable conflicts; and (h) performing detailed assessment and evaluation of information technology general controls to ensure that proper controls are designed and implemented including the evaluation of third-party system and organization control reports.
While we believe the Company’s remediation efforts to-date have improved and will continue to improve our disclosure controls and procedures, were effective.remediation of the material weakness will require validation and testing of the operating effectiveness of disclosure of internal controls over a sustained period of financial reporting cycles. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine additional measures are necessary to address control deficiencies or determine that it is necessary to modify the remediation plan described above. Management cannot provide assurance as to when the Company will remediate such weaknesses, nor can management be certain of whether additional actions will be required or the costs of any such actions.
There have been no changesOur remediation efforts and activities are ongoing and are subject to continued management review supported by ongoing design and testing. Notwithstanding the material weaknesses, our management has concluded that the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.
Changes in internal control over financial reporting
Other than our ongoing remediation efforts with respect to our disclosure controls and procedures, which extend to our internal control over financial reporting, that occurredthere were no changes during our last fiscal quarterthe three months ended December 31, 2023 that materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting during this interim reporting period and until a thorough evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).
Inherent limitation on the effectiveness of internal control
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 7, 2023, the Company entered into a confidential settlement agreement and general release (the “Legal Settlement Agreement”) with Grant Johnson, the former Chairman of the board of directors and Chief Executive Officer of the Company, with respect to all disputes and pending litigation between the Company and Mr. Johnson. Pursuant to the Legal Settlement Agreement, the parties have agreed to settle and resolve any and all disputes between the parties, including without limitation, disputes arising out of or relating to the following litigation:
| (i) | A complaint filed on December 23, 2022 by Mr. Johnson against the Company in the United States District Court for the Southern District of New York; | |
| (ii) | an amended complaint filed on February 28, 2023 by Mr. Johnson against the Company; and | |
| (iii) | a counterclaim filed on May 24, 2023 by the Company against Mr. Johnson (together with (i) and (ii) above, the “Actions”). |
Pursuant to the Legal Settlement Agreement, Mr. Johnson and the Company settled the Actions and provided a general release of all claims, whether or not raised in the pending litigation, and included mutual non-disparagement agreements. No party admitted any liability by entering into the Legal Settlement Agreement. Pursuant to the Legal Settlement Agreement, the Company has agreed to make an aggregate payment of $500,000 in cash to Mr. Johnson (which among includes attorneys’ fees and costs), comprised of an initial payment of $50,000 beginning approximately thirty (30) days after the signing of the Legal Settlement Agreement, with subsequent payments of $50,000 due on each subsequent thirtieth (30th) day of each month thereafter until fully paid. The Registrantcase regarding the above Actions and settlement is captioned Grant Johnson v. Esports Entertainment Group, Inc. 1:22-cv-10861 (SDNY).
On March 31, 2022, the Company filed a statement of claim against Metaverse Partners for breach of contract, fraud and defamation. The Company seeks damages in an amount to be determined at the upcoming hearing, but not less than $50,000 plus interest at the statutory rate, and an order directing the defendant to discontinue their extortion and defamation. Subsequently, on May 17, 2022, Metaverse Partners filed counterclaims in arbitration against the Company and former CEO for breach of contract, fraud and defamation claiming damages of not less than $5,000,000. The Company and Metaverse Partners have agreed to an arbitration hearing to take place in June 2024 to resolve any potential disputes pursuant to previous dealings between the companies. At this time we are unable to reasonably estimate a potential liability, if any, and expect to vigorously defend on this matter.
The Company at times may be involved in litigation relating to claims arising from its operations in the normal course of business. The Company is currently not involved in any litigation.litigation that it believes could have a material adverse effect on our financial condition or results of operations. Other than as discussed above, 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 company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1a.1A. Risk Factors
We areAs a smaller“smaller reporting company ascompany” (as defined by Rule 12b-2 of the Securitiesin Exchange Act of 1934 andRule 12b-2), we are not required to provide the information underrequired by this item.Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NoneDuring the six months ended December 31, 2023, and subsequently through March 26, 2023, the day preceding this filing, we sold the following shares of unregistered common stock on the date and for the consideration shown to the identified individuals pursuant to Section 4(a)(2) of the Securities Act or Section 3(a)(9), as applicable, which shares are restricted shares as defined in the Securities Act. The purchasers or recipients of our securities in these transactions were accredited investors, as defined in Regulation D.
| Date | Purchaser/Recipient | Security Type | Number of Securities | Consideration | ||||
| July 1, 2023 – December 31, 2023 | Holder of Series C Convertible Preferred Stock | Common Stock | 526,503 | Conversions of Series C Convertible Preferred Stock for shares of common stock | ||||
| August 15, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 25 | Settlement of $1,000 in Registration Delay Fees under the August 2023 Settlement Agreement | ||||
| October 6, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 25 | Settlement of $500 in Registration Delay Fees under the October 2023 Settlement Agreement | ||||
| November 3, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 200 | Settlement of $4,000 in Registration Delay Fees under the October 2023 Settlement Agreement | ||||
| November 10, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 65 | Settlement of $1,000 in Registration Delay Fees under the October 2023 Settlement Agreement | ||||
| November 17, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 91 | Settlement of $1,000 in Registration Delay Fees under the October 2023 Settlement Agreement | ||||
| November 24, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 103 | Settlement of $1,000 in Registration Delay Fees under the October 2023 Settlement Agreement | ||||
| December 1, 2023 | Holder of Series D Convertible Preferred Stock | Common Stock | 143 | Settlement of $1,000 in Registration Delay Fees under the October 2023 Settlement Agreement | ||||
| January 5, 2024 | Member of management | Preferred Stock (Series E) | 100 | $1,000 |
Item 3. Defaults Upon Senior Securities
NoneOn December 8, 2023, the Company announced that its Board of Directors temporarily suspended the Company’s monthly cash dividend on its 10% Series A Cumulative Redeemable Convertible Preferred Stock, commencing with the December 2023 dividend. As of the date of this Quarterly Report on Form 10-Q, an aggregate of $66,876 in dividends had accrued.
Item 4. Mine Safety Disclosure
[Not Applicable]Applicable.
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Item 5. Other Information
NoneDuring the second quarter of 2024, none of the Company’s officers or directors adopted or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Item 6. Exhibits
Exhibits.
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
SIGNATURES
In accordance with Section 13 or 15(a)Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this Reportreport to be signed on its behalf by the undersigned, thereuntothere unto duly authorized on the 14th day of March, 2018.authorized.
ESPORTS ENTERTAINMENT GROUP, INC. | ||
| Date: March 27, 2024 | By:
| /s/ Alex Igelman |
| Alex Igelman | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
In accordance with 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:
| Date: March 27, 2024 | By: | /s/ Michael Villani | |
Michael Villani | |||
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| (Principal |
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