Notes
to Unaudited Condensed Consolidated Financial Statements
Note
1 – Nature of Operations
Esports
Entertainment Group, Inc. (the “Company” or “EEG”) was formed in the state of Nevada on July 22, 2008 under the
name Virtual Closet, Inc., before changing its name to DK Sinopharma, Inc. on June 6, 2010 and then to, VGambling, Inc. on August 12,
2014. On or about April 24, 2017, VGambling, Inc. changed its name to Esports Entertainment Group, Inc.
The
Company is a diversified operator of iGaming, traditional sports betting and esports businesses with a global footprint. The
Company’s strategy is to build and acquire iGaming and traditional sports betting platforms and use them to grow the esports
business whereby customers have access to game centers, online tournaments and player-versus-player wagering. On July 31, 2020, the
Company commenced revenue generating operations with the acquisition of LHE Enterprises Limited, a holding company for Argyll
Entertainment and subsidiaries (“Argyll”), an online sportsbook and casino operator. In November 2022, the Company wound
down its Argyll operations, and on March 27, 2023 the Swiss courts declared the Argyll Entertainment subsidiary bankrupt and this
entity was deconsolidated (Note 18) at that time. On January 21, 2021, the Company completed its acquisition of Phoenix Games
Network Limited, the holding company for the Esports Gaming League (“EGL”), and provider of event management and team
services, including live and online events and tournaments. On March 1, 2021, the Company completed the acquisition of the operating
assets and specified liabilities that comprise the online gaming operations of Lucky Dino Gaming Limited, a company registered in
Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered in Estonia (collectively referred to as “Lucky
Dino”). On June 1, 2021, the Company acquired ggCircuit, LLC (“GGC”) and Helix Holdings, LLC
(“Helix”). GGC is a business-to-business software company that provides cloud-based management for gaming centers, a
tournament platform and integrated wallet and point-of-sale solutions. Helix owned and operated esports centers that were disposed
of on June 10, 2022, as the Company exited the physical sites. From the Helix acquisition, the Company retained its core esports
programming and gaming infrastructure and remains focused on its core esports offerings. On July 13, 2021, the Company completed its
acquisition of Bethard Group Limited the online casino and sports book business operating under the brand of Bethard
(“Bethard”). Bethard’s business-to-consumer operations provided sportsbook, casino, live casino and fantasy sport
betting services. On January 18, 2023, the Company sold its Spanish iGaming operations, including
its Spanish iGaming license (Note 18) and on February 24,
2023, the Company completed the divestiture of Prozone Limited, containing the Bethard online casino and sportsbook business back to
Gameday Group Plc (Note 18).
Note
2 – Summary of Significant Accounting Policies
Basis
of presentation and principles of consolidation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the
rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation
S-X. Pursuant to the rules and regulations of the SEC, certain information and footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been omitted. The unaudited condensed consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. Interim results are not necessarily indicative of the results for the full fiscal year. The unaudited
condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual
period ended June 30, 2022. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
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”), as approved by the board of directors (the “Board”). The Company’s shareholders approved the Reverse Stock Split at the 2022
Annual Meeting on January 26, 2023. 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 Split and are presented as if the Reverse Stock Split had occurred at the beginning of the earliest period
presented.
The
Reverse Stock Split did not change the terms of the common stock. Outstanding warrants, equity-based awards and other outstanding
equity rights were proportionately adjusted by dividing the shares of common stock underlying the securities by 100 and multiplying
the exercise/conversion price, as the case may be, by 100. The Reverse Stock Split also applied to common stock issuable upon the
conversion of the Company’s Senior Convertible Note, dated February 22, 2022 (the “Senior Convertible Note”), with
the Conversion Price, as defined in the Senior Convertible Note, being subject to adjustment under the terms of the Senior
Convertible Note and the Amendment and Waiver Agreement (the “Amendment”) (Note 18). The Company’s 10%
outstanding Series A Cumulative Redeemable Convertible Preferred Stock (“10% Series A Cumulative Redeemable Convertible
Preferred Stock”) was not affected by the Reverse Stock Split.
Reportable
Segments
The
Company operates two complementary business segments:
EEG
iGaming
EEG
iGaming includes the Company’s iGaming casino and sportsbook product offerings. Currently, the Company operates the business to
consumer segment primarily in Europe.
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, (2) online tournaments
(through our EGL tournament platform), and (3) player-vs-player wagering. 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 reviewed by the chief
operating decision maker to assess performance and make decisions about resource allocations.
Use
of Estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include the valuation and accounting for equity awards related to warrants and stock-based compensation, determination
of fair value for derivative instruments, the valuation and recoverability of goodwill and intangible assets, the accounting for business
combinations, including estimating contingent consideration and allocating purchase price, estimating fair value of intangible assets,
as well as the estimates related to accruals and contingencies.
Liquidity
and Going Concern
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue
as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date
these unaudited condensed consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities
and commitments in the normal course of business.
The
Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one
year from the date of issuance of these unaudited condensed consolidated financial statements included in this report.
One
such factor considered by the Company was its Senior Convertible Note, on which the Company had not maintained compliance with
certain debt covenants and was in default under the terms of the Senior Convertible Note and that had a March 31, 2023 outstanding
balance of $15,910,000.
The Senior Convertible Note outstanding was further reduced to $15,230,024 on April 19, 2023, when the Company redeemed $679,976 of
the Senior Convertible Note using funds that were on deposit in favor of the Holder from the Sale of the Bethard Business. Subsequent
to this, on April 19, 2023, the Company entered into the Note to Preferred Stock Exchange Agreement (Note 11 and Note 20) with the
Holder to convert the remaining $15,230,024 in
aggregate principal amount of the Senior Convertible Note outstanding into the new Series C Convertible Preferred Stock and the
Company closed and completed the exchange on April 28, 2023 (Note 11 and Note 20) and extinguishing the Senior Convertible
Note and eliminating the related derivative liability that had a fair value of 1,963,933 as of March 31, 2023.
In
addition to the above, the Company considered that it had an accumulated deficit of $180,635,674
as of March 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 March 31, 2023, the Company had total current assets of $5,448,355
and total current liabilities of $28,968,837.
Net cash used in operating activities for the nine months ended March 31, 2023 was $11,526,050
which includes a net loss of $31,495,248.
The Company 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. As of March 31, 2023, the Company had $1,875,758
of available cash on-hand and net current liabilities
of $23,520,482.
The amount of available cash on hand on May 19, 2023, one business day preceding this filing, was $382,037. On May 22, 2023, the
Company closed the issuance of a new (the “Series D Preferred Stock”), that includes the issuance of (i) 4,300 shares of
Series D Preferred Stock for a price of $1,000 per share, (ii) common warrants to purchase 1,433,333 shares of our Common Stock at a
price of $1.96 per share (the “Common Warrants”), and (iii) preferred warrants to purchase 4,300 shares of our Series D Preferred
Stock at a price of $1,000 per share (the “Preferred Warrants”), for a total gross proceeds to the Company of $4,300,000
before deducting underwriting discounts and commissions. Refer to Note 20 for additional discussion of the Series D Preferred Stock.
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 include (i) the potential expected proceeds from future offerings, where the amount of the offering has not yet been
determined, and (ii) 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.
Nasdaq
Continued Listing Rules or Standards
On
April 11, 2022, the Company received a deficiency notification letter from the Listing Qualifications Staff of Nasdaq (“Nasdaq”)
indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common
stock had closed below $1.00 per share for the previous thirty consecutive business days (the “Bid Price Rule”).
On
June 7, 2022, the Company received a further letter from Nasdaq notifying the Company that for the last 30 consecutive business days,
the Company’s minimum Market Value of Listed Securities (“MVLS”) was below the minimum of $35,000,000 required for
continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(b)(2) (the “MVLS Rule”).
On
October 11, 2022, the Company received a third letter from Nasdaq notifying the Company that the Company’s common stock will be
delisted, and the Company’s Common Stock warrants traded under the symbols GMBLW and GMBLZ and the Company’s 10% Series A
cumulative redeemable convertible preferred stock traded under symbol GMBLP will no longer qualify for listing, and in that regard trading
of the Company’s common stock, Common Stock warrants and 10% Series A cumulative redeemable convertible preferred stock will be
suspended. The Company requested an appeal with the Nasdaq Hearings Panel (the “Panel”) and the hearing was held on November
17, 2022.
On
November 30, 2022, the Company received a determination from the Panel granting the Company’s request for the continued listing
of its common stock on the Capital Market tier of Nasdaq, subject to the Company evidencing compliance with the Bid Price Rule, and 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), respectively, on or before February 7, 2023 (which, as described below, was subsequently extended on February 8, 2023)
and March 31, 2023, respectively, and adhering to certain other conditions and requirements described below.
On
December 6, 2022, the Company received a fourth letter from Nasdaq notifying the Company that it has not regained compliance with the
MVLS Rule. This was addressed in the November 17, 2022, hearing before the Panel where the Company presented on its plan to comply with
the MVLS Rule or alternative criteria and was granted continued listing subject to the criteria noted above.
On
February 8, 2023, the Company received notice from the Panel updating its remaining conditions as follows:
| |
1. |
On
February 20, 2023, the Company shall provide a written update to the Panel regarding the progress of its debt-to-equity conversion
plan and its impact on the Company’s equity; |
| |
2. |
On
March 7, 2023, the Company shall have demonstrated compliance with the Bid Price Rule, by evidencing a closing bid price of $1.00
or more per share for a minimum of ten consecutive trading sessions; and |
| |
3. |
On
March 31, 2023, the Company shall demonstrate compliance with the shareholder equity requirement, as outlined in the Equity Rule. |
The
Company provided an update on its progress to the Panel on February 20, 2023 and on March 9, 2023, the Company received a letter
from the Panel indicating that the Company has regained compliance with the Bid Price Rule.
On
March 30, 2023, the Company submitted a written submission requesting an extension on the requirement to demonstrate compliance with
the Equity Rule and on April 6, 2023, the Panel granted an extension through April 30, 2023.
On May 1, 2023, the Company announced it has met the
minimum Equity Rule. On May 11, 2023, May 12, 2023 and May 18, 2023, the Company made submissions to the Panel and is awaiting their decision.
There can be no assurances, however, that the Company will be able to regain
compliance. Any failure to regain and maintain compliance with
the continued listing requirements of Nasdaq could result in delisting of our common stock from Nasdaq and negatively impact our company
and holders of our common stock, including by reducing the willingness of investors to hold our common stock because of the resulting
decreased price, liquidity and trading of our common stock, limited availability of price quotations and reduced news and analyst coverage.
Delisting may adversely impact the perception of our financial condition, cause reputational harm with investors, our employees and parties
conducting business with us and limit our access to debt and equity financing.
Cash
and Cash Equivalents
Cash
includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months
or less. As of March 31, 2023 and June 30, 2022, the Company did not have any financial instruments classified as cash equivalents. At
times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
Accounts are insured by the FDIC up to $250,000 per financial institution. There have been no losses recognized on cash balances held
at these financial institutions.
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.
Accounts
Receivable
Accounts
receivable is comprised of the amounts billed to customers principally for esports events and team management services. Accounts receivable
is recorded net of an allowance for credit losses. The Company performs ongoing credit evaluations for its customers and determines the
amount of the allowance for credit losses upon considering such factors as historical losses, known disputes or collectability issues,
the age of a receivable balance as well as current economic conditions. Bad debt expense is recorded to maintain the allowance for credit
losses at an appropriate level and changes in the allowance for credit losses are included in general and administrative expense in the
unaudited condensed consolidated statements of operations. At March 31, 2023 and June 30, 2022, the allowance for credit losses was not
material to the unaudited condensed consolidated financial statements of the Company.
Receivables
Reserved for Users
User
deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with
a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded
as a receivable reserved for users on the unaudited condensed consolidated balance sheets. An allowance for doubtful accounts may be
established if it is determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance
for doubtful accounts is recognized as a loss within general and administrative expenses in the unaudited condensed consolidated statements
of operations. The allowance for doubtful accounts is not material to the unaudited condensed consolidated financial statements.
Equipment
Equipment
is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related
to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing
the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease
term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:
Schedule
of Estimated Useful Life of Assets
| Computer
Equipment |
Up
to 5 years |
| Furniture
and fixtures |
Up
to 7 years |
| Leasehold
improvements |
Shorter
of the remaining lease term or estimated life of the improvement |
The
estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period.
The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the
resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the unaudited condensed consolidated statements
of operations.
Business
Combinations
The
Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities
assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase
price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust
the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the
acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at
the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition
date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Goodwill
Goodwill
represents the excess of fair value of consideration paid for an acquired entity over the fair value of the assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized but rather it is tested for impairment at the reporting unit level on an
annual basis on April 1 for each fiscal year, or more often if events or changes in circumstances indicate that more likely than not
the carrying amount of the asset may not be recoverable. A reporting unit represents an operating segment or a component of an operating
segment. In accordance with ASC Topic 350 Intangibles –- Goodwill and Other, as of March 31, 2023 the Company’s business
is classified into four reporting units: iGaming Malta (Lucky Dino), iGaming Argyll (UK), EGL, and GGC. The Helix business was sold as
of June 10, 2022 and was previously its own reporting unit. The Bethard business was sold as of February 22, 2023, and was previously
part of the iGaming Malta reporting unit with Lucky Dino. Argyll Entertainment was declared bankrupt by the Swiss Court and deconsolidated on March 27, 2023 and was previously
part of the iGaming Argyll (UK) reporting unit.
In
testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step
0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its
carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry
and market considerations, cost factors, entity-specific financial performance and other events, including changes in the Company’s
management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting
unit is less than its carrying value, the Company then performs a quantitative goodwill impairment analysis by comparing the carrying
amount to the fair value of the reporting unit. If it is determined that the fair value is less than its carrying amount, the excess
of the goodwill carrying amount over the implied fair value is recognized as an impairment loss in accordance with Accounting Standards
Update (“ASU”) No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The
Company utilizes a discounted cash flow analysis, referred to as an income approach, and uses internal and market multiples, to assess
reasonableness of assumptions, to determine the estimated fair value of the reporting units. For the income approach, significant judgments
and assumptions including anticipated revenue growth rates, discount rates, gross margins, operating expenses, working capital needs
and capital expenditures are inherent in the fair value estimates, which are based on the Company’s operating and capital forecasts.
As a result, actual results may differ from the estimates utilized in the income approach. The use of alternate judgments and/or assumptions
could result in a fair value that differs from the Company’s estimate and could result in the recognition of additional impairment
charges in the financial statements. As a test for reasonableness, the Company also considers the combined fair values of the Company’s
reporting units to a reasonable market capitalization of the Company. The Company may elect not to perform the qualitative assessment
for some or all reporting units and perform a quantitative impairment test.
During
the three months ended December 31, 2022, the Company initiated a process to evaluate the strategic options for the EEG iGaming
business, including exploring a sale of EEG iGaming assets due to increasing regulatory burdens and competition. In December 2022,
the Company closed down its licensed remote gambling operation in the UK market and on December 9, 2022 surrendered its UK license,
as part of the winding down of the Argyll UK iGaming operations. Further, in early January 2023 the Company appointed a new Chief
Executive Officer and a new interim Chief Financial Officer. As part of these changes the Company has been focused on reducing costs
in its businesses as it has seen the EEG iGaming revenues decline significantly from levels seen in the previous year and previous
quarters. These items and uncertainties caused by inflation and certain world events were determined to be a triggering event as
of December 31, 2022, and the long-lived assets of the Company were quantitatively tested for impairment. At December 31, 2022, the
Company recognized total goodwill asset impairment charges of $16,135,000
in the unaudited condensed consolidated statements of operations, with asset impairment charges to the goodwill to the iGaming
reporting unit of $14,500,000,
which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1,635,000,
which is part of the EEG Games segment (see Note 6 for additional information regarding the goodwill impairment, and the effects on
the Company’s business, financial condition, and results of operations).
During
the three months ended March 31, 2023, the Company sold its Bethard business reducing goodwill by $2,153,419.
No
goodwill impairment charges were recognized in the three months ended March 31, 2023. Further downturns in economic,
regulatory and operating conditions could result in additional goodwill impairment in future periods.
During
the three and nine months ended March 31, 2022, the Company recognized goodwill impairment charges of $23,119,755, reducing the goodwill
of the Helix and EGL and GGC reporting units.
Intangible
assets
Intangible
assets with determinable lives consist of player relationships, developed technology and software, tradenames and gaming licenses. Intangible
assets with determinable lives are amortized on a straight-line basis over their estimated useful lives of 5 years for player relationships
and developed technology and software, 10 years for tradenames and 2 years for gaming licenses. The Company also capitalizes internal-use
software costs such as external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the
Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s
internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software
project and continues during the application development stage. Capitalization ceases when the software has been tested and is ready
for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life cycle
are expensed as incurred.
Impairment
of Long-Lived Assets
Equipment
and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and circumstances
indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of future undiscounted
cash flows are determined through estimated disposition date of the asset. To the extent that estimated future undiscounted net cash
flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the
carrying value of such asset and its fair value, considering external market participant assumptions. An estimation of future cash flows
requires significant judgment as the Company makes assumptions about future results and market conditions. Since the determination of
future cash flows is an estimate of future performance, there may be impairments recognized in future periods in the event future cash
flows do not meet expectations.
During
the three and nine months ended March 31, 2023, the Company determined that there was no impairment on its long-lived assets.
During
the three and nine months ended March 31, 2021, the Company recognized $13,484,122 for the impairment of the EGL and Helix tradenames
and developed technology and software and the impairment of the GGC tradename and developed technology (see Note 6), $608,626 for the
impairment of the EGL computer equipment and Helix game centers computer equipment, leasehold improvements and furniture and equipment
(see Note 5), and $1,416,807 for the impairment of operating lease right-of-use assets for the Helix building rentals (see Note 10),
in asset impairment charges in the unaudited condensed consolidated statements of operations.
Liabilities
to Customers
The
Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at
a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings
and player losses. The Company maintains a restricted cash balance and player deposits held by third parties, recorded as receivables
reserved for users on the unaudited condensed consolidated balance sheets, at levels equal to or exceeding its liabilities to customers.
Jackpot
Provision
The
jackpot provision liability is an estimate of the amount due to players for progressive jackpot winnings. The jackpot liability is accrued
monthly based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming
casino machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be
paid out randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount
that varies across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot
and therefore the winning of a jackpot affects other players on the network of participating iGaming casino machines.
Leases
The
Company leases office space through an operating lease agreement that was a result of its acquisition of Lucky Dino. The Company
previously leased office space, acquired through the Argyll acquisition, that wound down operations during November 2022 and game
center space, other property and equipment, acquired through the Helix acquisition, that was sold as part of the Helix sale
transaction on June 10, 2022, where the purchaser assumed the lease liabilities. The Company measures an operating lease
right-of-use (“ROU”) asset and liability, as well as a finance lease asset and liability, based on the present value of
the future minimum lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and
non-lease components of the agreement, as well as any variable rent payments that depend on an index, initially measured using the
index at the lease commencement date.
The
minimum payments under operating leases are recognized on a straight-line basis over the lease term in the unaudited condensed consolidated
statements of operations. Operating lease expenses related to variable lease payments are recognized as operating expenses in a manner
consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases
with a term of less than 12 months (“short-term leases”) are not recognized on the unaudited condensed consolidated balance
sheets. The rent expense for short-term leases is recognized on a straight-line basis over the lease term and included in general and
administrative expense on the unaudited condensed consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in the unaudited condensed consolidated financial statements
or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S.
GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses
the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the
weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized,
a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated
by considering taxable income in carryback years, existing taxable temporary differences, prudent and feasible tax planning strategies
and estimated future taxable profits.
The
Company accounts for uncertainty in income taxes recognized in the unaudited condensed consolidated financial statements by applying
a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the
likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not
to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the unaudited condensed consolidated
financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of
being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized
tax benefits, that are considered appropriate, as well as the related net interest and penalties.
Derivative
Instruments
The
Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of those
contracts qualify as derivatives (Note 11). The result of this accounting treatment is that the fair value of the embedded derivative
is recorded at fair value each reporting period and recorded as a liability (Note 17) in the unaudited condensed consolidated balance
sheets. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the unaudited condensed
consolidated statements of operations as other income or expense (Note 17).
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other
embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments
are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed
at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification
are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are
classified in the balance sheet as current or non-current to correspond with its host instrument. The Company records the fair value
of the remaining embedded derivative 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 unaudited condensed consolidated statements of operations.
Fair
Value Measurements
Fair
value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable
inputs. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous
market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The
following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and
the third is considered unobservable:
| Level
1: |
Unadjusted
quoted prices in active markets for identical assets or liabilities. |
| Level
2: |
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities. |
| Level
3: |
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Certain
assets and liabilities are required to be recorded at fair value on a recurring basis. The Company adjusts contingent consideration resulting
from a business combination, derivative financial instruments and warrant liabilities, to fair value on a recurring basis. Certain long-lived
assets may be periodically required to be measured at fair value on a nonrecurring basis, including long-lived assets that are impaired.
The fair values for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users,
other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have
been determined to approximate their carrying amounts due to the short maturities of these instruments. The fair values of the Senior
Convertible Note and lease liabilities approximate their carrying value based on current interest and discount rates.
Earnings
Per Share
Basic
income (loss) per share is calculated using the two-class method. Under the two-class method, basic income (loss) is computed by dividing
net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period excluding
the effects of any potentially dilutive securities. Diluted income (loss) per share is computed similar to basic income (loss) per share,
except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential
common shares had been issued if such additional common shares were dilutive. Diluted income (loss) per share includes the effect of
potential common shares, such as the Company’s preferred stock, notes, warrants and stock options, to the extent the effect is
dilutive. As the Company had net losses for all the periods presented, basic and diluted loss per share are the same, and additional
potential common shares have been excluded, as their effect would be anti-dilutive.
The
following securities were excluded from weighted average diluted common shares outstanding for the three and nine months ended March
31, 2023 and 2022 because their inclusion would have been antidilutive:
Schedule
of Weighted Average Diluted Shares Outstanding
| | |
| | |
| |
| | |
As of March 31, | |
| | |
2023 | | |
2022 | |
| Common stock options | |
| 32,324 | | |
| 13,594 | |
| Common stock warrants | |
| 562,006 | | |
| 203,506 | |
| Common stock issuable upon conversion of senior convertible note | |
| 72,875 | | |
| 160,315 | |
| 10% Series A cumulative redeemable convertible preferred stock | |
| 835,950 | | |
| 835,950 | |
| Total | |
| 1,503,155 | | |
| 1,213,365 | |
Comprehensive
Loss
Comprehensive
loss consists of the net loss for the year and foreign currency translation adjustments related to the effect of foreign exchange on
the value of assets and liabilities. The net translation loss for the year is included in the unaudited condensed consolidated statements
of comprehensive loss.
Stock-based
Compensation
The
Company periodically issues stock-based compensation to employees, directors, contractors and consultants for services rendered. Stock-based
compensation granted to employees and non-employee directors includes grants of restricted stock and employee stock options that are
measured and recognized based on their fair values determined on the grant date. The award of restricted stock and stock options, which
are generally time vested, are measured at the grant date fair value and charged to earnings on a straight-line basis over the vesting
period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several
variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price
of the stock option as compared to the fair market value of the Common Stock on the grant date, and the estimated volatility of the Common
Stock over the term of the equity award. The fair value of restricted stock is determined by the closing market price of the Company’s
Common Stock on the date of grant. The compensation cost for service-based stock options granted to consultants is measured at the grant
date, based on the fair value of the award, and is expensed on a straight-line basis over the requisite service period (the vesting period
of the award).
Revenue
and Cost Recognition
The
revenue of the Company is currently generated from online casino and sports betting (referred to herein as “EEG iGaming revenue”),
and esports revenue (referred to herein as “EEG Games Revenue”), consisting of the sales of subscriptions to access cloud-based
software used by independent operators of game centers, from consulting and data analytic services provided to game operators (“EEG
Games Esports and Other Revenue”), and from the provision of esports event and team management services (“EEG Games Esports
Event Management and Team Service Revenue”). The Company recognizes revenue in accordance with Accounting Standards Codification
(“ASC”) Topic 606 – Revenue from Contracts with Customers (“ASC 606”) when control of a product
or service is transferred to a customer. The amount of revenue is measured at the transaction price, or the amount of consideration that
the Company expects to receive in exchange for transferring a promised good or service. The transaction price includes estimates of variable
consideration to the extent that it is probable that a significant reversal of revenue recognized will not occur.
Revenue
generating activities of the Company may be subject to value added tax (“VAT”) in certain jurisdictions in which the Company
operates. Revenue is presented net of VAT in the unaudited condensed consolidated statements of operations. VAT receivables and VAT payables
are included in other receivables and accounts payable and accrued expenses, respectively on the unaudited condensed consolidated balance
sheets. Sales to customers do not have significant financing components or payment terms greater than 12 months.
EEG
iGaming Revenue
EEG
iGaming revenue is derived from the placement of bets by end-users, also referred to as customers, through online gaming sites. The transaction
price in an iGaming contract, or Net Gaming Revenue (“NGR”), is the difference between gaming wins and losses, as further
reduced by any nondiscretionary incentives awarded to the customer. Gaming transactions involve four performance obligations, namely
the settlement of each individual bet, the honoring of discretionary incentives available to the customer through loyalty reward programs,
the award of free spin and deposit match bonuses, and the winning of a casino jackpot. The total amount wagered by a customer is commonly
referred to as the win or Gross Gaming Revenue (“GGR”). The GGR is allocated to each performance obligation using the relative
standalone selling price (“SSP”) determined for iGaming contracts.
Revenue
recognition for individual wagers is recognized when the gaming occurs, as such gaming activities are settled immediately. The revenue
allocated to incentives, such as loyalty points offered through a rewards program, is deferred and recognized as revenue when the loyalty
points are redeemed. Revenue allocated to free spins and deposit matches, referred to as bonuses, are recognized at the time that they
are wagered. Jackpots, other than the incremental progressive jackpots, are recognized at the time they are won by customers. The Company
applies a practical expedient by accounting for its performance obligations on a portfolio basis as iGaming contracts have similar characteristics.
The Company expects the application of the revenue recognition guidance to a portfolio of iGaming contracts will not materially differ
from the application of the revenue recognition guidance on an individual contract basis.
The
Company evaluates bets that its users place on websites owned by third party brands in order to determine whether it may recognize revenue
on a gross basis, when acting as the principal provider of the wagering service, or on a net basis, when acting as an intermediary or
agent. The principal in a wagering service involving a third party is generally the entity that controls the wagering service such that
it has a right to the services being performed by the third party and can direct the third party in delivery of the service to its users.
The Company records revenue on a gross basis as it has determined it is the principal in transactions involving third parties, such as
revenue sharing arrangements, as it controls the wagering service being offered to the users such that it has a right to the service
performed by third parties and can further direct third parties in providing services to users. The Company further records expenses
related to its revenue sharing arrangements and other third-party iGaming expenses within costs of revenue in the unaudited condensed
consolidated statements of operations.
EEG
Games Revenue
EEG
Games Esports and Other Revenue
The
Company derives revenue from sales of subscriptions to access cloud-based software used by independent operators of game centers, as
well as from consulting and data analytic services provided to game operators. The revenue derived from the sale of subscription services
to cloud-based software used by game centers is recognized over the term of the contract, which generally can range from one month to
one year in duration, beginning on the date the customer is provided access to the Company’s hosted software platform. The revenue
from the operation of game centers by the Company is recognized when a customer purchased time to use the esports gaming equipment at
each center. The revenue from time purchased by a customer and from the sale of concessions is recognized at the point of sale.
The
Company further provides consultation services related to the use of hardware and equipment for gaming operations together with implementation
services that include sourcing, training, planning, and installation of technology. The Company considers services related to hardware
and equipment, implementation, and any design of user interface for the customer as separate performance obligations. Revenue for hardware
equipment and design of custom user interface is recognized at a point in time upon delivery and completion. Implementation services
are recognized over time, as services are performed.
The
Company also has contracts with software companies to provide talent data analytics and related esports services, which include analytic
development, other related services to develop software and applications for tournaments, and to provide data support, data gathering,
gameplay analysis and reporting which includes talent analytics and related esports services, including analytic development, data analysis,
survey design, interview services, player dossiers, and expert services. The Company recognizes revenue from its data analytic services
over the life of the contract utilizing the output method, using a direct measurement of the value to the customer of the goods or services
transferred to date relative to the remaining goods or services promised under the contact. The Company elected to use the right to invoice
practical expedient and recognize revenue based on the amounts invoiced. The payment terms and conditions vary by contract; however,
the Company’s terms generally require payment within 30 to 60 days from the invoice date.
The
Company has partnership contracts with strategic customers within the esports industry. The partnership contracts are negotiated agreements,
which contain both licensing arrangements of intellectual property and development services, including fixed and variable components.
The variability of revenue is driven by development plans and results of sales as specified by the partnership contract, which are known
as of an invoice date. Partnership contracts generally do not have terms that extend beyond one year. The Company considers licensing
arrangements and development services as separate performance obligations. Licensing revenues are recorded over time. Revenue associated
with development is recognized over time, as labor is incurred.
Contracts
that contain multiple performance obligations require an allocation of the transaction price to each distinct performance obligation
based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely
to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines
standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is
not observable through past transactions, the Company estimates the standalone selling price taking into account the Company’s
overall pricing objectives, considering market conditions and other factors, including the value of the deliverables in the contracts,
customer demographics, geographic locations, and the number and types of users within the contracts.
EEG
Games Esports Event Management and Team Service Revenue
The
Company derives revenue from esports event management and team services. Esports event management services support the creation, production
and delivery of an esports event by providing event staffing, gaming consoles, and other technical goods and services for a customer
event that is either hosted live in person or online. The revenue generated from esports event management services is generally earned
on a fixed fee basis per event.
The
esports team services offerings of the Company include recruitment and management services offered to sports clubs to facilitate their
entrance into esports tournament competition. Team services provided to a customer may include player recruitment, administration of
player contracts, processing of tournament admission, providing logistical arrangements, as well as providing ongoing support to the
team during the event. Team services are earned on a fixed fee basis per tournament.
Esports
event management and team services revenues are recognized over the term of the event or the relevant contractual term for services as
this method best depicts the transfer of control to the customer. The Company recognizes revenue for event management services based
on the number of days completed for the event relative to the total days of the event. Revenue from team management services is recognized
from inception of the contract through the end of the tournament using the number of days completed relative to the total number of days
in the contract term. Revenue collected in advance of the event management or team services is recorded as deferred revenue on the unaudited
condensed consolidated balance sheets. The Company may also enter into profit sharing arrangements which are determined based on the
net revenue earned by the customer for an event in addition to a fixed fee. Revenue recognition for profit sharing arrangements is recognized
at the time the revenue from the event is determined, which is generally at the conclusion of the event. An event or team services contract
may further require the Company to distribute payments to event or tournament attendees resulting in the recognition of a processing
fee by the Company. The Company does not recognize revenue from the processing of payments until the conclusion of the event or tournament.
The
Company evaluates the service being provided under an esports event and team services contract to determine whether it should recognize
revenue on a gross basis as the principal provider of the service, or on a net basis in a manner similar to that of an agent. The Company
has determined that for esports event and team services contracts that allow for the assignment of individual tasks to a third-party
contractor, the Company acts as the principal provider of the service being offered to the customer as it remains primarily responsible
for fulfilling the contractual promise to the customer. In profit sharing arrangements, such as events that allow for the Company to
share in the revenue earned by a customer for an event, the Company has determined it acts in the role of an agent to the customer as
the event creator. The Company has also determined it acts as an agent when it collects a processing fee for performing the service of
distributing prize money on behalf of its customers to event or tournament winners.
Contract
Liabilities
Liabilities
to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities.
The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing
a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage
or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price
in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play
or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue
from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users
is based on the estimated fair value of the loyalty point incentive available to the user.
The
Company also records payments received in advance of performance under an esports gaming services contract or event management or team
services contract as deferred revenue.
Recently
Adopted Accounting Pronouncements
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40). The standard clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity
should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains
equity classified after modification or exchange as an exchange of the original instrument for a new instrument. The guidance is effective
for the fiscal years beginning after December 15, 2021. The Company adopted this standard as of July 1, 2022. The adoption of this guidance
did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In
June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion
accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that
are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular
convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business
entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using
the fully retrospective or modified retrospective method. The Company adopted this standard as of July 1, 2022. The adoption of this
guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
Recently
Issued Accounting Standards
In
October 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 ASC Topic 606. The guidance is effective for fiscal years beginning after December 15, 2022 and
early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its unaudited condensed consolidated
financial statements and it does not expect the guidance to have a material effect on its unaudited condensed consolidated financial
statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held
at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new
standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most
other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees,
loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking
information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted,
although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends
the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU
2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB
issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842): Effective Dates, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years for smaller reporting companies. The Company is currently evaluating the impact that the adoption
of this guidance will have on its unaudited condensed consolidated financial statements.
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the
specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have
a material impact on the Company’s financial position or results of operations upon adoption.
Note
3 – Other Receivables
The
components of other receivables are as follows:
Schedule
of Other Receivables
| | |
| | |
| |
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Indirect taxes | |
| 13,270 | | |
| 306,040 | |
| Other | |
| 371,418 | | |
| 66,243 | |
| Other receivables | |
$ | 384,688 | | |
$ | 372,283 | |
Note
4 – Prepaid Expenses and Other Current Assets
The
components of prepaid expenses and other current assets are as follows:
Schedule
of Prepaid Expenses and other Current Assets
| | |
| | |
| |
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Prepaid marketing costs | |
$ | 51,988 | | |
$ | 298,300 | |
| Prepaid insurance | |
| 127,493 | | |
| 230,404 | |
| Prepaid gaming costs | |
| 482,568 | | |
| 575,113 | |
| Other | |
| 307,126 | | |
| 439,236 | |
| Prepaid expenses and other current assets | |
$ | 969,175 | | |
$ | 1,543,053 | |
Note
5 – Equipment
The
components of equipment are as follows:
Schedule
of Equipment
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Computer equipment | |
$ | 40,313 | | |
$ | 35,911 | |
| Furniture and equipment | |
| 35,772 | | |
| 34,526 | |
| Equipment, at cost | |
| 76,085 | | |
| 70,437 | |
| Accumulated depreciation and finance lease amortization | |
| (46,010 | ) | |
| (26,512 | ) |
| Equipment, net | |
$ | 30,075 | | |
$ | 43,925 | |
Depreciation
expense and finance lease amortization expense was $19,194 and $50,244 for the three months ended March 31, 2023 and 2022 and $55,506
and $109,852 for the nine months ended March 31, 2023 and 2022, respectively.
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, 2022 | |
| 19,660,481 | | |
| 2,614,832 | | |
| 22,275,313 | |
| | |
| | | |
| | | |
| | |
| Impairment charges | |
| (14,500,000 | ) | |
| (1,635,000 | ) | |
| (16,135,000 | ) |
| Disposal of Bethard Business | |
| (2,153,419 | ) | |
| - | | |
| (2,153,419 | ) |
| Foreign currency translation | |
| 487,581 | | |
| - | | |
| 487,581 | |
| Goodwill, balance as of March 31, 2023 | |
$ | 3,494,643 | | |
$ | 979,832 | | |
$ | 4,474,475 | |
During
the three months ended March 31, 2023 the Company recognized loss on disposal of businesses that included $2,116,882 of goodwill for
the Bethard Business.
Previously,
during the three months ended December 31, 2022, the Company concluded that goodwill impairment indicators existed considering that
the EEG iGaming revenues had declined significantly from levels seen in the previous year and in the previous quarters and EEG Games
was not performing at the level of previous expected. This and uncertainties caused by inflation and certain world events were
determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment.
The
Company performed its interim 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, 2022, the Company determined that all its asset groups
were recoverable under the undiscounted cash flow recoverability test. There were no asset impairment charges for long-lived assets, including
definite-lived intangible assets, for the three and nine months ended March 31, 2023.
In
accordance with ASC 350, at December 31, 2022, for goodwill, the Company performed an interim 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 interim impairment test
performed indicated that the carrying value of the iGaming and GGC reporting units exceeded their estimated fair values determined
by the Company. Based on the results of the goodwill impairment testing procedures as of 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
for the three and six months ended December 31, 2022 in asset impairment charges in the unaudited condensed consolidated statements
of operations. There was no
additional asset impairment charges recognized in the three months ended March 31, 2023.
In
the nine months ended March 31, 2022, the Company had concluded, at that time, that goodwill impairment indicators existed based on
the significant volatility in the Company’s stock price. As of March 31, 2022, the Company determined that in-person
attendance at its Helix and customer game centers is not expected to attain levels previously forecasted and that under the current
liquidity and investment constraints it is less likely to reach the previously forecasted revenue and profits for EGL and GGC. These
factors and the continuing impacts of the COVID-19 pandemic, uncertainties caused by inflation and certain world events, resulted
in the Company evaluating its goodwill and long-lived assets, including intangible assets, for impairment as of March 31,
2022.
As
of March 31, 2022, the Company performed an interim impairment test on its long-lived assets, including its definite-lived intangible
assets using an undiscounted cash flow analysis to determine if the cash flows expected to be generated by the asset groups over the
estimated remaining useful life of the primary assets were sufficient to recover the carrying value of the asset groups, which were determined
to be at the reporting unit level. As of March 31, 2022, the Company determined its EGL, Helix, and GGC asset groups failed the undiscounted
cash flow recoverability test. Accordingly, the Company estimated the fair value of its individual long-lived assets to determine if
any asset impairment charges were present. The Company’s estimation of the fair value of the definite-lived intangible assets included
the use of discounted cash flow and cost analyses, reflecting estimates of future revenues, royalty rates, cash flows, discount rates,
development costs and obsolescence. Based on these analyses, the Company concluded the fair values of certain intangible assets were
lower than their current carrying values, and at March 31, 2022, the Company recognized impairment of $2,561,231 and $10,824,348 for
the EGL, GGC and Helix tradenames and developed technology and software, respectively, and $98,543 for the EGL player relationships,
totaling $13,484,122 in asset impairment charges in the unaudited condensed consolidated statements of operations for the three and nine
months ended March 31, 2022. The table below reflects the adjusted gross carrying amounts for these intangible assets.
In
accordance with ASC 350, for goodwill, after considering the asset impairment charges to the asset groups, the Company performed an interim
impairment test as of March 31, 2022 that compared the estimated fair value of each reporting unit to their respective carrying values.
The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flows analysis. The results of the
impairment tests performed indicated that the carrying value of the EGL, GGC and Helix reporting units exceeded their estimated fair
values determined by the Company. Based on the results of the March 31, 2022 interim goodwill impairment testing procedures, the Company
recognized impairments of goodwill totaling $23,119,755 as of March 31, 2022 in asset impairment charges in the unaudited condensed consolidated
statements of operations for the three months ended March 31, 2022.
In
total, as described in detail above, the Company recorded $36,603,877 of goodwill and intangible asset impairment charges for the three
and nine months ended March 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 goodwill and 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
| | |
March 31, 2023 | | |
June 30, 2022 | |
| | |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | | |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
| Tradename | |
$ | 2,792,893 | | |
$ | (492,501 | ) | |
$ | 2,300,392 | | |
$ | 5,835,512 | | |
$ | (578,960 | ) | |
$ | 5,256,552 | |
| Developed technology and software | |
| 9,216,263 | | |
| (3,236,298 | ) | |
| 5,979,965 | | |
| 10,109,366 | | |
| (1,935,018 | ) | |
| 8,174,348 | |
| Gaming licenses | |
| 720,975 | | |
| (720,975 | ) | |
| - | | |
| 1,317,567 | | |
| (774,760 | ) | |
| 542,807 | |
| Player relationships | |
| 9,976,373 | | |
| (4,097,935 | ) | |
| 5,878,438 | | |
| 20,920,029 | | |
| (4,757,813 | ) | |
| 16,162,216 | |
| Internal-use software | |
| 226,274 | | |
| (14,643 | ) | |
| 211,631 | | |
| 225,086 | | |
| (14,520 | ) | |
| 210,566 | |
| Total | |
$ | 22,932,778 | | |
$ | (8,562,352 | ) | |
$ | 14,370,426 | | |
$ | 38,407,560 | | |
$ | (8,060,653 | ) | |
$ | 30,346,489 | |
Amortization
expense was $1,600,399 and $3,074,979 for the three months ended March 31, 2023 and 2022 and $5,352,961 and $9,445,332 for the nine months
ended March 31, 2023 and 2022, respectively. The amortization for EEG iGaming segment was $1,351,833 and $2,276,353 and for the EEG Games
segment was $248,566 and $910,000, for the three months ended March 31, 2023 and 2022, respectively. The amortization for EEG iGaming
segment was $4,607,244 and $6,825,332, and for the EEG Games segment was $745,717 and $2,730,000, for the nine months ended March 31,
2023 and 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 2023 | |
$ | 1,113,392 | |
| Fiscal 2024 | |
| 4,318,596 | |
| Fiscal 2025 | |
| 4,318,596 | |
| Fiscal 2026 | |
| 3,164,773 | |
| Fiscal 2027 | |
| 376,446 | |
| Thereafter | |
| 1,078,623 | |
| Total | |
$ | 14,370,426 | |
Note
7 – Other Non-Current Assets
The
components of other non-current assets are as follows:
Components
of Other Non-Current Assets
| | |
March 31, 2023 | | |
June 30, 2022 | |
| iGaming regulatory deposits | |
$ | - | | |
$ | 1,715,053 | |
| iGaming deposit with service providers | |
| - | | |
| 261,825 | |
| Rent deposit | |
| - | | |
| 80,520 | |
| Other | |
| 4,844 | | |
| 4,778 | |
| Other non-current assets | |
$ | 4,844 | | |
$ | 2,062,176 | |
Note
8 – Accounts Payable and Accrued Expenses
The
components of accounts payable and accrued expenses are as follows:
Components
of Accounts Payable and Accrued Expenses
| | |
March 31, 2022 | | |
June 30, 2022 | |
| Trade accounts payable | |
$ | 4,653,773 | | |
$ | 5,069,616 | |
| Accrued marketing | |
| 1,240,370 | | |
| 2,388,987 | |
| Accrued payroll and benefits | |
| 1,041,088 | | |
| 833,322 | |
| Accrued gaming liabilities | |
| 208,128 | | |
| 446,626 | |
| Accrued professional fees | |
| 359,856 | | |
| 555,967 | |
| Accrued jackpot liabilities | |
| 327,524 | | |
| 297,970 | |
| Accrued interest | |
| 56,743 | | |
| - | |
| Accrued other liabilities | |
| 1,007,588 | | |
| 2,751,564 | |
| Total | |
$ | 8,895,070 | | |
$ | 12,344,052 | |
Note
9 – Related Party Transactions
The
Company’s current Chief Executive Officer owns less than 5%
of Oddin.gg, a vendor of the Company. For the three and nine months ended March 31, 2023, the Company incurred charges of $0
and $72,107,
respectively, and for the three months nine months ended March 31, 2022, the Company incurred charges of $22,073
and $52,791,
respectively, related to the vendor. The Company owed $47,754
and $3,359
to the vendor as of March 31, 2023 and June 30,
2022, respectively.
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 months and nine months ended March 31,
2023, respectively, and $1,200 and $3,600 for the three months and nine months ended March 31, 2022, respectively. As of March 31, 2023
and 2022, there were no amounts payable to the former Chief Executive Officer. The former Chief Executive Officer was terminated for
cause 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.
The
Company retained the services of its former Chief Financial Officer and Chief Operating Officer 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 and Chief Operating Officer of NZD 36,995
($23,169
translated using the exchange rate in effect at March 31, 2023) under the consultancy agreement and $500
per month under the employment agreement. The former Chief Financial Officer and Chief Operating Officer resigned from his roles on
December 31, 2022. He will continue on in his role as a Director of the Company. As of March 31, 2023 and 2022, related to these
expenses there were no
amounts payable to the former Chief Financial Officer and Chief Operating Officer.
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 $4,255 and $1,857
for the three months ended March 31, 2023 and 2022, respectively, in accordance with these agreements. The Company incurred general and
administrative expenses of $10,776 and $22,139 for nine months ended March 31, 2023 and 2022, respectively, in accordance with these
agreements As of March 31, 2023 and 2022, there were $11,549 and $0 payable to Contact Advisory Services Ltd, respectively.
The
Company had retained services from a former member of its Board who remained as an advisor to the Company with an annual fee of $60,000.
The member was previously retained through a consultancy agreement dated August 1, 2020 and an employment agreement dated June 15, 2020.
The consultancy agreement required payments of £18,000 ($22,225 translated using the exchange rate in effect at March 31, 2023)
per month to the firm that is controlled by this member of the Board. The individual also received payroll of $500 per month through
the employment agreement as Chief Operating Officer. The member resigned from the Board and from his role as Chief Operating
Officer on May 31, 2022 and the consultancy agreement and the employment agreement were terminated.
During
the year ended June 30, 2021, the Company engaged in transactions with Tilt, LLC a game center operator controlled by the head of GGC.
For the three months ended March 31, 2022 the Company had net sales to Tilt, LLC in the amount of $22,977 for game center equipment,
and amounts paid to Tilt, LLC of $11,200 for equipment leased, $4,478 for services and $2,631 for cryptocurrency mining. For the nine
months ended March 31, 2022 the Company had net sales to Tilt, LLC in the amount of $222,599 for game center equipment, and amounts paid
to Tilt, LLC of $33,600 for equipment leased, $16,589 for services and $19,214 for cryptocurrency mining. The individual was no longer
employed by the Company during the nine months ended March 31, 2023.
Note
10 – Leases
The
Company leases office and building space and equipment under operating lease agreements. The Company previously leased computer equipment
under finance lease agreements that was disposed of in June 2022. The Company’s lease agreements have terms not exceeding five
years. Certain leases contain options to extend that are assessed by management at the commencement of the lease and are included in
the lease term if the Company is reasonably certain of exercising.
In
July 2021, the Company commenced a lease for office space of approximately 284 square meters in Saint Julians, Malta over a 3-year lease
term. The lease has an annual expense of €83,000 ($89,032 translated using the exchange rate in effect at March 31, 2023), increasing
4% annually. At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend. In October
2021, the Company commenced a lease for building space of approximately 3,200 square feet at the University of California in Los Angeles
over a 5-year lease term (the “UCLA Lease”). The lease has an annual expense of $17,500, increasing 3% annually. At lease
inception, the Company determined it was not reasonably certain to exercise any of the options to extend. On January 26, 2023, the Company
agreed to terminate the UCLA lease and there are no further obligations going forward. The Company recognized a gain of $799,901 in gain
on termination of lease in the unaudited condensed consolidated statement of operations.
The
consolidated balance sheet allocation of assets and liabilities related to operating and finance leases is as follows:
Schedule
of Assets and Liabilities Related to Operating Lease
| | |
Condensed Consolidated Balance Sheet Caption | |
March 31, 2023 (unaudited) | | |
June 30, 2022 | |
| Assets: | |
| |
| | | |
| | |
| Operating lease assets | |
Operating lease right-of-use assets | |
$ | 106,386 | | |
$ | 164,288 | |
| Total lease assets | |
| |
$ | 106,386 | | |
$ | 164,288 | |
| Liabilities: | |
| |
| | | |
| | |
| Current: | |
| |
| | | |
| | |
| Operating lease liabilities | |
Operating lease liability –- current | |
$ | 99,188 | | |
$ | 364,269 | |
| | |
| |
| | | |
| | |
| Long-term: | |
| |
| | | |
| | |
| Operating lease liabilities | |
Operating lease liability –- non-current | |
| 18,073 | | |
| 669,286 | |
| Total lease liabilities | |
| |
$ | 117,261 | | |
$ | 1,033,555 | |
The
operating lease expense for the three and nine months ended March 31, 2023 was $33,443 and $69,597, respectively. The operating lease
expense for the three and nine months ended March 31, 2022 was $162,733 and $458,949, respectively. The finance lease expense for the
three and nine months ended March 31, 2022 was $12,918 and $36,100, respectively. The rent expense for short-term leases was not material
to the unaudited condensed consolidated financial statements.
Weighted
average remaining lease terms and discount rates follow:
Schedule
of Weighted Average Remaining Lease Terms and Discount Rates
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Weighted Average Remaining Lease Term (Years): | |
| | | |
| | |
| Operating leases | |
| 1.50 | | |
| 3.87 | |
| | |
| | | |
| | |
| Weighted Average Discount Rate: | |
| | | |
| | |
| Operating leases | |
| 8.00 | % | |
| 8.00 | % |
The
future minimum lease payments at March 31, 2023 follows:
Schedule
of Future Minimum Lease Payments
| | |
Operating Lease | |
| Remainder of fiscal 2023 | |
$ | 24,094 | |
| Fiscal 2024 | |
| 100,126 | |
| Total lease payments | |
| 124,220 | |
| Less: imputed interest | |
| (6,959 | ) |
| Present value of lease liabilities | |
$ | 117,261 | |
Note
11 – Long-Term Debt
Notes
payable and other long-term debt
The
components of notes payable and other long-term debt follows:
Schedule
of Notes Payable and Other Long-term Debt
| | |
Maturity | | |
Interest Rate as of March 31, 2023 | | |
March 31, 2023 | | |
June 30, 2022 | |
| Notes payable | |
| April 30, 2023 | | |
| 3.49 | % | |
$ | 25,723 | | |
$ | 139,538 | |
| Total | |
| | | |
| | | |
| 25,723 | | |
| 139,538 | |
| Less current portion of notes payable and long-term debt | |
| | | |
| | | |
| (25,723 | ) | |
| (139,538 | ) |
| Notes payable and other long-term debt | |
| | | |
| | | |
$ | - | | |
$ | - | |
In
connection with its acquisition of Argyll on July 31, 2020, the Company assumed a note payable of £250,000 ($327,390 translated
using the exchange rate in effect at the acquisition date). The term loan was issued on April 30, 2020 and has a maturity of 3 years,
bears interest at 3.49% per annum over the Bank of England base rate, and is secured by the assets and equity of Argyll. The monthly
principal and interest payments on the note payable commenced in June 2021 and continue through May 2023. The principal balance of the
notes payable on March 31, 2023 was £20,833 ($25,723 translated using the exchange rate in effect at March 31, 2023). Interest
expense on the note payable was $324 and $1,945 for the three and nine months ended March 31, 2023, respectively. Interest expense on
the note payable was $1,791 and $6,448 for the three and nine months ended March 31, 2022, respectively.
The
maturities of long-term debt are as follows:
Schedule of Maturities of Long-term Debt
| | |
| | |
| Fiscal 2023 | |
$ | 25,723 | |
| Total | |
$ | 25,723 | |
| Long term debt | |
$ | 25,723 | |
Senior
Convertible Note
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 (Note 17) 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
as recorded in the unaudited condensed consolidated balance sheet as of December 31, 2022. On December 19, 2022, as part of the
Registered Direct Offering (Note 16) 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 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 March 31, 2023 (there were no additional Exchanges through April
28, 2023, the date of the Senior Convertible Note was converted to Series C Convertible Preferred Stock (Note 20)), 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 the Amendment, the Holder exchanged $19,261,583
in aggregate principal amount of the Senior Convertible Note for an aggregate of 2,242,143
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.
Subsequent
to March 31, 2023, on April 19, 2023, the Company redeemed $679,976 of the $15,910,000 previously outstanding on the Senior Convertible
Note following the Exchanges and the impact of the Amendment and Exchanges, using funds from the Sale of the Bethard Business deposited
in a bank account in favor of the Holder. On April 19, 2023, using these funds, the Company paid $750,000 to the Holder, to redeem the
$679,976, and settle the related redemption premium of $51,450 and accrued interest of $168,574, with the additional $150,000 owed being
paid on May 1, 2023 (Note 20).
Further,
on April 28, 2023, the Company closed on an agreement with the Holder to convert the remaining outstanding $15,230,024 into the Series
C Convertible Preferred Stock. The material terms and provisions of the Series C Convertible Preferred Stock are described in Note 20.
The
conversion of the Senior Convertible Note into the Series C Convertible Preferred Stock extinguished the Senior Convertible Note and
the remaining related debt liability outstanding of $15,230,024 and further eliminated the related derivative liability. As of March
31, 2023, the derivative liability had a $1,963,933 fair value ($1,862,000,000 approximate cash liability, as of March 31, 2023, calculated under
the terms of the Senior Convertible Note).
See
Note 20, Subsequent Events for further discussion related to the Series C Convertible Preferred Stock.
Prior
to the extinguishment of the debt, the interest rate on the Senior Convertible Note was 8.0% per annum (consistent with the Old Senior
Convertible Note), and from and after the occurrence and during the continuance of any Event of Default (as defined in the Senior Convertible
Note), the interest rate would automatically be increased to 12.0% per annum. As further described below, the Company was not in compliance
with certain debt covenants under the Senior Convertible Note as of September 30, 2021 or subsequently, until the conversion to the
Series C Preferred Stock. The Company had been accruing interest expense at a rate of 12% beginning March 31, 2022, the date it was initially
not in compliance with certain debt covenants, as compared to using the set rate of 8.0%, and has recorded an additional $56,743 and
$1,075,069 in interest expense in the unaudited condensed consolidated statement of operations for the three and nine months ended March
31, 2023, respectively. There was $56,743 of default interest recorded in accounts payable and accrued expenses in the unaudited condensed
consolidated balance sheet as of March 31, 2023.
The
maturity date of the Senior Convertible Note was June 2, 2023, and was subject to extension in certain circumstances, including bankruptcy
and outstanding events of default. The Company could redeem the Senior Convertible Note, subject to certain conditions, at a price equal
to 100% of the outstanding principal balance outstanding, together with accrued and unpaid interest and unpaid late charges thereon.
The
Company had not maintained compliance with certain debt covenants and was in default under the terms of the Senior Convertible Note at
March 31, 2023 through the date of the conversion to the Series C Preferred Stock.
The
Senior Convertible Note was convertible, at the option of the Holder, into shares of the Company’s Common Stock at a conversion
price of $1,750.00 per share. The Senior Convertible Note was subject to a most favored nations provision and standard adjustments in
the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If the Company entered
into any agreement to issue (or issues) any variable rate securities, the Holder had the additional right to substitute such variable
price (or formula) for the conversion price.
If
an Event of Default had occurred under the Senior Convertible Note, in addition to the default interest rate discussed above, the
Holder may have elected to alternatively convert the Senior Convertible Note at the Alternate Conversion Price (as defined in the
Senior Convertible Note). In connection with an Event of Default, the Holder may have required the Company to redeem in cash any or
all of the Senior Convertible Note. The redemption price would have equaled the
outstanding principal of the Senior Convertible to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or
an amount equal to market value of the shares of the Company’s Common Stock underlying the Senior Convertible Note, as
determined in accordance with the Senior Convertible Note, if greater. The
Holder did not have the right to convert any portion of a Senior Convertible Note, to the extent that, after giving effect to such
conversion, the Holder (together with certain related parties) would beneficially own in excess of 4.99% of the shares of the
Company’s Common Stock outstanding immediately after giving effect to such conversion. The Holder could have from time to time
increased this limit to 9.99%, provided that any such increase would not have been effective until the 61st day after delivery of a
notice to the Company of such increase.
If
an Event of Default occurred, the Holder of the Senior Convertible Note had the right to alternate conversion (“Alternate Conversion”)
and may have elected to convert the Senior Convertible Note in cash due upon such an acceleration of the applicable principal, at a price
(“Alternate Conversion Price”) equal to the greater of the Conversion Floor Price of $218.32 or a price derived from the
volume weighted average price of the Company’s Common Stock at the time of Alternate Conversion. If the Alternate Conversion were
to include the Conversion Floor Price of $218.32 as the Alternate Conversion Price, the Company would be required to settle in cash any
difference between the market value of the shares subject to the Alternate Conversion using the floor price and the market value of the
shares using the Alternate Conversion Price, excluding any reference to the floor, based on the formula as stipulated in the Senior Convertible
Note.
The
Senior Convertible Note included a provision that should the Company be in both breach of its debt covenants and its price per
common share trade below the conversion floor price of $218.32 (the “Conversion Floor Price”), the Holder may have elected
the Alternate Conversion option that includes a make-whole provision payable to the Holder in cash. At March 31, 2022 and through April 28, 2023, the date of the Senior Convertible Note was converted to
Series C Convertible Preferred Stock (Note 20), the Company was in breach of its debt covenants and the price per share of its Common Stock had declined
below the Conversion Floor Price. As a result, the make whole provision in the Senior Convertible Note was determined to represent an
obligation of the Company under the terms of the Senior Convertible Note. At March 31, 2023 and June 30, 2022, the Company estimates
it would have been required to issue up to 72,875 and 160,315 shares of Common Stock under the Alternate Conversion make whole provision
of the Senior Convertible Note, respectively. At March 31, 2023, the Company also estimated the fair value of the derivative liability,
which gives effect to the cash amount payable to the Holder under the Alternate Conversion make-whole provisions of the Senior Convertible
Note, to be $1,963,933. While the Company records a derivative liability at each reporting period for the amount contingently payable to the
Holder under the Alternate Conversion make-whole provision, a strict application of the formula in the Senior Convertible Note indicates
the cash liability to the Holder may be materially higher than the derivative liability. A calculation of the cash liability due to the
Holder under the Alternate Conversion make-whole provision of the Senior Convertible Note indicated a cash liability of approximately
$1,862,000,000 at March 31, 2023. The derivative liability amount recognized by the Company for its obligation to the Holder under the
Alternate Conversion make-whole provision of the Senior Convertible Note is subject to material fluctuation at each reporting date. The
output of the Monte Carlo model that is used to estimate the fair value of the derivative liability will fluctuate based on the Company’s
share price, market capitalization, estimated enterprise value, and the Company’s estimate of credit and non-performance risk.
Due to the conversion to the Series C Preferred Stock the derivative liability has been eliminated subsequent to March 31, 2023.
Until April 28, 2023, and the conversion of the Senior Convertible Note into the Series C Preferred Stock, under the Senior Convertible
Note, and consistent with the Old Senior Convertible Note, the Company was subject to certain customary affirmative and negative covenants
regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends,
distributions or redemptions, and the transfer of assets, among other matters. The Company was also subject to certain financial debt
covenants relating to available cash, minimum annual revenues, ratio of debt to market capitalization and minimum cash flow.
At
March 31, 2023, prior to the conversion of the Senior Convertible Note into the Series C Preferred Stock, the Company was in default
under the terms of the Senior Convertible Note. The Senior Convertible Note was to mature in less than 12 months from March 31,
2023, and the Company has continued to recognize its obligation under the Senior Convertible Note as a current liability in the
unaudited condensed consolidated balance sheet.
The
Old Senior Convertible Note was issued by the Company to the Holder on June 2, 2021 in the principal amount of $35,000,000 with the Company
receiving proceeds at issuance of $32,515,000, net of debt issuance costs of $2,485,000 for an aggregate principal. The Old Senior Convertible
Note was issued with 20,000 Series A Warrants and 20,000 Series B Warrants. On the date of issuance, the Company recorded the fair value
of the Series A Warrants and Series B Warrants as a discount to the Old Senior Convertible Note totaling $26,680,000. The debt discount
was amortized to interest expense over the term of the Old Senior Convertible Note using the effective interest method until extinguishment.
The obligation resulting from the issuance of the Series A Warrants and Series B Warrants was determined to qualify for liability classification
on the unaudited condensed consolidated balance sheet. See below for further discussion of the Series A Warrants and Series B Warrants.
The Old Senior Convertible Note was convertible, at the option of the Holder, into shares of the Company’s Common Stock at a conversion
price of $1,750.00 per share. The conversion amounts were calculated as the principal balance identified for conversion plus the Premium
on Principal.
Prior
to the default, it was previously determined that the Company was not in compliance with the Old Senior Convertible Note covenants at
September 30, 2021 and subsequent reporting dates. The Company therefore requested and received a waiver dated October 13, 2021 for (i)
any known breaches or potential breaches of financial covenants in effect related to the available cash test and minimum cash flow test
through December 25, 2021, (ii) any known breach resulting from the placement of a lien on the outstanding share capital of Prozone Limited,
the entity that holds the assets of Bethard, and (iii) any known breach which would result from the Company’s announcement that
it would purchase an equity interest in Game Fund Partners Group LLC through the contribution of up to 2,000 shares of Common Stock.
In addition, the Company requested and received an amendment to the Old Senior Convertible Note wherein the permitted ratio of outstanding
debt to market capitalization was increased temporarily from 25% to 35% through December 25, 2021.
In
consideration for the October 13, 2021 waiver, the Company agreed to permit the conversion of up to $7,500,000 of the original principal
balance of the Old Senior Convertible Note at the Alternate Conversion Price into shares of Common Stock, exclusive of the Premium on
Principal and 15% premium payable that applies to an Alternate Conversion. During the year ended June 30, 2022, the Holder of the Old
Senior Convertible Note had converted the full principal amount of $7,500,000 into 25,145 shares of Common Stock. As a result of these
conversions of principal, the Company recorded a loss on conversion of Senior Convertible Notes of $5,999,662 in the unaudited condensed
consolidated statement of operations for the nine months ended March 31, 2022. The Company has further accelerated the recognition of
the remaining debt discount and Premium on Principal in connection with the exchange and issuance of the Senior Convertible Note. This
resulted in the recognition of a loss on extinguishment of the Senior Convertible Note of $28,478,804 for the nine months ended March
31, 2022 in the unaudited condensed consolidated statement of operations.
The
Company previously obtained a waiver from the Holder of the Old Senior Convertible Note on November 2, 2021 in connection with its announcement
to commence an underwritten registered public offering of its 10.0% Series A Cumulative Redeemable Convertible Preferred Stock (Note
14). In consideration for this waiver, the Company agreed to increase the cash price payable upon a redemption of the Old Senior Convertible
Note by the Company to be equal to 10% of the conversion amount, as defined in Old Senior Convertible Note agreement as any unpaid principal,
minimum return due to the Holder, and unpaid interest due on such redemption date. The Company agreed to pay the Holder of the Old Senior
Convertible Note an amount of $1,500,000 under the terms of a registration rights agreement. The Company recognized the amount payable
to the Holder of the Old Senior Convertible Note under the registration rights agreement in other non-operating income (loss), net, in
the unaudited condensed consolidated statement of operations for the nine months ended March 31, 2022 and this was added to the Senior
Convertible Note as part of the Amendment as of March 31, 2022. As of June 30, 2022 the amount was recorded in accounts payable and accrued
expenses in the unaudited condensed consolidated balance sheet.
Make-Whole
Derivative Liability
The
Senior Convertible Note agreement included a provision that should both the Company be in breach of its debt covenants and its price
per common share trade below the Conversion Floor Price of $218.32, the Holder may elect the Alternate Conversion option that includes
a make-whole provision payable to the Holder in cash. At March 31, 2023, prior to the conversion of the Senior Convertible Note into
the Series C Preferred Stock, the Company was in breach of its debt covenants and the price per share of its Common Stock had declined
below the Conversion Floor Price. While the Company previously obtained waivers from the Holder of the Old Senior Convertible Note for
breach of covenants, as well as a waiver for breach of covenants through March 30, 2022 under the Senior Convertible Note, the Company
was unable to comply with the debt covenants under the Senior Convertible Note or otherwise obtain a debt waiver from March 31, 2022
through the nine months ended March 31, 2023 and subsequent to the period end until April 28, 2023 the date of conversion of the Senior
Convertible Note into the Series C Preferred Stock. As a result, the make-whole provision in the Senior Convertible Note agreement was
determined to represent an obligation of the Company at March 31, 2023 under the terms of the Senior Convertible Note.
The
make-whole provision in the Senior Convertible Note was a derivative liability. The Company’s obligation to make a payment under
the make-whole provision was previously assessed as remote with an immaterial fair value. 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. At March 31, 2023, the Company had been unable to complete an agreement to restructure
the terms and covenants of the Senior Convertible Note. The stock price further continued to trade materially below the Conversion Floor
Price and the Company had also been unable to secure a debt waiver. The fair value of the derivative liability at March 31, 2023 was
determined using a Monte Carlo valuation model. See Note 17 for further discussion of the fair value determined for the derivative liability.
At
March 31, 2023, the Company estimated that it would be required to issue up to 72,875 shares of Common Stock under the Alternate Conversion
provisions of the Senior Convertible Note. The Company further estimated the derivative liability to the Holder to be $1,963,933 and $9,399,620
at March 31, 2023 and June 30, 2022, respectively, which is included in the derivative liability in the unaudited condensed consolidated
balance sheets and the gain or loss was recorded in the change in fair value of derivative liability in the unaudited condensed consolidated
statements of operations. The make-whole cash liability calculated under the terms of the note of approximately $1,862,000,000 was materially
higher than the fair value of $1,963,933 determined as of March 31, 2023 and considers the difference in the market price of the Company’s
shares and a floor price of $218.32 multiplied by a number of shares that is based on the outstanding principal and the market price
of the Company’s Common Stock at March 31, 2023. The calculated make-whole liability may differ materially from the amount at which
the Company may be required to pay under the Senior Convertible Note. Due to the April 28, 2023, conversion of the Senior Convertible
Note into the Series C Preferred Stock the $1,963,933 derivative liability has been eliminated.
Warrants
September
2022 Warrants
On
September 19, 2022, the Company completed the September 2022 Offering, an equity offering in which it sold 300,000 units at $25.00 consisting
of one share of Common Stock and one warrant for a total of 300,000 September 2022 Warrants with an exercise price of $25.00. The Company
also sold a further 36,000 September 2022 Warrants in an overallotment with an exercise price of $25.00 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 $25.00. 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 March 31, 2023, the Company determined the total
fair value of the September 2022 Warrants to be $702,239. The change in fair value of the September 2022 Warrants liability recorded
in the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2023 was $1,565,215 and
$4,584,049, respectively. See Note 16 for additional disclosures related to the change in the fair value of the warrant liabilities.
March
2022 Warrants
On
March 2, 2022, the Company completed the March 2022 Offering, an equity offering in which it sold 150,000 units at $100.00 consisting
of one share of Common Stock and one warrant for a total of 150,000 March 2022 Warrants with an exercise price of $100.00. The Company
also sold a further 22,500 March 2022 Warrants in an overallotment with an exercise price of $100.00 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
$100.00. The March 2022 Warrants are callable by the Company should the volume weighted average share price of the Company exceed $300.00
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 June 30, 2022 the Company determined the total fair value of
the March 2022 Warrants to be $2,070,000. On March 31, 2023, the Company determined the total fair value of the March 2022 Warrants to
be $341,550. The change in fair value of the March 2022 Warrants liability recorded in the unaudited condensed consolidated statement
of operations for the three months and nine months ended March 31, 2023, was an increase of $169,050 and a decrease of $1,728,450, respectively.
The change in fair value of the March 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations
for the three months and nine months ended March 31, 2022 was a decrease of $5,503,500 for both periods. See Note 16 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 20,000 Series A Warrants and 20,000 Series B Warrants 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 (Note 20) and conversion to the Series C Convertible Preferred Stock
(Note 20) 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 $1,750.00. The Series B Warrants may only be exercised
to the extent that the indebtedness owing under the Senior Convertible Note is redeemed. As a result, for each share of Common Stock
determined to be issuable upon a redemption of principal of the Senior Convertible Note, one Series B Warrant will vest and be eligible
for exercise at an exercise price of $1,750.00. The Series A Warrants and Series B Warrants are callable by the Company should the volume
weighted average share price of the Company exceed $3,250.00 for each of 30 consecutive trading days following the date such warrants
become eligible for exercise. The Series A Warrants and Series B Warrants also contain a beneficial ownership limitation of 4.99% which
may be increased 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 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 June 30, 2022, the Company determined the total fair value of the Series A Warrants and Series B Warrants
to be $122,730, with a fair value of $117,340 determined for the Series A Warrants, and a fair value of $5,390 and determined for the
Series B Warrants. At March 31, 2023, the Company determined the total fair value of the Series A Warrants and Series B Warrants to be
$0. 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 nine months ended March 31, 2023 was a decrease of $16,776 and $122,730, respectively, and
for the three and nine months ended March 31, 2022 was a decrease of $2,677,898 and $32,986,240, respectively. See Note 16 for additional
disclosures related to the change in the fair value of the warrant liabilities.
The
proceeds from the issuance of the Old Senior Convertible Note were allocated to the Series A Warrants and Series B Warrants using the
with-and-without method. Under this method, the Company first allocated the proceeds from the issuance of the Old Senior Convertible
Note to the Series A Warrants and Series B Warrants based on their initial fair value measurement, and then allocated the remaining proceeds
to the Old Senior Convertible Note. The debt discount on the Old Senior Convertible Note was being amortized over its term of two years.
The Company accelerated the amortization of the debt discount on the Old Senior Convertible Note and the amount was fully recognized
in the prior year ended June 30, 2022.
Components
of Long-Term Debt, including Senior Convertible Note
The
components of the Company’s long-term debt, including the Senior Convertible Note follows:
Schedule
of Components of Long-term Debt
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Current portion of long-term debt, including the senior convertible note | |
$ | 15,935,723 | | |
$ | 35,139,538 | |
| Total | |
$ | 15,935,723 | | |
$ | 35,139,538 | |
| Carrying amount | |
$ | 15,935,723 | | |
$ | 35,139,538 | |
Note
12 – Commitments and contingencies
Commitments
On
October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (the “Team”) to obtain certain sponsorship-related
rights and benefits that include the ability to access commercial opportunities. The Company had agreed to initially pay the Team $
in cash and $ in Common Stock during the period from October 1, 2019 to June 30, 2022. On August 6, 2020, the Company entered
into an amended and restated sponsorship agreement (the “Amended Sponsorship Agreement”) with the Team that included cash
payments totaling $2,545,000 and the issuance of Common Stock totaling $825,000 for the term of the agreement ending January 31, 2023.
On December 31, 2021, the Amended Sponsorship Agreement terminated. For the three and nine months ended March 31, 2021, the Company
recorded $0 and $424,893 in sales and marketing expense related to the Team sponsorship. There were no outstanding amounts payable
to the Team as of March 31, 2023 or June 30, 2022.
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 500 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 100 shares of Common
Stock on each annual anniversary date. As of March 31, 2023, the future annual commitments by the Company under this agreement are
estimated at $1,250,000 and 100 shares of Common Stock payable each year through the year ended June 30, 2030. During each of the three
and nine months ended March 31, 2023 and 2022, the Company recorded $334,890 and $1,019,556, respectively, in sales and marketing expense
for its arrangement with Bally’s Corporation. There was $1,019,556 in accounts payable and accrued expenses in the unaudited condensed
consolidated financial statements outstanding and payable to Bally’s Corporation as of March 31, 2023 and no amounts outstanding
as of June 30, 2022. 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.
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 $2,000,000 of Company shares into 20% 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 1,000 shares to the fund during the period in which the fund receives total capital
commitments of $100,000,000. The Company has agreed to contribute an additional 1,000 shares to the fund during the period in which the
fund reaches total capital commitments of $200,000,000. As of March 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 nine months ended March 31, 2023, the Company recorded
$146,840 and $963,023 respectively, and during the three and nine months ended March 31, 2022, the Company recorded $1,090,523 and
$3,905,728, respectively, in sales and marketing expense for these arrangements. As of March 31, 2023, the commitments under these agreements
are estimated at $549,988 for the remainder of the year ended June 30, 2023, $433,612 for the year ended June 30, 2024, $217,730
for year ended June 30, 2025, and $149,913 for the year ended June 30, 2026.
Contingencies
On
December 23, 2022, Grant Johnson resigned from the Board. Mr. Johnson resigned following his termination for cause, by the Board, from
his position as Chairman and Chief Executive Officer of the Company, effective December 3, 2022. As a result, Mr. Johnson is no longer
an officer or director of the Company.
On
January 6, 2023, Mr. Johnson, filed a lawsuit in the United States District Court for the Southern District of New York against the Company.
The claim alleges breach by the Company of Mr. Johnson’s employment agreement when it terminated him for “Cause” as
defined in the agreement on December 3, 2022. Mr. Johnson seeks in excess of $1,000,000 as well as 2,000 shares of our common stock,
plus attorney’s fees.
On
February 28, 2023, Mr. Johnson filed an amended complaint to amend his original claim and to add an alleged defamation claim. On March
14, 2023, the Company filed its Pre-Motion Letter requesting that the claim be dismissed and on March 15, 2023, Mr. Johnson filed a letter
to the Court requesting that the claim not be dismissed. On May 4th a Rule 16 conference took place and the Company decided not
to move forward with the motion to dismiss and is preparing documents for the discovery phase and a response to the Plaintiff’s statement
of claim as well as a counterclaim.
The
Company believes the claims are without merit and intends to defend against the claims vigorously. The case is captioned Grant Johnson
v. Esports Entertainment Group, Inc. 1:22-cv-10861 (SDNY).
During
October 2022, the Company entered into an amendment to the Bethard SPA where it agreed to pay €6,535,753 (equivalent to $6,891,782
using exchange rates at February 24, 2023 the date of disposal of the Bethard Business) through installments equal to 12% of net gaming
revenue until the Company has paid the balance or the Company spends €13,120,000 in marketing costs (equivalent to $13,834,699 using
exchange rates at February 24, 2023 the date of disposal of the Bethard Business). On February 24, 2023, the contingent liability was
settled as part of the disposal of the Bethard Business. As of June 30, 2022 the Company has estimated the present value of the amount
owed to be $3,328,361. During the three and nine months ended March 31, 2023, the Company recognized a loss of $0 and $2,864,551, and
during the three and nine months ended March 31, 2022, the Company recognized a gain of $99,247 and $1,950,693, respectively, in the
change in fair value of contingent consideration in the unaudited condensed consolidated statement of operations.
Since
the acquisition of the Argyll UK EEG iGaming business on July 31, 2020, the Company has responded to periodic requests for
information from the UK Gambling Commission (the “UKGC”) in relation to information required to maintain its UK license
following the change of corporate control. There have been no adverse judgments imposed by the UKGC against the Company. On November
10, 2022, the Company determined that it would close down its licensed remote gambling operation in the UK market. On November 15,
2022, as part of the winding down of the Argyll UK iGaming operations, players were informed that they would no longer be able to
place bets from November 30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8, 2022 Argyll
UK surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022 and December
14, 2022 Argyll UK attempted to refund customer accounts that still had remaining balances. On March 3, 2023, the Board determined
that the Company’s wholly-owned subsidiary Argyll Entertainment, the Company’s Swiss entity that is part of Argyll UK,
would be liquidated. The Swiss courts declared Argyll Entertainment bankrupt on March 27, 2023, at which point the Company lost
control of Argyll Entertainment and, as a result, deconsolidated the entity. The Company had previously fully impaired the goodwill,
intangible assets and other long-lived assets of Argyll UK in the fiscal year ended June 30, 2022. The Company recognized a gain on
disposal of Argyll Entertainment of $3,288,060
in loss on disposal of businesses in the unaudited condensed consolidated statement of operations.
On
January 1, 2022, amendments to the Finnish Lotteries Act came into effect, further restricting marketing opportunities and enhancing
the enforcement powers of the Finnish regulator. Prior to these amendments coming into effect, in the fiscal quarter ended December 31,
2021, the Company has received communications from the Finnish regulator requesting clarification on its marketing and gaming practices
related to its Finnish EEG iGaming operations. The Company responded to the initial communication in third quarter of fiscal year 2022
and received a second request for further clarification. On November 28, 2022, the Company provided its response, further addressing
its business and marketing operations in Finland. Further powers allowing the Finnish regulator to require blocking by payment service
providers of overseas operators who are targeting their marketing activities towards Finnish customers are also due to come into effect
in 2023. Operations in Finland run under the MGA license on the Lucky Dino in-house built iDefix casino-platform. On January 5, 2023,
the Company received a communication that the Finnish regulator was satisfied with the Company’s response and no adverse judgments
were imposed by the Finnish regulator against the Company.
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. The Company did not have any liabilities recorded for
loss contingencies as of March 31, 2023 or June 30, 2022. 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 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.
Note
13 – 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, GGC
and Helix. The Company acquired Bethard in July 2021 adding to its revenue generating operations. The revenues and long-lived assets
of Argyll (until November 30, 2022 when no further bets were taken as part of the winding down of the Argyll operations), EGL Lucky
Dino and Bethard (until February 2023 when the operations of Bethard were sold (Note 18)), 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
FLIP, GGC and Helix (until June 10, 2022 when the Helix Game Centers were disposed) principally service customers in the United
States.
A
disaggregation of revenue by type of service for the three and nine months ended March 31, 2023 and 2022 is as follows:
Schedule
of Disaggregated by Revenue
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| | |
Three months ended March 31, | | |
Nine months ended March 31, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Online betting and casino revenues | |
$ | 3,437,387 | | |
$ | 14,590,447 | | |
$ | 17,571,219 | | |
$ | 41,692,731 | |
| Esports and other revenues | |
| 738,607 | | |
| 1,109,140 | | |
| 2,619,444 | | |
| 4,946,194 | |
| Total | |
$ | 4,175,994 | | |
$ | 15,699,587 | | |
$ | 20,190,663 | | |
$ | 46,638,925 | |
| Revenue | |
$ | 4,175,994 | | |
$ | 15,699,587 | | |
$ | 20,190,663 | | |
$ | 46,638,925 | |
A
summary of revenue by geography for the three and nine months ended March 31, 2023 and 2022 is as follows:
Schedule
of Revenues with Customers and Long-lived Assets Disaggregated by Geographical Area
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| | |
Three months ended March 31, | | |
Nine months ended March 31, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| United States | |
$ | 510,874 | | |
$ | 1,046,639 | | |
$ | 1,905,255 | | |
$ | 4,255,482 | |
| International | |
| 3,665,120 | | |
| 14,652,948 | | |
| 18,285,408 | | |
| 42,383,443 | |
| Total | |
$ | 4,175,994 | | |
$ | 15,699,587 | | |
$ | 20,190,663 | | |
$ | 46,638,925 | |
| Revenue | |
$ | 4,175,994 | | |
$ | 15,699,587 | | |
$ | 20,190,663 | | |
$ | 46,638,925 | |
A
summary of long-lived assets by geography is as follows:
Schedule
of Long-Lived Assets by Geography
| | |
March 31, 2023 | | |
June 30, 2022 | |
| United States | |
$ | 5,316,004 | | |
$ | 8,271,360 | |
| International | |
| 13,670,202 | | |
| 46,620,831 | |
| Total | |
$ | 18,986,206 | | |
$ | 54,892,191 | |
| Long-lived assets | |
$ | 18,986,206 | | |
$ | 54,892,191 | |
Note
14 – 10% Series A Cumulative Redeemable Convertible Preferred Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock. On November 10, 2021, the Company designated 1,725,000 shares of
preferred stock as 10% Series A Cumulative Redeemable Convertible Preferred Stock, with a par value of $0.001 per share and liquidation
value of $11.00. On November 11, 2021, the Company announced that it priced an underwritten public offering of preferred stock as 10%
Series A Cumulative Redeemable Convertible Preferred Stock in the first series issuance of preferred stock, of which 800,000 shares were
issued at $10 a share on November 16, 2021 for total gross proceeds of $8,000,000, before deducting underwriting discounts and other
estimated offering expenses. Net proceeds from the sale, after deducting issuance costs totaled $7,265,000.
In
addition, under the terms of the underwriting agreement for the public offering of the 10% Series A Cumulative Redeemable Convertible
Preferred Stock, the Company granted the underwriters a 45-day option to purchase up to an additional 120,000 shares. On December 10,
2021, there was a partial exercise to purchase 35,950 shares. Net proceeds from the additional sale, after deducting issuance costs,
totaled $334,335.
Conversion
Each
share of 10% Series A Cumulative Redeemable Convertible Preferred Stock is convertible into one share of the Company’s Common Stock
at a conversion price of $17.50 per common share. Subject to earlier conversion or redemption, the 10% Series A Cumulative Redeemable
Convertible Preferred Stock matures five years from issuance, or November 15, 2026, at which point the Company must redeem the shares
of 10% Series A Cumulative Redeemable Convertible Preferred Stock in cash.
Dividends
Dividends
on the 10% Series A Cumulative Redeemable Convertible Preferred Stock accrue daily and are cumulative from the date of issuance. The
dividends on the 10% Series A Cumulative Redeemable Convertible Preferred Stock are payable monthly in arrears on the last day of each
calendar month, when, as and if declared by the Board, at the rate of 10.0% per annum. In the event the
dividends are not paid in cash, the dividends shall continue to accrue at a dividend rate of 10.0%.
Redemption
and Liquidation
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is also redeemable, at the option of the Board, in whole
or in part, at any time on or after January 1, 2023.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock includes a change of control put option which allows the holders of the
10% Series A Cumulative Redeemable Convertible Preferred Stock to require the Company to repurchase such holders’ shares in cash
in an amount equal to the initial purchase price plus accrued dividends.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable upon certain deemed liquidation events, such
as a change in control. Because a deemed liquidation event could constitute a redemption event outside of the Company’s control,
all shares of preferred stock have been presented outside of permanent equity in mezzanine equity on the unaudited condensed consolidated
balance sheets. The instrument is initially recognized at fair value net of issuance costs. The Company reassesses whether the 10% Series
A Cumulative Redeemable Convertible Preferred Stock is currently redeemable, or probable to become redeemable in the future, as of each
reporting date. If the instrument meets either of these criteria, the Company will accrete the carrying value to the redemption value.
The 10% Series A Cumulative Redeemable Convertible Preferred Stock has not been adjusted to its redemption amount as of March 31,
2023 because a deemed liquidation event is not considered probable.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable,
and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the 10% Series
A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares
of 10% Series A Cumulative Redeemable Convertible Preferred Stock have been presented outside of permanent equity in mezzanine equity
on the unaudited condensed consolidated balance sheets.
Voting
Rights
The
holders of the 10% Series A Cumulative Redeemable Convertible Preferred Stock will not have any voting rights, except whenever dividends
on any share of any series of preferred stock (“Applicable Preferred Stock”) have not been paid in an aggregate amount equal
to four monthly dividends on the shares, the holders of the Applicable Preferred Stock will have the exclusive and special right, voting
separately as a class and without regard to series, to elect at an annual meeting of shareholders or special meeting held in place of
it one member of the Board, until all arrearages in dividends and dividends in full for the current monthly period have
been paid.
Note
15 – Series B Redeemable Preferred Stock
On
December 20, 2022, the Company entered into a Subscription and Investment Representation Agreement with a member of management, the Interim
Chief Financial Officer of the Company, pursuant to which the Company agreed to issue and sell one hundred (100) shares of the Company’s
Series B Preferred Stock, par value $0.001 per share, for $10 per share in cash. The sale closed on December 21, 2022.
On
December 21, 2022, the Company filed a certificate of designation (the “Certificate of Designation”) with the Secretary
of State of Nevada, effective as of the time of filing, designating the rights, preferences, privileges and restrictions of the
shares of Series B Preferred Stock. The Certificate of Designation provided that one hundred (100)
shares of Series B Preferred Stock will have 25,000,000
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 to effect a reverse stock split of the Company’s common stock. The Series B Preferred Stock was voted,
without action by the holder, on the reverse stock split proposal at our 2022 Annual Meeting on January 26, 2023, in the same
proportion as shares of common stock were voted. The Series B Preferred Stock otherwise had no voting rights except as otherwise
required by the Nevada Revised Statutes. The reverse stock split proposal was approved during the 2022 Annual Meeting.
Conversion
The
Series B Preferred Stock was not convertible.
Dividends
The
holder of Series B Preferred Stock, as such, was not entitled to receive dividends or distributions of any kind.
Voting
Rights
Except
as otherwise provided by the Company’s Amended and Restated Articles of Incorporation or required by law, the holder of Series
B Preferred Stock had no voting rights, except that the holder of Series B Preferred Stock had the right to vote on any resolution or
proposal presented to the stockholders of the Company to approve a decrease in the number of the Company’s issued and outstanding
shares of Common Stock, or reverse stock split of such issued and outstanding shares, within a range as determined by the Board in accordance
with the terms of such amendment (the “Reverse Stock Split Proposal”), or as otherwise required by the Nevada Revised Statutes.
The outstanding shares of Series B Preferred Stock had 25,000,000 votes per share. The outstanding shares of Series B Preferred
Stock voted together with the outstanding shares of Common Stock, par value $0.001 per share of Common Stock of the Company as a
single class exclusively with respect to the Reverse Stock Split Proposal and was not entitled to vote on any other matter except to
the extent required under the Nevada Revised Statutes.
The shares of Series B Preferred Stock was voted, without action by the
holder, on the Reverse Stock Split Proposal in the same proportion as shares of Common Stock were voted (excluding any shares of Common
Stock that were not voted), or otherwise, or which are counted as abstentions or broker non-votes) on the Reverse Stock Split Proposal
(and, for purposes of clarity, such voting rights did not apply on any other resolution presented to the stockholders of the Company).
Liquidation
The Series B Preferred Stock had no rights as to any distribution
of assets of the Company for any reason, including upon a liquidation, bankruptcy, reorganization, merger, acquisition, sale, dissolution
or winding up of the Company, whether voluntarily or involuntarily, and did not affect the liquidation or distribution rights of holders
of any other outstanding series of preferred stock of the Company, if any.
Redemption
The outstanding shares of Series B Preferred Stock were to be redeemed
in whole, but not in part, at any time (i) if such redemption was ordered by the Board in its sole discretion, automatically and effective
on such time and date specified by the Board in its sole discretion, or (ii) automatically upon the stockholder approval of the Reverse
Stock Split Proposal. As used herein, the “Redemption Time” meant the effective time of the redemption.
Each
share of Series B Preferred Stock redeemed in the redemption was to be redeemed in consideration for the right to receive an amount equal
to $10 in cash (the “Redemption Price”) for each share of Series B Preferred Stock that was owned of record as of immediately
prior to the applicable effective time of the redemption and redeemed pursuant to the Redemption, payable upon the applicable effective
time of the redemption.
From
and after the time at which the shares of Series B Preferred Stock was called for redemption (whether automatically or otherwise) in
accordance with the above, such shares of Series B Preferred Stock were to cease to be outstanding, and the only right of the former holder
of such shares of Series B Preferred Stock, as such, was to receive the applicable Redemption Price. The shares of Series B Preferred
Stock redeemed by the Company were to be automatically retired and restored to the status of authorized but unissued shares of preferred
stock, upon such redemption. Notice of a meeting of the Company’s stockholders for the submission to such stockholders of any proposal
to approve the Reverse Stock Split constitutes notice of the redemption of shares of Series B Preferred Stock and results in the automatic
redemption of the shares of Series B Preferred Stock at the effective time of the redemption pursuant to the above. In connection with
the issuance of the Series B Preferred Stock, the Company set apart funds for payment for the redemption of the shares of Series
B Preferred Stock. Pursuant to the terms of the Preferred Stock, the outstanding shares of Preferred Stock were redeemed in whole following
the effectiveness of stockholder approval of the reverse stock split proposal at the Company’s 2022 annual meeting held on January
26, 2023. The holder of the Preferred Stock received consideration of $10 per share in cash, or $1,000 in the aggregate, on February
10, 2023.
The Series B Preferred Stock was not mandatorily redeemable, but rather
was only contingently redeemable, and given that the redemption events were not certain to occur, the shares were not accounted for as
a liability. As the Series B Redeemable Preferred Stock was contingently redeemable on events outside of the control of the Company, all
shares of Series B Cumulative Redeemable Preferred Stock have been presented outside of permanent equity in mezzanine equity on the unaudited
condensed consolidated balance sheets.
Note
16 – Equity
Common
Stock
The
authorized capital stock of the Company consists of 500,000,000 shares of Common Stock at a par value of $0.001 per share.
Dividend
Rights
Subject
to the prior or equal rights of holders of all classes of stock at the time outstanding having prior or equal rights as to dividends,
the holders of the Company’s Common Stock may receive dividends out of funds legally available if the Board, in its
discretion, determines to issue dividends and then only at the times and in the amounts that the Board may determine. The
Company has not paid any dividends on the Company’s Common Stock and do not contemplate doing so in the foreseeable future.
Voting
Rights
Each
holder of the Common Stock is entitled to one vote for each share of Common Stock held by such stockholder.
No
Preemptive or Similar Rights
The
Company’s Common Stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.
Liquidation
In
the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets
that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the Common Stock.
The
following is a summary of common stock issuances for the nine months ended March 31, 2023:
| ● |
During
the nine months ended March 31, 2023, as part of the September 2022 Offering, the Company sold 300,000 units at $25.00, consisting
of one share of Common Stock and one warrant with an exercise price of $25.00, 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 $2,265,927 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 (Note 11). |
| |
|
| ● |
During
the nine months ended March 31, 2023, on December 21, 2022,
the Company closed an offering (the “Registered Direct Offering”) in which it sold: (a) 70,650 shares of Common Stock
to the Holder (the “Registered Direct Shares”) and (b) Pre-funded Warrants to purchase 178,500 shares of our common stock
at a price of $9.37 per warrant (the “Pre-funded Warrants”), directly to the Holder, with all but $0.10 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 all 178,500 Pre-funded warrants for additional
net proceeds of $17,850. |
| |
|
| ● |
During
the nine months ended March 31, 2023, the Company and the Holder of our Senior Convertible Note effected debt for equity exchanges under
the Senior Convertible Note of $19,261,583
in aggregate principal amount of the Senior Convertible Note for an aggregate of 2,242,143
shares
of our common stock and recorded a loss on extinguishment of the Senior Convertible Note of
$3,616,372 related to the conversions. |
| |
|
| ● |
During
the nine months ended March 31, 2023, in connection with his appointment as Chief Executive Officer, the Company granted the Chief
Executive Officer, Mr. Igelman, an award of 25,000 shares of common stock at a price of $7.36 per share. |
| |
|
| ● |
During the nine months ended March 31, 2023, in connection with the Reverse
Stock Split, the Company issued 36,781 shares of common stock at par value. |
The
following is a summary of common stock issuances for the nine months ended March 31, 2022:
| ● |
During
the nine months ended March 31, 2022, as part of the March 2022 Offering, the Company sold 150,000
units at $100.00,
consisting of one share of common stock and one warrant with an exercise price of $100.00,
for gross proceeds of $150,000.
The Company recorded the issuance of these shares at a fair value of $4,051,500
comprised of $13,605,000
of cash received from the offering equal to the
gross proceeds net of $1,395,000
issuance costs, and net of the fair value of
the warrant liability calculated on issuance of $9,553,500.
|
| |
|
| ● |
During
the nine months ended March 31, 2022, the Company issued 1,326 shares of common stock for services with a weighted average fair
value of $469.52 per share. |
| |
|
| ● |
During
the nine months ended March 31, 2022, the Company issued 140 shares of common stock from the exercise of stock options with a
weighted average exercise price of $482.00 per share or $67,479 in the aggregate. |
| |
|
| ● |
During
the nine months ended March 31, 2022, the Company issued 11,658 shares of common stock, with aggregate proceeds of $4,005,267,
or $3,885,109 net of issuance costs, and a weighted average exercise price of $343.56, under its ATM program (see below). |
| |
|
| ● |
During
the nine months ended March 31, 2022, the holder of the Senior Convertible Note converted an aggregate conversion value of $10,652,648
into 25,144 shares of common stock, with a weighted average conversion price of $423.67. |
At-the
Market Equity Offering Program
On
September 3, 2021, the Company entered “at the market” equity offering program to sell up to an aggregate of $20,000,000
of Common Stock. The shares were being issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252370)
and the Company filed a prospectus supplement, dated September 3, 2021 with the SEC in connection with the offer and sale of the shares
pursuant to the Equity Distribution Agreement with the broker. There were no shares sold under the ATM for the three and nine months
ended March 31, 2023 and 11,658 shares sold under the ATM during the year ended June 30, 2022 for gross proceeds of $4,005,267. The agreement
between the Company and Maxim Group LLC governing the ATM expired on September 3, 2022. At this time, the Company does not plan to sign
a new ATM agreement.
Common
Stock Warrants
On
December 21, 2022, the Company entered into a securities purchase agreement with an institutional investor. The offering included (a)
70,650 Registered Direct Shares and (b) 178,500 shares of our common stock at a price of $9.37 per Pre-Funded Warrant, directly to such
investor, with all but $0.10 per warrant prepaid to the Company at the closing of the offering. The exercise price of each Pre-funded
Warrant is $0.10 per share of common stock. The Holder redeemed all 178,500 Pre-funded warrants during the nine months ended March 31,
2023 for net proceeds of $17,850.
On
September 19, 2022, the Company closed the September 2022 Offering, in which it sold 300,000 units at $25.00 consisting of one share
of Common Stock and one September 2022 Warrant exercisable at any time after issuance for one share of Common Stock of the Company for
a total of 300,000 September 2022 Warrants at an exercise price of $25.00. On the offering date the underwriters of the September 2022
Offering exercised the over-allotment option to purchase 36,000 additional September 2022 Warrants to purchase shares at a price of $1.00
per warrant. The Company received net proceeds of $36,000. There were no September 2022 Warrants exercised during the nine months ended
March 31, 2023 and all September 2022 Warrants were outstanding as of March 31, 2023. The September 2022 Warrants expire on September
19, 2027.
On
March 2, 2022, the Company closed the March 2022 Offering, in which it sold 150,000 units at $100.00 consisting of one share of Common
Stock and one March 2022 Warrant exercisable at any time after issuance for one share of Common Stock of the Company for a total of 150,000
March 2022 Warrants at an exercise price of $100.00. On April 1, 2022, the underwriters of the March 2022 Offering exercised the over-allotment
option to purchase 22,500 additional March 2022 Warrants to purchase shares at a price of $1.00 per warrant. The Company received net
proceeds of $20,925. There were no March 2022 Warrants exercised during the nine months ended March 31, 2023 and all March 2022 Warrants
were outstanding as of March 31, 2023. The March 2022 Warrants expire on March 2, 2027.
On
June 2, 2021, the Company issued 20,000 Series A Warrants and 20,000 Series B Warrants with an exercise price of $1,750.00 per share
to the Holder of the Senior Convertible Note. There were no Series A Warrants exercised during the nine months ended March 31, 2022.
At March 31, 2023, the Series B Warrants are exercisable to the extent the Company has redeemed the principal under the Senior Convertible
Note. The Series A Warrants expire on June 2, 2025 and the Series B Warrants expire on June 2, 2023.
On
April 16, 2020, the Company closed an offering, (the “April 2020 Offering”), in which it sold 19,800 units consisting of
one share of Common Stock and one Unit A Warrant and one Unit B Warrant, for a total of 39,600 warrants, with each warrant entitling
the holder to purchase one share of Common Stock priced at $425 per share. The Company issued an additional 2,094 Unit A Warrants and
2,094 additional Unit B Warrants to the underwriter pursuant to an over-allotment option each entitling the holder to purchase one share
of Common Stock at $1.00 per share. There were 11,368 Unit A Warrants outstanding on March 31, 2023. The Unit A Warrants expire on April
14, 2025. The Unit B Warrants expired one year from the date of issuance on April 19, 2021 and there were no Unit B Warrants outstanding
at March 31, 2023.
In
connection with the April 2020 Offering the Company also issued 12,172 shares of Common Stock and 24,345 warrants (“Conversion
Warrants”) to purchase one share of Common Stock at $425 per share upon the conversion of $4,138,585 of the Company’s convertible
debt and accrued interest. There were 406 Unit A Conversion Warrants outstanding at March 31, 2023. The Unit B Conversion Warrants have
been fully exercised for shares of Common Stock.
A
summary of the warrant activity follows:
Schedule
of Warrant Activity
| | |
Number of Warrants | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Life (Years) | | |
Intrinsic Value | |
| Outstanding, July 1, 2021 | |
| 53,506 | | |
$ | 1,418.98 | | |
| 3.14 | | |
| 8,743,588 | |
| Issued | |
| 172,500 | | |
| 100.00 | | |
| | | |
| | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | |
| Forfeited or cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Outstanding, June 30, 2022 | |
| 226,006 | | |
$ | 412.26 | | |
| 4.07 | | |
| - | |
| Issued | |
| 336,000 | | |
| 25.00 | | |
| | | |
| | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | |
| Forfeited or cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Outstanding September 30, 2022 | |
| 562,006 | | |
$ | 180.73 | | |
| 4.51 | | |
| - | |
| Issued | |
| 178,500 | | |
| 0.10 | | |
| | | |
| | |
| Exercised | |
| (65,660 | ) | |
| 0.10 | | |
| | | |
| | |
| Forfeited or cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Outstanding December 31, 2022 | |
| 674,846 | | |
$ | 150.53 | | |
| 4.38 | | |
| - | |
| Issued | |
| - | | |
| - | | |
| | | |
| | |
| Exercised | |
| (112,840 | ) | |
| 0.10 | | |
| | | |
| | |
| Forfeited or cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Outstanding March 31, 2023 | |
| 562,006 | | |
$ | 180.73 | | |
| 4.01 | | |
| - | |
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 15,000 shares. Each year on January 1, for a period of up to nine years, the maximum number of shares
authorized for issuance under the 2020 Plan is automatically increased by 2,340 shares. At March 31, 2023, there was a maximum of 22,019
shares of Common Stock authorized for issuance under the 2020 Plan. There were no additional equity awards eligible for issuance from
the 2017 Stock Incentive Plan that had been adopted by the Company on August 1, 2017. The outstanding stock options granted under the
2017 Stock Incentive Plan were transferred to the 2020 Plan. As of March 31, 2022, there were 14,695 shares of Common Stock available
for future issuance under the 2020 Plan. On January 3, 2023, separate from the 2020 Plan, the Company issued an award of 25,000 time-based
stock options to the Chief Executive Officer with an exercise price of $7.70 per option. The Chief Executive Officer’s stock options
will vest in equal quarterly installments over a one-year period subject to his continued employment with the Company on the applicable
vesting dates.
A
summary of the Company’s stock option activity is as follows:
Schedule
of Stock Option
| | |
Number of Options | | |
Weighted Average Exercise Price | |
| Outstanding, June 30, 2021 | |
| 4,747 | | |
$ | 549.29 | |
| Granted | |
| 11,202 | | |
| 671.00 | |
| Exercised | |
| (140 | ) | |
| 482.00 | |
| Cancelled | |
| (4,704 | ) | |
| 653.64 | |
| Outstanding, June 30, 2022 | |
| 11,105 | | |
$ | 628.71 | |
| Granted | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | |
| Cancelled | |
| (3,470 | ) | |
| 656.38 | |
| Outstanding, December 31, 2022 | |
| 7,635 | | |
$ | 625.06 | |
| Granted | |
| 25,000 | | |
| 7.70 | |
| Exercised | |
| - | | |
| - | |
| Cancelled | |
| (311 | ) | |
| 628.39 | |
| Outstanding, March 31, 2023 | |
| 32,324 | | |
| 149.52 | |
As
of March 31, 2023, the weighted average remaining life of the options outstanding was 4.45 years. There are 32,324 options exercisable
at March 31, 2023, with a weighted average exercise price of $149.52. As of March 31, 2023, there was $63,234 remaining unamortized stock
compensation for Chief Executive Officer’s stock options that will be recognized over the next nine months.
Stock
Based Compensation
During
the three and nine months ended March 31, 2023 the Company recorded stock-based compensation expense of $21,079 and $1,127,070, respectively,
and during the three and nine months ended March 31, 2022 the Company recorded stock-based compensation expense of $1,346,502 and $3,958,275,
respectively, for the amortization of stock options and the issuance of Common Stock to employees and contractors for services which
has been recorded as general and administrative expense in the unaudited condensed consolidated statements of operations.
As
of March 31, 2023, other than the amounts related to the Chief Executive Officer’s stock options of $63,234, there was no
remaining unamortized stock compensation for stock options. Other than the 25,000
options granted to the Chief Executive Officer on January 3, 2023, no other options were granted during the nine months ended March
31, 2023.
Note
17 – Fair Value Measurements
The
following financial instruments were measured at fair value on a recurring basis:
Schedule
of Fair Value of Financial Instruments
| | |
| | | |
| | | |
| | | |
| | |
| | |
March 31, 2023 | |
| | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Liability for the September 2022 Warrants (Note 11) | |
$ | 702,239 | | |
$ | - | | |
$ | - | | |
$ | 702,239 | |
| Liability for the March 2022 Warrants (Note 11) | |
$ | 341,550 | | |
$ | 341,550 | | |
$ | - | | |
$ | - | |
| Derivative liability on Senior Convertible Note (Note 2, Note 11 and Note
20) | |
$ | 1,963,933 | | |
$ | - | | |
$ | - | | |
$ | 1,963,933 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
June 30, 2022 | |
| | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Contingent consideration (Note 12) | |
$ | 3,328,361 | | |
$ | - | | |
$ | - | | |
$ | 3,328,361 | |
| Liability for the March 2022 Warrants (Note 11) | |
$ | 2,070,000 | | |
$ | 2,070,000 | | |
$ | - | | |
$ | - | |
| Liability for the Series A and Series B Warrants (Note 11) | |
$ | 122,730 | | |
$ | - | | |
$ | - | | |
$ | 122,730 | |
| Derivative liability on Senior Convertible Note (Note 2, Note 11 and Note 20) | |
$ | 9,399,620 | | |
$ | - | | |
$ | - | | |
$ | 9,399,620 | |
A
summary of the changes in Level 3 financial instruments for the nine months ended March 31, 2023 is as follows:
Schedule
of Changes in Level 3 Financial Instruments
| | |
Warrant Liability | | |
Contingent Consideration | | |
Derivative liability on Senior Convertible Note | |
| Balance at June 30, 2022 | |
$ | 122,730 | | |
$ | 3,328,361 | | |
$ | 9,399,620 | |
| Fair value of the September 2022 Warrants (Note 11) | |
| 5,286,288 | | |
| - | | |
| - | |
| Change in fair value of September 2022 Warrants (Note 11) | |
| (1,482,103 | ) | |
| - | | |
| - | |
| Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 11) | |
| (105,953 | ) | |
| - | | |
| - | |
| Change in fair value of Bethard contingent consideration liability (Note 12) | |
| - | | |
| (179,468 | ) | |
| - | |
| Change in the fair value of the derivative liability on Senior Convertible Note (Note 2, Note 11 and Note 20) | |
| - | | |
| - | | |
| (274,864 | ) |
| Balance at September 30, 2022 | |
| 3,820,962 | | |
| 3,148,893 | | |
| 9,124,756 | |
| Change in fair value of September 2022 Warrants (Note 11) | |
| (1,536,732 | ) | |
| - | | |
| - | |
| Loss (gain) on Bethard contingent consideration liability (Note 12) | |
| - | | |
| 3,044,019 | | |
| - | |
| Change in the fair value of the derivative liability on Senior Convertible Note (Note 2, Note 11 and Note 20) | |
| - | | |
| - | | |
| (8,324,802 | ) |
| Balance at December 31, 2022 | |
$ | 2,284,230 | | |
| 6,192,912 | | |
| 799,954 | |
| Change in fair value of September 2022 Warrants (Note 11) | |
| (1,565,215 | ) | |
| - | | |
| - | |
| Change in fair value of Series A and Series B Warrants issued with Senior
Convertible Note (Note 11) | |
| (16,776 | ) | |
| | | |
| - | |
| Loss (gain) on Bethard contingent consideration liability (Note 12)1 | |
| - | | |
| (6,192,912 | ) | |
| - | |
| Change in the fair value of the derivative liability on Senior Convertible Note (Note 2, Note 11 and Note 20) | |
| - | | |
| - | | |
| 1,163,979 | |
| Balance at March 31, 2023 | |
$ | 702,239 | | |
| - | | |
| 1,963,933 | |
| 1 | The gain on the Bethard
contingent consideration was recorded as part of the total loss of disposal of the Bethard Business (Note 18). |
The
September 2022 Warrants were classified as Level 3 as they are plain vanilla warrants and are not callable by the Company (Note 11).
The September 2022 Warrants were valued using a Black Scholes valuation model on issuance at September 19, 2022 and for the warrants
outstanding at March 31, 2023 with the following assumptions:
Schedule
of Warrants Outstanding Fair Value Assumption
| | |
March 31, 2023 | | |
September 19, 2022 | |
| Contractual term, in years | |
| 5.00 | | |
| 5.00 | |
| Expected volatility | |
| 153 | % | |
| 167 | % |
| Risk-free interest rate | |
| 3.66 | % | |
| 3.69 | % |
| Dividend yield | |
| - | | |
| - | |
| Conversion / exercise price | |
$ | 25.00 | | |
$ | 25.00 | |
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 11). The March 2022 Warrants outstanding at December 31, 2022 and June 30, 2022 were valued using the following assumptions:
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Contractual term, in years | |
| 5.00 | | |
| 5.00 | |
| Active market | |
| Nasdaq | | |
| Nasdaq | |
| Market price | |
$ | 1.98 | | |
$ | 12.00 | |
The
Series A and Series B Warrants outstanding at March 31, 2023 and June 30, 2022 are callable by the Company if certain criteria are met
(Note 11) and were valued using a Monte Carlo valuation model with the following assumptions:
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Contractual term, in years | |
| 2.00
– 4.00 | | |
| 2.00
– 4.00 | |
| Expected volatility | |
| 142-145
| % | |
| 125%
– 133 | % |
| Risk-free interest rate | |
| 4.02-4.79
| % | |
| 2.75%
– 2.98 | % |
| Dividend yield | |
| - | | |
| - | |
| Conversion / exercise price | |
$ | 1,750.00 | | |
$ | 1,750.00 | |
The
value of the derivative liability on the Senior Convertible Note at March 31, 2023 and June 30, 2022 was valued using a nonperformance
risk adjusted Monte Carlo valuation model using total assets less goodwill and an estimate of the Company’s total enterprise value
with the following valuation assumptions:
| | |
March 31, 2023 | | |
June 30, 2022 | |
| Contractual term remaining, in years | |
| 0.17 | | |
| 0.92 | |
| Expected volatility | |
| 145.23 | % | |
| 137.11 | % |
| De-leveraged volatility | |
| 51.02 | % | |
| 62.88 | % |
| Risk-free interest rate | |
| 4.69 | % | |
| 2.72 | |
| Dividend yield | |
| — | | |
| — | |
| Conversion / exercise price | |
$ | 218.32 | | |
$ | 218.32 | |
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 cash liability calculated under the terms of the Senior Convertible Note of approximately $1,862,000,000
is materially higher than the fair value of the derivative liability of $1,963,933 calculated at March 31, 2023. The derivative was eliminated
on the conversion of the Senior Convertible Note into the Series C Convertible Preferred Stock (Note 20), that occurred on April 28,
2023.
The
following is information relative to the Company’s derivative instruments in the unaudited condensed consolidated balance sheets
as of March 31, 2023 and June 30, 2022:
Schedule
of Balance Sheet Derivative Instruments
Derivatives Not Designated as Hedging Instruments | |
Balance Sheet Location | | |
March 31, 2023 | | |
June 30, 2022 | |
| Derivative liability on Senior Convertible Note (Note 2 and 11) | |
| Derivative liability | | |
$ | 1,963,933 | | |
$ | 9,399,620 | |
The
effect of the derivative instruments on the unaudited condensed consolidated statements of operations is as follows:
Schedule
of Statement of Operation Derivative Instruments
| Derivatives Not | |
Location of Gain or (Loss) | |
Amount of Gain (Loss) Recognized in Income on Derivatives | |
Designated as Hedging | |
Recognized in Income on | |
Three months ended March 31, | | |
Nine months ended March 31, | |
| Instruments | |
Derivatives | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Derivative liability on Senior Convertible Note (Note 2 and 11) | |
Change in fair value of derivative liability on Senior Convertible Note | |
$ | (1,163,979 | ) | |
$ | (20,573,051 | ) | |
$ | 7,435,687 | | |
$ | (22,055,672 | ) |
Assets
Measured on a Nonrecurring Basis
Assets
that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. This includes the evaluation
of long-lived assets, goodwill and other intangible assets for impairment. The Company’s estimates of fair value required it to
use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to
future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain.
The carrying value of the assets after any impairment approximates fair value.
The
Company assesses the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. The Company assesses the fair value of goodwill using the income approach.
Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate
that approximates the cost of capital of a market participant.
The
Company uses undiscounted future cash flows of the asset or asset group for equipment and intangible assets. During the nine months ended
March 31, 2022, the Company recognized asset impairment charges to the goodwill of the EEG iGaming Malta reporting unit in the EEG iGaming
segment, and to the goodwill of the GGC reporting unit in the EEG Games segment (Note 6).
Note
18 – Loss on Disposal of Businesses, net
Sale
of Spanish iGaming Operations
On
January 18, 2023, the Company sold its Spanish iGaming operations, including its Spanish iGaming license.
The Company received approximately $1,200,000 in proceeds and $1,000,000 in cash from the return of a deposit held with the Spanish regulator.
Sixty-five percent (65%) of the proceeds and cash received were remitted to the Holder as required. The Company recognized a gain on
disposal of the Spanish iGaming operations of $1,114,992 in Loss on disposal of businesses, net in the unaudited condensed consolidated
statement of operations.
Sale
of Bethard Business
On
February 24, 2023, (the “Bethard Closing Date”), the Company, pursuant to a stock purchase agreement (the “Purchase
Agreement”) dated February 14, 2023 with Gameday Group PLC, a Malta company (“Purchaser”), completed the divestiture
of Prozone Limited, a Malta company containing the online casino and sportsbook business, including the Bethard brand (the “Bethard
Business”), that is licensed in Malta and Sweden (together, the sale of Prozone Limited with the Bethard Business herein referred
to as the “Sale of the Bethard Business”). The purchase consideration was determined by the Company to be $8,090,965
comprised of cash received on the Bethard Closing
Date of €1,650,000
($1,739,882
using exchange rates in effect on the Bethard
Closing Date), holdback consideration, of €150,000
($158,171
using exchange rates in effect on the Bethard
Closing Date) and the Company’s settlement of its contingent consideration liability of €5,872,989
($6,192,912
using exchange rates in effect on the Bethard
Closing Date) that had originated from its acquisition of the Bethard Business on July 13, 2021. The Purchaser further assumed net working
capital of the Bethard Business consisting primarily of accounts payable and accrued liabilities estimated to be €1,238,552
($1,306,021
using exchange rates at the Bethard Closing Date).
The Company recognized a loss on disposal of the Bethard Business of $8,601,414
in Loss on disposal of businesses, net in the
unaudited condensed consolidated statement of operations.
On
February 16, 2023, the Company entered into the Amendment with the Holder as a condition to the closing of the sale of the Bethard Business.
The Amendment required the Company to deposit 50% of the proceeds from the Sale of the Bethard Business in a bank account in favor of
the Holder. The Amendment also required the Company to deposit 50% of the proceeds of any permitted future sale of assets or any subsequent
debt or equity offer or sale (a “Securities Transaction”) and 100% of the proceeds of any additional indebtedness incurred
in the future, into such bank account in favor of the Holder, or, at the option of the Holder, redeem amounts under the Senior Convertible
Note using such proceeds. 50% of the proceeds received from the Sale of Bethard,
or €825,000
($869,941
using exchange rates in effect on the Closing
Date) was deposited into a bank account in favor of the Holder and recorded in Restricted Cash on the unaudited condensed consolidated
balance sheet.
The
Amendment also modified the Senior Convertible Note to increase the principal balance by $2,950,010, for fees of $450,010 and converted
accrued liabilities of $2,500,000. The Amendment further provided for a voluntary reduction in the Conversion Price (as defined in the
Senior Convertible Note) when, among other things, the Company issued or was deemed to issue common stock in a future registered offering
at a price below the Conversion Price then in effect, to the lower issuance price in such offering, subject to certain exceptions. The
Amendment also provided rights to the Holder to participate in future Securities Transactions for a period of two years from the later
of the date of the Amendment and the date that no payment amounts due to the Holder remain outstanding.
Closure
of Argyll
On
November 10, 2022, the Company determined that it would close down its licensed remote gambling operation in the UK market. On
November 15, 2022, as part of the winding down of the Argyll UK iGaming operations, players were informed that they would no longer
be able to place bets from November 30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8,
2022 Argyll UK surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022
and December 14, 2022 Argyll UK attempted to refund customer accounts that still had remaining balances. On March 3, 2023, the Board
determined that the Company’s wholly-owned subsidiary Argyll Entertainment, the Company’s Swiss entity that is part of
Argyll UK, would be liquidated. The Swiss courts declared Argyll Entertainment bankrupt on March 27, 2023, at which point the
Company lost control of Argyll Entertainment and, as a result, deconsolidated the entity. The Company had previously fully impaired
the goodwill, intangible assets and other long-lived assets of Argyll UK in the fiscal year ended June 30, 2022. The Company
recognized a gain on disposal of Argyll Entertainment of $3,288,060
in loss on disposal of businesses, net in the unaudited condensed consolidated statement of operations.
Note
19 – 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 and sportsbook product offerings. 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, (2) online tournaments
(through our EGL tournament platform), and (3) player-vs-player wagering. 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 EBITDA to evaluate
the performance of each operating and reportable segment.
The
Company has recast previously reported information to conform to the current management view for all prior periods presented. The changes
to reportable segments had no impact to the Company’s unaudited condensed consolidated financial statements.
The
Company utilizes Adjusted EBITDA (as defined below) as its measure of segment profit or loss. The following table highlights the Company’s
revenues and Adjusted EBITDA for each reportable segment and reconciles Adjusted EBITDA on a consolidated basis to net loss. Total capital
expenditures for the Company were not material to the unaudited condensed consolidated financial statements.
A
measure of segment assets and liabilities has not been currently provided to the Company’s CODM and therefore is not shown below.
The following tables present the Company’s segment information:
Schedule
of Segment Information
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| | |
For the three months ended March 31, | | |
For the nine months ended March 31, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| | |
| | |
| | |
| | |
| |
| Net Revenue | |
| | |
| | |
| | |
| |
| EEG iGaming segment | |
$ | 3,437,387 | | |
$ | 14,590,447 | | |
$ | 17,571,219 | | |
$ | 41,692,731 | |
| EEG Games segment | |
$ | 738,607 | | |
$ | 1,109,140 | | |
$ | 2,619,444 | | |
$ | 4,946,194 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total | |
$ | 4,175,994 | | |
$ | 15,699,587 | | |
$ | 20,190,663 | | |
$ | 46,638,925 | |
| | |
| | | |
| | | |
| | | |
| | |
| Adjusted EBITDA | |
| | | |
| | | |
| | | |
| | |
| EEG iGaming segment | |
$ | (954,581 | ) | |
$ | (1,736,531 | ) | |
$ | (2,566,714 | ) | |
$ | (5,590,343 | ) |
| EEG Games segment | |
$ | (701,767 | ) | |
$ | (1,765,436 | ) | |
$ | (1,810,305 | ) | |
$ | (3,487,751 | ) |
| Other(1) | |
$ | (1,864,276 | ) | |
$ | (3,791,162 | ) | |
$ | (5,823,540 | ) | |
$ | (9,296,739 | ) |
| Total Adjusted EBITDA | |
$ | (3,520,624 | ) | |
$ | (7,293,129 | ) | |
$ | (10,200,559 | ) | |
$ | (18,374,833 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Adjusted for: | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
$ | (460,914 | ) | |
$ | (611,021 | ) | |
$ | (2,490,696 | ) | |
$ | (5,368,933 | ) |
| Loss on disposal of businesses | |
$ | (4,198,362 | ) | |
$ | - | | |
$ | (4,198,362 | ) | |
$ | - | |
| Asset impairment charges | |
$ | - | | |
$ | (38,629,310 | ) | |
$ | (16,135,000 | ) | |
$ | (38,629,310 | ) |
| Gain on termination of lease |
|
$ |
799,901 |
|
|
$ |
- |
|
|
$ |
799,901 |
|
|
$ |
- |
|
| Loss on conversion of senior convertible note | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (5,999,662 | ) |
| Loss on extinguishment of senior convertible note | |
$ | (3,616,372 | ) | |
$ | - | | |
| (3,616,372 | ) | |
$ | (28,478,804 | ) |
| Change in fair value of derivative liability | |
$ | (1,163,979 | ) | |
$ | (20,573,051 | ) | |
$ | 7,435,687 | | |
$ | (22,055,672 | ) |
| Change in fair value of warrant liability | |
$ | 1,412,941 | | |
$ | 8,181,398 | | |
$ | 6,435,229 | | |
$ | 28,641,920 | |
| Change in fair value of contingent consideration | |
$ | - | | |
$ | 99,247 | | |
$ | (2,864,551 | ) | |
$ | 1,950,693 | |
| Other non-operating income (loss), net | |
$ | (551,921 | ) | |
$ | (39,440 | ) | |
$ | (19,085 | ) | |
$ | (1,391,855 | ) |
| Depreciation and amortization | |
$ | (1,658,020 | ) | |
$ | (3,125,223 | ) | |
$ | (5,408,467 | ) | |
$ | (9,555,184 | ) |
| Right of use asset amortization | |
$ | (31,170 | ) | |
$ | (218,502 | ) | |
$ | (69,597 | ) | |
$ | (471,007 | ) |
| Stock-based Compensation | |
$ | (205,079 | ) | |
$ | (1,346,502 | ) | |
$ | (1,127,070 | ) | |
$ | (3,958,275 | ) |
| Cost of acquisition | |
$ | - | | |
$ | (13,531 | ) | |
| (35,930 | ) | |
$ | (269,013 | ) |
| Income tax benefit (expense) | |
$ | (376 | ) | |
$ | (431 | ) | |
$ | (376 | ) | |
$ | 5,503,430 | |
| Net loss | |
$ | (13,193,975 | ) | |
$ | (63,569,495 | ) | |
$ | (31,495,248 | ) | |
$ | (98,456,505 | ) |
| (1) |
Other
comprises of corporate and overhead costs. |
| (2) |
The
Company has no intersegment revenues or costs and thus no eliminations required. |
| (3) |
The
Company defines Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense; income taxes;
depreciation and amortization, including right of use asset amortization; stock-based compensation; cost of acquisition; 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
20 – Subsequent Events
Series
C Convertible Preferred Stock
On
April 19, 2023, the Company entered into an agreement with the Holder (the “Note to Preferred Stock Exchange Agreement”)
to convert the $15,230,024 in aggregate principal amount of the Senior Convertible Note outstanding into the new Series C Convertible
Preferred Stock as part of the Company’s approved plan
of compliance with the Nasdaq Listing Rules.
Prior
to the conversion into the new Series C Convertible Preferred Stock, the Company redeemed $679,976 of the $15,910,000 previously outstanding
on the Senior Convertible Note following the Exchanges and the impact of the Amendment and Exchanges, using funds from the Sale of
the Bethard Business deposited in a bank account in favor of the Holder. On April 19, 2023, using these funds, the Company paid $750,000
to the Holder to redeem the $679,976 and settle the related redemption premium of $51,450 and accrued interest of $168,574, with the
additional $150,000 paid on May 1, 2023.
On
May 8, 2023, the Holder converted 129 shares of Series C Convertible Preferred Stock into 77,273 shares of Common Stock for an aggregate
amount of $132,583. The number of shares of Series C Convertible Preferred Stock was reduced to 15,101 and the Common Stock outstanding
increased to 3,339,576 subsequent to this conversion.
The
terms and provisions of the Series C Convertible Preferred Stock were set forth in a Series C Convertible Preferred Stock Certificate
of Designations (the “Series C Certificate of Designations”), filed and effective with the Secretary of State of the State
of Nevada in connection with the closing on April 28, 2023. The transactions contemplated by the Note to Preferred Stock Exchange Agreement
and the Series C Certificate of Designations were approved by our Board.
The
exchange of the Senior Convertible Note into the Series C Convertible Preferred Stock extinguished the Senior Convertible Note and the
related debt liability outstanding of $15,230,024 and eliminated the related derivative liability that had a fair value of $1,963,933 ($1,862,000,000
approximate cash liability, as of March 31, 2023, calculated under the terms of the Senior Convertible Note), as of March 31, 2023.
The
Series C Certificate of Designations contemplates that the Series C Convertible Preferred Stock will be convertible into common stock
(the “Conversion Shares”) at the option of the holder of Series C Convertible Preferred Stock at any time from time to time
after the date of issuance thereof. The number of Conversion Shares issuable upon conversion of any share of Series C Convertible Preferred
Stock shall be determined by dividing (x) the Conversion Amount (as defined below) of a share of Series C Convertible Preferred Stock
by (y) the lower of (i) the Conversion Price (as defined below); and (ii) the Alternate Conversion Price (as defined below), subject
to the Floor Price (as defined below). “Conversion Amount” shall mean, with respect to each share of Series C Convertible
Preferred Stock, the sum of (A) $1,000 (such amount, subject to adjustment, the “Stated Value”) and (B) all declared and
unpaid dividends with respect to such Stated Value and any other amounts owed under the Series C Certificate of Designations. “Conversion
Price” shall mean $2.50, subject to adjustment as provided in the Series C Certificate of
Designations. “Alternate
Conversion Price” shall mean with respect to any Alternate Conversion that price which shall be the lowest of (i) the applicable
Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) the greater of (x) the
Floor Price and (y) 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 (such period, the “Alternate Conversion Measuring Period”). All such
determinations to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction
that proportionately decreases or increases the Common Stock during such Alternate Conversion Measuring Period. “Floor Price”
shall mean $0.44.
The
Company shall not be allowed to effect the conversion of any of the Series C Convertible Preferred Stock held by the holder of Series
C Convertible Preferred Stock, and such holder of Series C Convertible Preferred Stock shall not have the right to convert any of the
Series C Convertible Preferred Stock held by such holder of Series C Convertible Preferred Stock pursuant to the terms and conditions
of the Series C Certificate of Designations to the extent that after giving effect to such conversion, such holder of Series C Convertible
Preferred Stock together with its affiliates and certain related parties collectively would beneficially own in excess of 9.99% of the
shares of common stock outstanding immediately after giving effect to such conversion.
Dividends
on the Series C Convertible Preferred Stock will accrue daily at a rate equal to 8.0% per annum, increasing 0.50% each 135 day anniversary
from the date of issuance and be payable by way of inclusion of the Dividends in the Conversion Amount on each Conversion Date in accordance
with an optional conversion or upon any redemption thereunder (including, without limitation, upon any required payment upon any Bankruptcy
Triggering Event, as defined in the Series C Certificate of Designations).
If at any time the Company grants, issues or sells
any options, convertible securities, or rights to purchase stock, warrants, securities or other property pro rata to all or substantially
all of the record holders of any class of Common Stock (the “Series C Purchase Rights”), then each holder of Series C Preferred
Stock will be entitled to acquire, upon the terms applicable to such Series C Purchase Rights, the aggregate Series C Purchase Rights
which such holder of Series C Preferred Stock could have acquired if such holder of Series C Preferred Stock had held the number of shares
of common stock acquirable upon complete conversion of all the Series C Preferred Stock held by such holder of Series C Preferred Stock
immediately prior to the date as of which the record holders of shares of common stock are to be determined for the grant, issue or sale
of such Series C Purchase Rights; subject to certain limitations on beneficial ownership.
Securities
Purchase Agreement and Series D Preferred Stock
On
April 30, 2023, the Company entered into and on May 22, 2023 subsequently closed a Securities Purchase Agreement with the Holder. The
Securities Purchase Agreement contemplates a direct offering to the Investor of (i) 4,300 shares of new Series D Preferred Stock, $0.001 par value per share, for a price of $1,000 per share, (ii)
common warrants to purchase 1,433,333 shares of our Common Stock at a price of $1.96 per share,
and (iii) preferred warrants to purchase 4,300 shares of our Series D Preferred Stock at a price of $1,000 per share, for a
total gross proceeds to the Company of $4,300,000
before deducting underwriting discounts and commissions.
Issuances
of shares of common stock upon conversion of the Series D Convertible Preferred Stock and Common Warrants in excess of 20% of the Company’s
outstanding shares of common stock would require approval by the Company’s stockholders pursuant to the rules and regulations of
the Nasdaq Stock Market.
The
Securities Purchase Agreement contains certain covenants and restrictions that the Company shall not file certain registration statements
or issue or sell securities for a period of time after the closing, as more fully described in the Securities Purchase Agreement. The
Securities Purchase Agreement contains customary representations and warranties and certain indemnification rights and obligations of
the parties.
The
transactions contemplated by the Securities Purchase Agreement and the designation of 10,000 shares of preferred stock as Series D Preferred
Stock, with a par value of $0.001 per share, to be effective upon filing of a Series D Certificate of Designations with the Secretary
of State of the State of Nevada, were approved by our Board.
The
securities are expected to be offered and issued pursuant to the exemption from registration provided by Section 4(a)(2) and/or Section
3(a)(9) of the Securities Act of 1933, as amended.
The
Series D Certificate of Designations contemplates that the Series D Preferred Stock will be convertible into common stock (the “Series
D Conversion Shares”) at the option of the holder of Series D Preferred Stock at any time from time to time after the date of issuance
thereof. The number of Series D Conversion Shares issuable upon conversion of any share of Series D Preferred Stock shall be determined
by dividing (x) the Series D Conversion Amount (as defined below) of a share of Series D Preferred Stock by (y) the lower of (i) the
Series D Conversion Price (as defined below); and (ii) the Series D Alternate Conversion Price (as defined below), subject to the Series
D Floor Price (as defined below). “Series D Conversion Amount” shall mean, with respect to each share of Series D Preferred
Stock, the sum of (A) $1,000 (such amount, subject to adjustment, the “Series D Stated Value”) and (B) all declared and unpaid
dividends with respect to such Series D Stated Value and any other amounts owed under the Series D Certificate of Designations. “Series
D Conversion Price” shall mean $3.00. “Alternate Conversion Price” shall mean 90% of the lowest VWAP (as defined in
the Series D Certificate of Designations) of the 10 trading days ending and including the date of conversion. “Series D Floor Price”
shall mean $0.39.
The
Company shall not be allowed to effect the conversion of any of the Series D Preferred Stock held by the holder of Series D Preferred
Stock, and such holder of Series D Preferred Stock shall not have the right to convert any of the Series D Preferred Stock held by such
holder of Series D Preferred Stock pursuant to the terms and conditions of the Series D Certificate of Designations to the extent that
after giving effect to such conversion, such holder of Series D Preferred Stock together with its affiliates and certain related parties
collectively would beneficially own in excess of 9.99% of the shares of common stock outstanding immediately after giving effect to such
conversion.
Dividends
on the Series D Preferred Stock will accrue daily at a rate equal to 8.0% per annum, increasing 0.50% each 135 day anniversary from the
date of issuance and be payable by way of inclusion of the Dividends in the Series D Conversion Amount on each Series D Conversion Date
in accordance with an optional conversion or upon any redemption hereunder (including, without limitation, upon any required payment
upon any Bankruptcy Triggering Event).
If
at any time the Company grants, issues or sells any options, convertible securities, or rights to purchase stock, warrants, securities
or other property pro rata to all or substantially all of the record holders of any class of Common Stock (the “Series D Purchase
Rights”), then each holder of Series D Preferred Stock will be entitled to acquire, upon the terms applicable to such Series D
Purchase Rights, the aggregate Series D Purchase Rights which such holder of Series D Preferred Stock could have acquired if such holder
of Series D Preferred Stock had held the number of shares of common stock acquirable upon complete conversion of all the Series D Preferred
Stock held by such holder of Series D Preferred Stock immediately prior to the date as of which the record holders of shares of common
stock are to be determined for the grant, issue or sale of such Series D Purchase Rights; subject to certain limitations on beneficial
ownership.
Common
Warrants and Preferred Warrants
The
Common Warrants and Preferred Warrants expire in five years. The Common Warrants have a cashless exercise provision. The exercise of
the Common Warrants are subject to a beneficial ownership limitation for the Holder of 4.99%, which may be increased to 9.99% provided
that the increase will not be effective until the 61st day after delivery of a notice to the Company.
If
and when the Preferred Warrants are exercised, pursuant to the terms of the Common Warrants, the number of shares of common stock that
will be issuable under the Common Warrants will increase by an amount equal to the aggregate value of the shares of Series D Preferred
Stock (including any dividends or other amounts thereon) divided by the Alternate Conversion Price (as defined in the Certificate of
Designations for the Series D Preferred Stock). The Common Warrants and Preferred Warrants contain customary anti-dilution protection
for the Holder and anti-dilution protection in the event of certain dilutive issuances. In addition, the Common Warrants provide the
Holder with certain purchase rights in subsequent issuances or sales of securities by the Company.
Registration
Right Agreement
Pursuant
to a Registration Rights Agreement (the “Registration Rights Agreement”) between the Holder and the Company, the Company
intends to grant certain registration rights to the Investor. The Registration Rights Agreement requires the Company to file a registration
statement covering the resale of the shares of Common Stock underlying the shares of Series D Preferred Stock to be issued in the offering
and the shares of common stock issued upon exercise of the Common Warrants. The Registration Rights Agreement also covers the conversion
of any shares of Series D Preferred Stock issued upon exercise of the Preferred Warrants. The Company shall file the registration statement
within 60 days from the closing of the transactions contemplated by the Securities Purchase Agreement 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
Registration Rights Agreement contains mutual customary indemnification provisions among the parties and requires the Company to make
certain cash payments in the event the Company fails to file and/or maintain the effectiveness of a required registration statement.
Maxim
Group LLC (“Maxim”) was engaged as the sole placement agent for the offering of the Series D Preferred Stock. Maxim is
entitled to receive a placement agent fee at the closing of the transactions contemplated by the Securities Purchase Agreement,
representing 7.0%
of the gross cash proceeds at the closing. After deducting the placement agent fee associated with the Securities Purchase
Agreement, our estimated net cash proceeds at the closing was approximately $4,000,000.