Notes
to the Consolidated Financial Statements
June
30, 2022
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 online tournaments and player-versus-player wagering. On July 31, 2020, the Company
commenced revenue generating operations with the acquisition of LHE Enterprises Limited, holding company for Argyll Entertainment
(“Argyll”), an online sportsbook and casino operator. On January 21, 2021, the Company completed its acquisition of
Phoenix Games Network Limited, the holding company for the Esports Gaming League (“EGL”), and provider of event
management and team services, including live and online events and tournaments. On March 1, 2021, 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 operated
esports centers that provided esports programming and gaming infrastructure. The Helix game center assets in Foxboro, MA and North
Bergen, NJ, herein referred to as the “Helix Game Centers” were sold on June 10, 2022. EEG Labs, the analytics platform,
and the yet to be released proprietary player-versus-player wagering platform Betground (previously referred to as LanDuel) from the
Helix acquisition were retained. On July 13, 2021, the Company completed its acquisition of the online casino and sports book
business operating under the brand of Bethard (referred to herein as “Bethard”). The acquisition of Bethard is discussed
further in Note 3, Business Combinations.
Note
2 – Summary of Significant Accounting Policies
Basis
of presentation and principles of consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Reportable
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 delivers esports entertainment
experiences to gamers through a combination of 1) the Company’s 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 the Company’s EGL tournament platform), and 3) player-vs-player
wagering (through our yet to be released Betground our proprietary wagering product). 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 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 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 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 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 consolidated financial statements. One such factor considered by the Company is its
compliance with certain debt covenants under terms of the Senior Convertible Note (the “Senior Convertible Note” or
“New Note”), issued by the Company on February 22, 2022 in the principal amount of $35,000,000. The Company has not
maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible Note. On
February 28, 2022 the Company exchanged the existing Senior Convertible Note (the “Old Senior Convertible Note”), issued
by the Company on June 2, 2021 in the principal amount of $35,000,000 with the New Note resulting in the increase of the principal
outstanding balance of indebtedness from the carrying value of $29,150,001,
as adjusted for the conversions of principal and a minimum return (“Premium on Principal”) equal to 6.0% of any
outstanding principal through February 22, 2022, to $35,000,000.
. The New Note is classified as a current liability on the consolidated balance sheet as it may be redeemed by the Holder prior to
its maturity date. The Company has also recorded a derivative liability for the alternate conversion in the Senior Convertible Note
of $9,399,620
in current liabilities on the consolidated balance sheet that may be due to the Holder as part of the make-whole liability
under the default terms of the Senior Convertible Note. The cash liability calculated under the terms of the New Note of
approximately $180,000,000,
is materially higher than the fair value of the derivative liability of $9,399,620
calculated at June 30, 2022. The calculated make-whole liability may differ materially from the amount at which the Company may be
required to pay under the New Note. The Company has held non-binding discussions with the Holder to restructure its obligation under
the New Note. However, there can be no guarantee that the Company will be able to reach an agreement to restructure the New Note. See Note 12 for additional
information regarding the Old Senior Convertible Note and the New Note, and the potential effects on the Company’s business, financial
condition, and results of operations.
In
addition to compliance with debt covenants, the Company considered that it had an accumulated deficit of $149,140,426
as of June 30, 2022 and that in recent years 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 June 30,
2022, the Company had total current assets of $9,971,985 and
total current liabilities of $65,822,224.
Net cash used in operating activities for the year ended June 30, 2022 was $21,006,437,
which includes a net loss of $102,232,090.
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. On March 2, 2022 the Company closed an
offering (the “March 2022 Offering”) in which it sold 15,000,000 units
at $1.00 consisting
of one share of Common Stock and one warrant for a total of 15,000,000 warrants
with an exercise price of $1.00 (the
“March 2022 Warrants”). The March 2022 Offering provided net cash proceeds of $13,605,000.
There was also an overallotment option exercised to purchase warrants to purchase an additional 2,250,000 shares of common stock
(the “April 2022 Overallotment Warrants”) with an exercise price of $1.00 issued
to the underwriters of the offering on April 1, 2022. As of June 30, 2022, the Company had $2,517,146 of
available cash on-hand and net current liabilities of $55,850,239.
On September 19, 2022 the Company closed an offering (the “September 2022 Offering”) in which it sold (a) 30,000,000 shares
of Common Stock, $0.001 par
value per share and (b) warrants to purchase up to 30,000,000 shares
of Common Stock, at an exercise price of $0.25 per
share (the “September 2022 Warrants”), at an aggregate price of $0.25 per
share and accompanying September 2022 Warrant. The gross proceeds to us from the sale of the shares of Common Stock and Warrants
before deducting underwriting discounts and commissions and offering expenses payable by the Company was $7,500,000.
The Company also granted an Overallotment for 3,600,000 Overallotment
Warrants (“September 2022 Overallotment Warrants”), at a purchase price of $0.01 per
warrant, with an exercise price of $0.25 per
warrant. Total proceeds from the September 2022 Overallotment Warrants were $36,000.
The Company remitted to the Holder of the Senior Convertible Note an amount of $2,265,928
equal to fifty percent (50%) of all net proceeds above $2,000,000
following the payment of 7%
in offering fees including Underwriting discounts and commissions. In addition, as part of the September 2022 Offering, the Holder
purchased $512,500
of securities (2,050,000
shares of Common Stock and 2,050,000
Warrants) and the Company paid the Holder an additional $512,500.
The proceeds remitted to the Holder of the Senior Convertible Note reduced the principal balance of the Senior Convertible Note on a
dollar-for-dollar basis. 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 of the Senior Convertible Note was $4,080,990.
The amount of available cash on hand on October 12, 2022, one business day preceding this filing, was $2,571,692.
The
Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations without
additional financing. Although the Company has financing available, as further described below, the ability to raise financing using
these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates
to the Company and the esports and iGaming industry. The combination of these conditions was determined to raise substantial doubt regarding
the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial
statements.
In
determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern,
the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional
financing sources it believes are currently available to fund its operations and drive future growth that include (i) the potential
proceeds from the exercise of the 15,000,000
March 2022 Warrants and the 2,250,000
April 2022 Overallotment Warrants, exercisable at $1.00,
outstanding at June 30, 2022, (ii) the potential proceeds from the exercise of the 30,000,000 September 2022 Warrants and 3,600,000
September Overallotment Warrants, exercisable at $0.25, that were issued subsequent to June 30, 2022 (iii) the ability to sell
shares of Common Stock of the Company through various forms of offerings, and (iv) the ability to raise additional financing from other
sources. The Company is also continuing discussions with the Holder of the Senior Convertible Note to restructure the payment terms
and debt covenants.
Net
cash provided by financing activities for the year ended June 30, 2022 totaled $23,488,285,
which related to proceeds from the issuance
of 15,000,000 units,
each consisting of one share of Common Stock and one March 2022 Warrant, as part of the March 2022 Offering, the issuance of the
shares of the 10% Series A cumulative redeemable convertible preferred stock and the issuance of Common Stock of 1,165,813 shares
through the at-the-money equity offering program (“ATM”), partially offset by the payment of the dividends on the 10% Series A cumulative redeemable convertible preferred stock, the contingent
consideration of Bethard and repayments of notes payable and finance lease.
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 consolidated financial statements do not reflect any adjustments
that might result from the outcome of this uncertainty.
COVID-19
The novel coronavirus (“COVID-19”) emerged
in December 2019 and has since adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility
in financial markets. The ongoing impacts of the COVID-19 pandemic has introduced material uncertainty and risk with respect to the Company
and its performance, especially as it relates to in-person attendance at events and game centers.
The Company has previously indicated that a
significant or prolonged decrease in consumer spending on entertainment or leisure activities may have an adverse effect on demand
for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and
revenues, and thereby materially harming the Company’s business, financial condition and results of operations. During the
year ended June 30, 2022, the Company determined that in-person attendance at its Helix and customer game centers was not expected
to attain levels previously forecasted for such period. Additionally, projections for the Argyll business included continued losses
into fiscal 2023 due to high levels of competition in the UK market and high regulatory burdens placed on the iGaming businesses in
the UK market. Further, the levels of investment by the Company that are necessary to achieve the previous revenue projections
impacted a number of the Company’s businesses. As such, the Company recognized an impairment of long-lived assets held by its
Argyll, GGC, EGL, and Helix businesses and impairment of goodwill held by its Argyll, EGL, GGC and Helix businesses. On June 10,
2022, the Company disposed of the assets and related liabilities of two Helix Game Centers located in New Jersey and Massachusetts.
See Notes 6, 7 and 11 for discussion of the asset impairment charges.
The ultimate impact of the COVID-19 pandemic on other areas of the business will depend on future developments, which are uncertain and
may result in an extended period of continued business disruption and reduced operations. A materially disruptive resurgence of COVID-19
cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on
where infection rates are highest. Any resulting financial impact cannot be reasonably estimated at this time but may have a material
adverse impact on the Company’s business, financial condition and results of operations. The Company will continue to monitor developments
relating to disruptions and uncertainties caused by COVID-19.
Nasdaq
Continued Listing Rules or Standards
On
April 11, 2022, the Company received a deficiency notification letter from the Listing
Qualifications Staff of the Nasdaq Stock Market (the “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.
In
accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days from the date of such notice, or until October
10, 2022, to regain compliance with the minimum bid price requirement. To regain compliance, the bid price for the Company’s
Common Stock must have closed at $1.00
per share or more for a minimum of ten consecutive business days.
On
June 7, 2022, the Company received a further letter from the listing qualifications department staff of 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 million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2).
In
accordance with Nasdaq Listing Rule 5810(c)(3)I, the Company has 180 calendar days, or until December 5, 2022, to regain compliance. The
notice states that to regain compliance, the Company’s MVLS must close at $35 million or more for a minimum of ten consecutive
business days (or such longer period of time as the Nasdaq staff may require in some circumstances, but generally not more than twenty
consecutive business days) during the compliance period ending December 5, 2022.
On
October 11, 2022 the Company received a letter from Nasdaq 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 at the opening of business
on October 20, 2022, if we have not requested an appeal. The Company is eligible to request an appeal of the delisting determination. Under
Nasdaq rules, while any appeal is pending, the suspension of trading of the Company’s Common Stock, warrants and 10% Series A cumulative
redeemable convertible preferred stock will be stayed and will continue to trade on Nasdaq until the Nasdaq hearing panel makes a determination
after the hearing.
While the Company is exercising diligent efforts to maintain the listing of its Common Stock on
Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with the Nasdaq listing standards.
Cash
and Cash Equivalents
Cash
includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months
or less. As of June 30, 2022 and June 30, 2021, the Company did not have any financial instruments classified as cash equivalents. At
times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
Accounts are insured by the FDIC up to $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
consolidated statements of operations. At June 30, 2022 and 2021, the allowance for credit losses was not material to the consolidated
financial statements of the Company.
Receivables
Reserved for Users
User
deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with
a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded
as a receivable reserved for users on the consolidated balance sheets. An allowance for doubtful accounts may be established if it is
determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance for doubtful accounts
is recognized as a loss within general and administrative expenses in the consolidated statements of operations. The allowance for doubtful
accounts is not material to the consolidated financial statements.
Equipment
Equipment
is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related
to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing
the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease
term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:
Schedule of Estimated Useful Life of Asset
Computer
Equipment |
Up
to 5 years |
Furniture
and fixtures |
Up
to 7 years |
Leasehold
improvements |
Shorter
of the remaining lease term or estimated life of the improvement |
The
estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period.
The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the
resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the consolidated statements of operations.
Digital
Assets
Digital
assets for the year ended June 30, 2022 comprised of Ethereum cryptocurrency (“Ethereum” or “ETH)”. The digital assets are included in current assets in
the accompanying consolidated balance sheets. The classification of digital assets as a current asset has been made after the
Company’s consideration of the consistent daily trading volume on cryptocurrency exchange markets. There are no limitations or
restrictions on the Company’s ability to sell digital assets. Digital assets purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are
accounted for in connection with the Company’s revenue recognition policy disclosed below.
Digital
assets held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is
not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that
it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value,
which is measured using the quoted price of the digital asset at the time its fair value is being measured. In testing for impairment,
the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment
exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary.
If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. Impairment losses of
the Company’s digital assets were not material to the consolidated financial statements for the years ended June 30, 2022 and June
30, 2021.
The Company accounts for its gains or losses in accordance
with the first in first out (FIFO) method of accounting. The Company generally liquidates its digital assets position monthly, or more
frequently depending upon the market conditions. The Company’s recognized realized gains through the sale and disbursement of digital
assets during the years ended June 30, 2022 and 2021 was not material to the consolidated financial statements. At June 30, 2022 and 2021,
the Company’s digital assets were $0 and $223,515, respectively.
The Ethereum upgrade from proof of work to proof
of stake occurred in mid-September 2022, subsequent to the financial year end. On the day of the upgrade no additional mining of ETH was
possible, and this required the Company to switch to a different digital asset. The switch in assets is not expected to have a
material impact on the Company’s financial position or results 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 June 30, 2022 the
Company’s business is classified into four reporting units: iGaming Malta (including Bethard and 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.
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 quarter ended March 31, 2022, the Company’s share price had a significant decline and the Company’s ability to
invest in its businesses was impacted. This was determined to be a triggering event and the long-lived assets of the Company were
quantitatively tested for impairment. As of March 31, 2022, the Company recognized goodwill asset impairment charges of $23,119,755
to the goodwill of the GGC, EGL and Helix reporting units, which are all part of the EEG Games segment. There was no further impairment identified as of the annual testing date
from that recognized as of March 31, 2022. During the last three months of the fiscal year, the Company’s share price further declined
and the macro environment was unstable, and the Company determined that a separate triggering event had occurred as of June 30,
2022. The Company performed an additional quantitative analysis and recorded a further goodwill asset impairment charge of $3,852,876
to the goodwill of the iGaming Argyll (UK) reporting unit, which is part of the EEG iGaming segment, for a total of $26,972,631
for the year ended June 30, 2022 (see Note 7 for additional information regarding the goodwill impairment, and the effects on the
Company’s business, financial condition, and results of operations). There were no goodwill impairment charges recorded during
the year ended June 30, 2021. Further downturns in economic, regulatory and operating conditions and the continuing impact of
COVID-19 could result in additional goodwill impairment in future periods.
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. The Company also holds indefinite-lived intangible assets in the form of digital assets as discussed above
in Digital Assets.
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 year ended June 30, 2022, the Company recognized a total impairment charge of $19,526,058
on its long-lived assets. This included $3,972,022
for the impairment of the Argyll tradename, developed technology, gaming license and customer relationships from the EEG iGaming
segment, and $13,484,122
for the impairment of the EGL tradename, developed technology and software, GGC and Helix tradenames and
developed technology from the EEG Games segment (see Note 7), $653,107
for the total equipment, net impairment, including $44,481
for the Argyll computer equipment and furniture and equipment from the EEG iGaming segment, and $608,626
for EGL computer equipment, Helix Game Centers computer equipment, leasehold improvements and furniture and equipment from the
EEG Games segment (see Note 6), and $1,416,807
for the impairment of operating lease right-of-use assets for the Helix building rentals from the EEG Games segment (see Note 11).
This was recognized in asset impairment charges in the consolidated statements of operations. There were no impairment charges on
long-lived assets identified for the year ended June 30, 2021.
Liabilities
to Customers
The
Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at
a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings
and player losses. The Company maintains a restricted cash balance and player deposits held by third parties, recorded as receivables
reserved for users on the 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 jackpot winnings. The jackpot liability is accrued monthly
based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming casino
machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be paid out
randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount that varies
across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot and therefore
the winning of a jackpot affects other players on the network of participating iGaming casino machines. Jackpot winnings reduce revenue
at the time the entity has the obligation to pay the jackpot, which occurs when the jackpot is won by the player.
Leases
The
Company leases for office space and game center space through operating lease agreements that were a result of its acquisitions of Argyll,
Lucky Dino and Helix. The Company also leased other property and equipment, acquired through Helix, that was subsequently sold as part
of the Helix sale transaction 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 consolidated statements of
operations. Operating lease expenses related to variable lease payments are recognized as operating expenses in a manner consistent with
the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of
less than 12 months (“short-term leases”) are not recognized on the consolidated balance sheets. The rent expense for short-term
leases is recognized on a straight-line basis over the lease term and included in general and administrative expense on the consolidated
statements of operations.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s
tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S. GAAP treatment and tax treatment
of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in
deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred
tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence,
that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established
through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback
years, existing taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.
The
Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to
determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will
be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained,
the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount
of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered
appropriate, as well as the related net interest and penalties.
Derivative
Instruments
The
Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of
those contracts qualify as derivatives (Note 12). The result of this accounting treatment is that the fair value of the embedded
derivative is recorded at fair value each reporting period and recorded as a liability (Note 18) in the consolidated balance sheets.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as
other income or expense (Note 18).
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 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 value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other
receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been
determined to approximate carrying amounts due to the short maturities of these instruments. The fair value of the Senior Convertible
Note and lease liabilities approximate their carrying value based on current interest and discount rates.
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 year ended June 30, 2022 and 2021
because their inclusion would have been antidilutive:
Schedule of Weighted Average Diluted Common Shares Outstanding
| |
2022 | | |
2021 | |
Common stock options | |
$ | 1,110,526 | | |
$ | 474,676 | |
Common stock warrants | |
| 22,600,558 | | |
| 5,350,558 | |
Common stock issuable upon conversion of senior convertible note | |
| 16,031,513 | | |
| 2,120,000 | |
10% Series A cumulative redeemable convertible preferred stock | |
| 835,950 | | |
| — | |
Total | |
$ | 40,578,547 | | |
$ | 7,945,234 | |
Comprehensive
Loss
Comprehensive
loss consists of the net loss for the year and foreign currency translation adjustments related to the effect of foreign exchange on
the value of assets and liabilities. The net translation loss for the year is included in the consolidated statements of comprehensive
loss.
Foreign
Currency
The
transaction currencies of the Company include the U.S. dollar, British Pound and Euro. The reporting currency of the Company is the U.S.
dollar. Assets and liabilities of the Company’s foreign operations with functional currencies other than the U.S. dollar are translated
at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during
the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’
equity. Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency. The Company recorded a foreign exchange transaction loss for the years ended June 30, 2022 and 2021 of $149,573 and $440,452,
respectively. Transaction gains and losses are reported within other non-operating income (loss), net, on the consolidated statements
of operations.
Stock-based
Compensation
The
Company periodically issues stock-based compensation to employees, directors, contractors and consultants for services rendered.
Stock-based compensation granted to employees and non-employee directors includes grants of restricted stock and employee stock
options that are measured and recognized based on their fair values determined on the grant date. The award of restricted stock and
stock options, which are generally time vested, are measured at the grant date fair value and charged to earnings on a straight-line
basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which
is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the
equity award, the exercise price of the stock option as compared to the fair market value of the Common Stock on the grant date, and
the estimated volatility of the Common Stock over the term of the equity award. The fair value of restricted stock is determined by
the closing market price of 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).
Sales
and Marketing
Sales
and marketing expenses are comprised primarily of advertising costs that include online search advertising and placement, including advertising
with affiliates for the online betting and casino operations, as well as other promotional expenses paid to third parties, including
expenses related to sponsorship agreements. Sales and marketing expense for the years ended June 30, 2022 and 2021 was $25,728,220 and
$10,038,524, respectively.
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 consolidated statements of operations. VAT receivables and VAT payables are included
in other receivables and accounts payable and accrued expenses, respectively on the consolidated balance sheets. Sales to customers do
not have significant financing components or payment terms greater than 12 months.
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. The revenue for jackpot games is recognized when the jackpot is won by the customer. The Company applies a practical expedient
by accounting for its performance obligations on a portfolio basis as iGaming contracts have similar characteristics. The Company expects
the application of the revenue recognition guidance to a portfolio of iGaming contracts will not materially differ from the application
of the revenue recognition guidance on an individual contract basis.
The
Company evaluates bets that its users place on websites owned by third party brands in order to determine whether it may recognize revenue
on a gross basis, when acting as the principal provider of the wagering service, or on a net basis, when acting as an intermediary or
agent. The principal in a wagering service involving a third party is generally the entity that controls the wagering service such that
it has a right to the services being performed by the third party and can direct the third party in delivery of the service to its users.
The Company records revenue on a gross basis as it has determined it is the principal in transactions involving third parties, such as
revenue sharing arrangements, as it controls the wagering service being offered to the users such that it has a right to the service
performed by third parties and can further direct third parties in providing services to users. The Company further records expenses
related to its revenue sharing arrangements and other third-party iGaming expenses within costs of revenue in the consolidated statements
of operations.
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
software subscriptions also allow for game center operators to enable their equipment to mine cryptocurrency when gaming stations
are not in use by the end user. The software allows the participating game center operators to contribute their computer power for
the purpose of adding a block to the blockchain within a mining pool where the Company and the participating game center operators
are participants. The Company’s software enables the participating game center operators to enter into mining pools with
mining pool operators to provide computing power to the mining pool to mine cryptocurrency digital assets. The Company and the
participating game center operators are entitled to a fractional share of the fixed cryptocurrency digital asset award the mining
pool operator receives (less transaction fees to the mining pool operator) for successfully adding a block to the blockchain. The
Company and participating game center operators’ fractional share is based on the proportion of computing power contributed to
the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
A digital asset award is received by the Company from the mining pool, in the form of crypto currency (i.e., Ethereum), for
successfully adding a block to the blockchain. The Company records a payable for the amount due to each participating game center
operator, in the form of U.S. dollars, based on the participating game center operators’ computing power contributed toward
the mining of the award less a fee charged by the Company. The amounts due to the participating game center operators are paid in
U.S. dollars. The Company recognizes the fair value of the digital awards, net of fees and amounts payable to the game center
operators, as revenue at the time the digital award is added to the blockchain using the price of the digital coin quoted in U.S.
dollars. The transaction consideration of the digital award the Company receives, if any, is non-cash consideration. The Company
records revenue on a net basis as it has determined it is the agent in the transactions with the mining pool and facilitates the
provision of the computing power and payments for the participating game center operators. The transaction consideration for the
mining of cryptocurrency is variable consideration as it is based on the number of blocks added to the blockchain and the amount of
the digital asset received from the mining pool. Because it is not probable that a significant reversal of cumulative revenue will
not occur, the consideration is constrained until the mining pool operator successfully places a block and the Company receives
confirmation of the consideration it will receive, at which time revenue is recognized. There is currently no specific definitive
guidance under U.S. GAAP or an alternative accounting framework for the accounting for digital assets recognized as revenue or held,
and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative
guidance is enacted by the Financial Accounting Standards Board (“FASB”), the Company may be required to change its
policies, which could impact the Company’s consolidated financial position and results from operations.
The
Company further provides consultation services related to the use of hardware and equipment for gaming operations together with implementation
services that include sourcing, training, planning, and installation of technology. The Company considers services related to hardware
and equipment, implementation, and any design of user interface for the customer as separate performance obligations. Revenue for hardware
equipment and design of custom user interface is recognized at a point in time upon delivery and completion. Implementation services
are recognized over time, as services are performed.
The
Company also has contracts with software companies to provide talent data analytics and related esports services, which include
analytic development, other related services to develop software and applications for tournaments, 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 consolidated
balance sheets. The Company may also enter into profit sharing arrangements which are determined based on the net revenue earned by the
customer for an event in addition to a fixed fee. Revenue recognition for profit sharing arrangements is recognized at the time the revenue
from the event is determined, which is generally at the conclusion of the event. An event or team services contact may further require
the Company to distribute payments to event or tournament attendees resulting in the recognition of a processing fee by the Company.
The Company does not recognize revenue from the processing of payments until the conclusion of the event or tournament.
The
Company evaluates the service being provided under an esports event and team services contract to determine whether it should recognize
revenue on a gross basis as the principal provider of the service, or on a net basis in a manner similar to that of an agent. The Company
has determined that for esports event and team services contracts that allow for the assignment of individual tasks to a third-party
contractor, the Company acts as the principal provider of the service being offered to the customer as it remains primarily responsible
for fulfilling the contractual promise to the customer. In profit sharing arrangements, such as events that allow for the Company to
share in the revenue earned by a customer for an event, the Company has determined it acts in the role of an agent to the customer as
the event creator. The Company has also determined it acts as an agent when it collects a processing fee for performing the service of
distributing prize money on behalf of its customers to event or tournament winners.
Contract
Liabilities
Liabilities
to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities.
The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing
a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage
or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price
in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play
or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue
from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users
is based on the estimated fair value of the loyalty point incentive available to the user.
The
Company also records payments received in advance of performance under an esports gaming services contract or event management or team
services contract as deferred revenue.
Recently
Adopted Accounting Pronouncements
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new
standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income
taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership
of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted
changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU
2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company
adopted this standard as of July 1, 2021. The adoption of this guidance did not have a material impact on the accompanying consolidated
financial statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASC
350). The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting
unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount
of goodwill in that reporting unit. The guidance is effective for the fiscal years beginning after December 15, 2022. Early adoption
is permitted. The Company adopted this standard during the year ended June 30, 2022. See Note 7 for additional information regarding
the results of the impairment tests performed on its goodwill and intangible assets.
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 Accounting Standards Codification 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 consolidated financial statements and it does not expect the guidance to have a material effect on its consolidated financial statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40). The standard clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity
should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains
equity classified after modification or exchange as an exchange of the original instrument for a new instrument. The guidance is effective
for the fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact that
the adoption of this guidance will have on its 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 is currently evaluating the potential impact of this standard on
its 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 consolidated financial statements.
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the
specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have
a material impact on the Company’s financial position or results of operations upon adoption.
Note
3 – Business Acquisitions
Bethard
Acquisition
On
July 13, 2021, the Company completed the acquisition of the business-to-consumer operations of Bethard Group Limited
(“Bethard”), which provides sportsbook, casino, live casino and fantasy sport betting services with gaming licenses to
customers in Sweden, Spain, Malta and Ireland (the “Bethard Business”), from Gameday Group Plc, a limited liability
company incorporated in Malta (the “Seller”). The acquisition of Bethard expanded the iGaming operations of the Company
in Europe and provides the Company with increased opportunity to cross-sell its esports offerings to a larger customer base. The
acquisition of Bethard resulted in the Company acquiring the outstanding share capital of Prozone Limited, a public liability
company registered in Malta, that had previously received the assets of Bethard in a pre-closing restructuring by the Seller. The
initial payment of purchase consideration for Bethard included cash paid at closing of €13,000,000
(equivalent to $15,346,019
using exchange rates in effect at the acquisition date), including €1,000,000
(equivalent to $1,180,463
using exchange rates in effect at the acquisition date) paid for a regulatory deposit with the Spanish Gaming Authority. The cash
purchase consideration of Bethard also included a second payment (“Second Payment”) of €4,000,000
(approximately $4,721,852
using exchange rates in effect at the acquisition date) that was paid by the Company on November 16, 2021 (the “Second Payment
Due Date”), using the proceeds raised from the issuance of the 10% Series A Cumulative Redeemable Convertible Preferred Stock
(see Note 15 for discussion of the 10% Series A Cumulative Redeemable Convertible Preferred Stock). The total purchase consideration
of Bethard also requires the Company to pay additional contingent cash consideration during the 24-month period following the
acquisition date equal to 15% of net gaming revenue until the date of the Second Payment, with the percentage then decreasing to 12%
of net gaming revenue for the remaining term ending July 2023. The total purchase consideration also provides for a payment of up
€7,600,000
(equivalent to $8,971,519
using exchange rates in effect at the acquisition date) of contingent share consideration should a specific ambassador agreement be
successfully assigned to the Bethard Business acquired by the Company following the acquisition date.
The
purchase consideration, including the fair value of the contingent cash consideration, is as follows:
Schedule
of Preliminary Purchase Price Allocation of Acquisition
| |
| - | |
Cash paid at closing | |
$ | 15,346,019 | |
Second Payment | |
| 4,721,852 | |
Total cash consideration paid for Bethard | |
| 20,067,871 | |
Loans receivable applied toward purchase consideration | |
| | |
Share consideration issued at closing | |
| | |
Holdback Consideration | |
| | |
Fair value of warrants issued at closing | |
| | |
Contingent cash consideration | |
| 6,700,000 | |
Total purchase price consideration | |
$ | 26,767,871 | |
The
contingent cash consideration assumes a cash payment equal to 15% of net gaming revenue for the Bethard Business through the
Additional Payment Due Date as set forth through the Second Payment Due Date estimated to be approximately four months at
acquisition, then reverting to 12% thereafter for the remainder of a two-year period following the acquisition date. The
estimated contingent cash consideration of $6,700,000
is calculated using the applicable percentages applied to projected net gaming revenue of the Bethard Business at the date of
acquisition. Based on updated revenue projections as of June 30, 2022, the Company determined the fair value of the remaining
contingent consideration payable to be $3,328,361,
net of the amount paid to the Seller through June 30, 2022 of $1,016,331.
The decrease in the contingent cash consideration liability resulted in the recognition of a benefit of $2,355,308,
included as change in fair value of contingent consideration in the consolidated statement of operations for the year ended June 30,
2022.
The
purchase consideration excludes contingent share consideration payable to the Seller as there is no indication such contingent share
contingent consideration will become payable from a successful assignment of the specified ambassador agreement. The Seller of the
Bethard Business had up to 6 months to assign the ambassador agreement to receive the contingent share consideration. After the 6
months, the contingent share consideration is reduced by €422,222
(equivalent to $498,417
using exchange rates in effect at the acquisition date) for each month the contract is not assigned to the Company through the
24-month anniversary. As of October 12, 2022, one business day preceding this filing, the ambassador agreement had not been assigned
to the Company.
The
purchase price and purchase price allocation of the assets acquired and liabilities assumed is as follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Cash | |
| - | |
Restricted cash | |
| | |
Receivables reserved for users | |
$ | 3,109,782 | |
Accounts receivable | |
| | |
Prepaid expenses and other current assets | |
| | |
Other receivables | |
| | |
Equipment | |
| | |
Operating lease right-of-use asset | |
| | |
Intangible assets | |
| 18,100,000 | |
Goodwill | |
| 11,292,685 | |
Other non-current assets | |
| 1,180,463 | |
Accrued liabilities | |
| (5,634 | ) |
Accounts payable and accrued expenses | |
| | |
Player liability | |
| (3,108,425 | ) |
Deferred tax liability | |
| | |
Deferred revenue | |
| | |
Liabilities to customers | |
| | |
Notes payable | |
| | |
Operating lease liability | |
| | |
Long-term debt | |
| | |
Deferred income taxes | |
| (3,801,000 | ) |
Total | |
$ | 26,767,871 | |
The
acquired intangible assets, useful lives and fair value at the acquisition date follows:
Schedule
of Fair Value of Acquired Intangible Assets
| |
Useful Life (years) | | |
Fair Value | |
Tradename | |
10 | | |
$ | 3,500,000 | |
Player interface | |
5 | | |
| 1,200,000 | |
Gaming licenses | |
2 | | |
| 700,000 | |
Player relationships | |
5 | | |
| 12,700,000 | |
Total | |
| | |
$ | 18,100,000 | |
Qualitative
factors that contribute to the recognition of goodwill include certain intangible assets that are not being recognized as separate
identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of
benefits from securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace
participant, as well as acquiring a talented workforce and cost savings opportunities. The goodwill of Bethard is not deductible for
tax purposes. Transaction related expenses incurred for the acquisition of the Bethard Business total $1,005,594,
including $255,481
incurred for the year ended June 30, 2022 and $750,113 for the year ended June 30, 2021. Transaction related expenses are recorded
in general and administrative expenses in the consolidated statements of operations.
Acquisition
of GGC
On
June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of GGC. The total consideration paid
at closing was $24,273,211, with $14,100,000 paid in cash at closing and $900,000 paid through application of loans receivable from GGC,
inclusive of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advanced as loans
receivable was $14,993,977 after adjustment for cash acquired of $6,023). The Company also issued 830,189 shares common stock at closing
using a value per share $13.25 pursuant to the GGC Purchase Agreement. The fair value of the share consideration paid at closing was
determined to be $9,273,211 using the closing share price of the Company on the date of acquisition.
The
loans receivable applied toward the purchase consideration had originated during the negotiation to purchase GGC, whereby the Company
had advanced an aggregate of $600,000 to GGC during 2020 in the form of loans (“GGC Loans”). Upon execution of the purchase
agreement to acquire GGC, the Company paid GGC an additional $600,000 to be used for operating expenses pending the closing of the GGC
acquisition (“GGC Operating Expense Payments”). The Company had recorded these advances totaling $1,200,000 as loans receivable
at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase consideration for
the GGC Loans and GGC Operating Expense Payments if the acquisition of GGC were to close by April 30, 2021. If acquisition of GGC were
to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward the purchase price for
the GGC Loans, and a credit toward the purchase price equal to 60% of the GGC Operating Expense Payments. If the acquisition closed after
May 14, 2021, the Company was to receive full credit toward the purchase price for the GGC Loans, and a credit toward the purchase price
equal to 50% of the GGC Operating Expense Payments. The acquisition did not close by May 14, 2021, and therefore the Company had forgiven
50% of the GGC Operating Expense Payments or $300,000 and applied the remaining balance of the total loans receivable, or $900,000 toward
the purchase price of GGC.
A
summary of the purchase consideration follows:
Schedule of Preliminary Purchase Price Allocation of Acquisition
| |
| - | |
Cash
paid at closing | |
$ | 14,100,000 | |
Loans
receivable applied toward purchase consideration | |
| 900,000 | |
Share
consideration issued at closing | |
| 9,273,211 | |
Total
purchase price consideration | |
$ | 24,273,211 | |
The
allocation of assets acquired and liabilities assumed follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Cash | |
$ | 6,023 | |
Accounts
receivable | |
| 102,701 | |
Prepaid
expenses and other current assets | |
| 97,083 | |
Equipment | |
| 7,704 | |
Intangible
assets | |
| 16,300,000 | |
Goodwill | |
| 11,445,832 | |
Accounts
payable and accrued expenses | |
| (263,132 | ) |
Deferred
tax liability | |
| (3,423,000 | ) |
Total | |
$ | 24,273,211 | |
The
acquired intangible assets, useful life and fair value determined at the acquisition date follows:
Schedule of Fair Value of Acquired Intangible Assets
| |
Useful
Life (years) | | |
Fair
Value | |
Tradename | |
| 10 | | |
$ | 2,600,000 | |
Developed
technology | |
| 5 | | |
| 13,300,000 | |
Customer
relationships | |
| 5 | | |
| 400,000 | |
Total | |
| | | |
$ | 16,300,000 | |
The
results of operations of GGC are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the GGC acquisition is not deductible for tax purposes. Transaction related expenses
were $801,317 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated statements
of operations. The transaction expenses incurred for the GGC acquisition include a charge of $300,000 related to the forgiveness of the
GGC Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the GGC operations prior
to closing that were not eligible to be applied toward the purchase consideration.
Acquisition
of Helix
On
June 1, 2021, the Company completed its acquisition of the issued and outstanding membership units of Helix. The total consideration
paid at closing was $17,000,000, with $9,400,000 paid in cash and $600,000 paid through application of loans receivable from Helix, inclusive
of operating advances, toward the purchase consideration (net cash paid by the Company inclusive of cash advances as loans receivable
was $9,964,691 after adjustment for cash acquired of $35,309). The Company also issued 528,302 shares of common stock at closing using
a value per share of $13.25 pursuant to the Helix Purchase Agreement. The fair value of the share consideration paid at closing to be
$5,901,133 using the closing share price of the Company on the date of acquisition.
The
loans receivable applied toward the purchase consideration had originated during the negotiation to purchase Helix, whereby the Company
had advanced an aggregate of $400,000 to Helix during 2020 and 2021 in the form of loans (“Helix Loans”). Upon execution
of the purchase agreement to acquire Helix, the Company paid Helix an additional $400,000 to be used for operating expenses pending the
closing of the Helix acquisition (“Helix Operating Expense Payments”). The Company had recorded these advances totaling $800,000
as loans receivable at March 31, 2021 pending the closing of the acquisition. The Company was to receive full credit toward the purchase
consideration for the Helix Loans and Helix Operating Expense Payments if the acquisition of Helix were to close by April 30, 2021. If
acquisition of Helix were to close after April 30, 2021, but on or prior to May 14, 2021, the Company was to receive full credit toward
the purchase price for the Helix Loans, and a credit toward the purchase price equal to 60% of the Helix Operating Expense Payments.
If the acquisition closed after May 14, 2021, the Company was to receive full credit toward the purchase price for the Helix Loans, and
a credit toward the purchase price equal to 50% of the Helix Operating Expense Payments. The acquisition did not close by May 14, 2021,
and therefore the Company had forgiven 50% of the Helix Operating Expense Payments or $200,000 and applied the remaining balance of the
total loans receivable, or $600,000 toward the purchase price of Helix.
A
summary of the purchase consideration follows:
Schedule of Preliminary Purchase Price Allocation of Acquisition
| |
| - | |
Cash
paid at closing | |
$ | 9,400,000 | |
Loans
receivable applied toward purchase consideration | |
| 600,000 | |
Share
consideration issued at closing | |
| 5,901,133 | |
Total
purchase price consideration | |
$ | 15,901,133 | |
The
allocation of assets acquired and liabilities assumed follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Cash | |
$ | 35,309 | |
Accounts
receivable | |
| 3,054 | |
Prepaid
expenses and other current assets | |
| 76,933 | |
Equipment | |
| 643,537 | |
Operating
lease right-of-use asset | |
| 803,503 | |
Intangible
assets | |
| 3,600,000 | |
Goodwill | |
| 12,393,591 | |
Other
non-current assets | |
| 31,015 | |
Deferred
revenue | |
| (9,036 | ) |
Deferred
income taxes | |
| (756,000 | ) |
Operating
lease liability | |
| (803,503 | ) |
Long-term
debt | |
| (117,270 | ) |
Total | |
$ | 15,901,133 | |
The
acquired intangible assets, useful lives fair value determined at the acquisition date follows:
Schedule of Fair Value of Acquired Intangible Assets
| |
Useful
Life (years) | | |
Fair
Value | |
Tradename | |
| 10 | | |
$ | 800,000 | |
Developed
technology | |
| 5 | | |
| 2,800,000 | |
Total | |
| | | |
$ | 3,600,000 | |
The
results of operations of Helix are in the consolidated financial statements of the Company for the year ended June 30, 2021 since the
date of acquisition. The goodwill recorded in the Helix acquisition is not deductible for tax purposes. Transaction related expenses
were $604,603 for the year ended June 30, 2021 are included in general and administrative expenses in the consolidated statements of
operations. The transaction expenses incurred for the Helix acquisition include a charge of $200,000 related to the forgiveness of Helix
Operating Expense Payments discussed above, and an additional $100,000 of operating expense advances to fund the Helix operations prior
to closing that were not eligible to be applied toward the purchase consideration.
Acquisition
of Lucky Dino
On
March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming
casino operations of Lucky Dino for cash paid at closing €25,000,000 ($30,133,725 using exchange rates in effect at the acquisition
date), or with net cash paid being €24,001,795 ($28,930,540 using exchange rates in effect at the acquisition date) after adjustment
for cash acquired of €998,205 ($1,203,185 using exchange rates in effect at the acquisition date). The acquisition of Lucky Dino
was funded with available cash on hand.
The
allocation assets acquired and liabilities assumed follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Restricted
cash | |
$ | 1,203,185 | |
Other
receivables | |
| 131,111 | |
Equipment | |
| 13,765 | |
Operating
lease right-of-use asset | |
| 371,898 | |
Intangible
assets | |
| 19,100,000 | |
Goodwill | |
| 10,541,217 | |
Other
non-current assets | |
| 37,840 | |
Accounts
payable and accrued expenses | |
| (319,149 | ) |
Liabilities
to customers | |
| (574,244 | ) |
Operating
lease liability | |
| (371,898 | ) |
Total | |
$ | 30,133,725 | |
The
acquired intangible assets, useful lives and fair value determined at the acquisition date follows:
Schedule of Fair Value of Acquired Intangible Assets
| |
Useful
Life (years) | | |
Fair
Value | |
Tradename | |
| 10 | | |
$ | 2,100,000 | |
Gaming
licenses | |
| 2 | | |
| 800,000 | |
Developed
technology | |
| 5 | | |
| 5,500,000 | |
Player
relationships | |
| 5 | | |
| 10,700,000 | |
Total | |
| | | |
$ | 19,100,000 | |
The
results of operations of Lucky Dino are included in the consolidated financial statements of the Company for the year ended June 30,
2021 since the date of acquisition. The goodwill recorded in the Lucky Dino acquisition is deductible for tax purposes. Transaction related
expenses were $1,280,766 for the year ended June 30, 2021 and are included in general and administrative expenses in the consolidated
statements of operations.
Acquisition
of EGL
On
January 21, 2021, the Company acquired all the issued and outstanding share capital of EGL for total purchase consideration of $2,975,219.
The total purchase consideration included $481,386 of cash paid at closing, (net cash paid at closing being $477,350 after adjustment
for cash acquired of $4,036), and the issuance of 292,511 shares of common stock with a fair value of $2,193,833 as determined using
the closing share price on the date of acquisition. The purchase consideration also included an estimate of $300,000 for contingent consideration
(“Holdback Consideration”) payable by the Company in cash and share consideration based on the progress of EGL towards the
achievement of certain revenue targets based on the ability of EGL to achieve certain revenue targets by May 16, 2021. The Holdback Consideration
was settled by the Company for $145,153 paid in cash, (increasing the total cash paid for EGL to $622,503), and through issuance of 63,109
shares of common stock with a fair value of $597,650, as determined using the closing price on the date of settlement. The incremental
consideration paid in excess of the amount estimated at Holdback Consideration of $442,803 was recorded to change in fair value of contingent
consideration within the statement of operations for the year ended June 30, 2021.
The
terms of the EGL purchase agreement may further require the Company to pay an additional $2,750,000 (equivalent to approximately £2,000,000
of purchase price using exchange rates at the acquisition date) in contingent earnout consideration (“Earnout Consideration”)
if EGL is to achieve an earnings benchmark on the 18-month anniversary of the closing date. On the date of acquisition, the Company determined
that the likelihood of a payout of the Earnout Consideration was remote and therefore did not assign a value to the Earnout Consideration
on the date of acquisition. This considers the Earnout Consideration benchmark increases during the earnout period for amounts invested
by the Company in the operations of EGL. The Earnout Consideration benchmark used to determine the minimum threshold for payment of additional
purchase consideration payable by the Company also increases should there be an increase in the value of the share consideration that
was issued by the Company on the date of acquisition.
A
summary of the purchase consideration follows:
Schedule of Preliminary Purchase Price Allocation of Acquisition
| |
| - | |
Cash
paid at closing | |
$ | 481,386 | |
Share
consideration issued at closing | |
| 2,193,833 | |
Holdback
Consideration | |
| 300,000 | |
Total
purchase price consideration | |
$ | 2,975,219 | |
The
allocation of assets acquired and liabilities assumed follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Cash | |
$ | 4,036 | |
Accounts
receivable | |
| 141,031 | |
Other
receivables | |
| 32,923 | |
Equipment | |
| 11,274 | |
Intangible
assets | |
| 1,371,789 | |
Goodwill | |
| 1,978,668 | |
Other
non-current assets | |
| 5,382 | |
Accounts
payable and accrued expenses | |
| (118,157 | ) |
Deferred
revenue | |
| (95,062 | ) |
Notes
payable | |
| (68,589 | ) |
Deferred
income taxes | |
| (288,076 | ) |
Total | |
$ | 2,975,219 | |
The
acquired intangible assets, useful lives and fair value at the acquisition date follows:
Schedule of Fair Value of Acquired Intangible Assets
| |
Useful
Life (years) | | |
Fair
Value | |
Tradename | |
| 10 | | |
$ | 411,537 | |
Developed
technology | |
| 5 | | |
| 823,073 | |
Customer
relationships | |
| 5 | | |
| 137,179 | |
Total | |
| | | |
$ | 1,371,789 | |
The
following table summarizes the change in fair value of the Holdback Consideration that was settled by the Company through the payment
of cash and issuance of common stock:
Schedule of Fair Value of the Holdback Consideration
| |
| - | |
Fair
value of contingent share consideration at January 21, 2021 | |
$ | 300,000 | |
Change
in fair value contingent consideration | |
| 442,803 | |
Payment
of Holdback Consideration in cash | |
| (145,153 | ) |
Stock
issued of Holdback Contingent in shares | |
| (597,650 | ) |
Stock issued settlement of contingent share consideration (March 3, 2021) | |
| | |
Fair
value of contingent share consideration at June 30, 2021 | |
$ | — | |
The
results of operations of EGL are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the EGL acquisition is not deductible for tax purposes. Transaction related expenses
were immaterial for the year ended June 30, 2021.
Acquisition
of Argyll
On
July 31, 2020, the Company acquired Argyll, an online casino and sportsbook operator for total purchase consideration $7,802,576. The
purchase consideration includes $1,250,000 in cash comprised of a cash deposit of $500,000 that had been paid during the year ended June
30, 2020, as well as cash paid at closing of $750,000 (net cash paid being $728,926 in fiscal 2021 after adjustment for cash acquired
of $21,074). The purchase consideration also includes the issuance of 650,000 shares of common stock with a fair value of $3,802,500
and the issuance of warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share
during a term of three years.
A
summary of the purchase consideration follows:
Schedule of Preliminary Purchase Price Allocation of Acquisition
| |
| - | |
Cash
paid | |
$ | 1,250,000 | |
Share
consideration issued at closing | |
| 3,802,500 | |
Fair
value of warrants issued at closing | |
| 2,750,076 | |
Total
purchase price consideration | |
$ | 7,802,576 | |
The
allocation of assets acquired and liabilities assumed follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Cash | |
$ | 21,074 | |
Receivables
reserved for users | |
| 27,777 | |
Other
receivables | |
| 605,898 | |
Prepaid
expenses and other current assets | |
| 413,441 | |
Equipment | |
| 70,712 | |
Operating
lease right-of-use asset | |
| 373,016 | |
Intangible
assets | |
| 7,333,536 | |
Goodwill | |
| 4,143,224 | |
Other
non-current assets | |
| 1,130,034 | |
Accounts
payable and accrued expenses | |
| (2,471,244 | ) |
Liabilities
to customers | |
| (1,737,106 | ) |
Notes
payable | |
| (327,390 | ) |
Operating
lease liability | |
| (240,353 | ) |
Deferred
income taxes | |
| (1,540,043 | ) |
Total | |
$ | 7,802,576 | |
The
acquired intangible assets, useful lives and a fair value at the acquisition date follows:
Schedule of Fair Value of Acquired Intangible Assets
| |
Useful
Life (years) | | |
Fair
Value | |
Tradename | |
| 10 | | |
$ | 1,440,516 | |
Gaming
licenses | |
| 2 | | |
| 916,692 | |
Player
interface | |
| 5 | | |
| 2,226,252 | |
Player
relationships | |
| 5 | | |
| 2,750,076 | |
Total | |
| | | |
$ | 7,333,536 | |
The
results of operations of Argyll are included in the consolidated financial statements of the Company for the year ended June 30, 2021
since the date of acquisition. During the year ended June 30, 2021, the Company recorded a measurement period adjustment to reduce the
preliminary purchase consideration by $2,738,095 as the Company updated the fair value of the warrants issued using a Monte Carlo simulation.
The Company also recorded a measurement period adjusted to update the preliminary purchase price allocation based on final allocation
of fair value to identifiable intangible assets. The goodwill is not deductible for tax purposes. Transaction related expenses were immaterial
for the year ended June 30, 2021.
Acquisition
of Flip
On
September 3, 2020 the Company acquired the software development operations of Flip Sports Limited (“FLIP”) for cash of $100,000,
share consideration of $411,817 resulting from the issuance 93,808 shares of common stock by the Company at the share price on the date
of acquisition, and contingent share consideration payable based on the retention of certain key FLIP employees and having an estimated
fair value of $500,000 on the date of acquisition. The contingent share consideration was settled on March 3, 2021 through the issuance
of 93,808 shares of common stock have a market value on the date of settlement of $1,805,804, resulting in the recognition of $1,305,804 as the change in fair value of contingent consideration in the consolidated statement of operations for the year ended June 30, 2021.
A
summary of the purchase consideration follows:
Schedule of Preliminary Purchase Price Allocation of Acquisition
| |
| - | |
Cash | |
$ | 100,000 | |
Share
consideration issued at closing | |
| 411,817 | |
Contingent
share consideration | |
| 500,000 | |
Total
purchase price consideration | |
$ | 1,011,817 | |
The
allocation to the assets acquired follows:
Schedule of Purchase Price Allocation of the Assets Acquired and Liabilities Assumed
| |
| - | |
Intangible
assets (developed software) | |
$ | 550,000 | |
Goodwill | |
| 461,817 | |
Total
purchase price consideration | |
$ | 1,011,817 | |
The
developed software was determined to have an estimated useful life of 5 years. During the year ended June 30, 2021, the Company recorded
a measurement period adjustment of $88,183 to reduce the amount of goodwill due to a decrease in the fair value of the purchase share
consideration issued at closing. The following table summarizes the change in fair value of the FLIP contingent share consideration that
was settled by the Company through the issuance of common stock:
Schedule of Fair Value of the Holdback Consideration
| |
| - | |
Fair
value of contingent share consideration at September 3, 2020 | |
$ | 500,000 | |
Change
in fair value contingent consideration | |
| 1,305,804 | |
Stock
issued settlement of contingent share consideration (March 3, 2021) | |
| (1,805,804 | ) |
Fair
value of contingent share consideration at June 30, 2021 | |
$ | — | |
The
results of operations of FLIP are included in the consolidated financial statements of the Company for the year ended June 30, 2021 since
the date of acquisition. The goodwill recorded in the FLIP acquisition is deductible for tax purposes. Transaction related expenses for
FLIP were not material to the consolidated statement of operations.
Pro
Forma Operating Results
The following table summarizes pro forma results of
operations for the year ended June 30, 2021 as if Bethard, as well as the fiscal year 2021 acquisitions of the Company completed during
the year ended June 30, 2021, namely Argyll, Lucky Dino, EGL, GGC and Helix, had been acquired on July 1, 2020. The results of operations
of FLIP acquired during the year ended June 30, 2021 were excluded from the pro forma presentation for the year ended June 30, 2021 due
to immateriality. The results of operations of Bethard, as well as the previous acquisitions identified above, are included in the consolidated
statement of operations of the Company for the year ended June 30, 2022, with any differences resulting from the acquisition of Bethard
on July 13, 2021 assessed as immaterial.
The
pro forma results of operations for the year ended June 30, 2021 were prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had these acquisitions been made as of July 1, 2020 and may not be useful in predicting the future
results of operations for the Company. The actual results of operations may differ materially from the pro forma amounts included in
the table below:
Schedule
of Unaudited Pro Forma Operating Results
| |
Unaudited Pro Forma for the year ended June 30, 2021 | |
Net revenue | |
$ | 62,289,822 | |
Net loss | |
$ | (41,054,763 | ) |
Net loss per common share, basic and diluted | |
$ | (2.23 | ) |
The
pro forma operating results of operations for the year ended June 30, 2021 are based on the individual
historical results of the Company and the businesses acquired, with adjustments to give effect as if the acquisitions had occurred on
July 1, 2020, after giving effect to certain adjustments including the amortization of intangible assets and depreciation of equipment
resulting from the acquisitions.
Note
4 – Other Receivables
The
components of other receivables follows:
Schedule
of Other Receivables
| |
June 30, 2022 | | |
June 30, 2021 | |
Marketing receivables from revenue partners | |
$ | - | | |
$ | 233,725 | |
Receivable from revenue sharing arrangement | |
| - | | |
| 137,461 | |
Indirect taxes | |
| 306,040 | | |
| 135,676 | |
Other | |
| 66,243 | | |
| 151,883 | |
Other receivables | |
$ | 372,283 | | |
$ | 658,745 | |
Note
5 – Prepaid Expenses and Other Current Assets
The
components of prepaid expenses and other current assets follows:
Schedule
of Prepaid Expenses and Other Current Assets
| |
June 30, 2022 | | |
June 30, 2021 | |
Prepaid marketing costs | |
$ | 298,300 | | |
$ | 1,727,669 | |
Prepaid insurance | |
| 230,404 | | |
| 175,620 | |
Prepaid gaming costs | |
| 575,113 | | |
| 687,866 | |
Accrued income | |
| 110,613 | | |
| 184,707 | |
Other | |
| 328,623 | | |
| 488,482 | |
Prepaid expenses and other current assets | |
$ | 1,543,053 | | |
$ | 3,264,344 | |
Note
6 – Equipment
The
components of equipment follow:
Schedule
of Equipment
| |
June 30, 2022 | | |
June 30, 2021 | |
Computer equipment | |
$ | 35,911 | | |
$ | 258,049 | |
Furniture and equipment | |
| 34,526 | | |
| 249,070 | |
Leasehold improvements | |
| - | | |
| 221,787 | |
Finance lease asset | |
| - | | |
| 117,979 | |
Equipment, at cost | |
| 70,437 | | |
| 846,885 | |
Accumulated depreciation and finance lease amortization | |
| (26,512 | ) | |
| (119,943 | ) |
Equipment, net | |
$ | 43,925 | | |
$ | 726,942 | |
During
the years ended June 30, 2022 and 2021, the Company recorded total depreciation expense and finance lease amortization of $154,464 and
$111,380, respectively. Impairment of $653,107 for the Argyll computer equipment and furniture and equipment, EGL computer equipment
and the Helix Game Centers computer equipment, furniture and equipment, leasehold improvements and finance lease assets was recorded
in asset impairment charges in the consolidated statements of operations for the year ended June 30, 2022. There was no impairment in
the year ended June 30, 2021.
Note
7 – Goodwill and Intangible Assets
A
reconciliation of goodwill and accumulated goodwill impairment losses,
by reportable segment, is as follows:
Schedule
of Goodwill
| |
EEG iGaming | | |
EEG Games | | |
Total | |
Balance as of July 1, 2020 | |
| | | |
| | | |
| | |
Goodwill, net (1) | (1) |
$ | - | | |
$ | - | | |
$ | - | |
Goodwill acquired during the year | |
| 15,146,258 | | |
| 25,818,092 | | |
| 40,964,350 | |
Effects of foreign currency exchange rates | |
| (37,246 | ) | |
| 10,266 | | |
| (26,980 | ) |
Balance as of June 30, 2021 | |
| | | |
| | | |
| | |
Goodwill, gross | |
| 15,109,012 | | |
| 25,828,358 | | |
| 40,937,370 | |
Accumulated goodwill impairment charges | |
| - | | |
| - | | |
| - | |
Goodwill, net | |
| 15,109,012 | | |
| 25,828,358 | | |
| 40,937,370 | |
Goodwill acquired during the year | |
| 11,292,685 | | |
| - | | |
| 11,292,685 | |
Effects of foreign currency exchange rates | |
| (2,888,340 | ) | |
| (93,771 | ) | |
| (2,982,111 | ) |
Impairment charges | |
| (3,852,876 | ) | |
| (23,119,755 | ) | |
| (26,972,631 | ) |
Balance as of June 30, 2022 | |
| | | |
| | | |
| | |
Goodwill, gross | |
| 23,513,357 | | |
| 25,734,587 | | |
| 49,247,944 | |
Accumulated goodwill impairment charges | |
| (3,852,876 | ) | |
| (23,119,755 | ) | |
| (26,972,631 | ) |
Goodwill, net | |
$ | 19,660,481 | | |
$ | 2,614,832 | | |
$ | 22,275,313 | |
| (1) | As
of July 1, 2020 the Company had not yet acquired any goodwill. |
During
the third quarter the Company concluded that goodwill impairment indicators existed based on the significant volatility in the Company’s
stock price where the Company experienced a sustained reduction from the middle of the quarter through March 31, 2022 and subsequently.
As of March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers was not expected to attain
levels previously forecasted and that under the current liquidity and investment constraints is the Company was 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, and uncertainties
caused by inflation and world stability, resulted in the Company evaluating its goodwill and long-lived assets, including intangible
assets, for impairment as of March 31, 2022. The Company tests its goodwill for impairment annually on April 1. There was no further impairment identified as of the annual testing date
from that recognized as of March 31, 2022. In the three months ending June 30, 2022, while implementing cost saving initiatives, and with the
continuing liquidity and investment restraints and further reduction in the Company’s already deflated stock price, the Company
again concluded that as of June 30, 2022, goodwill impairment indicators existed, and the Company evaluated its goodwill and long-lived
assets, including intangible assets, for further impairment as of the end of the fiscal year.
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 March 31, 2022, the Company determined its EGL, Helix, and GGC asset
groups failed the undiscounted cash flow recoverability test and as of June 30, 2022 the Argyll asset group 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 recognized impairment totaling $3,644,048 and $12,100,997 for the Argyll, EGL, GGC and Helix tradenames
and developed technology and software, respectively, $1,675,580 for the Argyll and EGL player relationships, and $35,519 for the Argyll
gaming licenses, totaling $17,456,144 for the year ended June 30, 2022 in asset impairment charges in the consolidated statements of
operations.
In
accordance with ASC 350, for goodwill, after considering the asset impairment charges to the asset groups, the Company performed its
interim and annual goodwill impairment tests, which compared the estimated fair value of each reporting unit to its respective
carrying values. The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flows
analysis. The results of the impairment 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 goodwill impairment testing procedures,
the Company recognized impairments of goodwill of $1,895,164 for
the EGL reporting unit, $8,831,000 for
the GGC reporting unit, and $12,393,591 for
the Helix reporting unit, for a total of $23,119,755 for
the EEG Games segment, and $3,852,876 for
the iGaming Argyll (UK) reporting unit of the EEG iGaming segment, totaling $26,972,631 for
the year ended June 30, 2022 in asset impairment charges in the consolidated statements of operations. As of June 30, 2022, the
Company determined there was no impairment related to the remaining $19,660,481 of goodwill in the iGaming Malta reporting unit and
EEG iGaming segment and $2,614,832 of
goodwill in the GGC reporting unit and EEG Games segment.
The
assumptions used in the cost and undiscounted and discounted cash flow analyses require significant judgment, including judgment about
appropriate growth rates, and the amount and timing of expected future cash flows. The Company’s forecasted cash flows were based
on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions
used in the cash flows were revenue growth rates, operating expenses and gross margins and the discount rates in the discounted cash
flows. The assumptions used consider the current early growth stage of the Company and the emergence from a period impacted by COVID-19.
The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its
procedures for estimating future cash flows for each reporting unit, asset group and intangible asset are reasonable and consistent with
current market conditions as of the testing date. If the markets that impact the Company’s business continue to deteriorate, the Company could
recognize further goodwill and long-lived asset impairment charges.
In
total, as described in detail above, the Company recorded $44,428,775
of goodwill and definite-lived intangible asset impairment charges for the year ended June 30, 2022.
There
were no asset impairment charges for goodwill or long-lived assets, including definite-lived intangible assets, for the year ended June
30, 2021.
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
| |
June 30, 2022 | |
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
| |
| | |
| | |
| |
Tradenames | |
$ | 5,835,512 | | |
$ | (578,960 | ) | |
$ | 5,256,552 | |
Developed technology and software | |
| 10,109,366 | | |
| (1,935,018 | ) | |
| 8,174,348 | |
Gaming licenses | |
| 1,317,567 | | |
| (774,760 | ) | |
| 542,807 | |
Player relationships | |
| 20,920,029 | | |
| (4,757,813 | ) | |
| 16,162,216 | |
Internal-use software | |
| 225,086 | | |
| (14,520 | ) | |
| 210,566 | |
| |
| | | |
| | | |
| | |
Total | |
$ | 38,407,560 | | |
$ | (8,060,653 | ) | |
$ | 30,346,489 | |
| |
June 30, 2021 | |
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
| |
| | |
| | |
| |
Tradename | |
$ | 7,396,804 | | |
$ | (257,018 | ) | |
$ | 7,139,786 | |
Developed technology and software | |
| 25,231,659 | | |
| (1,242,605 | ) | |
| 23,989,054 | |
Gaming licenses | |
| 1,752,612 | | |
| (573,876 | ) | |
| 1,178,736 | |
Player relationships | |
| 13,956,083 | | |
| (1,253,135 | ) | |
| 12,702,948 | |
Internal-use software | |
| 777,171 | | |
| (15,140 | ) | |
| 762,031 | |
| |
| | | |
| | | |
| | |
Total | |
$ | 49,114,329 | | |
$ | (3,341,774 | ) | |
$ | 45,772,555 | |
Amortization
expense was $11,872,117
and $3,304,872
for the years ended June 30, 2022 and 2021, respectively. The amortization for EEG iGaming segment was $8,544,593 and $2,782,446, EEG Games segment was $3,192,236 and $421,593
and for the Other segment was $135,288 and $100,833, for the years ended June 30, 2022 and 2021, respectively.
The
estimated future amortization related to definite-lived intangible assets is as follows:
Schedule
of Future Amortization of Intangible Assets
| |
| | |
Fiscal 2023 | |
$ | 7,533,227 | |
Fiscal 2024 | |
| 6,990,001 | |
Fiscal 2025 | |
| 6,990,001 | |
Fiscal 2026 | |
| 5,870,261 | |
Fiscal 2027 | |
| 665,547 | |
Thereafter | |
| 2,297,452 | |
Total | |
$ | 30,346,489 | |
Note
8 – Other Non-Current Assets
The
components of other non-current assets follow:
Schedule
of Other Non-Current Assets
| |
June 30, 2022 | | |
June 30, 2021 | |
iGaming regulatory deposits | |
$ | 1,715,053 | | |
$ | 755,474 | |
iGaming deposits with service providers | |
| 261,825 | | |
| 434,738 | |
Rent deposit | |
| 80,520 | | |
| 91,253 | |
Other | |
| 4,778 | | |
| 33,544 | |
Other non-current assets | |
$ | 2,062,176 | | |
$ | 1,315,009 | |
Note
9 – Account Payable and Accrued Expenses
The
components of account payable and accrued expenses follow:
Schedule of Account Payable and Accrued Expenses
| |
June 30, 2022 | | |
June 30, 2021 | |
Trade accounts payable | |
$ | 5,069,616 | | |
$ | 2,609,212 | |
Accrued marketing | |
| 2,388,987 | | |
| 1,582,470 | |
Accrued payroll and benefits | |
| 833,322 | | |
| 1,093,263 | |
Accrued gaming liabilities | |
| 446,626 | | |
| 758,536 | |
Accrued professional fees | |
| 555,967 | | |
| 704,748 | |
Accrued jackpot liabilities | |
| 297,970 | | |
| 432,504 | |
Accrued other liabilities | |
| 2,751,564 | | |
| 988,082 | |
Accrued legal settlement (Note 13) | |
| - | | |
| 289,874 | |
Total | |
$ | 12,344,052 | | |
$ | 8,458,689 | |
Note
10 – Related Party Transactions
The
Company reimburses the Chief Executive Officer for office rent and related expenses. The Company incurred charges owed to the Chief
Executive Officer for office expense reimbursement of $4,800
for both years ended June 30, 2022 and 2021. As of June 30, 2022 and 2021, there were no
amounts payable to the Chief Executive 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 $26,148
and $96,020
for years ended June 30, 2022 and 2021, respectively, in accordance with these agreements. As of June 30, 2022 and 2021, there were no
amounts payable to Contact Advisory Services Ltd.
The
Company retained services from a member of its Board of Directors through a consultancy agreement dated August 1, 2020 and an employment
agreement dated June 15, 2020. The consultancy agreement required payments of £18,000 ($21,920 translated using the exchange rate
in effect at June 30, 2022) per month to the firm that is controlled by this member of the Board of Directors. The individual also received
payroll of $500 per month through the employment agreement as Chief Operating Officer. The member resigned from the Board of Directors
and from his role as Chief Operating Officer on May 31, 2022 and the consultancy agreement and the employment agreement were terminated.
The member remained as an advisor to the Company with an annual fee of $60,000.
The
Company retained the services of its Chief Financial Officer through a consultancy agreement dated April 2, 2022 and an employment agreement
dated April 2, 2022. The Company remits monthly payments to its Chief Financial Officer of NZD 36,995 ($23,524 translated using the exchange
rate in effect at June 30, 2022) under the consultancy agreement and $500 per month under the employment agreement. In connection with
this appointment the Company provided a one-time issuance of 200,000 shares of Common Stock to the Chief Financial Officer.
During
the year ended June 30, 2022, the Company engaged in transactions with Tilt, LLC a game center operator controlled by the head of
GGC. This included net sales Tilt, LLC in the amount of $222,559
for game center equipment, and amounts paid to Tilt, LLC of $33,600 for equipment leased, $16,589
for services, $20,128
for cryptocurrency mining and $140,000
for purchases of computer inventory.
Note
11 – Leases
The
Company leases office and building space and equipment under operating lease agreements and equipment under finance lease agreements.
The Company’s lease agreements have terms not exceeding five years. Certain leases contain options to extend that are assessed
by management at the commencement of the lease and are included in the lease term if the Company is reasonably certain of exercising.
In July 2021, 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, 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 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.
In
March 2022 the Company commenced a finance lease for computer equipment for one of its owned and operated game centers. The lease had
annual payments of $40,103 including 8% interest. The lease term was approximately 2.5 years. In June 2020 the Company commenced a finance
lease for computer equipment for one of its owned and operated game centers. The lease had annual payments of $50,702 including 8% interest.
The lease term was approximately years. These game center computer equipment finance leases were disposed of during June 2022.
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 Leases
| |
Consolidated Balance Sheet Caption | |
June 30, 2022 | | |
June 30, 2021 | |
Assets: | |
| |
| | | |
| | |
Operating lease assets | |
Operating lease right-of-use assets | |
$ | 164,288 | | |
$ | 1,272,920 | |
Finance lease assets | |
Equipment, net | |
| - | | |
| 114,540 | |
Total lease assets | |
| |
$ | 164,288 | | |
$ | 1,387,460 | |
Liabilities: | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating lease liabilities | |
Operating lease liability – current | |
$ | 364,269 | | |
$ | 414,215 | |
Operating
lease liabilities, current | |
Operating
lease liability - current | |
$ | 364,269 | | |
$ | 414,215 | |
| |
| |
| | | |
| | |
Finance lease liabilities | |
Current portion of notes payable and other long-term debt | |
| - | | |
| 50,702 | |
Finance
lease liabilities, current | |
Current
portion of notes payable and other long-term debt | |
| - | | |
| 50,702 | |
| |
| |
| | | |
| | |
Long-term: | |
| |
| | | |
| | |
Operating lease liabilities | |
Operating lease liability – non-current | |
| 669,286 | | |
| 878,809 | |
Operating
lease liabilities, noncurrent | |
Operating
lease liability - non-current | |
| 669,286 | | |
| 878,809 | |
| |
| |
| | | |
| | |
Finance lease liabilities | |
Notes payable and other long-term debt | |
| - | | |
| 63,161 | |
Finance
lease liabilities, noncurrent | |
Notes
payable and other long-term debt | |
| - | | |
| 63,161 | |
| |
| |
| | | |
| | |
Total lease liabilities | |
| |
$ | 1,033,555 | | |
$ | 1,406,887 | |
The
Company recognized in asset impairment charges in the consolidated statements of operations, $1,416,807 for operating lease right-of-use
assets for the Helix Game Center building rentals and $175,858 for the Helix computer equipment finance leases. The operating lease expense
and finance lease expense, excluding asset impairment charges, for the year ended June 30, 2022 were $356,395 and $33,398, respectively.
The outstanding lease liabilities for the Helix equipment and finance leases were assumed by the purchaser in the Helix transaction
on June 10, 2022. The operating lease expense and finance lease expense for the year ended June 30, 2021 were $156,543 and $2,039, respectively.
The rent expense for short-term leases was not material to the consolidated financial statements.
Weighted
average remaining lease terms and discount rates follow:
Schedule
of Weighted Average Remaining Lease Terms and Discount Rates
| |
June 30, 2022 | | |
June 30, 2021 | |
Weighted Average Remaining Lease Term (Years): | |
| | | |
| | |
Operating leases | |
| 3.87 | | |
| 4.11 | |
Finance leases | |
| - | | |
| 2.50 | |
| |
| | | |
| | |
Weighted Average Discount Rate: | |
| | | |
| | |
Operating leases | |
| 8.00 | % | |
| 6.82 | % |
Finance leases | |
| - | % | |
| 8.00 | % |
The
future minimum lease payments at June 30, 2022 follow:
Schedule
of Maturity of Operating Lease Liability
| |
Operating Lease | |
Fiscal 2023 | |
$ | 364,269 | |
Fiscal 2024 | |
| 311,362 | |
Fiscal 2025 | |
| 221,167 | |
Fiscal 2026 | |
| 227,802 | |
Fiscal 2027 | |
| 57,368 | |
Thereafter | |
| - | |
Total lease payments | |
| 1,181,968 | |
Less: imputed interest | |
| (148,413 | ) |
Present value of lease liabilities | |
$ | 1,033,555 | |
Note
12 – 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 June 30, 2022 | | |
June 30, 2022 | | |
June 30, 2021 | |
Notes payable | |
April 30, 2023 | | |
| 3.49 | % | |
$ | 139,538 | | |
$ | 330,654 | |
Finance lease obligation (Note 11) | |
— | | |
| — | | |
| - | | |
| 113,863 | |
Total | |
| | |
| | | |
| 139,538 | | |
| 444,517 | |
Less current portion of notes payable and long-term debt | |
| | |
| | | |
| (139,538 | ) | |
| (223,217 | ) |
Notes payable and other long-term debt | |
| | |
| | | |
$ | - | | |
$ | 221,300 | |
The
Company assumed a note payable of £250,000 (equivalent to $327,390) in connection with its acquisition of Argyll on July 31, 2020.
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 June 30, 2022 was £114,583 ($139,538
using exchange rates at June 30, 2022). Interest expense on the note payable was $9,076 and $962 for the years ended June 30, 2022 and
2021, respectively. The finance lease obligations were assumed by the purchasers in the Helix transaction (see Note 11).
The
maturities of long-term debt are as follows:
Schedule
of Maturities of Long-term Debt
| |
| | |
Fiscal 2023 | |
$ | 139,538 | |
Total | |
$ | 139,538 | |
Senior
Convertible Note
On
June 2, 2021, the Company, the Old Senior Convertible Note before it was exchanged for the New Note on February 22, 2022. The Old
Senior Convertible Note was issued to the Holder in the principal amount of $35,000,000
with the Company receiving proceeds at issuance of $32,515,000,
net of debt issuance costs of $2,485,000.
The Old Senior Convertible Note would have matured on June
2, 2023, at which time the Company would have been required to repay the original principal balance and the Premium on
Principal. The aggregate principal of the Old Senior Convertible Note repayable
at maturity was $37,100,000
and the Old Senior Convertible Note accrued interest at rate of 8% per annum payable in cash monthly. The Old Senior Convertible
Note was issued with 2,000,000
Series A Warrants and 2,000,000
Series B Warrants. On the date of issuance, the Company recorded the fair value of the Series A Warrants and Series B Warrants as a
discount to the Old Senior Convertible Note totaling $26,680,000.
The debt discount was being amortized to interest expense over the term of the Old Senior Convertible Note using the effective
interest method. The obligation resulting from the issuance of the Series A Warrants and Series B Warrants was determined to qualify
for liability classification on the consolidated balance sheet. See below for further discussion of the Series A Warrants and Series
B Warrants.
The
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 $17.50 per share. The conversion amounts were calculated as the principal balance identified for conversion plus the Premium on Principal. At any time after issuance, the Company had the option, subject to certain conditions, to redeem some
or all of outstanding principal, inclusive of any minimum return due to the Holder based on the number of days the principal was outstanding.
On
February 22, 2022, the Company agreed to enter into an exchange agreement (the “Exchange Agreement”) with the Holder whereby the Old Senior Convertible Note, with
a remaining principal amount of $29,150,001, was exchanged for the New Note in the aggregate principal amount of $35,000,000. The increase
in the principal balance outstanding of $5,849,999 was recognized as a loss on extinguishment of Senior Convertible Note in the second
quarter ended December 31, 2021, and is included in the consolidated statements of operations for the year ended June 30, 2022. The Company
further accelerated the recognition of the remaining debt discount and Premium on Principal in connection with the exchange and issuance
of the New Note during the second quarter ended December 31, 2021, which is included in the loss on extinguishment of the Old Senior Convertible
Note of $22,628,805 for the year ended June 30, 2022 in the consolidated statements of operations.
The interest
rate on the Old Senior Convertible Note from June 2, 2022 through February 22, 2022, was 8.0% per annum, and remained unchanged in
the New Note. From and after the occurrence and during the continuance of any Event of Default (as defined in the New Note), the
interest rate shall automatically be increased to 12.0% per annum. As further described below, the Company was not in compliance
with certain debt covenants under the Old Senior Convertible Note and New Note, but received a waiver from compliance through March
30, 2022. The Company was subject to begin accruing interest expense at a rate of 12%
beginning March 31, 2022, as compared to using the set rate of 8.0%, and has recorded the additional $350,000
interest expense for the difference in rates in accounts payable and accrued expenses in the consolidated financial statements for
the year ended June 30, 2022. The maturity date (the “Maturity Date”) of the Exchange Agreement has remained unchanged
in the Exchange Agreement and the New Note is due on June 2, 2023, subject to extension in certain
circumstances, including bankruptcy and outstanding events of default. The ability of the Company to redeem the principal balance
outstanding also remains unchanged. The Company may redeem the New 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
New Note is convertible, at the option of the Holder, into shares of the Company’s Common Stock at a conversion price of $17.50
per share. The New Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock
dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue (or issues)
any variable rate securities, the Holder has the additional right to substitute such variable price (or formula) for the conversion price.
If
an Event of Default has occurred under the New Note, in addition to the default interest rate discussed above, the Holder may elect to
alternatively convert the New Note at the Alternate Conversion Price (as defined in the New Note). In connection with an Event of Default,
the Holder may require the Company to redeem in cash any or all of the New Note. The redemption price will equal 100% of the outstanding principal
of the New Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or an amount equal to market value of
the shares of the Company’s Common Stock underlying the New Note, as determined in accordance with the New Note, if greater. The Holder will not
have the right to convert any portion of a New Note, to the extent that, after giving effect to such conversion, the Holder (together
with certain related parties) would beneficially own in excess of 4.99% of the shares of the Company’s Common Stock outstanding immediately after
giving effect to such conversion. The Holder may from time to time increase this limit to 9.99%, provided that any such increase will
not be effective until the 61st day after delivery of a notice to the Company of such increase. The Company is currently in default
and the Holder has not yet elected to alternatively convert.
In addition, unless approval of the
Company’s stockholders as required by the Nasdaq is obtained, the Company is
prohibited from issuing any shares of Common Stock upon conversion of the New Note or otherwise pursuant to the terms of the New
Note, if the issuance of such shares of Common Stock would exceed 19.99% of the Company’s outstanding shares of Common Stock
or otherwise exceed the aggregate number of shares of Common Stock which the Company may issue without breaching its obligations
under the rules and regulations of Nasdaq. Should the Holder convert the principal balance outstanding at June 30, 2022 at the
Alternate Conversion Price that is currently available to the Holder, or a portion of the principal balance, the Company may be
subject to remit amounts to the Holder materially in excess of the principal balance outstanding through payment of cash. Refer to
the Alternate Conversion discussion below for further information of this settlement option available to the Holder.
In
connection with a Change of Control (as defined in the New Note), the Holder may require the Company to redeem all or any portion of the New Note.
The redemption price per share will equal the greatest of (i) 115% of the outstanding principal of the New Note to be redeemed, and accrued
and unpaid interest and unpaid late charges thereon, (ii) 115% of the market value of the shares of the Company’s Common Stock underlying the New
Note, as determined in accordance with the New Note, and (iii) 115% of the aggregate cash consideration that would have been payable
in respect of the shares of the Company’s Common Stock underlying the New Note, as determined in accordance with the New Note.
At
any time after the date the Company provides notice to the Holder of the Company incurring additional debt, the Holder will have the right
to have the Company redeem all or a portion of the New Note at a redemption price of 100% of the portion of the New Note subject to redemption.
Under
the New Note, and consistent with the Old Senior Convertible Note, the Company is subject to certain customary affirmative and negative
covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect
of dividends, distributions or redemptions, and the transfer of assets, among other matters. The Company is also subject to certain financial
debt covenants relating to available cash, minimum annual revenues, ratio of debt to market capitalization and minimum cash flow.
The
New Note is subject to a most favored nation provision and standard adjustments in the event of any stock split, stock dividend, stock
combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue, or issue any variable
rate securities, the Holder of the New Note has the additional right to substitute such variable price (or formula) for the conversion
price. If the Holder were to substitute a floor price of $2.1832 (“Conversion Floor Price”) as the variable price, the Company
would be required to settle in cash any difference between the market value of the shares subject to conversion at the floor price and
the market value of the shares using the variable price, excluding any reference to the floor. The Holder of the Senior Convertible Note
also has the right to have the Company redeem all or a portion of the New Note should the Company provide notice of incurring additional
debt.
If
an Event of Default occurs, the Holder of the Senior Convertible Note has the right to alternate conversion (“Alternate Conversion”)
and may elect to convert the Senior Convertible Note, inclusive of a 15% premium payable (“Incremental Premium”) 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 $2.1832 or a price derived from the volume weighted average price of the Company’s Common Stock
at the time of Alternate Conversion. If the Alternate Conversion were to include the Conversion Floor Price of $2.1832 as the Alternate
Conversion Price, the Company would be required to settle in cash any difference between the market value of the shares subject to the
Alternate Conversion using the floor price and the market value of the shares using the Alternate Conversion Price, excluding any reference
to the floor. The Company is currently in default and the Holder has not yet elected to alternatively convert. See further discussion
in make-whole derivative liability below.
As
discussed above, during the three months ended December 31, 2021, the Company had not maintained compliance with the covenants of the
Senior Convertible Note, having identified non-compliance with the same financial debt covenants previously identified at September 30,
2021. The Company obtained a waiver from the compliance with certain covenants, as of December 31, 2021 and through March 30, 2022. The
Company further entered into a non-binding term sheet dated February 22, 2022, to restructure the New Note to mitigate the risk of default
on the covenants in future periods. This term sheet expired without a new debt facility being completed. Since the expiration of the
waiver on March 30, 2022, the Company is not in compliance with its covenants. At June 30, 2022, the Company is in default under the
terms of the Senior Convertible Note. The Senior Convertible Note matures in less than 12 months from June 30, 2022, and the Company
has continued to recognize its obligation under the Senior Convertible Note as a current liability in the consolidated balance sheet.
The Company has not remitted payment to the Holder of the Senior Convertible Note an amount equal to 30% of the gross proceeds from the
March 2022 Offering to be applied as a reduction of principal (see Note 16).
The
Company previously determined that it had not maintained compliance with its Senior Convertible Note covenants at September 30,
2021. The Company therefore requested and received a waiver dated October 13, 2021 for (i) any known breaches or potential breaches
of financial debt covenants in effect related to the available cash test and minimum cash flow test through December 25, 2021, (ii)
any known breach resulting from the placement of a lien on the outstanding share capital of Prozone Limited, the entity that holds
the assets of Bethard through the Additional Payment Due Date (see Note 3 for discussion of the Bethard acquisition) and (iii) any
known breach which would result from the Company’s announcement that it would purchase an equity interest in Game Fund
Partners Group LLC through the contribution of up to 200,000
shares of Common Stock. In
addition, the Company requested and received an amendment to the Senior Convertible Note wherein the permitted ratio of outstanding
debt to market capitalization was increased temporarily from 25% to 35% through December 25, 2021.
In
consideration for the October 13, 2021 waiver, the Company agreed to permit the conversion of up to $7,500,000 of the original principal
balance of the Senior Convertible Note at the Alternate Conversion Price into shares of Common Stock, exclusive of the Premium on Principal
and Incremental Premium that applies to an Alternate Conversion. During the year ended June 30, 2022, the Holder of the Senior Convertible
Note had converted the full principal amount of $7,500,000 into 2,514,459 shares of Common Stock. As a result of these conversions of
principal, the Company recorded a loss on conversion of senior convertible note of $5,999,662 in the consolidated statement of operations
for the year ended June 30, 2022. The loss on conversion included accelerated amortization of the debt discount of $4,515,273, accelerated
amortization of the Premium on Principal of $288,300 and the Incremental Premium due on conversion of $1,196,089.
The
Company also previously obtained a waiver from the Holder of the Old Senior Convertible Note on November 2, 2021 in connection with
its announcement to commence an underwritten registered public offering of its 10.0%
Series A Cumulative Redeemable Convertible Preferred Stock (see Note 15). 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 consolidated statement of
operations for the year ended June 30, 2022 and in accounts payable and accrued expenses at June 30, 2022 on the consolidated
balance sheet.
Make-Whole
Derivative Liability
The
New Note agreement includes 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 $2.1832,
the Holder may elect the Alternate Conversion option that includes a make-whole provision payable to the Holder in cash. At June 30,
2022, both 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 New Note, the Company was unable to comply
with the debt covenants under the New Note or otherwise obtain a debt waiver from March 31, 2022 through the year ended June 30,
2022 and subsequent to year end. As a result, the make-whole provision in the New Note agreement was determined to represent an
obligation of the Company at June 30, 2022 under the terms of the New Note.
The
make-whole provision in the New Note is a derivative liability. The Company’s obligation to make a payment under the
make-whole provision 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. Further, the Company had further signed a non-binding term sheet on
February 22, 2022 (in combination with entering into the New Note) for the purpose of revising the debt covenants that were to be
included in a revised or amended note agreement. At June 30, 2022, the Company has been unable to complete an agreement to
restructure the terms and covenants of the New Note. The stock price further continued to trade materially below the Conversion
Floor Price and the Company has also been unable to secure a debt waiver. The fair value of the derivative liability at June 30,
2022 was determined using a Monte Carlo valuation model. See Note 18 for further discussion of the fair value determined for the
derivative liability.
At
June 30, 2022, the Company estimates that it would be required to issue up to 16,031,513
shares of Common Stock under the Alternate Conversion provisions of the New Note. The Company further estimated the derivative
liability to the holder to be $9,399,620
which is included in the derivative liability in the consolidated balance sheets and the expense was recorded in the change in fair
value of derivative liability in the consolidated statements of operations. The make-whole liability calculated under the terms of
the note of approximately $180,000,000
was materially higher than the fair value of $9,399,620
determined at June 30, 2022 and considers the difference in the market price of the Company’s shares and a floor price of
$2.1832 multiplied by a number of
shares that is based on the outstanding principal and the market price of the Company’s Common Stock at June 30, 2022. The
calculated make-whole liability may differ materially from the amount at which the Company may be required to pay under the New
Note. The Company has held non-binding discussions with the Holder to restructure its obligation under the New Note. However, there
can be no guarantee that the Company will be able to reach an agreement to restructure the New Note.
Warrants
March
2022 Warrants and April 2022 Overallotment Warrants
On
March 2, 2022, the Company completed the March 2022 Offering, an equity offering in which it sold 15,000,000 units at $1.00 consisting
of one share of Common Stock and one warrant for a total of 15,000,000 March 2022 Warrants with an exercise price of $1.00. The Company
also sold a further 2,250,000 April 2022 Overallotment Warrants with an exercise price of $1.00 issued to the underwriters of the offering
on April 1, 2022.
The
March 2022 Warrants and April 2022 Overallotment Warrants may be exercised at any time after issuance for one share of Common Stock of
the Company at an exercise price of $1.00. The March 2022 Warrants and April 2022 Overallotment Warrants are callable by the Company
should the volume weighted average share price of the Company exceed $3.00 for each of 20 consecutive trading days following the date
such warrants become eligible for exercise. The March 2022 Warrants and April 2022 Overallotment 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 and April 2022 Overallotment 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 and April 2022 Overallotment 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. At March 2, 2022, the date of the Common Stock issuance, the Company determined the total
fair value of the March 2022 Warrants to be $9,553,500 and on the date of the Common Stock issuance, the Company determined the total
fair value of the April 2022 Overallotment Warrants to be $607,500. At June 30, 2022, the Company determined the total fair value of
the March 2022 Warrants and April 2022 Overallotment Warrants to be $2,070,000. The change in fair value of the March 2022 Warrants and
April 2022 Overallotment Warrants liability recorded in the consolidated statement of operations for the year ended June 30, 2022 was
$8,091,000. See Note 18 for additional disclosures related to the change in the fair value of the warrant liabilities.
Series
A and Series B Warrants
The
Company issued 2,000,000 Series A Warrants and 2,000,000 Series B Warrants to the holder of the Old Senior Convertible Note. The Exchange
Agreement 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 $17.50. 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 $17.50. The Series A Warrants and Series B Warrants are callable by the Company
should the volume weighted average share price of the Company exceed $32.50 for each of 30 consecutive trading days following the date
such warrants become eligible for exercise. The Series A Warrants and Series B Warrants also contain a beneficial ownership limitation
of 4.99% which may be increased 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, 2021, the Company determined the total fair value of the Series A Warrants
and Series B Warrants to be $23,500,000,
with a fair value of $13,600,000
determined for the Series A Warrants and a fair value of $9,900,000
determined for the Series B Warrants. 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
determined for the Series B Warrants. The change in fair value of the Series A Warrants and Series B Warrants liability recorded in
the consolidated statements of operations for the year ended June 30, 2022 and 2021 were a decrease of $23,377,270
and an increase of $1,549,924,
respectively. See Note 18 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 during the second quarter resulting
in the Company recording of a loss on extinguishment of $22,628,805 for the year ended June 30, 2022, as further described above. Prior
to accelerating the amortization of debt discount in the second quarter, the Company recorded the remaining amortization of the debt
discount of $2,262,112 as interest expense on the consolidated statement of operations for the 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 on the consolidated balance sheets follows:
Schedule
of Components of Long-term Debt
| |
June 30, 2022 | | |
June 30, 2021 | |
Current portion of notes payable and long-term debt including the senior convertible note | |
$ | 35,139,538 | | |
$ | 223,217 | |
Notes payable and long-term debt including the senior convertible note | |
| - | | |
| 6,523,804 | |
Total | |
| 35,139,538 | | |
| 6,747,021 | |
Note
13 – 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, and no cash or Common Stock was paid subsequently during the six
months ended June 30, 2022. For the year ended June 30, 2022, the Company recorded $444,304 in sales and marketing expense related
to the Team sponsorship. There were no outstanding amounts payable to the Team as of 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 was March 31, 2021. The Company paid $1,550,000 and issued
50,000 shares of Common Stock in connection with the commencement of the arrangement. The Bally’s agreement extends for 10 years
from July 1, 2021, the date of commencement, requiring the Company to pay $1,250,000 and issue 10,000 shares of Common Stock on each
annual anniversary date. As of June 30, 2022, the future annual commitments by the Company under this agreement are estimated at $1,250,000
and 10,000 shares of Common Stock payable each year through the year ended June 30, 2030. During the year ended June 30, 2022 and 2021,
the Company has recorded $1,358,168 and $357,167, respectively, in sales and marketing expense for its arrangement with Bally’s
Corporation. There were no outstanding amounts payable to Bally’s Corporation as of June 30, 2022 or June 30, 2021.
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 100,000 shares to the fund during the period in which the fund receives total
capital commitments of $100,000,000. The Company has agreed to contribute an additional 100,000 shares to the fund during the period
in which the fund reaches total capital commitments of $200,000,000. As of June 30, 2022, 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. As of June 30, 2022, the commitments under these agreements are estimated
at $2,319,014 for the year ended June 30, 2023, $1,363,797 for the year ended June 30, 2024, $494,980 for year ended June 30, 2025, and
$290,663 for the year ended June 30, 2026.
Contingencies
Since the acquisition of the Argyll iGaming business on July 31, 2020, the Company has been responding to periodic requests for information
from the UKGC in relation to information required to maintain its UK license following the change of corporate control. The Company continues
to operate in the UK market and there have been no adverse judgments imposed by the UKGC against the Company.
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 received a communication from the Finnish
regulator requesting clarification on its marketing and gaming practices related to its Finnish iGaming operations. The Company responded
to the communication in Q3 of fiscal year 2022 and changed its business operations in Finland as of the fiscal quarter ended June 30,
2022 as part of its response.
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 expected to come into effect in the calendar year starting January 1, 2023. The Company believes that the changes that it has made
to its business operations in Finland will allow it to avoid being adversely affected by the Finnish regulator’s new powers.
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 as of 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.
In
September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that it was owed $192,664,
as well as warrants to purchase 1,417,909
shares of the Company’s Common Stock as compensation for Boustead acting as the placement agent for the sale of the
Company’s securities between June 2017 and 2018. This matter was brought to arbitration on December 7, 2020. On February 3,
2021, the
arbitration awarded Boustead $289,874
in damages and allowable costs (excluding attorneys’ fees) with interest accruing approximately $21 per day. At June 30, 2021,
the Company had recorded a liability for the amount awarded in arbitration in accounts payable and accrued expenses in the
consolidated balance sheet. The Company paid $294,051
to settle the arbitration award, inclusive of accrued interest, on August 24, 2021.
On
August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit against the Company alleging that it had breached its
obligations related to an 8%
convertible promissory note dated June 3, 2016 and common stock purchase warrants of the same date. On April 30, 2021, a Settlement
Agreement was entered into with Tangiers for an undisclosed amount. The Company has settled and paid the liability and the amount of
the settlement was not material to the consolidated financial statements of the Company.
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
14 – Revenue and Geographic Information
The
Company is a provider of iGaming, traditional sports betting and esports services that commenced revenue generating operations during
the year ended June 30, 2021 with the acquisitions of Argyll, FLIP, EGL, Lucky Dino, GGC and Helix. The Company acquired Bethard in July
2021 adding to its revenue generating operations. The revenues and long-lived assets of Argyll, EGL Lucky Dino and Bethard have been
identified 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 year ended June 30, 2022 and 2021 is as follows:
Schedule
of Disaggregated by Revenue
| |
2022 | | |
2021 | |
| |
Year ended June 30, | |
| |
2022 | | |
2021 | |
Online betting and casino revenues | |
$ | 53,104,795 | | |
$ | 16,231,028 | |
Esports and other revenues | |
| 5,246,855 | | |
| 552,886 | |
Total | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
A
summary of revenue by geography follows for the year ended June 30, 2022 and 2021 is as follows:
Schedule
of Revenues with Customers and Long-lived Assets Disaggregated by Geographical Area
| |
June 30, 2022 | | |
June 30, 2021 | |
United States | |
$ | 4,799,084 | | |
$ | 671,519 | |
International | |
| 53,552,566 | | |
| 16,112,395 | |
Total | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
Revenue, total | |
$ | 58,351,650 | | |
$ | 16,783,914 | |
A
summary of long-lived assets by geography as at June 30, 2022 and 2021 follows:
| |
June 30, 2022 | | |
June 30, 2021 | |
United States | |
$ | 8,271,360 | | |
$ | 48,081,926 | |
International | |
| 46,620,831 | | |
| 41,942,870 | |
Total | |
$ | 54,892,191 | | |
$ | 90,024,796 | |
Long-lived assets, total | |
$ | 54,892,191 | | |
$ | 90,024,796 | |
Note
15 – 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 (“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 Company’s Board of Directors, at the rate of 10.0% per annum. In the event the
dividends are not paid in cash, the dividends shall continue to accrue at a dividend rate of 10.0%.
Redemption
and Liquidation
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is also redeemable, at the option of the Board of Directors, in whole
or in part, at any time on or after January 1, 2023.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock includes a change of control put option which allows the holders of the
10% Series A Cumulative Redeemable Convertible Preferred Stock to require the Company to repurchase such holders’ shares in cash
in an amount equal to the initial purchase price plus accrued dividends.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable upon certain deemed liquidation events, such
as a change in control. Because a deemed liquidation event could constitute a redemption event outside of the Company’s control,
all shares of preferred stock have been presented outside of permanent equity in mezzanine equity on the 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 June 30,
2022 because a deemed liquidation event is not considered probable.
The
10% Series A Cumulative Redeemable Convertible Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable,
and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the 10% Series
A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares
of 10% Series A Cumulative Redeemable Convertible Preferred Stock have been presented outside of permanent equity in mezzanine equity
on the 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 of Directors, until all arrearages in dividends and dividends in full for the current monthly period have
been paid.
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 of Directors, in its discretion, determines
to issue dividends and then only at the times and in the amounts that the Board of Directors 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 year ended June 30, 2022:
● |
During
the year ended June 30, 2022, as part of the March 2022 Offering, the Company sold 15,000,000
units at $1.00,
consisting of one share of Common Stock and one warrant with an exercise price of $1.00,
for gross proceeds of $15,020,925.
The Company recorded the issuance of these shares at a fair value of $3,449,925
comprised of $13,625,925
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 March 2022 Warrant liability of $9,553,500
and the April 2022 Overallotment Warrants liability of $607,500,
respectively, 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 equal to 30% of the gross proceeds to be applied as a reduction of principal (see
Note 12). At June 30, 2022 the Company has not remitted payment to the Holder and principal remains at $35,000,000. |
● |
During the year ended June
30, 2022, the Company issued 332,527 shares of Common Stock for services with a weighted average fair value of $2.25 per share or
$748,149 in the aggregate. |
|
|
● |
During the year ended June
30, 2022, the Company issued 14,000 shares of Common Stock from the exercise of stock options with a weighted average exercise price
of $4.82 per share or $67,479 in the aggregate. |
|
|
● |
During the year ended June
30, 2022, the Company issued 1,165,813 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 $3.44, under its ATM program (see below). |
|
|
● |
During the year ended June
30, 2022, the holder of the Senior Convertible Note converted an aggregate conversion value of $10,652,648 into 2,514,459 shares
of Common Stock, with a weighted average conversion price of $4.24. |
The
following is a summary of Common Stock issuances for the year ended June 30, 2021:
● |
On February 11, 2021, the
Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors resulting in the
raise of $30,000,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell,
in a registered direct offering, an aggregate of 2,000,000 shares (the “Shares”) of the Company’s Common Stock,
par value $0.001 per share at a price of $15.00 per Share. The offering was consummated on February 16, 2021, at which time the Company
received net proceeds of $27,340,000. |
|
|
● |
On July 31, 2020, the Company
issued 650,000 shares of Common Stock as a component of the purchase consideration for Argyll. The Company recorded the issuance
of these shares at fair value in the amount of $3,802,500. During the year ended June 30, 2021, the Company also issued 1,000,000
shares of Common Stock in connection with the exercise of warrants that were included as a component of the purchase consideration
paid for Argyll. The warrants entitled the holder to purchase one share of Common Stock at $8.00 per share. The Company recorded
the issuance of these shares at the settlement date fair value of $15,480,000 comprised of $8,000,000 of cash received from the exercise,
and non-cash settlement of the warrant liability totaling $7,480,000. The warrant liability established on the date of acquisition
of Argyll was $2,750,076 and subsequently increased to the settlement date fair value by recording a charge of $4,729,924 in the
statement of operations for the year ended June 30, 2021. Refer to discussion of the Argyll acquisition at Note 3. |
● |
During the year ended June
30, 2021, the Company issued a total of 187,616 shares of Common Stock as a component of the purchase consideration for FLIP, inclusive
of share consideration paid to settle a portion of the purchase consideration that was recorded as a contingent liability. The Company
recorded the issuances of these shares at a total fair value of $2,217,621, which includes the initial issuance of 93,808 shares
of Common Stock at a fair value of $411,817 on September 3, 2020, and the subsequent issuance of 93,808 shares of Common Stock on
March 3, 2021 at a fair value of $1,805,804 in settlement of contingent purchase consideration. Refer to discussion of the FLIP acquisition
at Note 3. |
|
|
● |
On January 21, 2021, the
Company issued 292,511 shares of Common Stock as a component of the purchase consideration for EGL. The Company recorded the issuance
of these shares at fair value in the amount of $2,193,833. On May 21, 2021, the Company issued an additional 63,109 shares of Common Stock with a fair value of $597,650 to settle contingent holdback purchase consideration for the EGL acquisition. Refer to discussion
of the EGL acquisition at Note 3. |
|
|
● |
On June 1, 2021, the Company
issued 830,189 shares of Common Stock with a fair value of $9,273,211 in connection with the acquisition of GGC. |
|
|
● |
On June 1, 2021, the Company
issued 528,302 shares of Common Stock with a fair value of $5,901,133 in connection with the acquisition of Helix Holdings, LLC. |
|
|
● |
During the year ended June
30, 2021, the Company issued 5,503,167 shares of Common Stock for the exercise of warrants with a weighted average exercise price
of $4.86 per share or $26,737,849 in the aggregate. The warrants issued for shares of Common Stock in the statement of stockholders’
equity (deficit) also includes the cash received of $8,000,000 from the exercise of warrants issued in the acquisition of Argyll,
and the non-cash settlement of the related warrant liability of $7,480,000, discussed above. The Company recorded issuance costs
of $197,627 related to the issuance of warrants during the year ended June 30, 2021. |
● |
During the year ended June
30, 2021, the Company issued 5,333 shares of Common Stock from the exercise of stock options with a weighted average exercise price
of $8.37 per share or $44,637 in the aggregate. |
|
|
● |
During the year ended June
30, 2021, the Company issued 602,695 shares of its Common Stock for services rendered with a weighted average fair value of $4,024,746
per share or $6.68 in the aggregate. |
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 are being issued pursuant to the Company’s shelf registration statement on Form S-3 (File No.
333-252370) and the Company filed a prospectus supplement, dated September 3, 2021 with the SEC in connection with the offer and
sale of the shares pursuant to the Equity Distribution Agreement with the broker. There were 1,165,813 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 on signing a new ATM agreement.
Common
Stock Warrants
On
March 2, 2022, the Company closed the March 2022 Offering, in which it sold 15,000,000
units at $1.00
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 15,000,000
March 2022 Warrants at an exercise price of $1.00.
On April 1, 2022 the underwriters of the March 2022 Offering exercised the over-allotment option to purchase 2,250,000
additional March 2022 Warrants to purchase shares at a price of $0.01
per warrant. The Company received net proceeds of $20,925.
There were no March 2022 Warrants or April 2022 Overallotment Warrants exercised during the year ended June 30, 2022 and all March
2022 Warrants and April 2022 Overallotment Warrants were outstanding as of June 30, 2022.
On
July 31, 2020, the Company issued 1,000,000
warrants in connection with its acquisition of Argyll with an exercise price of $8.00.
These warrants were exercised during the year ended June 30, 2021. On June 2, 2021, the Company also issued 2,000,000
Series A Warrants and 2,000,000
Series B Warrants with an exercise price of $17.50
per share to the Holder of the Senior Convertible Note. There were no Series A Warrants exercised during the year ended June 30,
2022. The Series B Warrants may not be exercised until there is a redemption of principal under the Senior Convertible Note. The
Series B Warrants were not exercisable at June 30, 2022.
On
April 16, 2020, the Company closed an offering, (the “April 2020 Offering”), in which it sold 1,980,000 units consisting
of one share of Common Stock and one Unit A Warrant and one Unit B Warrant, for a total of 3,960,000 warrants, with each warrant entitling
the holder to purchase one share of Common Stock priced at $4.25 per share. The Company issued an additional 209,400 Unit A Warrants and
209,400 additional Unit B Warrants to the underwriter pursuant to an over-allotment option each entitling the holder to purchase one
share of Common Stock at $0.01 per share. There were 1,136,763 of Unit A Warrants outstanding on June 30, 2022. The Unit B Warrants expired
one year from the date of issuance on April 19, 2021 and there were no Unit B Warrants outstanding at June 30, 2022.
In
connection with the April 2020 Offering the Company also issued 1,217,241 shares of Common Stock and 2,434,482 warrants (“Conversion
Warrants”) to purchase one share of Common Stock at $4.25 per share upon the conversion of $4,138,585 of the Company’s convertible
debt and accrued interest. There were 40,582 Unit A Conversion Warrants outstanding at June 30, 2022. 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, 2020 | |
| 5,264,592 | | |
$ | 4.28 | | |
| 0.86 | | |
$ | 14,654,296 | |
Issued | |
| 5,603,674 | | |
| 14.38 | | |
| | | |
| | |
Exercised | |
| (5,503,167 | ) | |
| 4.88 | | |
| | | |
| | |
Forfeited or cancelled | |
| (14,541 | ) | |
| 4.25 | | |
| | | |
| | |
Outstanding, June 30, 2021 | |
| 5,350,558 | | |
| 14.19 | | |
| 3.14 | | |
| 8,743,588 | |
Issued | |
| 17,250,000 | | |
| 1.00 | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Forfeited or cancelled | |
| — | | |
| — | | |
| | | |
| | |
Outstanding June 30, 2022 | |
| 22,600,558 | | |
| 4.12 | | |
| 4.07 | | |
| — | |
Common Stock Options
On
September 10, 2020, the Company’s Board of Directors adopted the 2020 Equity and Incentive Plan (the “2020 Plan”)
that provides for the issuance of incentive and non-qualified stock options, restricted stock, restricted stock units and stock
appreciation rights to officers, employees, directors, consultants, and other key persons. Under the 2020 Plan, the maximum number
of shares of Common Stock authorized for issuance was 1,500,000
shares. Each
year on January 1, for a period of up to nine years, the maximum number of shares authorized for issuance under the 2020 Plan is
automatically increased by 233,968 shares. At June 30, 2022, there was a maximum of 1,967,936
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 June 30, 2022, there were 857,410
shares of Common Stock available for future issuance under the 2020 Plan.
A
summary of the Company’s stock option activity is as follows:
Schedule
of Stock Option Activity
| |
Number of Options | | |
Weighted Average Exercise Price | |
Outstanding, June 30, 2020 | |
| 51,942 | | |
$ | 10.50 | |
Granted | |
| 436,400 | | |
| 4.96 | |
Exercised | |
| (5,333 | ) | |
| 8.37 | |
Cancelled | |
| (8,333 | ) | |
| 4.09 | |
Outstanding, June 30, 2021 | |
| 474,676 | | |
| 5.49 | |
Granted | |
| 1,120,150 | | |
| 6.71 | |
Exercised | |
| (14,000 | ) | |
| 4.82 | |
Cancelled | |
| (470,300 | ) | |
| 6.54 | |
Outstanding, June 30, 2022 | |
| 1,110,526 | | |
$ | 6.29 | |
As
of June 30, 2022, the weighted average remaining life of the options outstanding was 4.10 years. There are 1,069,432 options exercisable
at June 30, 2022, with a weighted average exercise price of $6.27.
Stock
Based Compensation
During
the year ended June 30, 2022 and 2021, the Company recorded stock-based compensation expense of $5,165,653
and $4,129,726,
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 consolidated statements of operations.
The
Company had previously recognized stock-based compensation expense of $927,855 during its year ended June 30, 2020 related to the issuance
of 117,450 shares of Common Stock for services rendered, comprised of 1,333 shares granted to management, 16,966 shares granted to employees,
and 99,151 shares granted to consultants. At June 30, 2020, the Company recorded the fair value of these shares issued as liabilities
to be settled in stock. During the first quarter of the Company’s fiscal year ended June 30, 2021, the Company settled the balance
of the liabilities to be settled in stock through the issuance of Common Stock in a non-cash transaction.
As
of June 30, 2022, unamortized stock compensation for stock options was $1,074,485 with a weighted-average recognition period of 0.25
years. The options granted during the year ended June 30, 2022 were valued using the Black-Scholes option pricing model using the following
weighted average assumptions:
Schedule of Weighted Average Assumptions Valued Using Black-Scholes Option Pricing Model
| |
Year ended
June 30, 2022 | |
Expected term, in years | |
| 2.81 | |
Expected volatility | |
| 150.82 | % |
Risk-free interest rate | |
| 0.45 | % |
Dividend yield | |
| — | |
Grant date fair value | |
$ | 5.34 | |
As
of June 30, 2021, unamortized stock compensation for stock options was $598,105 with a weighted-average recognition period of 0.60 years.
The options granted during the year ended June 30, 2021 were valued using the Black-Scholes option pricing model using the following
weighted average assumptions:
| |
Year ended June 30, 2021 | |
Expected term, in years | |
| 2.76 | |
Expected volatility | |
| 132.60 | % |
Risk-free interest rate | |
| 0.32 | % |
Dividend yield | |
| — | |
Grant date fair value | |
$ | 3.41 | |
Note
17 – Other Non-Operating Income (Loss), Net
Other
non-operating income (loss), net, for the years ended June 30, 2022 and 2021 was as follows:
Schedule of Other Non Operating Income Loss Net
| |
June 30, 2022 | | |
June 30, 2021 | |
Foreign exchange loss | |
$ | (149,573 | ) | |
$ | (440,452 | ) |
Gain on sale of business | |
| 1,069,262 | | |
| - | |
Other non-operating loss | |
| (1,504,155 | ) | |
| (19,876 | ) |
Total | |
$ | (584,466 | ) | |
$ | (460,328 | ) |
On
June 10, 2022, the Company entered into and consummated the transaction contemplated by that certain asset purchase agreement by and
between the Company and SCV CAPITAL, LLC (the “Buyer”) pursuant to which the Buyer agreed to acquire from the Company
the Helix assets related to the Company’s ownership and operation of Helix Game Centers. The total purchase price for the
Helix Game Centers was approximately $1,200,000, with the purchase price being primarily attributable to the Buyer’s
assumption of certain liabilities related to the Helix Game Centers, including leases and sponsorship liabilities. The gain on sale
of $1,069,262 was driven by the amounts of liabilities assumed by the Buyer. Other non-operating loss for the year ended June 30,
2022 includes the amount the Company agreed to pay the Holder of the Old Senior Convertible Note of $1,500,000 under
the terms of a registration rights agreement (see Note 12).
Note
18 – Fair Value Measurements
The
following financial instruments were measured at fair value on a recurring basis:
Schedule
of Fair Value of Financial Instruments
| |
June 30, 2022 | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Contingent consideration (Note 3) | |
$ | 3,328,361 | | |
$ | — | | |
$ | — | | |
$ | 3,328,361 | |
Liability for the March 2022 Warrants and April 2022 Overallotment Warrants (Note 12) | |
$ | 2,070,000 | | |
$ | 2,070,000 | | |
$ | — | | |
$ | — | |
Liability for the Series A and Series B Warrants (Note 12) | |
$ | 122,730 | | |
$ | — | | |
$ | — | | |
$ | 122,730 | |
Derivative liability on Senior Convertible Note (Note 12) | |
$ | 9,399,620 | | |
$ | — | | |
$ | — | | |
$ | 9,399,620 | |
| |
June 30, 2021 | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Liability for the Series A and Series B Warrants (Note 12) | |
$ | 23,500,000 | | |
$ | — | | |
$ | — | | |
$ | 23,500,000 | |
| |
| | | |
| | | |
| | | |
| | |
A
summary of the changes in Level 3 financial instruments for the years ended
June 30, 2022 and 2021 is as follows:
Summary
of the Changes in Level 3 Financial Instruments
| |
Warrant Liability | | |
Contingent Consideration | | |
Derivative liability on Senior Convertible Note | |
Balance at June 30, 2020 | |
$ | — | | |
$ | — | | |
$ | — | |
Fair value of warrants issued for Argyll acquisition (“Argyll Warrant Liability”) (Note 3) | |
| 2,750,076 | | |
| — | | |
| — | |
Revaluation of Argyll warrant liability for warrants issued in Argyll Acquisition (Note 16) | |
| 4,729,924 | | |
| — | | |
| — | |
Settlement of Argyll warrant liability (Note 16) | |
| (7,480,000 | ) | |
| — | | |
| — | |
Issuance of Series A and Series B warrants with Senior Convertible Note (Note 12) | |
| 26,680,000 | | |
| — | | |
| — | |
Revaluation of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | |
| (3,180,000 | ) | |
| — | | |
| — | |
Balance at June 30, 2021 | |
| 23,500,000 | | |
| | | |
| — | |
Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 12) | |
| (23,377,270 | ) | |
| — | | |
| — | |
Fair value of contingent consideration for Bethard at acquisition (Note 3) | |
| — | | |
| 6,700,000 | | |
| — | |
Payments of Bethard contingent consideration | |
| — | | |
| (1,016,331 | ) | |
| — | |
Change in fair value of Bethard contingent consideration liability (Note 3) | |
| — | | |
| (2,355,308 | ) | |
| — | |
Fair value of derivative liability on Senior Convertible Note (Note 12) | |
| — | | |
| — | | |
| 20,281,861 | |
Change in the fair value of the derivative liability on Senior Convertible Note (Note 12) | |
| — | | |
| — | | |
| (10,882,241 | ) |
Balance at June 30, 2022 | |
$ | 122,730 | | |
$ | 3,328,361 | | |
$ | 9,399,620 | |
The
Series A and Series B Warrants outstanding at June 30, 2022 were valued using a Monte Carlo valuation model with the following assumptions:
Schedule
of Warrants Outstanding Fair Value Assumption
| |
June 30, 2022 |
| |
June 30, 2021 |
|
Contractual term, in years | |
| 2.00 – 4.00 |
| |
| 2.00 – 4.00 |
|
Expected volatility | |
| 125% – 133 |
% | |
| 120% – 140 |
% |
Risk-free interest rate | |
| 2.75% – 2.98 |
% | |
| 0.24% – 0.65 |
% |
Dividend yield | |
| — |
| |
| — |
|
Conversion / exercise price | |
$ | 17.50 |
| |
$ | 17.50 |
|
The
value of the March 2022 Warrants issuance at March 2, 2022 were valued using a Monte Carlo valuation model with the following assumptions:
| |
March 2, 2022 | |
Contractual term, in years | |
| 5.00 | |
Expected volatility | |
| 139 | % |
Risk-free interest rate | |
| 1.74 | % |
Dividend yield | |
| — | |
Conversion / exercise price | |
$ | 1.00 | |
On
issuance, the March 2022 Warrants were classified as a Level 3 instrument and were subsequently transferred out of Level 3 and classified
as a Level 1, as subsequent valuations were based upon the market price of the warrants. On issuance, the April 2022 Overallotment Warrants
were classified as Level 1 using the market price. At June 30, 2022 the March 2022 Warrants and the April 2022 Overallotment Warrants
were valued using the market price.
The
fair value of a derivative instrument in a liability position includes measures of the Company’s nonperformance risk. Significant
changes in nonperformance risk used in the fair value measurement of the derivative liability may result in significant changes to
the fair value measurement. The cash liability calculated under the terms of the New Note of approximately $180,000,000 is materially
higher than the fair value of the derivative liability of $9,399,620 calculated at June 30, 2022. The calculated make-whole liability
may differ materially from the amount the Company may be required to pay under the New Note. The Company has held non-binding
discussions with the Holder to restructure its obligation under the New Note. However, there can be no guarantee that the Company will
be able to reach an agreement to restructure the New Note.
The
following is information relative to the Company’s derivative instruments in the consolidated balance sheets as of June
30, 2022 and 2021:
Schedule of Balance Sheet Derivative
Instruments
Derivatives Not Designated as Hedging Instruments | |
Balance Sheet Location | |
June 30, 2022 | | |
June 30, 2021 | |
Derivative liability on Senior Convertible Note (Note 12) | |
Derivative liability | |
$ | 9,399,620 | | |
$ | - | |
The
effect of the derivative instruments on the consolidated statements of operations is as follows:
Schedule
of Statement of Operation Derivative Instruments
| |
| |
Amount of Gain (Loss) Recognized in Income on Derivatives | |
| |
| |
| | |
Year ended June 30, | |
Derivatives Not Designated as Hedging Instruments | |
Location of Gain or (Loss) Recognized in Income on Derivatives | |
| | |
| | |
2022 | | |
2021 | |
Derivative liability on Senior Convertible Note (Note 12) | |
Change in fair value of derivative liability on Senior Convertible Note | |
| | | |
| | | |
$ | (10,882,241 | ) | |
$ | - | |
Argyll
Warrant Valuation
During
the year ended June 30, 2021, the Company issued 1,000,000
warrants in connection with its acquisition of Argyll. Each warrant entitled the holder to purchase one share of Common Stock at
exercise price of $8.00
per share. The Company initially estimated the fair value of the warrants issued to be $5,488,171
as of the Argyll acquisition date of July 31, 2020. At September 30, 2020, the Company estimated the fair value of these warrants to
be $3,387,218,
resulting in a gain on the change in fair value of warrant liability in the amount of $2,100,953.
The Company valued the warrants using the Black-Scholes option pricing model with the following terms on July 31, 2020: (a) exercise
price of $8.00,
(b) volatility rate of 187.40%,
(c) discount rate of 0.48%,
(d) term of three
years, and (e) dividend rate of 0%.
The Company valued the warrant using the Black-Scholes option pricing model with the following terms on September 30, 2020: (a)
exercise price of $8.00,
(b) volatility rate of 183.25%,
(c) discount rate of 0.28%,
(d) term of 2 years
and 10 months, and (e) dividend rate of 0%.
Subsequent
to September 30, 2020, the holder of the warrants issued in the Argyll acquisition exercised the warrants resulting in the issuance of
1,000,000 shares of Common Stock by the Company. Prior to the exercises of the warrants, the Company recorded a measurement period adjustment
to reduce the acquisition date fair value of the warrant liability by $2,738,095 using a Monte Carlo simulation. The issuance of the
shares of Common Stock upon exercise of the warrants were recorded at their settlement date fair value of $15,480,000 comprised of $8,000,000
of cash received from the exercise, and non-cash settlement of the warrant liability totaling $7,480,000.
Assets
Measured on a Nonrecurring Basis
Assets
that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. This includes the evaluation
of long-lived assets, goodwill and other intangible assets for impairment. The Company’s estimates of fair value required it to
use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to
future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain.
The carrying value of the assets after any impairment approximates fair value.
The
Company assesses the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the fair value of goodwill using the income approach. Inputs
used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that
approximates the cost of capital of a market participant.
The
Company uses undiscounted future cash flows of the asset or asset group for equipment and intangible assets. During the year ended June
30, 2022, the Company wrote down certain long-lived assets other than goodwill related to the same reporting unit to fair value. The
Company estimated the fair value when conducting the long-lived asset impairment tests primarily using an income approach and used a
variety of unobservable inputs and underlying assumptions consistent with those discussed above for purposes of the Company’s goodwill impairment
test.
During
the year ended June 30, 2022, the Company recognized asset impairment charges to the goodwill and long-lived assets of the iGaming
Argyll (UK) reporting unit in the EEG iGaming segment, and EGL, GGC and Helix reporting units in the EEG Games segment (See Notes 6,
7 and 11).
Note
19 – Income Taxes
The
income (loss) before income taxes follows:
Schedule of Income (loss) Before Income Taxes
| |
Fiscal 2022 | | |
Fiscal 2021 | |
United States | |
$ | (87,679,037 | ) | |
$ | (19,987,348 | ) |
International | |
| ) | |
| ) |
Total loss before income taxes | |
$ | ) | |
$ | ) |
The
provision (benefit) from income taxes follows:
Schedule of Provision (benefit) from Income Taxes
| |
Fiscal 2022 | | |
Fiscal 2021 | |
Current: | |
| | | |
| | |
Federal | |
$ | - | | |
$ | 300,000 | |
State | |
| - | | |
| — | |
Foreign | |
| (2,581 | ) | |
| 24,722 | |
Total current | |
| (2,581 | ) | |
| 324,722 | |
Deferred: | |
| | | |
| | |
Federal | |
| (5,671,861 | ) | |
| (4,136,258 | ) |
State | |
| - | | |
| — | |
Foreign | |
| - | | |
| — | |
Total deferred | |
| (5,671,861 | ) | |
| (4,136,258 | ) |
Income tax provision (benefit) | |
$ | (5,674,442 | ) | |
$ | (3,811,536 | ) |
During the year ended June 30,
2022, the Company recorded a deferred tax liability in connection with its acquisition of Bethard. This acquisition impacted the Company’s
estimate of realizability of its deferred tax assets and resulted in a reduction of the Company’s valuation allowance of $5,671,861 during
the year ended June 30, 2022. During the year ended June 30, 2021, the Company recorded a deferred tax liability in connection with its
acquisitions of Argyll, EGL, Helix and ggCircuit. These acquisitions impacted the Company’s estimate of realizability of its deferred
tax assets and resulted in a reduction to the valuation allowance of $4,136,258 during the year ended June 30, 2021.
The
reconciliation of the expected tax expense (benefit) based on U.S. federal statutory rate of 21% with the actual expense follows:
Schedule of Reconciliation of Income Tax Expense
| |
Fiscal 2022 | | |
Fiscal 2021 | |
U.S. federal statutory rate | |
$ | (22,660,372 | ) | |
$ | (6,338,697 | ) |
Change in valuation allowance | |
| 17,373,839 | | |
| 1,133,233 | |
Foreign tax rate and other foreign tax | |
| (1,171,464 | ) | |
| (150,274 | ) |
Extinguishment of senior convertible note | |
| 5,544,743 | | |
| - | |
Non-deductible warrant revaluations | |
| (6,608,337 | ) | |
| 325,484 | |
Non-deductible revaluation of contingent consideration | |
| 1,790,656 | | |
| 367,207 | |
Acquisition costs | |
| 56,493 | | |
| 521,235 | |
Other | |
| — | | |
| 330,276 | |
Income tax provision (benefit) | |
$ | (5,674,442 | ) | |
$ | (3,811,536 | ) |
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.
The CARES Act, among other things, permits Net Operating Liabilities (“NOLs”) carryovers and carrybacks to offset 100%
of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020
to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is
currently evaluating the impact of the CARES Act, but due to sustained losses, the NOL carryback provision of the CARES Act is not
expected to yield a benefit to us.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities
consist of the following:
Schedule
of Deferred Tax Assets
| |
Fiscal 2022 | | |
Fiscal 2021 | |
Assets: | |
| | | |
| | |
Net operating losses | |
$ | 29,509,842 | | |
$ | 9,728,136 | |
Nonqualified stock options | |
| 1,307,113 | | |
| 382,974 | |
Depreciation and amortization | |
| 473,380 | | |
| 452,388 | |
Other | |
| 26,265 | | |
| 26,264 | |
Gross deferred tax assets | |
| 31,316,600 | | |
| 10,589,762 | |
Deferred tax liabilities | |
| | | |
| | |
Acquired intangible assets | |
| (3,269,763 | ) | |
| (5,593,787 | ) |
Net deferred tax assets | |
| 28,046,837 | | |
| 4,995,975 | |
Valuation allowance | |
| (28,046,837 | ) | |
| (6,866,836 | ) |
Deferred tax liabilities, net | |
$ | — | | |
$ | (1,870,861 | ) |
The
Company had net deferred tax assets of $28,046,837 at June 30, 2022 for which there is a full valuation allowance. The Company determined
that it would not be able to realize the remaining deferred tax assets in the future. The need to maintain a valuation allowance against
the Company’s deferred tax assets may cause greater volatility to the Company’s effective tax rate.
At June 30, 2022, the Company had
estimated federal net operating loss carry forwards of $95,096,045,
which may be offset against future taxable income subject to limitation under IRC Section 382. At June 30, 2022, the Company had net
operating loss carryforwards related to its foreign operations in Malta of $13,233,576 and the UK of $1,314,884 that do not expire, as well as net operating loss carryforwards related to its foreign operations in Switzerland of $24,985,656 that
can be carried forward for 7 years. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was
enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryovers and
carrybacks to offset taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in
2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income
taxes. Due to historical losses, the net operating loss carryback provision of the CARES Act is would not yield a material benefit
to the Company. The Company determined that a full valuation allowance will be recorded against the net operating loss deferred tax
assets.
The
Company applied the “more-likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a
tax return, which resulted in no unrecognized tax benefits as of June 30, 2022 or June 30, 2021, respectively.
During
the years ended June 30, 2022 and 2021, the Company recorded income tax benefits of $5,674,442 and
$3,811,536, respectively, which is attributable primarily to non-recurring partial releases of the Company’s U.S.
valuation allowance as a result of purchase price accounting. The Company regularly evaluates the realizability of its deferred tax
assets and establishes a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be
realized.
Note
20—Segment Information
During
the fourth quarter of fiscal 2022, the Company evaluated its reportable segments and changed them to: EEG iGaming and EEG Games. This
change reflects management’s organizational structure and financial information available to and evaluated regularly by the chief
operating decision maker (“CODM”), who is the Company’s Chief Executive Officer.
As
a result of the change in reportable segments described above, 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 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 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
| |
2022 | | |
2021 | |
| |
For the year ended June 30, | |
| |
2022 | | |
2021 | |
Revenues: | |
| | |
| |
EEG iGaming segment | |
| 53,104,795 | | |
| 16,231,028 | |
EEG Games segment | |
| 5,246,855 | | |
| 552,886 | |
| |
| | | |
| | |
Total | |
| 58,351,650 | | |
| 16,783,914 | |
| |
| | | |
| | |
Adjusted EBITDA | |
| | | |
| | |
EEG iGaming segment | |
| (7,526,205 | ) | |
| (6,740,890 | ) |
EEG Games segment | |
| (4,915,549 | ) | |
| (454,467 | ) |
Other(1) | |
| (12,960,209 | ) | |
| (7,475,738 | ) |
Total Adjusted EBITDA | |
| (25,401,963 | ) | |
| (14,671,095 | ) |
| |
| | | |
| | |
Adjusted for: | |
| | | |
| | |
Interest expense | |
| (6,423,039 | ) | |
| (698,973 | ) |
Loss on conversion of senior convertible note | |
| (5,999,662 | ) | |
| - | |
Loss on extinguishment of senior convertible note | |
| (28,478,804 | ) | |
| - | |
Change in fair value of derivative liability | |
| (10,882,241 | ) | |
| - | |
Change in fair value of warrant liability | |
| 31,468,270 | | |
| (1,549,924 | ) |
Change in fair value of contingent consideration | |
| 2,355,308 | | |
| (1,748,607 | ) |
Other non-operating income (loss), net | |
| (584,466 | ) | |
| (460,328 | ) |
Income tax benefit (expense) | |
| 5,674,442 | | |
| 3,811,536 | |
Depreciation and amortization | |
| (12,026,581 | ) | |
| (3,416,252 | ) |
Asset impairment charges | |
| (46,498,689 | ) | |
| - | |
Stock-based Compensation | |
| (5,165,653 | ) | |
| (4,129,726 | ) |
Cost of acquisition | |
| (269,012 | ) | |
| (3,509,365 | ) |
Net loss | |
| (102,232,090 | ) | |
| (26,372,734 | ) |
(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, net; income
taxes; depreciation and 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 income (loss), and
certain other non-recurring, non-cash or non-core items (included in table above).
Note
21 – Subsequent Events
September
2022 Financing
On September 15, 2022, the Company
entered into a underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC and Joseph Gunnar & Co., LLC,
as representative of the several underwriters identified therein (collectively, the “Underwriters”), relating to a firm commitment
public offering of (a) 30,000,000 shares of the Company’s Common Stock and (b) Warrants (“September 2022 Warrants”)
to purchase up to 30,000,000 shares of Common Stock, at an exercise price of $0.25 per share, at an aggregate price of $0.25 per share
and accompanying Warrant (the “September 2022 Offering”). Under the terms of the Underwriting Agreement, the Company granted
the Underwriters a 45-day option an option to purchase up to an additional 4,500,000 of Common Stock (the “September 2022 Overallotment
Common Stock”) and/or Warrants (the “September 2022 Overallotment Warrants”) (collectively, the “September 2022
Overallotment”). The closing of the offering took place on September 19, 2022.
The gross proceeds received from the sale of the
shares of the Common Stock and September 2022 Warrants in the September 2022 Offering, before deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company and before any overallotment, was $7,500,000.
The underwriters exercised their option for 3,600,000 September
Overallotment Warrants, at a purchase price of $0.01 per
warrant, with an exercise price of $0.25 per
warrant. Total proceeds from the September 2022 Overallotment Warrants was $36,000.
The Company remitted to
the Holder of the Senior Convertible Note an amount of $2,265,928 equal to fifty percent (50%) of all net proceeds above $2,000,000
following the payment of 7% in offering fees including Underwriting discounts and commissions. In addition, as part of the September 2022 Offering, the Holder purchased $512,500 of securities (2,050,000 shares of
Common Stock and 2,050,000 Warrants) and the Company paid the Holder an additional $512,500. The proceeds remitted to the Holder of the
Senior Convertible Note reduced the principal balance of the Senior Convertible Note on a dollar-for-dollar basis.
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 of the Senior Convertible Note was $4,080,990.
The shares of Common Stock and the September 2022
Warrants, including the 2022 Overallotment Warrants, sold by the Company have been registered pursuant to a registration statement on
Form S-3 (File No. 333-252370), which the SEC declared effective on February
5, 2021. A final prospectus supplement and accompanying base prospectus relating to the offering were filed with the SEC on September
19, 2022.
The Company does not intend to list the September
2022 Warrants, including the 2022 Overallotment Warrants, sold in the offering on any securities exchange or other trading market.
On September 19, 2022, prior to the closing of the
offering, the Company entered into a warrant agency agreement (the “Warrant Agency Agreement”) with Vstock Transfer, LLC (“Vstock”),
to serve as the Company’s warrant agent for the September 2022 Warrants, including September 2022 Overallotment Warrants. Upon
the closing of the offering. The September 2022 Warrants, including September 2022 Overallotment Warrants are exercisable upon issuance
and expire five years from the date they first became exercisable.