10-Q 1 ebet_i10q-033122.htm FORM 10-Q
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Transition Period From                  to

 

Commission File Number: 001-40334

 

EBET, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   85-3201309

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

197 E. California Ave. Ste. 302, Las Vegas, NV   89104
(Address of Principal Executive Offices)   (Zip Code)

 

(888) 411-2726

(Registrant's Telephone Number, Including Area Code) 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock EBET The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒ No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ☐ Accelerated Filer ☐
Non-Accelerated Filer Smaller Reporting Company
  Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The registrant had 14,666,830 shares of common stock outstanding on May 3, 2022.

 

   

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

The forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to those described under the “Risk Factors” section and include, among other things:

 

  · our ability to successfully integrate our asset acquisitions;

  

  · our ability to introduce new enhancements to our website on the timeline we have indicated;

 

  · our ability to obtain additional funding to develop additional services and offerings and to service our debt obligations;

 

  · compliance with obligations under intellectual property licenses with third parties;

 

  · market acceptance of our new offerings;

 

  · competition from existing online offerings or new offerings that may emerge;

 

  · our ability to establish or maintain collaborations, licensing or other arrangements;

 

  · our ability and third parties’ abilities to protect intellectual property rights;

 

  · our ability to adequately support future growth; and

 

  · our ability to attract and retain key personnel to manage our business effectively.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.

 

We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments we may make or enter into.

 

 

 2 

 

 

EBET, Inc.

 

FORM 10-Q

For the Quarter Ended March 31, 2022

 

INDEX

 

    Page
PART I. FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
         
    a) Consolidated Balance Sheets as of March 31, 2022 and September 30, 2021 4
    b) Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2022 and 2021 5
    c) Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended March 31, 2022 and 2021 6
    d) Consolidated Statements Cash Flows for the Six Months Ended March 31, 2022 and 2021 7
    e) Notes to Consolidated Financial Statements 8
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
         
  Item 4. Controls and Procedures 26
         
PART II.  OTHER INFORMATION  
         
  Item 1. Legal Proceedings 27
         
  Item 1A. Risk Factors 27
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
       
  Item 3. Defaults Upon Senior Securities 27
       
  Item 4. Mine Safety Disclosure 27
         
  Item 5. Other Information 27
         
  Item 6. Exhibits 28
         
SIGNATURE 29

 

 

 3 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements.

 

EBET, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

           
   March 31,   September 30, 
   2022   2021 
         
ASSETS          
Current assets:          
Cash  $7,051,815   $9,064,859 
Accounts receivable, net   1,732,097    21,636 
Prepaid expenses and other current assets   1,504,086    690,637 
Right of use asset, operating lease, current portion   171,819    170,512 
           
Total current assets   10,459,817    9,947,644 
           
Long term assets:          
Fixed assets, net   924,692    85,334 
Right of use asset, operating lease   76,971    172,915 
Intangible assets - license agreement, net   1,308,846    1,616,088 
Intangible assets - domain names, net   2,249,033    2,240,510 
Goodwill   34,912,645     
Acquired intangibles, net   34,889,210     
           
Total assets  $84,821,214   $14,062,491 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $8,114,433   $1,721,103 
Current lease liabilities   171,818    170,511 
Derivative liabilities   66,457     
Borrowings   1,906,894    1,396,133 
Liabilities to users   1,019,482    58,789 
Total current liabilities   11,279,084    3,346,536 
           
Long-Term Liabilities          
Borrowings   32,686,431    463,925 
           
Total liabilities   43,965,515    3,810,461 
           
COMMITMENTS AND CONTINGENCIES        
           
Stockholders' equity:          
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 39,551 and 0 issued and outstanding as of March 31, 2022 and September 30, 2021, respectively   40     
Common stock; $0.001 par value, 100,000,000 shares authorized,14,416,830 and 13,315,414 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively   14,416    13,315 
Additional paid-in capital   80,979,465    26,834,354 
Accumulated other comprehensive (deficit) income   (915,486)   53,911 
Accumulated deficit   (39,222,736)   (16,649,550)
Total stockholders’ equity   40,855,699    10,252,030 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $84,821,214   $14,062,491 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 4 

 

  

EBET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

                     
   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
   2022   2021   2022   2021 
                 
Revenue  $19,002,588   $33,834   $26,142,515   $44,628 
Cost of revenue   (12,009,596)   (12,465)   (16,618,683)   (24,724)
                     
Gross profit   6,992,992    21,369    9,523,832    19,904 
                     
Operating expenses:                    
Sales and marketing expenses   9,474,087    234,691    13,448,872    273,944 
Product and technology expenses   1,139,914    603,445    2,155,162    1,109,380 
Acquisition costs   1,190        2,240,147     
General and administrative expenses   5,446,776    1,189,410    8,591,195    2,783,121 
Total operating expenses   16,061,967    2,027,546    26,435,376    4,166,445 
                     
Income (loss) from operations   (9,068,975)   (2,006,177)   (16,911,544)   (4,146,541)
                     
Other expenses:                    
Interest expense   (2,764,819)   (367,214)   (3,741,237)   (967,620 
Foreign currency loss   (7,277)   (2,269)   (69,328)   (12,230)
Total other expense   (2,772,096)   (369,483)   (3,810,565)   (979,850 
                     
Loss before provision for income taxes   (11,841,071)   (2,375,660)   (20,722,109)   (5,126,391)
Provision for income taxes                
                     
Net loss  $(11,841,071)  $(2,375,660)  $(20,722,109)  $(5,126,391)
                     
Preferred stock dividends   (1,367,260)       (1,851,077)    
Net loss attributable to common shareholders   (13,208,331)   (2,375,660)   (22,573,186)   (5,126,391 
                     
Net loss per common share – basic and diluted  $(0.93)  $(0.22)  $(1.61)  $(0.52)
                     
Weighted average common shares outstanding – basic and diluted   14,236,755    10,587,654    13,980,720    9,878,185 

 

 

 The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 5 

 

 

 

EBET, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

 

                                         
   Common stock   Preferred Stock                 
   Number of       Number of       Additional paid-in  

Accumulated

Other

Comprehensive

   Accumulated     
   Shares   Amount   Shares   Amount   capital   Income   deficit   Total 
                                         
Balance at September 30, 2020   7,340,421   $7,340       $   $3,053,660   $   $(1,449,526)  $1,611,474 
Shares issued for cash, net   2,000,000    2,000            3,646,071            3,648,071 
Stock-based compensation   683,334    683            1,321,343            1,322,026 
Shares issued due to conversion of notes payable   375,000    375            187,125            187,500 
Stock warrants issued for asset acquisition                   57,252            57,252 
Net loss                           (2,750,731)   (2,750,731)
Balance at December 31, 2020   10,398,755    10,398           $8,265,451        (4,200,257)   4,075,592 
                                         
Shares issued for cash, net   250,014    251            719,435            719,686 
Stock-based compensation                   700,000            700,000 
Net loss                           (2,375,660)   (2,375,660)
Balance at March 31, 2021   10,648,769    10,649           $9,684,886        (6,575,917   $3,119,618 
                                         
                                         
                                         
Balance at September 30, 2021   13,315,414   $13,315           $26,834,354   $53,911   $(16,649,550)  $10,252,030 
Shares & warrants issued for cash, net           37,700    38    37,699,962            37,700,000 
Shares issued to Aspire Global plc   186,838    187            13,326,565            13,326,752 
Cashless exercise of warrants   244,346    244            (244)            
Shares issued for conversion of debt   423,141    423            112,077            112,500 
Exercise of stock options for cash   2,000    2            5,998            6,000 
Stock-based compensation   20,000    20            1,435,296            1,435,316 
Preferred share dividends             484         483,817         (483,817)    
Issuance costs                   (2,100,000)           (2,100,000)
Net loss                           (8,881,038)   (8,881,038)
Comprehensive income                       187,428        187,428 
Balance at December 31, 2021   14,191,739   $14,191    38,184   $38   $77,797,825   $241,339   $(26,014,405)  $52,038,988 
                                         
Cashless exercise of warrants and RSU   225,091    225            (225)            
Stock-based compensation                   1,814,607            1,814,607 
Preferred share dividends            1,367    2    1,367,258        (1,367,260)    
Net loss                           (11,841,071)   (11,841,071)
Comprehensive income                       (1,156,825)       (1,156,825)
Balance at March 31, 2022   14,416,830   $14,416    39,551   $40   $80,979,465   $(915,486)  $(39,222,736)  $40,855,699 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.  

 

 

 6 

 

 

EBET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2022 and 2021

(Unaudited)

           
   For the Six Months Ended
March 31,
 
   2022   2021 
         
Cash flow from operating activities:          
Net loss  $(20,722,109)  $(5,126,391)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount, issuance costs   1,368,188    867,593 
Depreciation and amortization expense   2,795,880    12,346 
Stock-based compensation   3,249,923    2,022,026 
Gain on cryptocurrency settlement       (35,140)
Derivative (gain)/loss   73,083     
Foreign exchange (gain)/loss   (216,678   50,932 
Changes in operating assets and liabilities:          
Accounts receivable   (1,711,122)   (35,251)
Prepaid expenses and other   (717,505)   (91,220)
Accounts payable and accrued liabilities   7,301,761    426,368 
Accounts payable - related parties       2,340 
Liabilities to users   960,693    32,924 
Net cash used in operating activities   (7,617,886)   (1,873,473)
           
Cash flow from investing activities:          
Purchase of fixed assets   (902,469)   (90,899)
Cash paid for business combinations   (56,229,526)    
Purchase of other long term assets       (133,770)
Net cash used by investing activities   (57,131,995)   (224,669)
           
Cash flow from financing activities:          
Proceeds from debt issuance, net of issuance costs   27,130,837     
Proceeds from equity issuance, net of issuance costs   35,606,000    4,367,757 
Net cash provided by financing activities   62,736,837    4,367,757 
           
NET CHANGE IN CASH   (2,013,044)   2,269,615 
CASH AT BEGINNING OF PERIOD   9,064,859     
CASH AT END OF PERIOD  $7,051,815   $2,269,615 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $1,427,915   $ 
           
Non-cash transactions          
Preferred shares issued for dividends  $1,851,077   $ 
Stock warrants issued in connection with Senior Notes  $7,661,382   $ 
Stock issued for conversion of notes payable  $112,500   $ 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 7 

 

 

EBET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION, NATURE OF OPERATIONS AND GOING CONCERN

 

Organization

 

EBET, Inc. (“EBET” or “the Company”) was formed on September 24, 2020 as a Nevada corporation. EBET is a technology company creating and operating platforms focused on esports and competitive gaming. The Company operates under a Curacao gaming sublicense and can provide online betting services to various countries around the world. On May 5, 2022, the Company changed its name to EBET, Inc. from Esports Technologies, Inc.

 

On September 24, 2020, ESEG Limited (“ESEG”) was acquired by Global E-Sports Entertainment Group, LLC (“Global E-Sports”) in exchange for 50% of the membership interest in Global E-Sports held by the former owners of ESEG. The remaining 50% interest of Global E-Sports is held by EBET. Prior to this transaction both ESEG and Global E-Sports shared common ownership. This transaction was accounted for as a combination of entities under common control and as such both operations have been combined from their inception. In addition, on September 24, 2020, EBET executed a Share Exchange Agreement (“Share Exchange”) resulting in the acquisition of 100% of the membership interest of Global E-Sports in exchange for the issuance of 7,340,421 shares of common stock.

 

Pursuant to the Share Exchange, the merger between Global E-Sports and the Company was accounted for as a reverse merger. Under this method of accounting, EBET was treated as the “acquired” company for financial reporting purposes. The net assets of Global E-Sports are stated at historical cost, with no goodwill or other intangible assets recorded.

 

Acquisition of the B2C business of Aspire Global plc

 

On October 1, 2021, the Company, and Esports Product Technologies Malta Ltd. (“Esports Malta”) entered into a Share Purchase Agreement (the “Acquisition Agreement”) with Aspire Global plc, (“Aspire”) and various Aspire group companies to acquire all of the issued and outstanding shares of Karamba Limited. The total acquisition price was €65,000,000 paid as follows: (i) cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms of an unsecured subordinated promissory note (the “Note”); and (iii) shares of Company common stock, which are valued at €5,000,000 (based on the weighted-average per-share price of the ten days prior to the execution date of the Acquisition Agreement (the “Exchange Shares”). See Notes 3, 4 and 5 for additional information.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has recurring losses and generated negative cash flows from operations since inception. In April 2021, the Company completed its Initial Public Offering (“IPO”) and issued 2,400,000 shares of common stock for gross cash proceeds of $14,400,000, receiving net proceeds of $13,514,200. The Company's forecasts for 2022 and beyond indicate that it we will need additional funding in order to have sufficient financial resources to continue to settle its debts as they fall due. In making this assessment, the Directors considered the going concern status for a period of at least 12 months from the date of signing the financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

Impact of COVID-19

 

The outbreak of the 2019 novel coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, has severely impacted the U.S. and world economies. Economic recessions, including those brought on by the COVID-19 outbreak may have a negative effect on the demand for the Company’s products and the Company’s operating results. The range of possible impacts on the Company’s business from the coronavirus pandemic could include: (i) changing demand for the Company’s online betting products; and (ii) increasing contraction in the capital markets.

 

 

 8 

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The significant accounting policies followed in the preparation of the consolidated financial statements are as follows:

 

Basis of Presentation

 

The accompanying unaudited financial statements of the Company, include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles accepted in the United States (“U.S. GAAP”) for interim unaudited financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary in order to make the condensed financial statements not misleading. Operating results for the three months ended March 31, 2022, are not necessarily indicative of the final results that may be expected for the year ended September 30, 2022. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited consolidated financial statements for the year ended September 30, 2021 included in our Form 10-K filed with the SEC. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. All intercompany accounts, transactions and balances have been eliminated in consolidation.

 

Certain reclassifications have been made to prior period amounts to conform to the current year presentation.

 

Business combinations

 

The Company accounts for business combinations under the acquisition method of accounting, in accordance with ASC 805, which requires assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. Any fair value of purchase consideration in excess of the fair value of the assets acquired less liabilities assumed is recorded as goodwill. The fair values of the assets acquired, and liabilities assumed are determined based upon the valuation of the acquired business and involve management making significant estimates and assumptions.

 

Accounts Receivable

 

Accounts receivables are recorded at amortized cost, less any allowance for doubtful accounts. Accounts receivable consists primarily of amounts due from our platform provider.

 

Intangible Assets

 

Other Intangible Assets

 

The Company’s other intangible assets consist of customer relationships, trademarks and internet domain names. Certain intangible assets have a defined useful life and others are classified as indefinite-lived intangible assets. Other intangible assets with a defined useful life are amortized over their estimated useful economic lives on a straight-line basis. 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. 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 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.

 

See Note 3 for intangible assets acquired in a business acquisition transaction.

 

 

 9 

 

 

Liabilities to Users

 

The Company records liabilities for user account balances at a given reporting period based on deposits made by players either to the Company or the sales affiliate, less any losses on wagers and payout made to players. Liabilities to users amounts are not required to be backed by cash reserves of the Company.

  

Impairment of Long-Lived Assets

 

Long-lived assets consist of software and equipment, finite-lived acquired intangible assets, such as license agreements, and indefinite-lived assets such as internet domain names. Long-lived assets are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. Impairment expense is recognized to the extent an asset’s expected undiscounted future cash flows are less than the asset’s carrying amount.

 

Leases

 

The Company accounts for leases under ASC 842. The Company assesses whether a contract contains a lease on its execution date. If the contract contains a lease, lease classification is assessed upon its commencement date under ASC 842. For leases that are determined to qualify for treatment as operating leases, rent expense is recognized on a straight-line basis over the lease term. Leases that are determined to qualify for treatment as finance leases recognize interest expense as determined using the effective interest method with corresponding amortization of the right-of-use assets. For leases with terms of 12 months and greater, an asset and liability are initially recorded at an amount equal to the present value of the unpaid lease payments over the lease term. In determining the lease term for each lease, the Company includes options to extend the lease when it is reasonably certain that the option will be exercised. The Company uses the interest rate implicit in the lease, when known, or its estimated incremental borrowing rate, which is derived from information available at the lease commencement date including prevailing financial market conditions, in determining the present value of the unpaid lease payments.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers, which was adopted on October 1, 2018 using the modified retrospective method. ASC Topic 606 requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASC Topic 606 had no impact to the Company’s comparative consolidated financial statements. Revenue is recognized based on the following five step model:

 

· Identification of the contract with a customer

 

· Identification of the performance obligations in the contract

 

· Determination of the transaction price

 

· Allocation of the transaction price to the performance obligations in the contract

 

· Recognition of revenue when, or as, the Company satisfies a performance obligation 

 

No single customer exceeded more than 10% of revenue during the three months ended March 31, 2022 and 2020. In addition, no disaggregation of revenue is required because all current revenue is generated from gaming revenue.

 

 

 10 

 

 

Performance Obligations

 

The Company operates an online betting platform allowing users to place wagers on a variety of live sporting events and esports events. Each wager placed by users create a single performance obligation for the Company to administer each event wagered. Gross gaming revenue is the aggregate of gaming wins and losses based on results of each event that customers wager bets on. Variable commission fees are paid to sales affiliates based on a percentage of revenue generated from the affiliate. The commissions rebated to affiliates are recorded as a reduction to gross gaming revenue.

  

Cost of Revenue

 

Cost of revenue consists of third-party costs associated with the betting software platform and gaming taxes.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of expenses associated with customer related acquisition costs, advertising and related software, strategic league and team partnerships and costs related to free to play contests, and the compensation of sales and marketing personnel, including stock-based compensation expenses. Advertising costs are expensed as incurred. Advertising costs incurred was $434,465 and $0 for the six months ended March 31, 2022 and 2021, respectively.

  

Product and Technology Expenses

 

Product and technology expenses consist primarily of expenses which are not subject to capitalization or otherwise classified within Cost of Revenue. Product and Technology expenses include software licenses, depreciation of hardware and software and costs related to the compensation of product and technology personnel, including stock-based compensation.

 

General and Administrative Expenses

 

General and administrative expenses include costs related to the compensation of the Company’s administrative functions, insurance costs, professional fees and consulting expense.

 

Income Taxes

 

Deferred taxes are determined utilizing the "asset and liability" method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, when it's more likely than not that deferred tax assets will not be realized in the foreseeable future. Deferred tax liabilities and assets are classified as current or non-current based on the underlying asset or liability or if not directly related to and asset or liability based on the expected reversal dates of the specific temporary differences.

 

Fair value of financial instruments

 

The Company discloses fair value measurements for financial and non-financial assets and liabilities measured at fair value. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but are corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

 

 11 

 

 

Foreign Currency

 

The Company’s reporting currency is the U.S. Dollar. Certain subsidiaries of the Company have a functional currency other than the U.S. Dollar, and are translated to the Company’s reporting currency at each reporting date. Non-monetary items are translated at historical rates. Monetary assets and liabilities are translated from British pounds and Euro into U.S. Dollars, at the period-end exchange rate, while foreign currency expenses are translated at the exchange rate in effect on the date of the transaction. The net effect of translation is reflected as other comprehensive income. The gains or losses on transactions denominated in currencies other than an entity’s functional currency are included in the consolidated statement of operations.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. When assessing goodwill for impairment, the Company uses qualitative and if necessary, quantitative methods in accordance with FASB ASC Topic 350, Goodwill. The Company also considers its enterprise value and if necessary, discounted cash flow model, which involves assumptions and estimates, including the Company’s future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws.

 

Circumstances that could indicate impairment and require the Company to perform a quantitative impairment test include a significant decline in the Company’s financial results, a significant decline in the Company’s enterprise value relative to its book value, an unanticipated change in competition of the Company’s market share and a significant change in the Company’s strategic plans.

 

Recently Issued Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“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 COMBINATIONS

 

Acquisition of the B2C business of Aspire Global plc

 

On October 1, 2021, in order to accelerate the growth and expand market access for our esports product offerings, the Company and Esports Malta entered into the “Acquisition Agreement” with Aspire, Aspire Global International Limited, AG Communications Limited, Aspire Global 7 Limited (collectively the “Aspire Related Companies”), and Karamba Limited (“Karamba”) whereby Esports Malta acquired all of the issued and outstanding shares of Karamba. The total acquisition price, paid at the closing of the acquisition of the Karamba shares, was €65,000,000 paid as follows: (i) a cash amount of €50,000,000; (ii) €10,000,000, paid in accordance with the terms of an unsecured subordinated promissory note (the “Note”); and (iii) shares of Company common stock, which were valued at €5,000,000 (based on the weighted-average per-share price of the ten days prior to the execution date of the Acquisition Agreement). The transaction closed on November 29, 2021.

 

 

 

 12 

 

 

The Note provides for an interest rate of 10% per annum. The maturity date of the Note is the earlier of that date which is four years from the issuance date or a liquidity event. The Note requires repayment of the principal amount plus any accrued interest in three equal installments, payable annually starting on the second anniversary after issuance. No interest payment shall be due until that date which is the last day of the end of the second anniversary of issuance should the Note remain unpaid at such time. Should the Note remain unpaid at the second anniversary, the total accrued interest due at that time shall be paid at the second-year anniversary for accrued interest for the period from the issuance date through the second-year anniversary date. Thereafter, and on each anniversary date thereafter, the interest due for the prior annual period shall be paid. Notwithstanding the foregoing, if the Company owes greater than $15.0 million under the credit agreement with CP BF Lending, LLC entered into in connection with the acquisition (See Note 4 – Borrowings – Senior Notes, then then the parties agree that the Company shall repay any principal amount plus any accrued interest due through the issuance of Company common stock in lieu of any cash payment and the amount of said common stock shares to be issued by the Company shall be determined by using the Conversion Price as defined below. Should an event of default occur on the Note, then at the election of Aspire, either (i) the Operator Services Agreement will be amended such that the fees payable shall increase by 5% during the continuation of the event of default, or (ii) Aspire may elect to convert the entire outstanding principal amount plus any accrued interest into fully-paid and non-assessable shares of common stock of the Company at a price per share based on the weighted-average per-share price for the ten days prior to the date of the occurrence of the event of default (“Conversion Price”). In no event shall the Conversion Price be lower than $18.00 per share (as adjusted for stock splits, stock dividends, or similar events occurring after the date hereof) and the total maximum number of common stock shares that may be issued to Aspire upon any such conversion in the aggregate shall be 650,000 shares (as adjusted for stock splits, stock dividends, or similar events occurring after the date hereof).

 

The acquired assets were recorded at their estimated fair values. The purchase price allocation is preliminary, and as additional information becomes available, the Company may further revise the preliminary purchase price allocation, including the fair value of identified intangible assets, during the remainder of the measurement period, which will not exceed 12 months from the closing of the acquisition. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts are determined. Any such adjustments may be material.

  

The purchase price of this acquisition was allocated on a preliminary basis as follows:

     
     
   Fair Value 
Trademarks  $21,836,528 
Customer relationships   16,162,202 
Goodwill   35,620,270 
Total  $73,619,000 

 

Useful life is the period over which an asset is expected to add to the future cash flows of an entity. Useful life for identifiable assets is generally estimated using a modified straight-line method or a usage period. The Company has determined that the useful life of the trademarks vary from 5 years to an indefinite life and determined that the useful life of the Customer Relationships was three years.

 

Goodwill represents the excess of the gross considerations transferred over the fair value of the underlying net assets acquired and liabilities assumed. Goodwill recognized is not deductible for local tax purposes.

 

Upon completing the acquisition of Aspire, the company incurred the following costs: 

     
     
Debt issuance costs   2,869,163 
Equity issuance costs   2,100,000 
Transaction expenses   2,615,098 
 Total acquisition expenses  $7,584,261 

 

Debt issuance costs relate to costs associated with acquiring the loan from the CP BF Lending LLC. These have been recorded as reduction of the face value of the debt and are amortized over the life of the loan. Equity issuance costs relate to the costs associated with the private placement. These have been recorded as reduction of the equity proceeds. Transactions costs relate to all direct and indirect costs associated with the acquisition, and expensed as incurred.

 

 

 13 

 

 

NOTE 4 – BORROWINGS

 

The following is a summary of borrowings outstanding as at March 31, 2022 and September 30, 2021: 

                                                    
         March 31, 2022   September 30, 2021 
   Contractual Interest     Principal outstanding balance   Principal outstanding balance   Unamortized debt discount    Issuance costs   Carrying amount   Principal outstanding balance   Unamortized debt discount   Issuance costs   Carrying amount 
   rate  Cur  Local   USD   USD    USD   USD   USD   USD   USD   USD 
Senior notes  15%  USD   30,000,000    30,000,000    (7,150,623)    (1,750,134)   21,099,243                 
Note due to Aspire  10%  EUR   10,000,000    11,101,000             11,101,000                 
Convertible notes  10%  USD   1,906,894    1,906,894             1,906,894    1,912,500    (516,366)       1,396,134 
Other  0%  USD   675,000    675,000    (188,812)        486,188    675,000    (211,076)       463,924 
Total borrowings              43,682,894    (7,339,435)    (1,750,134)   34,593,325    2,587,500    (727,442)       1,860,058 
                                                     
Current                              1,906,894                   1,396,133 
Long-term                              32,686,431                   463,925 
Total borrowings                              34,593,325                   1,860,058 

 

Senior Notes

 

On November 29, 2021, the Company entered into a credit agreement (the “Credit Agreement”) with CP BF Lending, LLC (“Lender”), pursuant to which the Lender agreed to make a single loan to the Company of $30,000,000 (the “Loan”). The Loan bears interest on the unpaid principal amount at a rate per annum equal to 15.0% as follows: (1) cash interest on the unpaid principal amount of the Loan at a rate equal to 14.0% per annum, plus (2) payable-in-kind interest (“PIK Interest”) on the unpaid principal amount of the Loan at a rate equal to 1.0% per annum. The Company paid to Lender on the closing date a non-refundable origination fee in an amount equal to $750,000.

  

The Loan matures in 36 months, provided that the Company may receive two 12-month extensions of the maturity date by paying to the Lender (1) an extension fee equal to 1.0% of the unpaid principal balance of the Loan as of the date of such extension, and (2) all reasonable and documented out-of-pocket fees and expenses paid or incurred by Lender, in each case in connection with the extension request, including but not limited to fees and expenses for appraisals, collateral exams and audits, and legal counsel. The foregoing extension right is subject to, among other items, (i) the Loan not being in default, (ii) the representations and warranties contained in Credit Agreement being true and correct; and (iii) the Lender granting its written approval thereof in its sole discretion. 

 

The Loan may be prepaid by the Company at any time. In addition, the Credit Agreement provides that in the event there shall be excess cash flow from the Aspire Business (as such concept is defined in the Credit Agreement) for any calendar month, commencing with the month ended December 31, 2022, the Company shall apply such excess cash flow amount to prepay the outstanding principal balance of the Loan; provided that no such prepayment shall be required once the unpaid principal balance of the Loan has been reduced to $15,000,000.

 

The Credit Agreement requires the Company to meet certain financial covenants commencing March 31, 2022. The Loan is secured by all of the assets of the Company and its subsidiaries. The Loan may be accelerated by the Lender upon an event of default, which in addition to customary events of default include: (i) if (1) any of the Company or its subsidiaries shall fail to maintain in full force and effect any gaming approval (as defined in the Credit Agreement) required for the operation of its business or (2) any gaming regulator shall impose any condition or limitation on any of the foregoing entities that could be reasonably expected to have a material adverse effect; or (ii) the suspension from trading or failure of the Company’s common stock to be trading or listed on the Nasdaq exchange for a period of three consecutive trading days.

 

As of March 31, 2022, the Company had not maintained compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion of an equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants, the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million.

 

 

 14 

 

 

In connection with the Loan, the Company issued the Lender a warrant (the “Lender Warrant”) to purchase 1,567,840 shares of Company common stock at an exercise price of $25.00 per share expiring on the earlier to occur of (i) five years following the issue date or (ii) the second anniversary of the satisfaction of all obligations of the Company under the Credit Agreement. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. In addition, the exercise price of the Lender Warrant is subject to “weighted-average” anti-dilution protection for issuances by the Company below the exercise price (other than certain defined exempt issuances), and, upon shareholder approval, which was received on February 9, 2022, the number of shares underlying the Lender Warrant shall also be adjusted for issuances to which the “weighted-average” anti-dilution protection applies. The Lender will not have the right to exercise any portion of the Lender Warrant if the Lender (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Company common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Lender Warrant, which beneficial ownership amount, at the election of the Lender may be increased to any other percentage not in excess of 19.99% as specified by the Lender. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for the Company, and will assume all of the Company’s obligations under the Lender Warrant with the same effect as if such successor entity had been named in the Lender Warrant itself.

 

Note due to Aspire

 

The Note provides for an interest rate of 10% per annum. The maturity date of the Note will be the earlier of that date which is four years from the issuance date or a liquidity event. The Note will require repayment of the principal amount plus any accrued interest in three equal installments, payable annually starting on the second anniversary after issuance. No interest payment shall be due until that date which is the last day of the end of the second-year anniversary of issuance should the Note remain unpaid at such time. Should the Note remain unpaid at the second-year anniversary, the total accrued interest due at that time shall be paid at the second year anniversary for accrued interest for the period from the issuance date through the second year anniversary date. Thereafter, and on each annual anniversary date thereafter, the interest due for the prior annual period shall be paid. Notwithstanding the foregoing, if the Company owes greater than $15,000,000 under the Credit Agreement, then the parties agree that the Company shall repay any principal amount plus any accrued interest due through the issuance of Company common stock in lieu of any cash payment and the amount of said common stock shares to be issued by the Company shall be determined by using the Conversion Price as defined below. Should an event of default occur on the Note, then at the election of Aspire, either (i) the Operator Services Agreement will be amended such that the fees payable shall increase by 5% during the continuation of the event of default, or (ii) Aspire may elect to convert the entire outstanding principal amount plus any accrued interest into shares of common stock of the Company at a price per share based on the weighted-average per-share price for the ten trading days prior to the date of the occurrence of the event of default (“Conversion Price”). In no event shall the Conversion Price be lower than $18.00 per share (as adjusted for stock splits, stock dividends, or similar events occurring after the date hereof) and the total maximum number of shares of common stock that may be issued to Aspire upon any such conversion in the aggregate shall be 650,000 shares (as adjusted for stock splits, stock dividends, or similar events occurring after the date hereof).

  

Convertible Notes and other

 

On September 1, 2020, ESEG entered into three promissory notes, with a combined principal amount of $2,100,000. The notes bore interest at the rate of 10% per annum and matured on March 1, 2022 and are now convertible at the noteholder’s option. The Company also agreed to pay two of the lenders a total of $675,000 on September 1, 2025, bearing no interest. The Company issued each of the lenders a conversion option at a fixed price of $0.50 per share and issued 2,015,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.30 per share, each with a term of five years. The convertible notes bear interest at 10% per annum and mature on March 1, 2022. The holder may convert the note into shares of common stock at any time throughout the maturity date, to the extent and provided that no holder of the notes was or will be permitted to convert such notes so long as it or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The Company determined that the assignment of the notes payable by the subsidiary to the parent company was an extinguishment of the original notes payable due to the addition of a substantive conversion feature, and the Company recognized a loss on extinguishment of $265,779 during the year ended September 30, 2020.

 

 

 15 

 

 

The Company evaluated the conversion option and concluded a beneficial conversion feature was present at issuance. The Company recognized the beneficial conversion feature and relative fair value of the warrants as a debt discount and additional paid in capital. The fair value of the warrants at the grant date was estimated using a Black-Scholes model and the following assumptions: 1) volatility of approximately 85% based on a peer group of companies; 2) dividend yield of 0%; 3) risk-free rate of 0.26%; and 4) an expected term of five years. The $2,100,000 debt discount will be amortized through the maturity date of the convertible notes payable. During the three months ended December 31, 2020, a total of $187,500 of principal was converted into 375,000 shares of common stock. As of December 31, 2021, the balance due under these notes, net of unamortized discount of $826,189, is $1,086,311, with accrued interest of $116,774. During the three months ended March 31, 2022, the Company recorded a charge of $1,187,913 in the accompanying consolidated statement of operations from the amortization of its debt discount related to the convertible notes payable and other liabilities described above.

 

NOTE 5 – STOCKHOLDERS’ EQUITY

 

The Company is currently authorized to issue up to 100,000,000 shares of common stock with a par value of $0.001. In addition, the Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001. The specific rights of the preferred stock, when so designated, shall be determined by the board of directors.

 

Acquisition of the B2C segment of Aspire Global plc

 

On October 1, 2021, in connection with the Acquisition, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “Investors”). Pursuant to the Subscription Agreements, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to such Investors, simultaneous with the closing of the Acquisition Agreement, an aggregate of 37,700 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) for a purchase price of $1,000.00 per share, for aggregate gross proceeds of $37,700,000 (the “Private Placement”). For each share of Preferred Stock issued, the Company issued the Investor a warrant to purchase 150% of the shares of Company common stock underlying the Preferred Stock (the “Warrants”).

 

Pursuant to the Subscription Agreement, the Company has obtained shareholder approval of the conversion of the Preferred Stock and Warrants into Company common stock in compliance with the rules and regulations of the Nasdaq Stock Market (“Shareholder Approval”).

 

The Preferred Stockholders are entitled to receive dividends, at a rate of 14.0% per annum, which shall be payable quarterly in arrears on January 1, April 1, July 1 and October 1, beginning on the first such date after the issuance date. With limited exceptions, the Preferred Stockholders will have no voting rights. The dividends can be paid in either cash or in the issuance of additional preferred shares. Upon any liquidation, dissolution or winding-up of the Company, the holders of the Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company available to shareholders, an amount equal to the greater of: (i) the purchase price for each share of Preferred Stock then held, or (ii) the amount the holders would have received had the holders fully converted the Preferred Stock to Company common stock, in each case, before any distribution or payment shall be made to the holders of the Company’s common stock. The Preferred Stock is convertible into Company common stock at an initial conversion price of $28.00 per share (“Conversion Price”); provided that the Conversion Price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the Conversion Price then in effect. In addition, nine months from the issuance date (the “Adjustment Date”), the Conversion Price shall be adjusted to the lesser of: (i) the Conversion Price in effect on the Adjustment Date, or (ii) 85% of the average closing price of the Company’s common stock for the fifteen trading days prior to the Adjustment Date. If the Company’s EBITDA is equal to or greater than $2.0 million for the quarter ending March 31, 2022, then no adjustment pursuant to the foregoing sentence will cause the Conversion Price to be less than $20.00.

   

The Warrants are exercisable and expire on the fifth anniversary thereafter. The Warrants will initially be exercisable at an exercise price of $30.00 per share, provided that the exercise price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the exercise price then in effect. The Warrants can be exercised on a cashless basis if there is no effective registration statement registering, or no current prospectus available for, the resale of the ordinary shares underlying the Warrants.

 

The holders of the Preferred Stock and Warrants will not have the right to convert or exercise any portion of the Preferred Stock and Warrants to the extent that, after giving effect to such conversion, such holder (together with certain related parties) would beneficially own in excess of 4.99% of the Company’s common stock outstanding immediately after giving effect to such conversion or exercise.

 

 

 16 

 

 

Shares issued in the prior year

 

During the three months ended December 31, 2020, the Company received gross cash proceeds of $4,000,000 in exchange for 2,000,000 shares of common stock. In conjunction with this fundraising, broker commission and expenses of $351,929 were paid and 173,625 common stock warrants with an exercise price of $2.00 and a five-year term were issued. The fair value of the warrants issued in connection with the financing was estimated to be $228,500 as discussed below.

 

In January 2021, the Company sold 250,014 shares of common stock to investors for $3 per share, receiving gross proceeds of $750,042. The company paid $30,314 of broker fees and commissions related to this fundraising and issued 8,750 warrants to purchase common stock with an exercise price of $3 per share and a term of 5 years. The fair value of the warrants issued in connection with the financing was estimated to be $228,500 as discussed below.

 

In April 2021, the Company completed its IPO and issued 2,400,000 shares of common stock for gross cash proceeds of $14,400,000 and received net proceeds of $13,514,200 after costs of $885,800 which were recorded in shareholders’ equity. The Company also issued 168,000 common stock warrants with a five-year term and exercise price of $7.20 to the underwriter. These warrants have an estimated fair value of $5,474,076.

 

2020 Stock Plan

 

In December 2020, the Company adopted the 2020 Stock Plan, or the 2020 Plan. The 2020 Plan is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, stock unit awards and stock appreciation rights to key employees, non-employee directors and consultants.

 

Under the 2020 Plan, the aggregate value of all compensation granted or paid to any individual for service as a non-employee director with respect to any calendar year, including awards granted under the 2020 Plan and cash fees paid to such non-employee director, will not exceed $300,000 in total value. For purposes of this limitation, the value of awards is calculated based on the grant date fair value of such awards for financial reporting purposes.

 

The number of shares of the common stock that may be issued under the 2020 Plan is 4,000,000. As of December 31, 2021, the Company had awarded a total 3,868,098 shares under the 2020 Plan, with 131,902 remaining under the 2020 Plan.

 

Common Stock Awards

 

During the six months ended March 31, 2022, the Company agreed to award a total of 381,100 restricted stock units that convert into common stock to various employees, consultants and officers under the 2020 Plan. Of the restricted stock unit awarded, 281,100 will vest annually over a period of one to four years.

 

During the six months ended March 31, 2022, the Company recognized a total of $2,281,520 of stock-based compensation expense related to common stock awards and expects to recognize additional compensation cost of $9,981,520 upon vesting of all awards.

 

 

 

 17 

 

 

Warrants

 

As discussed above, the Company has issued common stock warrants in connection with its fundraising activities to preference shareholders, its lender and convertible notes issued during the six months ended March 31, 2022. The following table summarizes warrant activity during the six months ended March 31, 2022:

               
             
   Common Stock Warrants 
   Shares   Weighted
Average
Exercise
Price
   Weighted
average
Remaining
Life in years
 
Outstanding at September 30, 2021   2,199,541   $0.93    4.04 
Granted   3,697,225    27.82    4.67 
Cancelled            
Expired            
Exercised   (711,375)   (2.21)   (3.73)
Outstanding at March 31, 2022   5,185,391   $19.92    4.49 
Exercisable at March 31, 2022   5,185,391   $19.92    4.49 

 

At March 31, 2022, the outstanding and exercisable common stock warrants had an estimated intrinsic value of $9,579,541. The Company estimated the fair value of the warrants using a Black-Scholes option pricing model and the following assumptions: 1) stock price of $2 to $28.95 per share; 2) dividend yield of 0%; 3) risk-free rate of between 0.18% and 1.18%; 4) expected term of between 2.5 and 5 years; 5) an exercise price of $0.25, $2 $3, $25, or $28 and 6) expected volatility of 42.14% based on a peer group of public companies.

 

Options

 

The following table summarizes option activity during the three months ended March 31, 2022: 

               
             
   Common Stock Options 
   Shares   Weighted
Average
Exercise
Price
   Weighted
average
Remaining
Life in years
 
Outstanding at September 30, 2021   2,344,348   $2.57    8.39 
Granted   154,000    11.78    9.20 
Cancelled   (23,000)   (5.57)   9.76 
Expired            
Exercised            
Outstanding at March 31, 2022   2,475,348   $3.12    8.34 
Exercisable at March 31, 2022   1,143,348   $0.93    8.45 

 

During the six months ended March 31, 2022, the Company recognized stock-based compensation expense of $968,401 related to common stock options awarded. The exercisable common stock options had an intrinsic value as of March 31, 2022, of $6,645,579. The Company expects to recognize an additional $4,996,713 of compensation cost related to stock options expected to vest.

  

The Company estimated the fair value of the stock options awarded using a Black-Scholes option pricing model and the following assumptions: 1) stock price of $3 to $31.33 per share; 2) dividend yield of 0%; 3) risk-free rate of between 0.85% and 1.20%; 4) expected term of between 3.5 and 6.25 years; 5) an exercise price between $0.25 and $31.33 and 6) expected volatility of 42.14% based on a peer group of public companies.

 

 

 18 

 

 

NOTE 6 – LONG-LIVED ASSETS

 

Fixed Assets

 

The Company’s fixed assets consisted of the following as of March 31, 2022 and September 30, 2021:  

          
         
  

March 31,

2022

  

September 30,

2021

 
Software  $677,287   $214,996 
Furniture and fixtures   418,976     
Total fixed assets   1,096,263    214,996 
Accumulated depreciation   (171,571)   (129,662)
Fixed assets, net  $924,692   $85,334 

 

On November 5, 2020, the Company entered into an asset purchase agreement with a third party to acquire certain proprietary technology data. The Company made a cash payment of $61,425 and granted warrants to purchase 32,000 shares of common stock at an exercise price of $0.25 per share for a period of five years. The fair value of the warrants was estimated to be $57,252 as of the grant date. The total consideration paid of $118,677 is included as part of software costs within property and equipment on the Company’s consolidated balance sheet. The Company also entered into an employment agreement with the seller, effective November 1, 2020. The employee will be compensated at a rate of $110,000 per year and will receive a common stock award of 100,000 shares, which vest annually over four years.

 

The software costs above relate to acquired components of the Company’s new platform which is being depreciated over an expected useful life.

 

Intangible Assets

 

On September 1, 2020, the Company’s wholly-owned subsidiary, ESEG, entered into domain purchase agreements to acquire the rights to certain domain names from third parties. The cost to acquire the domain names was $2,239,606, based on the estimated fair value of the consideration transferred to the sellers. ESEG issued notes payable with a combined principal amount of $2,100,000, which were to mature on March 1, 2022, bearing interest at 10%. These notes were exchanged for notes of the Company in September 2020. The Company also agreed to pay a total of $675,000 on September 1, 2025, with no interest. The Company estimated discount of these liabilities totaling $535,394 at the date of the transaction, to be amortized over the maturity period of the liabilities. The domain names were recorded as an intangible asset with an indefinite useful life. The Company’s management evaluated the domain names at September 30, 2020 and determined no impairment was necessary.

 

License Agreement

 

On October 1, 2020, the Company entered into an option agreement which gave the Company rights to acquire a license for proprietary technology related to online betting. The Company paid $133,770 upon execution of the option agreement and paid an additional $286,328 in cash and agreed to issue 65,000 shares of common stock upon exercise of the option on or about May 3, 2021. The shares were issued in July 2021 and had a fair value of $1,456,650 at the date of exercise of the option and execution of the license agreement resulting in total value for the license agreement of $1,876,748. During the three months ended March 31, 2022, the Company recognized amortization expense of $156,396 included in product and technology expenses.

 

 

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NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

On September 2, 2020, the Company entered into a financial advisor agreement with Boustead Securities LLC, the representative of the underwriters in the Company’s initial public offering, to provide services related to fundraising on the Company’s planned public listing. The Company agreed to pay the financial advisor a success fee of 4% of any gross proceeds from any debt financing, and a 7% success fee related to any equity or convertible debt financing, subject to customary approval by the regulatory authorities. In April 2021, the Company completed its IPO and issued 2,400,000 shares of common stock for gross cash proceeds of $14,400,000. The Company paid underwriting fees of $885,800 and issued 168,000 warrants to purchase shares of common stock at a price of $7.20 per share for a period of five 5 years.

 

On September 26, 2020, the Company entered into a consulting agreement with a registered foreign broker dealer for fundraising services and paid 10% of any gross proceeds through capital raises from non-US investors introduced by the consultant, up to a maximum payment to the consultant of $200,000 and the consultant also received warrants to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. These warrants were exercised in April 2021 and were converted into 62,386 shares of the Company stock.

 

Financial Advisor’s Claims

 

Subsequent to quarter end, the Company’s previous financial advisors (together, “Advisor”) have alleged a breach by the Company over the termination of the engagement and timing of the payment and amount of the fees. The fees the Company expects to pay are accrued in the accompanying balance sheet. The Company disputes the allegations of the Advisor. The Company and the Advisor are currently seeking a resolution to this dispute, but there is no certainty that the parties will amicably resolve this matter.

 

NOTE 8 –LOSS PER COMMON SHARE

 

The basic net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the weighted average number of common shares during the year. The diluted net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the diluted weighted average number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding is the basic weighted number of common shares adjusted for any potentially dilutive debt or equity. Common shares issuable under convertible debt, stock options and common stock warrants were excluded from the calculation of diluted net loss per share due to their antidilutive effect.

                    
   Three Months Ended  Six Months Ended 
   March 31, 2022   March 31, 2021   March 31, 2022   March 31, 2021 
Numerator                    
Net income (loss)  $(11,841,071)  $(2,375,660)  $(20,722,109)  $(5,126,391)
Preferred stock dividends   (1,367,260)       (1,851,077)    
Net income (loss) attributable to common stockholders  $(13,208,331)  $(2,375,660)  $(22,573,186)  $(5,126,391)
                     
Denominator                    
Basic and diluted weighted average common shares   14,236,755    10,587,654    13,980,720    9,878,185 
Basic and diluted net income (loss) per common share  $(0.93)  $(0.22)  $(1.61)  $(0.52)

 

NOTE 9 SUBSEQUENT EVENT

 

As disclosed in Note 4, the Company had not maintained compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion an equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants, the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million.

 

 

 

 

 

 

 

 20 

 

 

 

item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section of this report includes forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like, believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

 

Overview

 

We develop products and operate platforms to provide a real money online gambling experience focused on esports and competitive gaming. We operate licensed online gambling platforms which are real money betting platforms. Our mission is to define, shape and drive growth of the current and future esports wagering ecosystem by providing advanced product, platform and marketing solutions directly to service providers and customers. We accept wagers on major esports titles including: Counter-Strike: GO, League of Legends, Dota 2, StarCraft 2, Rocket League, Rainbow Six, Warcraft 3, King of Glory and FIFA; as well as professional sports including the National Football League, National Basketball Association, Major League Baseball, soccer and more.

 

Acquisition of the B2C business of Aspire Global plc (the “Acquisition”)

 

On October 1, 2021, the Company, and Esports Product Technologies Malta Ltd. entered into a Share Purchase Agreement with Aspire Global plc, (“Aspire”) and various Aspire group companies to acquire its business to consumer (“B2C”) business. The total acquisition price was €65,000,000 paid as follows: (i) cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms of an unsecured subordinated promissory note (the “Note”); and (iii) shares of Company common stock, which were valued at €5,000,000 (based on the weighted-average per-share price of the ten days prior to the execution date of the Acquisition Agreement.

 

This acquisition expands our product offerings and increases the number of markets in which we can operate. The B2C business offers a portfolio of distinctive proprietary brands to a diverse customer base operating across regulated markets.

 

The acquisition of Aspire’s B2C business provides the following strategic benefits:

 

  · ownership of Aspire’s portfolio of B2C proprietary online casino and sportsbook brands consisting of Karamba, Hopa, Griffon Casino, BetTarget, Dansk777, and GenerationVIP;

 

  · market access for our esports products in key regulated markets including the United Kingdom, Germany, Ireland, Malta, and Denmark, among others, allowing us to cross-sell esports wagering opportunities;

 

  · Ability to launch additional esports focused online gaming websites that target these additional markets; and

 

  · enhanced strategic partnership with Aspire who will provide the on-line gaming platform and a managed services offering, including customer service, customer on-boarding and payment processing ensuring operational stability and continuity.

 

Our gaming license from the Curacao Gaming Authority and the licenses made available to us from the Acquisition of the Aspire B2C business allows us to accept esports and sports wagers from residents of more than 160 jurisdictions.

  

 

 21 

 

 

Results of Operations

 

Results of operations in dollars and as a percentage of net revenue were as follows:

 

   Three Months Ended March 31,   Six Months Ended 
   2022   2021   2022   2021 
   $   %   $   %   $   %   $   % 
                                 
Revenue   19,002,588    100%    33,834    100%    26,142,515    100%    44,628    100% 
Cost of revenue   12,009,596    63%    12,465    37%    16,618,683    64%    24,724    55% 
                                         
Gross profit   6,992,992    37%    21,369    63%    9,523,832    36%    19,904    45% 
                                         
Operating expenses:                                        
Sales and marketing expenses   9,474,087    50%    234,691    694%    13,448,872    51%    273,944    614% 
Product and technology expenses   1,139,914    6%    603,445    1,784%    2,155,162    8%    1,109,380    2,486% 
Acquisition costs   1,190    0%        0%    2,240,147    9%        0% 
General and administrative expenses   5,446,776    29%    1,189,409    3,516%    8,591,195    33%    2,783,121    6,236% 
Total operating expenses   16,061,967    85%    2,027,546    5,993%    26,435,376    101%    4,166,445    9,336% 
                                         
Income (loss) from operations   (9,068,975)   (48)%    (2,006,177)   (5,930)%    (16,911,544)   (65)%    (4,146,541)   (9,291)% 
                                         
Other expenses:                                        
Interest expense   (2,764,819)   (15)%    (367,214)   (1,085)%    (3,741,237)   (14)%    (967,620)   (2,168)% 
Loss on derivatives   (67,031)   (0)%        0%    (73,083)   (0)%        0% 
Foreign currency gain/(loss)   (59,754)   0%    (2,269   (7)%    3,755    0%    (12,230   (27)% 
Total other expense   (2,772,096)   (15)%    (369,483)   (1,092)%    (3,810,565)   (15)%    (979,850)   (2,196)% 
                                         
Income (loss) before provision for income taxes   (11,841,071)   (62)%    (2,375,660)   (7,022)%    (20,722,109)   (79)%    (5,126,391)   (11,487)% 
Provision for income taxes       0%        0%        0%        0% 
                                         
Net income (loss)   (11,841,071)   (62)%    (2,375,660)   (7,022)%    (20,722,109)   (79)%    (5,126,391)   (11,487)% 

  

Three Months Ended March 31, 2022 compared to March 31, 2021

 

Revenue

 

During the three months ended March 31, 2022, we generated $19.0 million in revenue an increase from $0.033 million in the same period of the prior year. The increase in revenue was driven by the Acquisition which continues to generate significant revenue in the UK, Germany, Denmark, Ireland, Austria and other regulated markets. The acquisition of the Aspire B2C business accounted for substantially all of the increase in revenue for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

  

Cost of Sales

 

During the three months ended March 31, 2022, cost of sales was $12.0 million as compared with $0.012 million in the same period in the prior year. The increase in cost of sales is due entirely to the Acquisition and is consistent with the increase in revenue and consists primarily of platform fees, which are charged as a percentage of revenue and gaming taxes.

 

 

 22 

 

 

Sales and Marketing Expense

 

Sales and marketing expense was $9.5 million for the three months ended March 31, 2022, an increase from $0.2 million in the same period in the prior year. The increase in sales and marketing expense is driven by increase in revenue from the acquisition of the Aspire B2C business, increase in stock-based compensation and increased levels of staff. Stock-based compensation was approximately $0.964million for three-month period ended March 31, 2022. We expect sales and marketing expenses to increase in future periods as our marketing campaigns increase in both number and volume.

 

Product and Technology Expense

 

Product and technology expense increased to $1.1 million for the three months ended March 31, 2022, from $0.6 million for the three months ended March 31, 2021. The increase is a result of increased hiring of both employees and consultants as we focus on expanding our product offerings. Product and technology expense, for the three months ended March 31, 2022, included payroll-related costs of approximately $613,000 and stock-based compensation of $367,000.

  

General and Administrative Expense

 

General and administrative expense was $5.4 million for the three months ended March 31, 2022, as compared to $1.2 million for the three months ended March 31, 2021. The increase in general and administrative expense was mainly attributable to an increase in employee costs from adding new employees, $483,000 of stock-based compensation cost, and professional fees including legal, accounting, investor relations and other professional fees, depreciation and amortization of intangible assets.

 

Interest and Other Expenses

 

During the three months ended March 31, 2022, we recognized interest expense of $2.7 million, which included amortization of debt discount of $0.8 million related to the convertible debt issued to acquire certain intangible assets consisting of acquired domain names and our recent loan completed as part of the Acquisition. We also incurred interest on the term loan completed on November 29, 2021 of $1.9 million.

 

Net Income/Loss

 

Net loss for the three months ended March 31, 2022, was $11.8 million compared to a net loss of $2.4 million for the three months ended March 31, 2021. The increase in net loss was primarily due to the significant in increase in cost of sales and sales and marketing costs to support the Acquisition as well as increased general and administrative expenses product and technology expenses as a result of our efforts to develop our new products and services. Increased interest expense from the issuance of the senior notes, also contributed to the increase in our net loss for the period.

  

Six Months Ended March 31, 2022 compared to March 31, 2021

 

Revenue

 

During the six months ended March 31, 2022, we generated $26.1 million in revenue an increase from $0.045 million in the same period of the prior year. The increase in revenue was driven by the Acquisition which continues to generate significant revenue in the UK, Germany, Denmark, Ireland, Austria and other regulated markets. The acquisition of the Aspire B2C business accounted for substantially all of the increase in revenue for the six months ended March 31, 2022, as compared to the six months ended March 31, 2021.

  

Cost of Sales

 

During the six months ended March 31, 2022, cost of sales was $16.6 million as compared with $0.025 million in the same period in the prior year. The increase in cost of sales is due entirely to the Acquisition and is consistent with the increase in revenue and consists primarily of platform fees, which are charged as a percentage of revenue and gaming taxes.

 

 

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Sales and Marketing Expense

 

Sales and marketing expense was $13.4 million for the six months ended March 31, 2022, an increase from $0.3 million in the same period in the prior year. The increase in sales and marketing expense is driven by increase in revenue from the acquisition of the Aspire B2C business, increase in stock-based compensation and increased levels of staff. Stock-based compensation was approximately $1.842 million for six-month period ended March 31, 2022. We expect sales and marketing expenses to increase in future periods as our marketing campaigns increase in both number and volume.

 

Product and Technology Expense

 

Product and technology expense increased to $2.2 million for the six months ended March 31, 2022, from $1.1 million for the six months ended March 31, 2021. The increase is a result of increased hiring of both employees and consultants as we focus on expanding our product offerings. Product and technology expense, for the six months ended March 31, 2022, included payroll-related costs of approximately $955,000, stock-based compensation of $696,000.

 

Acquisition Costs

 

Acquisition costs was $2.2 million for the six months ended March 31, 2022, as compared to zero for the six months ended March 31, 2021. Acquisition costs included a non cash hedging loss of $1.570 million from executing a forward contract on the purchase price of the Acquisition. Acquisition costs also included various legal and consultant fees associated with completing the Acquisition.

 

General and Administrative Expense

 

General and administrative expense was $8.6 million for the six months ended March 31, 2022, as compared to $2.8 million for the six months ended March 31, 2021. The increase in general and administrative expense was mainly attributable to an increase in employee costs from adding new employees, $711,000 of stock-based compensation cost, and professional fees including legal, accounting, investor relations and other professional fees, depreciation and amortization of intangible assets.

 

Interest and Other Expenses

 

During the six months ended March 31, 2022, we recognized interest expense of $3.7 million, which included amortization of debt discount of $1.4 million related to the convertible debt issued to acquire certain intangible assets consisting of acquired domain names and our recent loan completed as part of the Acquisition. We also incurred interest on the term loan completed on November 29, 2021 of $2.3 million.

 

Net Income/Loss

 

Net loss for the six months ended March 31, 2022, was $20.7 million compared to a net loss of $5.1 million for the six months ended March 31, 2021. The increase in net loss was primarily due to the significant in increase in cost of sales and sales and marketing costs to support the Acquisition as well as increased general and administrative expenses product and technology expenses as a result of our efforts to develop our new products and services. Increased interest expense from the issuance of the senior notes, also contributed to the increase in our net loss for the period. 

 

Liquidity and Capital Resources

 

On March 31, 2022, we had cash of $7.1 million, and had working capital deficit of $0.82 million. We have historically funded our operations from proceeds from debt and equity sales, and funds received from customers. The Company's forecasts for fiscal year 2022 indicate that it will need additional funding during such period in order to have sufficient financial resources to continue to settle its debts as they fall due. The Company does not have any commitments for such funding and there is no assurance that it will be able to raise additional financing on favorable terms, if at all.

 

Acquisition of Aspire Global Business to Consumer (“B2C”) Business

 

In order to accelerate the growth and expand market access for our esports product offerings, on November 29, 2021, we completed the acquisition of Aspire Global’s B2C business for €65,000,000 payable as follows: (i) a cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms of an unsecured subordinated promissory note; and (iii) 186,838 shares of our common stock, which were valued at €5,000,000.

 

 

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On September 30, 2021, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “Investors”). Pursuant to the Subscription Agreements, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to such Investors, simultaneous with the closing of the Acquisition Agreement, shares of Series A Convertible Preferred Stock (the “Preferred Stock”) for a purchase price of $1,000.00 per share (the “Private Placement”). For each share of Preferred Stock issued, the Company issued the Investor a warrant to purchase 150% of the shares of Company common stock underlying the Preferred Stock (the “Warrants”). The aggregate Private Placement, which was completed on the closing date of the Acquisition Agreement was $37.7 million.

 

On November 29, 2021, the Company entered a credit agreement (the “Credit Agreement”) with CP BF Lending, LLC (“Lender”), pursuant to which the Lender agreed to make a single loan to the Company of $30.0 million (the “Loan”). The Loan bears interest on the unpaid principal amount at a rate per annum equal to 15.0% as follows: (1) cash interest on the unpaid principal amount of the Loan at a rate equal to 14.0% per annum, plus (2) payable-in-kind interest (“PIK Interest”) on the unpaid principal amount of the Loan at a rate equal to 1.0% per annum. The Company paid to Lender on the closing date a non-refundable origination fee in an amount equal to $750,000.

 

As of March 31, 2022, the Company had not maintained compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion an equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants, the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million.

 

During fiscal year September 30, 2021, we completed two private placements totaling 2,250,000 shares of our common stock for gross proceeds of $4.75 million.

 

In April 2021, the Company completed its IPO and issued 2,400,000 shares of common stock for gross cash proceeds of $14,400,000. The Company paid underwriting fees and other expenses of $885,800 and issued 168,000 warrants to purchase shares of common stock at a price of $7.20 per share for a period of five years.

 

As of March 31, 2021, we have incurred an accumulated deficit of $39.9 million since inception and have not yet generated any meaningful income from operations.

 

Cash used in operating activities

 

Net cash used in operating activities was $7.6 million for the six months ended March 31, 2022, as compared to cash used in operating activities of $1.8 million for the six months ended March 31, 2021. Net cash used in operating activities during the period were primarily impacted by the increase in Accounts Receivable due to the growth in our business, which was collected in April 2022. Cash flow from operations also benefitted from deferred payments for professional fees to our consultants, attorneys and accountants primarily required to complete the Acquisition.

 

Subsequent to quarter end, the Company’s previous financial advisors (together, “Advisor”) have alleged a breach by the Company over the termination of the engagement and timing of the payment and amount of the fees. The fees the Company expects to pay are accrued in the accompanying balance sheet. The Company disputes the allegations of the Advisor. The Company and the Advisor are currently seeking a resolution to this dispute, but there is no certainty that the parties will amicably resolve this matter.

  

Cash used in investing activities

 

Net cash used in investing activities was $57.1 million for the six months ended March 31, 2022, as compared to cash used in investing activities of $0.2 million for the six months ended March 31, 2021. Net cash used in investing activities during the period related to the completion of the Acquisition. Also contributing to the cash used in investing activities were purchase of fixed assets of $0.9 million due primarily to opening of our office in Malta and purchase of software assets to support the new wagering platform.

 

Cash used provided by financing activities

 

Net cash provided by financing activities was $62,7 million for the six months ended March 31, 2022 due to the issuance of Preferred Shares and Senior Notes of $37.7 million and $30.0 million, respectively. Offsetting these amounts were the direct issuance costs.

 

Off Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervisions of and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and Chief Financial Officer, who is our principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of March 31, 2022.

 

There were no changes to our internal control over financial reporting during the three months ended March 31, 2022, that have materially affected, or are reasonable likely to materially effect, our internal controls over financial reporting.

 

 

 

 

 

 

 

 

 

 

 

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

For a discussion of potential risks or uncertainties, see “Risk Factors” in the Company’s most recent annual report on Form 10-Kon file with the SEC. Except as set forth below, there have been no material changes to the risk factors disclosed in such annual report.

 

Future sales of shares by our preferred stockholders could cause our stock price to decline.

 

On November 29, 2021, in connection with the Acquisition, we issued an aggregate of 37,700 shares of Preferred Stock for a purchase price of $1,000.00 per share, for aggregate gross proceeds of $37,700,000 (the “Private Placement”). For each share of Preferred Stock issued, we issued the investors a warrant to purchase 150% of the shares of common stock underlying the Preferred Stock (the “Warrants”). The Preferred Stock is convertible into common stock at an initial conversion price of $28.00 per share (“Conversion Price”); provided that the Conversion Price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the Conversion Price then in effect. In addition, nine months from the issuance date (the “Adjustment Date”), the Conversion Price shall be adjusted to the lesser of: (i) the Conversion Price in effect on the Adjustment Date, or (ii) 85% of the average closing price of the Company’s common stock for the fifteen trading days prior to the Adjustment Date. The Warrants are initially exercisable at an exercise price of $30.00 per share, provided that the exercise price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the exercise price then in effect. The trading price of our common stock could be adversely impacted if these preferred stockholders sell, or if the market believes such holders may sell, substantial amounts of our common stock in the public market.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

As disclosed in Note 4, the Company had not maintained compliance with the covenants of its Senior Notes and obtained a waiver from its lender which waiver is contingent on the completion an equity raise of $3.5 million prior to May 31, 2022. In consideration for obtaining a waiver from the compliance with certain covenants, the Company has agreed to amend the Senior Notes such that $5 million of principle loan balance becomes convertible at the effective average share price (giving effect to any warrants or other economic consideration) from which the Company raises the first $10,000,000 of common equity through one or more qualified equity offerings immediately following the receipt of the foregoing $3.5 million

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

 

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Item 6. Exhibits.

 

Exhibit

Number

  Description
3.1   Articles of Merger (incorporated by reference to exhibit 3.1 of the Form 8-K filed May 5, 2022)
3.2   Amended and Restated Bylaws (incorporated by reference to exhibit 3.2 of the Form 8-K filed May 5, 2022)
31.1*   Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
31.2*   Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
32.1*(1)   Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*(1)   Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104   Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

____________________

* Filed herewith.

 

(1) The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

 

 

  

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

  EBET, INC.
     
Date: May 16, 2022 By: /s/ Aaron Speach
   

Aaron Speach

Chief Executive Officer, President and Director

(Principal Executive Officer)

     
     
Date: May 16, 2022 By: /s/ James Purcell
   

James Purcell

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

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