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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: September 30, 2023

 

or

 

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

 

For the transition period from __________________ to __________________

 

Commission File Number: 001-39262

 

ESPORTS ENTERTAINMENT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-3062752
(State or other jurisdiction of incorporation or organization)  

(IRS Employer

Identification No.)

 

Block 6, Triq Paceville

St. Julians, Malta, STJ 3109

(Address of principal executive offices) (Zip Code)

 

356 2713 1276

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and formal fiscal year, if changed since last report)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   GMBL   The Nasdaq Stock Market LLC
Common Stock Purchase Warrants   GMBLW   The Nasdaq Stock Market LLC
10.0% Series A Cumulative Redeemable Convertible Preferred Stock   GMBLP   The Nasdaq Stock Market LLC
Common Stock Purchase Warrants   GMBLZ   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

 

As of November 17, 2023, there were 124,368,281 shares of common stock, par value $0.001 issued and outstanding.

 

 

 

 

 

 

ESPORTS ENTERTAINMENT GROUP, INC.

 

Quarterly Report on Form 10-Q

 

For the Quarter ended September 30, 2023

 

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
     
Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and June 30, 2023 1
   
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2023 and 2022 (unaudited) 2
   
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2023 and 2022 (unaudited) 3
   
Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity (Deficit) For the Three Months Ended September 30, 2023 and 2022 (unaudited) 4
   
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2023 and 2022 (unaudited) 5
   
Notes to Unaudited Condensed Consolidated Financial Statements 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
   
Item 4. Controls and Procedures 34
   
PART II: OTHER INFORMATION 35
   
Item 1. Legal Proceedings 35
   
Item 1A. Risk Factors 35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
   
Item 3. Defaults Upon Senior Securities 35
   
Item 4. Mine Safety Disclosures 35
   
Item 5. Other Information 36
   
Item 6. Exhibits 36
   
Signatures 37

 

i

 

 

PART I. - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Esports Entertainment Group, Inc.

Condensed Consolidated Balance Sheets

 

  

September 30, 2023

(Unaudited)

   June 30, 2023 
         
ASSETS          
           
Current assets          
Cash  $302,934   $1,745,298 
Restricted cash   109,647    168,304 
Accounts receivable, net   113,195    93,871 
Receivables reserved for users   847,325    831,942 
Other receivables   484,607    497,603 
Prepaid expenses and other current assets   380,366    706,030 
Total current assets   2,238,074    4,043,048 
           
Equipment, net   16,118    20,013 
Operating lease right-of-use asset   62,208    85,517 
Intangible assets, net   12,051,032    13,324,627 
Goodwill   4,385,575    4,491,223 
Other non-current assets   136,863    136,863 
           
TOTAL ASSETS  $18,889,870   $22,101,291 
           
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable and accrued expenses  $8,322,352   $7,106,194 
Liabilities to customers   620,093    664,313 
Deferred revenue   1,147,515    989,027 
Operating lease liability – current   70,430    95,903 
Total current liabilities   10,160,390    8,855,437 
           
Warrant liability   160,361    365,726 
Deferred income taxes   -    - 
           
Total liabilities   10,320,751    9,221,163 
           
Commitments and contingencies (Note 10)   -     -  
           
Mezzanine equity:          
10% Series A cumulative redeemable convertible preferred stock, $0.001 par value, 1,725,000 authorized, 835,950 shares issued and outstanding, aggregate liquidation preference $9,195,450 at September 30, 2023 and June 30, 2023   8,161,311    8,083,869 
 Series B redeemable preferred stock, $0.001 par value, 100 authorized, no shares issued and outstanding, September 30, 2023 and June 30, 2023   -    - 
           
Total Mezzanine equity   8,161,311    8,083,869 
           
Stockholders’ equity          
Preferred stock $0.001 par value; 10,000,000 shares authorized   -    - 
Series C Convertible Preferred Stock, $0.001 par value, 20,000 authorized, 4,219 shares issued and outstanding, aggregate liquidation preference $8,018,245 at September 30, 2023 and 14,601 shares issued and outstanding, aggregate liquidation preference $18,506,798 at June 30, 2023   6,414,596    14,805,438 
Series D Convertible Preferred Stock, $0.001 par value, 10,000 authorized, 4,300 shares issued and outstanding, aggregate liquidation preference $5,530,740 at September 30, 2023 and 4,300 shares issued and outstanding, aggregate liquidation preference $5,421,245 at June 30, 2023   2,705,714    2,618,389 
Common stock $0.001 par value; 500,000,000 shares authorized, 58,878,941 and 3,784,169 shares issued and outstanding as of September 30, 2023 and June 30, 2023, respectively   58,879    3,784 
Additional paid-in capital   182,455,082    173,461,717 
Accumulated deficit   (186,224,057)   (181,425,905)
Accumulated other comprehensive loss   (5,002,406)   (4,667,164)
Total stockholders’ equity   407,808    4,796,259 
           
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY  $18,889,870   $22,101,291 

 

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

 

1
 

 

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   2023   2022 
   Three Months Ended September 30, 
   2023   2022 
         
Net revenue  $2,689,817   $9,605,264 
           
Operating costs and expenses:          
Cost of revenue   602,026    3,750,416 
Sales and marketing   913,096    2,445,335 
General and administrative   6,187,836    9,471,034 
Total operating expenses   7,702,958    15,666,785 
           
Operating loss   (5,013,141)   (6,061,521)
           
Other income (expense):          
Interest expense   -    (1,058,408)
Change in fair value of derivative liability on the senior convertible note   -    274,864 
Change in fair value of warrant liability   205,365    2,450,556 
Change in fair value of contingent consideration   -    179,468 
Other non-operating income (loss), net   

9,624

   46,450 
Total other income (expense), net   214,989    1,892,930 
           
Loss before income taxes   (4,798,152)   (4,168,591)
           
Income tax benefit (expense)   -    - 
           
Net loss  $(4,798,152)  $(4,168,591)
           
Dividend on 10% Series A cumulative redeemable convertible preferred stock   (200,628)   (200,628)
Accretion of 10% Series A cumulative redeemable convertible preferred stock to redemption value   (77,442)   (74,544)
Dividend on Series C convertible preferred stock   (255,523)   - 
Dividend on Series D convertible preferred stock   (87,325)   - 
Deemed dividend on make whole provision on Series C Preferred Stock   (3,759,649)   - 
Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock   (9,382,909)   - 
           
Net loss attributable to common stockholders  $(18,561,628)  $(4,443,763)
           
Net loss per common share:          
Basic and diluted loss per common share  $(0.68)  $(9.91)
Weighted average number of common shares outstanding, basic and diluted   27,372,803    448,360 

 

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

 

2
 

 

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

   2023   2022 
   Three Months Ended September 30, 
   2023   2022 
         
Net loss  $(4,798,152)  $(4,168,591)
           
Other comprehensive loss:          
Foreign currency translation loss   (335,242)   (2,526,478)
           
Total comprehensive loss  $(5,133,394)  $(6,695,069)

 

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

 

3
 

 

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity (Deficit)

For the Three Months Ended September 30, 2023 and 2022 (Unaudited)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Shares-   Amount   Shares   Amount   capital   Deficit   loss   (Deficit) 
   10% Series A Cumulative Redeemable   Series B   Series C   Series D               Accumulated   Total 
   Convertible Preferred Stock   Redeemable Preferred Stock  

Convertible

Preferred Stock

  

Convertible

Preferred Stock

   Common Stock  

Additional

paid-in

   Accumulated   other comprehensive   Stockholders’ Equity 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   capital   Deficit   loss   (Deficit) 
Balance as at July 1, 2023   835,950   $8,083,869    -   $-    14,601   $14,805,438    4,300   $2,618,389    3,784,169   $3,784   $173,461,717   $(181,425,905)  $(4,667,164)  $4,796,259 
                                                                       
Common stock and warrants issued in equity financing   -    -    -    -    -    -    -    -    1,000,000    1,000    192,500    -    -    193,500 
Proceeds from exercise of pre funded warrants   -    -    -    -    -    -    -    -    4,167,959    4,168    802,332    -    -    806,500 
Accretion of redemption value and issuance costs   -    77,442    -    -    -    -    -    -    -    -    (77,442)   -    -    (77,442)
10% Series A cumulative redeemable convertible preferred stock cash dividend   -    -    -    -    -    -    -    -    -    -    (200,628)   -    -    (200,628)
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock dividends   -    -    -    -    -    255,523    -    87,325    -    -    (342,848)   -    -    - 
Deemed dividend on make whole provision on Series C   -    -    -    -    -    3,759,649    -    -    -    -    (3,759,649)   -    -    - 
Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock   -    -    -    -    -    -    -    -    -    -    -    -    -    - 
Conversions of the Convertible preferred stock   -    -    -    -    (10,382)   (12,406,014)   -    -    49,916,813    49,917    12,356,097    -    -    - 
Delay Payment for Series D Convertible Preferred Stock   -    -    -    -    -    -    -    -    10,000    10    1,925    -    -    1,935 
Stock based compensation   -    -    -    -    -    -    -    -    -    -    21,078    -    -    21,078 
Foreign exchange translation   -    -    -    -    -    -    -    -    -    -    -    -    (335,242)   (335,242)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (4,798,152)   -    (4,798,152)
Balance as of September 30, 2023   835,950   $8,161,311    -   $-    4,219   $6,414,596    4,300   $2,705,714    58,878,941   $58,879   $182,455,082   $(186,224,057)  $(5,002,406)  $407,808 
                                                                       
Balance as of July 1, 2022   835,950   $7,781,380    -   $-    -   $-    -   $-    409,229   $409    $144,914,687   $(149,140,426)  $(7,376,114)  $(11,601,444)
                                                                       
Accretion of redemption value and issuance costs   -    74,544    -    -    -    -    -    -    -    -    (74,544)   -    -    (74,544)
10% Series A cumulative redeemable convertible preferred stock cash dividend   -    -    -    -    -    -    -    -    -    -    (200,628)   -    -    (200,628)
Common stock and warrants issued in equity financing, net of issuance costs   -    -    -    -    -    -    -    -    300,000    300    1,567,830    -    -    1,568,130 
Stock based compensation   -    -    -    -    -    -    -    -    -    -    921,991    -    -    921,991 
Foreign exchange translation   -    -    -    -    -    -    -    -    -    -    -    -    (2,526,478)   (2,526,478)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (4,168,591)   -    (4,168,591)
Balance as at September 30, 2022   835,950   $7,855,924    -   $-    -   $-    -   $-    709,229   $709   $147,129,336   $(153,309,017)  $(9,902,592)  $(16,081,564)

 

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

 

4
 

 

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   2023   2022 
   Three Months Ended September 30, 
   2023   2022 
Cash flows from operating activities:          
Net loss  $(4,798,152)  $(4,168,591)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization and depreciation   1,086,949    1,862,718 
Right-of-use asset amortization   18,261    18,443 
Stock-based compensation   21,078    921,991 
Change in fair value of warrant liability   (205,365)   (2,450,556)
Change in fair value of contingent consideration   -    (179,468)
Change in fair value of derivative liability   -    (274,864)
Changes in operating assets and liabilities:         
Accounts receivable   (19,324)   (235,486)
Receivables reserved for users   (41,552)   (227,573)
Other receivables   3,775    (395,566)
Prepaid expenses and other current assets   355,609    34,553 
Other non-current assets   -    (338)
Accounts payable and accrued expenses   1,317,637    714,622 
Liabilities to customers   (24,915)   (611,003)
Deferred revenue   158,488    464,656 
Operating lease liability   (25,473)   (68,392)
Net cash used in operating activities   (2,152,984)   (4,594,854)
           
Cash flows from investing activities:          
Purchase of intangible assets   (60,131)   - 
Net cash used in investing activities   (60,131)   - 
           
Cash flows from financing activities:          
Proceeds from equity financing, net of issuance costs   193,500    6,854,418 
Proceeds from the exercise of pre-funded warrants   806,500    - 
Payment of dividends on 10% Series A cumulative redeemable convertible preferred stock   (200,628)   (200,628)
Repayment of senior convertible note   -    (2,778,427)
Repayment of notes payable and finance leases   -    (36,814)
Net cash provided by financing activities   799,372    3,838,549 
           
Effect of exchange rate on changes in cash and restricted cash   (87,278)   227,928
Net decrease in cash and restricted cash   (1,501,021)   (528,377)
Cash and restricted cash, beginning of period   1,913,602    4,809,808 
Cash and restricted cash, end of period  $412,581   $4,281,431 

 

Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:

 

   September 30, 2023  

September 30, 2022

 
Cash  $302,934   $2,982,179 
Restricted cash   109,647    1,299,252 
Cash and restricted cash  $412,581   $4,281,431 

 

Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:

 

  

June 30, 2023

   

June 30, 2022

 
Cash  $1,745,298    $ 2,517,146  
Restricted cash   168,304      2,292,662  
Cash and restricted cash  $1,913,602    $ 4,809,808  

 

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

 

5
 

 

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   September 30, 2023   September 30, 2022 
SUPPLEMENTAL CASH FLOW INFORMATION:          
CASH PAID FOR:          
Interest  $-   $701,496 
Income taxes  $-   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:          
Accretion of 10% Series A cumulative redeemable convertible preferred stock  $77,442   $74,544 
Conversion of Series C Convertible Preferred Stock to common stock  $12,406,014   $- 
Common Stock issued to settle registration rights delay fee  $1,935   $- 
Series C Convertible Preferred Stock dividends and Series D Convertible Preferred Stock dividends  $

342,848

   $- 
Deemed dividend on make whole provision on Series C and Series D Convertible Preferred Stock  $

3,759,649

   $- 
Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock  $

9,382,909

   $- 

 

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

 

6
 

 

Esports Entertainment Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 – Nature of Operations

 

Esports Entertainment Group, Inc. (the “Company”) was formed in the state of Nevada on July 22, 2008 under the name Virtual Closet, Inc., before changing its name to DK Sinopharma, Inc. on June 6, 2010 and then to, VGambling, Inc. on August 12, 2014. On or about April 24, 2017, VGambling, Inc. changed its name to Esports Entertainment Group, Inc.

 

The Company is a diversified operator of iGaming, traditional sports betting and esports businesses with a global footprint. The Company’s strategy is to build and acquire iGaming and traditional sports betting platforms and use them to grow the esports business whereby customers have access to game centers, online tournaments and player-versus-player wagering. On July 31, 2020, the Company commenced revenue generating operations with the acquisition of LHE Enterprises Limited, a holding company for Argyll Entertainment (“Argyll”), an online sportsbook and casino operator. On January 21, 2021, the Company completed its acquisition of Phoenix Games Network Limited, the holding company for the Esports Gaming League (“EGL”), and provider of event management and team services, including live and online events and tournaments. On March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming operations of Lucky Dino Gaming Limited, a company registered in Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered in Estonia (collectively referred to as “Lucky Dino”). On June 1, 2021, the Company acquired ggCircuit, LLC (“GGC”). GGC is a business-to-business software company that provides cloud-based management for gaming centers, a tournament platform and integrated wallet and point-of-sale solutions. On July 13, 2021, the Company acquired Bethard Group Limited’s business-to-consumer operations that included the online casino and sports book business operating under the brand of Bethard (“Bethard”). Bethard’s operations provided sportsbook, casino, live casino and fantasy sport betting services.

 

In the prior year ended June 30, 2023, the Company completed a series of independent transactions to streamline its operations to reduce operating losses and to increase its focus on core businesses. The Company closed its Argyll operations on December 8, 2022 by surrendering of its UK license and deconsolidated its Argyll operating entities due to liquidation and loss of control of the entities, with Argyll Entertainment being deconsolidated on March 27, 2023 and Argyll Productions being deconsolidated on June 9, 2023. The Company sold its Spanish iGaming operations on January 18, 2023, sold the Bethard business on February 24, 2023 and exited the EGL business as of June 30, 2023. The core businesses of the Company include Lucky Dino of EEG iGaming and GGC of EEG Games (see Reportable Segments).

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of presentation and principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Pursuant to the rules and regulations of the SEC, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full fiscal year. The unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual period ended June 30, 2023. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

 

Effective February 22, 2023, the Company completed a one-for-one-hundred (1-for-100) reverse stock split of the Company’s issued and outstanding common stock (the “Reverse Stock Split”). All references to shares of the Company’s common stock in the unaudited condensed consolidated financial statements and related notes refer to the number of shares of common stock after giving effect to the Reverse Stock Split and are presented as if the Reverse Stock Split had occurred at the beginning of the earliest period presented.

 

Reportable Segments

 

The Company operates two complementary business segments:

 

EEG iGaming

 

EEG iGaming includes the Company’s iGaming casino and sportsbook product offerings. Currently, the Company operates the business to consumer segment primarily in Europe.

 

EEG Games

 

EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of: (1) our proprietary infrastructure software, GGC, which underpins our focus on esports and is a leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, and (2) the creation of esports content for distribution to the betting industry. Currently, we operate our esports EEG Games business in the United States and Europe.

 

These segments consider the organizational structure of the Company and the nature of financial information available and are reviewed by the chief operating decision maker to assess performance and make decisions about resource allocations.

 

7
 

 

Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation and recoverability of goodwill and intangible assets.

 

Liquidity and Going Concern

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these unaudited condensed consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

 

The Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one year from the date of issuance of these unaudited condensed consolidated financial statements.

 

The Company considered that it had an accumulated deficit of $186,224,057 as of September 30, 2023 and that it has had a history of recurring losses from operations and recurring negative cash flows from operations as it has prepared to grow its esports business through acquisition and new venture opportunities. At September 30, 2023, the Company had $302,934 of available cash on-hand and net current liabilities of $7,922,316. Net cash used in operating activities for the three months ended September 30, 2023 was $2,152,984, which includes a net loss of $4,798,152.

 

The Company also considered its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits.

 

In determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes, depending on market conditions, may be available to fund its operations and drive future growth, which includes:

 

  (i) up to $7,186,257 of gross proceeds from the equity distribution agreement entered into on September 15, 2023, (the “Equity Distribution Agreement”) through an “at the market” (“ATM”) equity offering program whereby, per the settlement agreement entered into by the Company on October 6, 2023, (the “October 2023 Settlement Agreement”), of which on November 17, 2023, one business day preceding this filing, $5,099,000 remained to be utilized (the Company receives 50% of the net proceeds from ATM sales (after deducting the agent’s commissions pursuant to the “at the market” offering and other customary offering expenses) and the remaining 50% of the net proceeds from ATM sales will be used by the Company to redeem first, the outstanding shares of Series D Convertible Preferred Stock and second, the outstanding shares of Series C Convertible Preferred Stock, unless the Holder elects to change such allocations (discussed further below));
  (ii) the potential expected proceeds from future offerings, where the amount of the offering has not yet been determined; and
  (iii) the ability to raise additional financing from other sources.

 

These above plans are likely to require the Company to place reliance on several factors, including favorable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

 

The amount of available cash on hand on November 17, 2023, one business day preceding this filing, was approximately $647,000.

 

8
 

 

Compliance with Nasdaq Listing Requirements

 

On November 30, 2022, the Company received a determination from the Nasdaq Listing Panel (the “Panel”) granting the Company’s request for the continued listing of its common stock on the Capital Market tier of Nasdaq, subject to the Company evidencing compliance with the Bid Price Rule (described below), and the minimum of $2,500,000 stockholders’ equity requirement (the “Equity Rule”), as set forth in Nasdaq Listing Rules 5550(a)(2) and 5550(b)(1). On March 9, 2023, the Company received a letter from the Panel indicating that the Company had regained compliance with the Bid Price Rule and on June 13, 2023, the Company received a notice from the Panel providing that the Company demonstrated compliance with the requirements for continued listing on The Nasdaq Capital Market, including the Equity Rule. The Company remains subject to a “Panel Monitor,” as defined by Nasdaq Listing Rule 5815(d)(4)(A), through June 13, 2024. In the event the Company fails to satisfy a continued listing requirement during the Panel Monitor, the Company may not be provided with the opportunity to present a compliance plan to the Staff and the Staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Rule 5810(c)(3), which process might otherwise be available under the Nasdaq Listing Rules, but would instead have an opportunity to request a new hearing with the Panel. The Company’s securities may be at that time delisted from Nasdaq. As of September 30, 2023, the Company’s stockholders’ equity was under the minimum $2,500,000 Equity Rule requirement.

 

Subsequent to regaining compliance, on September 6, 2023, the Company received a deficiency notification letter from the Staff indicating that the Company’s common stock had closed below $1.00 per share for the previous thirty consecutive business days and was not in compliance with the “Bid Price Rule”. The Company was granted 180 calendar days from the date of such notice, or until March 4, 2024, to regain compliance with the Bid Price Rule. To regain compliance, the bid price for the Company’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. On October 20, 2023, the Company received another deficiency notification letter from the Staff indicating that the Company’s common stock had closed under $0.10 a share for ten consecutive days, and was not in compliance with the “Low Price Rule”. On October 27, 2023, the Company submitted a request for a hearing and on October 30, 2023 received a letter notifying the Company that the hearing is scheduled for December 14, 2023 and any delisting is stayed until a determination is made from the Staff subsequent to the hearing. The Company will be expected to address all listing rule deficiencies at the time of the hearing.

 

Any failure to regain and maintain compliance with the continued listing requirements of Nasdaq could result in delisting of our common stock from Nasdaq and negatively impact our company and holders of our common stock, including by reducing the willingness of investors to hold our common stock because of the resulting decreased price, liquidity and trading of our common stock, limited availability of price quotations and reduced news and analyst coverage. Delisting may adversely impact the perception of our financial condition, cause reputational harm with investors, our employees and parties conducting business with us and limit our access to debt and equity financing.

 

Earnings Per Share

 

Basic income (loss) per share is calculated using the two-class method. Under the two-class method, basic income (loss) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period excluding the effects of any potentially dilutive securities. Diluted income (loss) per share is computed similar to basic income (loss) per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential common shares had been issued if such additional common shares were dilutive. Diluted income (loss) per share includes the effect of potential common shares, such as the Company’s preferred stock, notes, warrants and stock options, to the extent the effect is dilutive. As the Company had net losses for all the periods presented, basic and diluted loss per share are the same, and additional potential common shares have been excluded, as their effect would be anti-dilutive.

 

9
 

 

The following securities were excluded from weighted average diluted common shares outstanding for the three months ended September 30, 2023 and 2022 because their inclusion would have been antidilutive:

 

   

September 30

2023

   

September 30,

2022

 
Common stock options   $ 29,941     $ 9,811  
Common stock warrants     1,975,339       562,006  
Common stock issuable upon conversion of senior convertible note     -       147,589  
10% Series A cumulative redeemable convertible preferred stock     835,950       835,950  
Common stock issuable on conversion of Series C convertible preferred stock     66,986,174       -  
Common stock issuable on conversion of Series D convertible preferred stock     46,205,013       -  
Common stock issuable on conversion of Series D convertible preferred stock issuable from exercise of preferred warrants issued in the Series D convertible preferred stock offering     44,903,927       -  
Total   $ 160,936,344     $ 1,555,356  

 

The table includes the number of shares of common stock potentially issuable upon a conversion of the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock into shares of common stock. The table also includes any shares of common stock that would be issuable upon exercise and conversion of the preferred warrants issued in the Series D Convertible Preferred Stock offering. The conversion price used to estimate the number of common stock issuable for the Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and Common stock issuable on conversion of Series D convertible preferred stock issuable from exercise of Series D preferred warrants, was 90% of the Company’s Nasdaq Official Closing Price of $0.1064 on September 30, 2023. Issuances of shares of common stock upon conversion of the Series D Convertible Preferred Stock and Common Warrants in excess of 20% of the Company’s outstanding shares of common stock require approval by the Company’s stockholders pursuant to the rules and regulations of the Nasdaq Stock Market.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company adopted this standard as of July 1, 2023. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. The guidance is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements. The Company adopted this standard as of July 1, 2023. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.

 

Recently Issued Accounting Standards

 

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in Accounting Standards Codification Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements.

 

10
 

 

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.

 

Note 3 – Other Receivables

 

The components of other receivables are as follows:

 

   September 30, 2023   June 30, 2023 
Indirect taxes  $156,276   $21,024 
Other   328,331    476,579 
Other receivables  $484,607   $497,603 

 

Note 4 – Prepaid Expenses and Other Current Assets

 

The components of prepaid expenses and other current assets are as follows:

 

   September 30, 2023   June 30, 2023 
Prepaid marketing costs  $25,036   $53,365 
Prepaid insurance   249,221    265,974 
Prepaid gaming costs   36,388    375,082 
Other   69,721    11,609 
Prepaid expenses and other current assets  $380,366   $706,030 

 

Note 5 – Equipment

 

The components of equipment are as follows:

 

   September 30, 2023   June 30, 2023 
Computer equipment  $36,529   $36,630 
Furniture and equipment   34,862    35,943 
Equipment, at cost   71,391    72,573 
Accumulated depreciation   (55,273)   (52,560)
Equipment, net  $16,118   $20,013 

 

Depreciation expense was $5,222 and $22,413 for the three months ended September 30, 2023 and 2022, respectively.

 

11
 

 

Note 6 – Goodwill and Intangible Assets

 

A summary of the changes in the balance of goodwill by segment is as follows:

 

   EEG iGaming   EEG Games   Total 
             
Goodwill, balance as of June 30, 2023  $3,511,391   $979,832   $4,491,223 
Foreign currency translation   (105,648)   -    (105,648)
Goodwill, balance as of September 30, 2023  $3,405,743   $979,832   $4,385,575 

 

There were no asset impairment charges for goodwill or long-lived assets, including definite-lived intangible assets, for the three months ended September 30, 2023 or 2022.

 

The intangible amounts comprising the intangible asset balance are as follows:

 

   September 30, 2023   June 30, 2023 
   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Tradename  $2,744,747   $(623,813)  $2,120,934   $2,801,963   $(566,501)  $2,235,462 
Developed technology and software   9,090,168    (4,175,343)   4,914,825    9,240,018    (3,757,061)   5,482,957 
Gaming licenses   702,635    (702,635)   -    724,431    (724,431)   - 
Player relationships   9,731,063    (4,975,502)   4,755,561    10,022,587    (4,621,655)   5,400,932 
Internal-use software   285,538    (25,826)   259,712    226,438    (21,162)   205,276 
Total  $22,554,151   $(10,503,119)  $12,051,032   $23,015,437   $(9,690,810)  $13,324,627 

 

During the three months ended September 30, 2023 and 2022, the Company recorded amortization expense for its intangible assets of $1,081,727 and $1,840,305, respectively. The amortization for EEG iGaming segment was $833,152 and $1,591,740, and for the EEG Games segment was $248,575 and $248,565, for the three months ended September 30, 2023 and 2022, respectively.

 

The estimated future amortization related to definite-lived intangible assets is as follows:

 

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