UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended:
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Securities registered pursuant to Section 12(b) of the Act:
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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)
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As of May 19, 2023, there were 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 March 31, 2023
TABLE OF CONTENTS
| i |
Esports Entertainment Group, Inc.
Condensed Consolidated Balance Sheets
March 31, 2023 (Unaudited) | June 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Receivables reserved for users | ||||||||
| Other receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Liabilities to customers | ||||||||
| Deferred revenue | ||||||||
| Senior convertible note | ||||||||
| Derivative liability | ||||||||
| Current portion of notes payable and other long-term debt | ||||||||
| Operating lease liability – current | ||||||||
| Contingent consideration – current | ||||||||
| Total current liabilities | ||||||||
| Warrant liability | ||||||||
| Operating lease liability – non-current | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Mezzanine equity: | ||||||||
| 10% Series A cumulative redeemable convertible preferred stock, $ par value, authorized, shares issued and outstanding, aggregate liquidation preference $ | ||||||||
| Series B redeemable preferred stock, $ par value, authorized, issued and outstanding, at March 31, 2023 and June 30, 2022 | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock $ par value; shares authorized | ||||||||
| Common stock $ par value; shares authorized, and shares issued and outstanding as of March 31, 2023 and June 30, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
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)
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Loss on disposal of businesses, net | ||||||||||||||||
| Asset impairment charges | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on termination of lease | ||||||||||||||||
| Loss on conversion of senior convertible note | ( | ) | ||||||||||||||
| Loss on extinguishment of senior convertible note | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of warrant liability | ||||||||||||||||
| (Loss) gain on contingent consideration | ( | ) | ||||||||||||||
| Other non-operating income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | $ | $ | $ | ||||||||||||
| Dividend on 10% Series A cumulative redeemable convertible preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Accretion of 10% Series A cumulative redeemable convertible preferred stock to redemption value | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common stockholders | $ | $ | $ | $ | ||||||||||||
| Net loss per common share: | ||||||||||||||||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
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)
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | $ | $ | $ | ||||||||||||
| Other comprehensive loss: | ||||||||||||||||
| Reclassification of accumulated foreign currency translation net losses to net loss as a result of the disposal of businesses | ( | ) | ( | ) | ||||||||||||
| Foreign currency translation (gain) loss | ( | ) | ( | ) | ||||||||||||
| Total comprehensive loss | $ | $ | $ | $ | ||||||||||||
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 and Nine Months Ended March 31, 2023 and 2022 (Unaudited)
| 10% Series A Cumulative Redeemable Convertible Preferred Stock | Series B Redeemable Preferred Stock | Common Stock | Additional paid-in | Accumulated | Accumulated other comprehensive | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | loss | (Deficit) | |||||||||||||||||||||||||||||||
| Balance as of July 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Common stock and warrants issued in equity financing, net of issuance costs | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Proceeds from issuance of Series B redeemable preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock and pre-funded warrants issued in equity financing, net of issuance costs | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued on exercise of Pre-funded warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Redemption of the Series B redeemable preferred stock | - | ( | ) | ( | ) | - | ||||||||||||||||||||||||||||||||||
| Common stock and warrants issued in equity financing, net of issuance costs | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued on exercise of Pre-funded warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Conversion of senior convertible note | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Common stock issued upon the exercise of stock options | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Conversion of Senior Convertible Note | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock and warrants issued in equity financing, net of issuance costs | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Accretion of redemption value and issuance costs | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| 10% Series A cumulative redeemable convertible preferred stock cash dividend | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Common stock and warrants issued in equity financing, net of issuance costs | - | |||||||||||||||||||||||||||||||||||||||
| Conversion of senior convertible note | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM, net of issuance costs | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | |||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
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)
| Nine Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization and depreciation | ||||||||
| Asset impairment charges | ||||||||
| Right-of-use asset amortization | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Loss on conversion of senior convertible note | ||||||||
| Loss on extinguishment of senior convertible note | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||
| Loss (gain) on contingent consideration | ( | ) | ||||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Loss on disposal of businesses, net | ||||||||
| Gain on termination of lease | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Receivables reserved for users | ||||||||
| Other receivables | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Other non-current assets | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Liabilities to customers | ( | ) | ||||||
| Deferred revenue | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from the sale of Bethard Business | ||||||||
| Proceeds from the sale of Spanish operations | ||||||||
| Cash consideration paid for Bethard acquisition, net of cash acquired | ( | ) | ||||||
| Purchase of intangible assets | ( | ) | ||||||
| Purchases of equipment | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from equity financing, net of issuance costs | ||||||||
| Proceeds from exercise of pre-funded warrants | ||||||||
| Proceeds from issuance of Series B redeemable preferred stock, net of issuance costs | ||||||||
| Redemption of Series B redeemable preferred stock | ( | ) | ||||||
| Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock, net of issuance costs | ||||||||
| Payment of dividends on 10% Series A cumulative redeemable convertible preferred stock | ( | ) | ( | ) | ||||
| Issuance of common stock under the ATM, net of issuance costs | ||||||||
| Payment of Bethard contingent consideration | ( | ) | ||||||
| Proceeds from exercise of stock options and warrants, net of issuance costs | ||||||||
| Repayment of senior convertible note | ( | ) | ||||||
| Repayment of notes payable and finance leases | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate on changes in cash and restricted cash | ( | ) | ||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| March 31, 2023 | March 31, 2022 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
Reconciliation of cash and restricted cash to the unaudited condensed consolidated balance sheets:
| June 30, 2022 | June 30, 2021 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
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)
| March 31, 2023 | March 31, 2022 | |||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| CASH PAID FOR: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: | ||||||||
| Accretion of 10% Series A cumulative redeemable convertible preferred stock | $ | $ | ||||||
| Fair value of contingent consideration payable in cash and common stock for Bethard acquisition | $ | $ | ||||||
| Increase in Senior Convertible Note from conversion of accounts payable and accrued interest | $ | $ | ||||||
| Conversion of senior convertible notes to common stock | $ | $ | ||||||
| Right-of-use asset obtained in exchange for operating lease obligation | $ | $ | ||||||
| Finance lease asset obtained in exchange for financing lease obligation | $ | $ | ||||||
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” or “EEG”) was formed in the state of Nevada on July 22, 2008 under the name Virtual Closet, Inc., before changing its name to DK Sinopharma, Inc. on June 6, 2010 and then to, VGambling, Inc. on August 12, 2014. On or about April 24, 2017, VGambling, Inc. changed its name to Esports Entertainment Group, Inc.
The Company is a diversified operator of iGaming, traditional sports betting and esports businesses with a global footprint. The Company’s strategy is to build and acquire iGaming and traditional sports betting platforms and use them to grow the esports business whereby customers have access to game centers, online tournaments and player-versus-player wagering. On July 31, 2020, the Company commenced revenue generating operations with the acquisition of LHE Enterprises Limited, a holding company for Argyll Entertainment and subsidiaries (“Argyll”), an online sportsbook and casino operator. In November 2022, the Company wound down its Argyll operations, and on March 27, 2023 the Swiss courts declared the Argyll Entertainment subsidiary bankrupt and this entity was deconsolidated (Note 18) at that time. On January 21, 2021, the Company completed its acquisition of Phoenix Games Network Limited, the holding company for the Esports Gaming League (“EGL”), and provider of event management and team services, including live and online events and tournaments. On March 1, 2021, the Company completed the acquisition of the operating assets and specified liabilities that comprise the online gaming operations of Lucky Dino Gaming Limited, a company registered in Malta, and Hiidenkivi Estonia OU, its wholly owned subsidiary registered in Estonia (collectively referred to as “Lucky Dino”). On June 1, 2021, the Company acquired ggCircuit, LLC (“GGC”) and Helix Holdings, LLC (“Helix”). GGC is a business-to-business software company that provides cloud-based management for gaming centers, a tournament platform and integrated wallet and point-of-sale solutions. Helix owned and operated esports centers that were disposed of on June 10, 2022, as the Company exited the physical sites. From the Helix acquisition, the Company retained its core esports programming and gaming infrastructure and remains focused on its core esports offerings. On July 13, 2021, the Company completed its acquisition of Bethard Group Limited the online casino and sports book business operating under the brand of Bethard (“Bethard”). Bethard’s business-to-consumer operations provided sportsbook, casino, live casino and fantasy sport betting services. On January 18, 2023, the Company sold its Spanish iGaming operations, including its Spanish iGaming license (Note 18) and on February 24, 2023, the Company completed the divestiture of Prozone Limited, containing the Bethard online casino and sportsbook business back to Gameday Group Plc (Note 18).
Note 2 – Summary of Significant Accounting Policies
Basis of presentation and principles of consolidation
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Pursuant to the rules and regulations of the SEC, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full fiscal year. The unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual period ended June 30, 2022. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Effective
February 22, 2023 the Company completed a
The Reverse Stock Split did not change the terms of the common stock. Outstanding warrants, equity-based awards and other outstanding equity rights were proportionately adjusted by dividing the shares of common stock underlying the securities by 100 and multiplying the exercise/conversion price, as the case may be, by 100. The Reverse Stock Split also applied to common stock issuable upon the conversion of the Company’s Senior Convertible Note, dated February 22, 2022 (the “Senior Convertible Note”), with the Conversion Price, as defined in the Senior Convertible Note, being subject to adjustment under the terms of the Senior Convertible Note and the Amendment and Waiver Agreement (the “Amendment”) (Note 18). The Company’s 10% outstanding Series A Cumulative Redeemable Convertible Preferred Stock (“10% Series A Cumulative Redeemable Convertible Preferred Stock”) was not affected by the Reverse Stock Split.
Reportable Segments
The Company operates two complementary business segments:
EEG iGaming
EEG iGaming includes the Company’s iGaming casino and sportsbook product offerings. Currently, the Company operates the business to consumer segment primarily in Europe.
| 7 |
EEG Games
EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of: (1) our proprietary infrastructure software, GGC, which underpins our focus on esports and is a leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, (2) online tournaments (through our EGL tournament platform), and (3) player-vs-player wagering. Currently, we operate our esports EEG Games business in the United States and Europe.
These segments consider the organizational structure of the Company and the nature of financial information available and reviewed by the chief operating decision maker to assess performance and make decisions about resource allocations.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation and accounting for equity awards related to warrants and stock-based compensation, determination of fair value for derivative instruments, the valuation and recoverability of goodwill and intangible assets, the accounting for business combinations, including estimating contingent consideration and allocating purchase price, estimating fair value of intangible assets, as well as the estimates related to accruals and contingencies.
Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these unaudited condensed consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The Company has determined that certain factors raise substantial doubt about its ability to continue as a going concern for a least one year from the date of issuance of these unaudited condensed consolidated financial statements included in this report.
One
such factor considered by the Company was its Senior Convertible Note, on which the Company had not maintained compliance with
certain debt covenants and was in default under the terms of the Senior Convertible Note and that had a March 31, 2023 outstanding
balance of $
| 8 |
In
addition to the above, the Company considered that it had an accumulated deficit of $
In determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes, depending on market conditions, may be available to fund its operations and drive future growth, which include (i) the potential expected proceeds from future offerings, where the amount of the offering has not yet been determined, and (ii) the ability to raise additional financing from other sources.
These above plans are likely to require the Company to place reliance on several factors, including favorable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.
| 9 |
Nasdaq Continued Listing Rules or Standards
On April 11, 2022, the Company received a deficiency notification letter from the Listing Qualifications Staff of Nasdaq (“Nasdaq”) indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous thirty consecutive business days (the “Bid Price Rule”).
On
June 7, 2022, the Company received a further letter from Nasdaq notifying the Company that for the last 30 consecutive business days,
the Company’s minimum Market Value of Listed Securities (“MVLS”) was below the minimum of $
On October 11, 2022, the Company received a third letter from Nasdaq notifying the Company that the Company’s common stock will be delisted, and the Company’s Common Stock warrants traded under the symbols GMBLW and GMBLZ and the Company’s 10% Series A cumulative redeemable convertible preferred stock traded under symbol GMBLP will no longer qualify for listing, and in that regard trading of the Company’s common stock, Common Stock warrants and 10% Series A cumulative redeemable convertible preferred stock will be suspended. The Company requested an appeal with the Nasdaq Hearings Panel (the “Panel”) and the hearing was held on November 17, 2022.
On
November 30, 2022, the Company received a determination from the Panel granting the Company’s request for the continued listing
of its common stock on the Capital Market tier of Nasdaq, subject to the Company evidencing compliance with the Bid Price Rule, and the
minimum of $
On December 6, 2022, the Company received a fourth letter from Nasdaq notifying the Company that it has not regained compliance with the MVLS Rule. This was addressed in the November 17, 2022, hearing before the Panel where the Company presented on its plan to comply with the MVLS Rule or alternative criteria and was granted continued listing subject to the criteria noted above.
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On February 8, 2023, the Company received notice from the Panel updating its remaining conditions as follows:
| 1. | On February 20, 2023, the Company shall provide a written update to the Panel regarding the progress of its debt-to-equity conversion plan and its impact on the Company’s equity; | |
| 2. | On March 7, 2023, the Company shall have demonstrated compliance with the Bid Price Rule, by evidencing a closing bid price of $ or more per share for a minimum of ten consecutive trading sessions; and | |
| 3. | On March 31, 2023, the Company shall demonstrate compliance with the shareholder equity requirement, as outlined in the Equity Rule. |
The Company provided an update on its progress to the Panel on February 20, 2023 and on March 9, 2023, the Company received a letter from the Panel indicating that the Company has regained compliance with the Bid Price Rule.
On March 30, 2023, the Company submitted a written submission requesting an extension on the requirement to demonstrate compliance with the Equity Rule and on April 6, 2023, the Panel granted an extension through April 30, 2023.
On May 1, 2023, the Company announced it has met the minimum Equity Rule. On May 11, 2023, May 12, 2023 and May 18, 2023, the Company made submissions to the Panel and is awaiting their decision.
There can be no assurances, however, that the Company will be able to regain compliance. Any failure to regain and maintain compliance with the continued listing requirements of Nasdaq could result in delisting of our common stock from Nasdaq and negatively impact our company and holders of our common stock, including by reducing the willingness of investors to hold our common stock because of the resulting decreased price, liquidity and trading of our common stock, limited availability of price quotations and reduced news and analyst coverage. Delisting may adversely impact the perception of our financial condition, cause reputational harm with investors, our employees and parties conducting business with us and limit our access to debt and equity financing.
Cash and Cash Equivalents
Cash
includes cash on hand. Cash equivalents consist of highly liquid financial instruments purchased with an original maturity of three months
or less. As of March 31, 2023 and June 30, 2022, the Company did not have any financial instruments classified as cash equivalents. At
times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
Accounts are insured by the FDIC up to $
Restricted Cash
Restricted cash includes cash reserves maintained for compliance with gaming regulations that require adequate liquidity to satisfy the Company’s liabilities to customers.
Accounts Receivable
Accounts receivable is comprised of the amounts billed to customers principally for esports events and team management services. Accounts receivable is recorded net of an allowance for credit losses. The Company performs ongoing credit evaluations for its customers and determines the amount of the allowance for credit losses upon considering such factors as historical losses, known disputes or collectability issues, the age of a receivable balance as well as current economic conditions. Bad debt expense is recorded to maintain the allowance for credit losses at an appropriate level and changes in the allowance for credit losses are included in general and administrative expense in the unaudited condensed consolidated statements of operations. At March 31, 2023 and June 30, 2022, the allowance for credit losses was not material to the unaudited condensed consolidated financial statements of the Company.
Receivables Reserved for Users
User deposit receivables are stated at the amount the Company expects to collect from a payment processor. A user initiates a deposit with a payment processor, and the payment processor remits the deposit to the Company. The amount due from the payment processor is recorded as a receivable reserved for users on the unaudited condensed consolidated balance sheets. An allowance for doubtful accounts may be established if it is determined that the Company is unable to collect a receivable from a payment processor. An increase to the allowance for doubtful accounts is recognized as a loss within general and administrative expenses in the unaudited condensed consolidated statements of operations. The allowance for doubtful accounts is not material to the unaudited condensed consolidated financial statements.
| 11 |
Equipment
Equipment is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:
| Computer Equipment | Up
to |
| Furniture and fixtures | Up
to |
| Leasehold improvements |
The estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period. The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the unaudited condensed consolidated statements of operations.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The Company records the assets acquired, liabilities assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. The Company may adjust the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances that impact the determination of fair value at the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Goodwill
Goodwill represents the excess of fair value of consideration paid for an acquired entity over the fair value of the assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but rather it is tested for impairment at the reporting unit level on an annual basis on April 1 for each fiscal year, or more often if events or changes in circumstances indicate that more likely than not the carrying amount of the asset may not be recoverable. A reporting unit represents an operating segment or a component of an operating segment. In accordance with ASC Topic 350 Intangibles –- Goodwill and Other, as of March 31, 2023 the Company’s business is classified into four reporting units: iGaming Malta (Lucky Dino), iGaming Argyll (UK), EGL, and GGC. The Helix business was sold as of June 10, 2022 and was previously its own reporting unit. The Bethard business was sold as of February 22, 2023, and was previously part of the iGaming Malta reporting unit with Lucky Dino. Argyll Entertainment was declared bankrupt by the Swiss Court and deconsolidated on March 27, 2023 and was previously part of the iGaming Argyll (UK) reporting unit.
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In testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, including changes in the Company’s management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company then performs a quantitative goodwill impairment analysis by comparing the carrying amount to the fair value of the reporting unit. If it is determined that the fair value is less than its carrying amount, the excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss in accordance with Accounting Standards Update (“ASU”) No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The Company utilizes a discounted cash flow analysis, referred to as an income approach, and uses internal and market multiples, to assess reasonableness of assumptions, to determine the estimated fair value of the reporting units. For the income approach, significant judgments and assumptions including anticipated revenue growth rates, discount rates, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on the Company’s operating and capital forecasts. As a result, actual results may differ from the estimates utilized in the income approach. The use of alternate judgments and/or assumptions could result in a fair value that differs from the Company’s estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, the Company also considers the combined fair values of the Company’s reporting units to a reasonable market capitalization of the Company. The Company may elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test.
During
the three months ended December 31, 2022, the Company initiated a process to evaluate the strategic options for the EEG iGaming
business, including exploring a sale of EEG iGaming assets due to increasing regulatory burdens and competition. In December 2022,
the Company closed down its licensed remote gambling operation in the UK market and on December 9, 2022 surrendered its UK license,
as part of the winding down of the Argyll UK iGaming operations. Further, in early January 2023 the Company appointed a new Chief
Executive Officer and a new interim Chief Financial Officer. As part of these changes the Company has been focused on reducing costs
in its businesses as it has seen the EEG iGaming revenues decline significantly from levels seen in the previous year and previous
quarters. These items and uncertainties caused by inflation and certain world events were determined to be a triggering event as
of December 31, 2022, and the long-lived assets of the Company were quantitatively tested for impairment. At December 31, 2022, the
Company recognized total goodwill asset impairment charges of $
During
the three months ended March 31, 2023, the Company sold its Bethard business reducing goodwill by $
No goodwill impairment charges were recognized in the three months ended March 31, 2023. Further downturns in economic, regulatory and operating conditions could result in additional goodwill impairment in future periods.
During
the three and nine months ended March 31, 2022, the Company recognized goodwill impairment charges of $
Intangible assets
Intangible
assets with determinable lives consist of player relationships, developed technology and software, tradenames and gaming licenses. Intangible
assets with determinable lives are amortized on a straight-line basis over their estimated useful lives of
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Impairment of Long-Lived Assets
Equipment and other long-lived assets, including finite lived intangibles, are evaluated for impairment periodically or when events and circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, an estimate of future undiscounted cash flows are determined through estimated disposition date of the asset. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. An estimation of future cash flows requires significant judgment as the Company makes assumptions about future results and market conditions. Since the determination of future cash flows is an estimate of future performance, there may be impairments recognized in future periods in the event future cash flows do not meet expectations.
During the three and nine months ended March 31, 2023, the Company determined that there was no impairment on its long-lived assets.
During
the three and nine months ended March 31, 2021, the Company recognized $
Liabilities to Customers
The Company records liabilities to customers, also referred to as player liabilities, for the amounts that may be withdrawn by a player at a given time. The player liabilities include player deposits, bonuses or incentive awards and user winnings less withdrawals, tax withholdings and player losses. The Company maintains a restricted cash balance and player deposits held by third parties, recorded as receivables reserved for users on the unaudited condensed consolidated balance sheets, at levels equal to or exceeding its liabilities to customers.
Jackpot Provision
The jackpot provision liability is an estimate of the amount due to players for progressive jackpot winnings. The jackpot liability is accrued monthly based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming casino machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be paid out randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount that varies across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot and therefore the winning of a jackpot affects other players on the network of participating iGaming casino machines.
Leases
The Company leases office space through an operating lease agreement that was a result of its acquisition of Lucky Dino. The Company previously leased office space, acquired through the Argyll acquisition, that wound down operations during November 2022 and game center space, other property and equipment, acquired through the Helix acquisition, that was sold as part of the Helix sale transaction on June 10, 2022, where the purchaser assumed the lease liabilities. The Company measures an operating lease right-of-use (“ROU”) asset and liability, as well as a finance lease asset and liability, based on the present value of the future minimum lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and non-lease components of the agreement, as well as any variable rent payments that depend on an index, initially measured using the index at the lease commencement date.
The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the unaudited condensed consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of less than 12 months (“short-term leases”) are not recognized on the unaudited condensed consolidated balance sheets. The rent expense for short-term leases is recognized on a straight-line basis over the lease term and included in general and administrative expense on the unaudited condensed consolidated statements of operations.
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Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the unaudited condensed consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S. GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback years, existing taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.
The Company accounts for uncertainty in income taxes recognized in the unaudited condensed consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the unaudited condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.
Derivative Instruments
The Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of those contracts qualify as derivatives (Note 11). The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability (Note 17) in the unaudited condensed consolidated balance sheets. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the unaudited condensed consolidated statements of operations as other income or expense (Note 17).
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument. The Company records the fair value of the remaining embedded derivative at each balance sheet date and records the change in the fair value of the remaining embedded derivative as other income or expense in the unaudited condensed consolidated statements of operations.
Fair Value Measurements
Fair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third is considered unobservable:
| Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
| 15 |
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company adjusts contingent consideration resulting from a business combination, derivative financial instruments and warrant liabilities, to fair value on a recurring basis. Certain long-lived assets may be periodically required to be measured at fair value on a nonrecurring basis, including long-lived assets that are impaired. The fair values for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been determined to approximate their carrying amounts due to the short maturities of these instruments. The fair values of the Senior Convertible Note and lease liabilities approximate their carrying value based on current interest and discount rates.
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.
| As of March 31, | ||||||||
| 2023 | 2022 | |||||||
| Common stock options | ||||||||
| Common stock warrants | ||||||||
| Common stock issuable upon conversion of senior convertible note | ||||||||
| 10% Series A cumulative redeemable convertible preferred stock | ||||||||
| Total | ||||||||
Comprehensive Loss
Comprehensive loss consists of the net loss for the year and foreign currency translation adjustments related to the effect of foreign exchange on the value of assets and liabilities. The net translation loss for the year is included in the unaudited condensed consolidated statements of comprehensive loss.
Stock-based Compensation
The Company periodically issues stock-based compensation to employees, directors, contractors and consultants for services rendered. Stock-based compensation granted to employees and non-employee directors includes grants of restricted stock and employee stock options that are measured and recognized based on their fair values determined on the grant date. The award of restricted stock and stock options, which are generally time vested, are measured at the grant date fair value and charged to earnings on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the Common Stock on the grant date, and the estimated volatility of the Common Stock over the term of the equity award. The fair value of restricted stock is determined by the closing market price of the Company’s Common Stock on the date of grant. The compensation cost for service-based stock options granted to consultants is measured at the grant date, based on the fair value of the award, and is expensed on a straight-line basis over the requisite service period (the vesting period of the award).
| 16 |
Revenue and Cost Recognition
The revenue of the Company is currently generated from online casino and sports betting (referred to herein as “EEG iGaming revenue”), and esports revenue (referred to herein as “EEG Games Revenue”), consisting of the sales of subscriptions to access cloud-based software used by independent operators of game centers, from consulting and data analytic services provided to game operators (“EEG Games Esports and Other Revenue”), and from the provision of esports event and team management services (“EEG Games Esports Event Management and Team Service Revenue”). The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers (“ASC 606”) when control of a product or service is transferred to a customer. The amount of revenue is measured at the transaction price, or the amount of consideration that the Company expects to receive in exchange for transferring a promised good or service. The transaction price includes estimates of variable consideration to the extent that it is probable that a significant reversal of revenue recognized will not occur.
Revenue generating activities of the Company may be subject to value added tax (“VAT”) in certain jurisdictions in which the Company operates. Revenue is presented net of VAT in the unaudited condensed consolidated statements of operations. VAT receivables and VAT payables are included in other receivables and accounts payable and accrued expenses, respectively on the unaudited condensed consolidated balance sheets. Sales to customers do not have significant financing components or payment terms greater than 12 months.
EEG iGaming Revenue
EEG iGaming revenue is derived from the placement of bets by end-users, also referred to as customers, through online gaming sites. The transaction price in an iGaming contract, or Net Gaming Revenue (“NGR”), is the difference between gaming wins and losses, as further reduced by any nondiscretionary incentives awarded to the customer. Gaming transactions involve four performance obligations, namely the settlement of each individual bet, the honoring of discretionary incentives available to the customer through loyalty reward programs, the award of free spin and deposit match bonuses, and the winning of a casino jackpot. The total amount wagered by a customer is commonly referred to as the win or Gross Gaming Revenue (“GGR”). The GGR is allocated to each performance obligation using the relative standalone selling price (“SSP”) determined for iGaming contracts.
Revenue recognition for individual wagers is recognized when the gaming occurs, as such gaming activities are settled immediately. The revenue allocated to incentives, such as loyalty points offered through a rewards program, is deferred and recognized as revenue when the loyalty points are redeemed. Revenue allocated to free spins and deposit matches, referred to as bonuses, are recognized at the time that they are wagered. Jackpots, other than the incremental progressive jackpots, are recognized at the time they are won by customers. The Company applies a practical expedient by accounting for its performance obligations on a portfolio basis as iGaming contracts have similar characteristics. The Company expects the application of the revenue recognition guidance to a portfolio of iGaming contracts will not materially differ from the application of the revenue recognition guidance on an individual contract basis.
The Company evaluates bets that its users place on websites owned by third party brands in order to determine whether it may recognize revenue on a gross basis, when acting as the principal provider of the wagering service, or on a net basis, when acting as an intermediary or agent. The principal in a wagering service involving a third party is generally the entity that controls the wagering service such that it has a right to the services being performed by the third party and can direct the third party in delivery of the service to its users. The Company records revenue on a gross basis as it has determined it is the principal in transactions involving third parties, such as revenue sharing arrangements, as it controls the wagering service being offered to the users such that it has a right to the service performed by third parties and can further direct third parties in providing services to users. The Company further records expenses related to its revenue sharing arrangements and other third-party iGaming expenses within costs of revenue in the unaudited condensed consolidated statements of operations.
| 17 |
EEG Games Revenue
EEG Games Esports and Other Revenue
The Company derives revenue from sales of subscriptions to access cloud-based software used by independent operators of game centers, as well as from consulting and data analytic services provided to game operators. The revenue derived from the sale of subscription services to cloud-based software used by game centers is recognized over the term of the contract, which generally can range from one month to one year in duration, beginning on the date the customer is provided access to the Company’s hosted software platform. The revenue from the operation of game centers by the Company is recognized when a customer purchased time to use the esports gaming equipment at each center. The revenue from time purchased by a customer and from the sale of concessions is recognized at the point of sale.
The Company further provides consultation services related to the use of hardware and equipment for gaming operations together with implementation services that include sourcing, training, planning, and installation of technology. The Company considers services related to hardware and equipment, implementation, and any design of user interface for the customer as separate performance obligations. Revenue for hardware equipment and design of custom user interface is recognized at a point in time upon delivery and completion. Implementation services are recognized over time, as services are performed.
The Company also has contracts with software companies to provide talent data analytics and related esports services, which include analytic development, other related services to develop software and applications for tournaments, and to provide data support, data gathering, gameplay analysis and reporting which includes talent analytics and related esports services, including analytic development, data analysis, survey design, interview services, player dossiers, and expert services. The Company recognizes revenue from its data analytic services over the life of the contract utilizing the output method, using a direct measurement of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contact. The Company elected to use the right to invoice practical expedient and recognize revenue based on the amounts invoiced. The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date.
| 18 |
The Company has partnership contracts with strategic customers within the esports industry. The partnership contracts are negotiated agreements, which contain both licensing arrangements of intellectual property and development services, including fixed and variable components. The variability of revenue is driven by development plans and results of sales as specified by the partnership contract, which are known as of an invoice date. Partnership contracts generally do not have terms that extend beyond one year. The Company considers licensing arrangements and development services as separate performance obligations. Licensing revenues are recorded over time. Revenue associated with development is recognized over time, as labor is incurred.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each distinct performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account the Company’s overall pricing objectives, considering market conditions and other factors, including the value of the deliverables in the contracts, customer demographics, geographic locations, and the number and types of users within the contracts.
EEG Games Esports Event Management and Team Service Revenue
The Company derives revenue from esports event management and team services. Esports event management services support the creation, production and delivery of an esports event by providing event staffing, gaming consoles, and other technical goods and services for a customer event that is either hosted live in person or online. The revenue generated from esports event management services is generally earned on a fixed fee basis per event.
The esports team services offerings of the Company include recruitment and management services offered to sports clubs to facilitate their entrance into esports tournament competition. Team services provided to a customer may include player recruitment, administration of player contracts, processing of tournament admission, providing logistical arrangements, as well as providing ongoing support to the team during the event. Team services are earned on a fixed fee basis per tournament.
Esports event management and team services revenues are recognized over the term of the event or the relevant contractual term for services as this method best depicts the transfer of control to the customer. The Company recognizes revenue for event management services based on the number of days completed for the event relative to the total days of the event. Revenue from team management services is recognized from inception of the contract through the end of the tournament using the number of days completed relative to the total number of days in the contract term. Revenue collected in advance of the event management or team services is recorded as deferred revenue on the unaudited condensed consolidated balance sheets. The Company may also enter into profit sharing arrangements which are determined based on the net revenue earned by the customer for an event in addition to a fixed fee. Revenue recognition for profit sharing arrangements is recognized at the time the revenue from the event is determined, which is generally at the conclusion of the event. An event or team services contract may further require the Company to distribute payments to event or tournament attendees resulting in the recognition of a processing fee by the Company. The Company does not recognize revenue from the processing of payments until the conclusion of the event or tournament.
The Company evaluates the service being provided under an esports event and team services contract to determine whether it should recognize revenue on a gross basis as the principal provider of the service, or on a net basis in a manner similar to that of an agent. The Company has determined that for esports event and team services contracts that allow for the assignment of individual tasks to a third-party contractor, the Company acts as the principal provider of the service being offered to the customer as it remains primarily responsible for fulfilling the contractual promise to the customer. In profit sharing arrangements, such as events that allow for the Company to share in the revenue earned by a customer for an event, the Company has determined it acts in the role of an agent to the customer as the event creator. The Company has also determined it acts as an agent when it collects a processing fee for performing the service of distributing prize money on behalf of its customers to event or tournament winners.
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Contract Liabilities
Liabilities to customers include both player liabilities, consisting of a free spin bonus and a deposit match bonus, and the player reward liabilities. The free spin bonus provides the user the opportunity to a free play, or otherwise spin, on an iGaming casino slot machine without withdrawing a bet amount from the player’s account. The deposit match bonus matches a player’s deposit up to a certain specified percentage or amount. These bonuses represent consideration payable to a customer and therefore are treated as a reduction of the transaction price in determining NGR. The Company also offers non-discretionary loyalty rewards points to customers that can be redeemed for free play or cash. The Company allocates revenue from wagers to loyalty points rewards earned by users, thereby deferring a portion of revenue from users that participate in a loyalty reward program. The amount of revenue deferred related to loyalty points available to users is based on the estimated fair value of the loyalty point incentive available to the user.
The Company also records payments received in advance of performance under an esports gaming services contract or event management or team services contract as deferred revenue.
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The standard clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. The guidance is effective for the fiscal years beginning after December 15, 2021. The Company adopted this standard as of July 1, 2022. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. The Company adopted this standard as of July 1, 2022. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
Recently Issued Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with ASC Topic 606. The guidance is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its unaudited condensed consolidated financial statements and it does not expect the guidance to have a material effect on its unaudited condensed consolidated financial statements.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company is currently evaluating the impact that the adoption of this guidance will have on its unaudited condensed consolidated financial statements.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.
Note 3 – Other Receivables
The components of other receivables are as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Indirect taxes | ||||||||
| Other | ||||||||
| Other receivables | $ | $ | ||||||
Note 4 – Prepaid Expenses and Other Current Assets
The components of prepaid expenses and other current assets are as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Prepaid marketing costs | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Prepaid gaming costs | ||||||||
| Other | ||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
Note 5 – Equipment
The components of equipment are as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Computer equipment | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Equipment, at cost | ||||||||
| Accumulated depreciation and finance lease amortization | ( | ) | ( | ) | ||||
| Equipment, net | $ | $ | ||||||
Depreciation
expense and finance lease amortization expense was $
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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, 2022 | ||||||||||||
| Impairment charges | ( | ) | ( | ) | ( | ) | ||||||
| Disposal of Bethard Business | ( | ) | ( | ) | ||||||||
| Foreign currency translation | ||||||||||||
| Goodwill, balance as of March 31, 2023 | $ | $ | $ | |||||||||
During
the three months ended March 31, 2023 the Company recognized loss on disposal of businesses that included $
Previously, during the three months ended December 31, 2022, the Company concluded that goodwill impairment indicators existed considering that the EEG iGaming revenues had declined significantly from levels seen in the previous year and in the previous quarters and EEG Games was not performing at the level of previous expected. This and uncertainties caused by inflation and certain world events were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment.
The
Company performed its interim impairment tests on its long-lived assets, including its definite-lived intangible assets using an undiscounted
cash flow analysis to determine if the cash flows expected to be generated by the asset groups over the estimated remaining useful life
of the primary assets were sufficient to recover the carrying value of the asset groups, which were determined to be at the business
component level. Based on the circumstances described above as of December 31, 2022, the Company determined that all its asset groups
were recoverable under the undiscounted cash flow recoverability test. There were
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In
accordance with ASC 350, at December 31, 2022, for goodwill, the Company performed an interim goodwill impairment test, which
compared the estimated fair value of each reporting unit to its respective carrying values. The estimated fair value of each
reporting unit was derived primarily by utilizing a discounted cash flows analysis. The results of the interim impairment test
performed indicated that the carrying value of the iGaming and GGC reporting units exceeded their estimated fair values determined
by the Company. Based on the results of the goodwill impairment testing procedures as of December 31, 2022, the Company recognized goodwill impairments of
$
In the nine months ended March 31, 2022, the Company had concluded, at that time, that goodwill impairment indicators existed based on the significant volatility in the Company’s stock price. As of March 31, 2022, the Company determined that in-person attendance at its Helix and customer game centers is not expected to attain levels previously forecasted and that under the current liquidity and investment constraints it is less likely to reach the previously forecasted revenue and profits for EGL and GGC. These factors and the continuing impacts of the COVID-19 pandemic, uncertainties caused by inflation and certain world events, resulted in the Company evaluating its goodwill and long-lived assets, including intangible assets, for impairment as of March 31, 2022.
As
of March 31, 2022, the Company performed an interim impairment test on its long-lived assets, including its definite-lived intangible
assets using an undiscounted cash flow analysis to determine if the cash flows expected to be generated by the asset groups over the
estimated remaining useful life of the primary assets were sufficient to recover the carrying value of the asset groups, which were determined
to be at the reporting unit level. As of March 31, 2022, the Company determined its EGL, Helix, and GGC asset groups failed the undiscounted
cash flow recoverability test. Accordingly, the Company estimated the fair value of its individual long-lived assets to determine if
any asset impairment charges were present. The Company’s estimation of the fair value of the definite-lived intangible assets included
the use of discounted cash flow and cost analyses, reflecting estimates of future revenues, royalty rates, cash flows, discount rates,
development costs and obsolescence. Based on these analyses, the Company concluded the fair values of certain intangible assets were
lower than their current carrying values, and at March 31, 2022, the Company recognized impairment of $
In
accordance with ASC 350, for goodwill, after considering the asset impairment charges to the asset groups, the Company performed an interim
impairment test as of March 31, 2022 that compared the estimated fair value of each reporting unit to their respective carrying values.
The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flows analysis. The results of the
impairment tests performed indicated that the carrying value of the EGL, GGC and Helix reporting units exceeded their estimated fair
values determined by the Company. Based on the results of the March 31, 2022 interim goodwill impairment testing procedures, the Company
recognized impairments of goodwill totaling $
In
total, as described in detail above, the Company recorded $
The assumptions used in the cost and undiscounted and discounted cash flow analyses require significant judgment, including judgment about appropriate growth rates, and the amount and timing of expected future cash flows. The Company’s forecasted cash flows were based on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions used in the cash flows were revenue growth rates, operating expenses and gross margins and the discount rates in the discounted cash flows. The assumptions used consider the current early growth stage of the Company. The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its procedures for estimating future cash flows for each reporting unit, asset group and intangible asset are reasonable and consistent with current market conditions as of the testing date. If the markets that impact the Company’s business continue to deteriorate, the Company could recognize further goodwill and long-lived asset impairment charges.
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The table below reflects the adjusted gross carrying amounts for these intangible assets. The intangible amounts comprising the intangible asset balance are as follows:
| March 31, 2023 | June 30, 2022 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Tradename | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Developed technology and software | ( | ) | ( | ) | ||||||||||||||||||||
| Gaming licenses | ( | ) | ( | ) | ||||||||||||||||||||
| Player relationships | ( | ) | ( | ) | ||||||||||||||||||||
| Internal-use software | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Amortization
expense was $
The estimated future amortization related to definite-lived intangible assets is as follows:
| Remainder of Fiscal 2023 | $ | |||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Fiscal 2026 | ||||
| Fiscal 2027 |