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: December 31, 20222023

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 001-3926226-3062752

(State or other jurisdiction
of incorporation or organization)

incorporation)

(Commission

File No.)

 

(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)15(d) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered Symbol(s)
Common Stock GMBL The Nasdaq Stock Market LLCOTC Pink
Common Stock Purchase WarrantsGMBLW GMBLWThe Nasdaq Stock Market LLCOTC Pink
10.0% Series A Cumulative Redeemable Convertible Preferred StockGMBLP OTC Pink
GMBLPCommon Stock Purchase Warrants The Nasdaq Stock Market LLC
Common Stock Purchase WarrantsGMBLZ GMBLZThe Nasdaq Stock Market LLCOTC Pink

 

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 No☒ ☒

 

As of February 17, 2023,March 26, 2024, there were 315,497,3861,145,980 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 December 31, 20222023

 

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION1
  
Item 1. Financial Statements (Unaudited)1
  
Condensed Consolidated Balance Sheets as of December 31, 20222023 (unaudited) and June 30, 202220231
  
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2023 and 2022 and 2021(unaudited)2
  
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended December 31, 2023 and 2022 and 2021(unaudited)3
  
Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity (Deficit) For the Three and Six Months Ended December 31, 2023 and 2022 and 2021(unaudited)4
  
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2023 and 2022 and 2021(unaudited)5
  
Notes to Unaudited Condensed Consolidated Financial Statements7
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations4430
  
Item 3. Quantitative and Qualitative Disclosures about Market Risk5537
  
Item 4. Controls and Procedures5537
  
PART II: OTHER INFORMATION5638
  
Item 1. Legal Proceedings5638
  
Item 1A. Risk Factors5638
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds5638
  
Item 3. Defaults Upon Senior Securities5638
  
Item 4. Mine Safety Disclosures5638
  
Item 5. Other Information5639
  
Item 6. Exhibits5639
  
Signatures5740

 

i

 

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements.

Esports Entertainment Group, Inc.

Condensed Consolidated Balance Sheets

 December 31, 2023 June 30, 2023 
 

December 31, 2022

(Unaudited)

  June 30, 2022  (Unaudited)    
          
ASSETS                
                
Current assets                
Cash $682,378  $2,517,146  $1,101,731  $1,745,298 
Restricted cash  677,730   2,292,662   2,350,231   168,304 
Accounts receivable, net  894,204   304,959   72,919   93,871 
Receivables reserved for users  2,965,926   2,941,882   445,988   831,942 
Other receivables  1,292,776   372,283   293,874   497,603 
Prepaid expenses and other current assets  1,358,808   1,543,053   402,390   706,030 
Total current assets  7,871,822   9,971,985   4,667,133   4,043,048 
                
Equipment, net  35,966   43,925   -   20,013 
Operating lease right-of-use asset  126,064   164,288   43,305   85,517 
Intangible assets, net  27,048,230   30,346,489   2,893,971   13,324,627 
Goodwill  6,584,114   22,275,313   -   4,491,223 
Other non-current assets  1,522,328   2,062,176   -   136,863 
                
TOTAL ASSETS $43,188,524  $64,864,176  $7,604,409  $22,101,291 
                
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                
Current liabilities                
Accounts payable and accrued expenses $14,399,368  $12,344,052  $8,488,120  $7,106,194 
Liabilities to customers  2,848,252   4,671,287   270,931   664,313 
Deferred revenue  1,090,333   575,097   1,267,682   989,027 
Senior convertible note  32,221,573   35,000,000 
Derivative liability  799,954  9,399,620   2,356,698   - 
Current portion of notes payable and other long-term debt  75,612   139,538 
Operating lease liability – current  422,344   364,269   49,500   95,903 
Contingent consideration – current  3,012,978   3,328,361 
Total current liabilities  54,870,414   65,822,224   12,432,931   8,855,437 
                
Warrant liability  2,456,730   2,192,730   86,250   365,726 
Operating lease liability – non-current  549,482   669,286 
Contingent consideration – non-current  3,179,934   - 
Deferred income taxes  -   - 
                
Total liabilities  61,056,560   68,684,240   12,519,181   9,221,163 
                
Commitments and contingencies (Note 12)  -   - 
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 December 31, 2022 and June 30, 2022  7,931,182   7,781,380 
Series B redeemable preferred stock, $0.001 par value, 100 authorized, issued and outstanding, aggregate liquidation preference $1,000 at December 31, 2022 and none authorized, issued and outstanding at June 30, 2022  1,000   - 
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 $9,262,326 at December 31, 2023 and $9,195,450 at June 30, 2023  8,306,371   8,083,869 
Series B redeemable preferred stock, $0.001 par value, 100 authorized, no shares issued and outstanding, December 31, 2023 and June 30, 2023  -   - 
Series C Convertible Preferred Stock, $0.001 par value, 20,000 authorized, 1,775 shares issued and outstanding, aggregate liquidation preference $4,405,831 at December 31, 2023  3,524,665   - 
Redeemable Convertible Preferred Stock  3,524,665   - 
        
Total Mezzanine equity  11,831,036   8,083,869 
                
Stockholders’ equity (deficit)                
Preferred stock $0.001 par value; 10,000,000 shares authorized  -   -   -   - 
Common stock $0.001 par value; 500,000,000 shares authorized, 84,553,944 and 40,922,944 shares issued and outstanding as of December 31, 2022 and June 30, 2022, respectively  84,554   40,923 
Series C Convertible Preferred Stock, $0.001 par value, 20,000 authorized, 14,601 shares issued and outstanding, aggregate liquidation preference $18,506,798 at June 30, 2023  -   14,805,438 
Series D Convertible Preferred Stock, $0.001 par value, 10,000 authorized, 3,988 shares issued and outstanding, aggregate liquidation preference $5,244,520 at December 31, 2023 and 4,300 shares issued and outstanding, aggregate liquidation preference $5,421,245 at June 30, 2023  2,495,617   2,618,389 
Preferred Stock value  2,495,617   2,618,389 
        
Common stock $0.001 par value; 1,250,000 shares authorized, 1,145,980 and 9,461 shares issued and outstanding as of December 31, 2023 and June 30, 2023, respectively  

1,146

   9 
Additional paid-in capital  148,922,856   144,874,173   

188,472,019

   173,465,492 
Accumulated deficit  (167,441,699)  (149,140,426)  

(203,272,130

)  (181,425,905)
Accumulated other comprehensive loss  (7,365,929)  (7,376,114)  (4,442,460)  (4,667,164)
Total stockholders’ equity (deficit)  (25,800,218)  (11,601,444)  (16,745,808)  4,796,259 
                
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT) $43,188,524  $64,864,176  $7,604,409  $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)

 2022  2021  2022  2021  2023  2022  2023  2022 
 

Three Months Ended

December 31,

  

Six Months Ended

December 31,

  

Three Months Ended

December 31,

 

Six Months Ended

December 31,

 
 2022  2021  2022  2021  2023  2022  2023  2022 
                  
Net revenue $6,409,405  $14,531,047  $16,014,669  $30,939,338  $2,582,027  $6,409,405  $5,271,844  $16,014,669 
                                
Operating costs and expenses:                                
Cost of revenue  2,371,655   6,515,140   6,122,071   12,966,432   688,532   2,371,655   1,290,558   6,122,071 
Sales and marketing  1,843,557   6,871,546   4,288,892   14,258,009   658,846   1,843,557   1,571,942   4,288,892 
General and administrative  7,559,402   13,171,186   17,030,436   24,346,322   4,784,053   7,559,402   10,971,889   17,030,436 
Asset impairment charges  16,135,000   -   16,135,000   -   12,981,142   16,135,000   12,981,142   16,135,000 
Total operating expenses  27,909,614   26,557,872   43,576,399   51,570,763   19,112,573   27,909,614   26,815,531   43,576,399 
                                
Operating loss  21,500,209   12,026,825   27,561,730   20,631,425   (16,530,546)  (21,500,209)  (21,543,687)  (27,561,730)
                                
Other income (expense):                                
Interest expense  (971,374)  (2,412,716)  (2,029,782)  (4,757,912)  -   (971,374)  -   (2,029,782)
Loss on conversion of senior convertible note  -   (5,999,662)  -   (5,999,662)
Loss on extinguishment of senior convertible note  -   (28,478,804)  -   (28,478,804)
Change in fair value of derivative liability  8,324,802   (1,482,621)  8,599,666   (1,482,621)  (536,698)  8,324,802   (536,698)  8,599,666 
Change in fair value of warrant liability  2,571,732   8,651,922   5,022,288   20,460,522   74,111   2,571,732   279,476   5,022,288 
(Loss) gain on contingent consideration  (3,044,019)  1,851,446   (2,864,551)  1,851,446 
Loss on contingent consideration  -   (3,044,019)  -   (2,864,551)
Other non-operating income (loss)  486,386   58,770   532,836   (1,352,415)  (54,940)  486,386   (45,316)  532,836 
Total other income (expense), net  7,367,527   (27,811,665)  9,260,457   (19,759,446)  (517,527)  7,367,527   (302,538)  9,260,457 
                                
Loss before income taxes  14,132,682   39,838,490   18,301,273   40,390,871   (17,048,073)  (14,132,682)  (21,846,225)  (18,301,273)
                                
Income tax benefit (expense)  -   5,503,861   -   5,503,861   -   -   -   - 
                                
Net loss $14,132,682  $34,334,629  $18,301,273  $34,887,010  $(17,048,073) $(14,132,682) $(21,846,225) $(18,301,273)
                                
Dividend on 10% Series A cumulative redeemable convertible preferred stock  (200,628)  (100,314)  (401,256)  (100,314)  (133,752)  (200,628)  (334,380)  (401,256)
Undeclared dividend on 10% Series A cumulative redeemable convertible preferred stock  (66,876)  -   

(66,876

)  - 
Accretion of 10% Series A cumulative redeemable convertible preferred stock to redemption value  (75,258)  (35,073)  (149,802)  (35,073)  (78,184)  (75,258)  (155,626)  (149,802)
Accretion of the discount on Series C convertible preferred stock  

(1,820,000

)  -   

(1,820,000

)  - 
Dividend on Series C convertible preferred stock  (125,459)  -   (380,982)  - 
Dividend on Series D convertible preferred stock  (87,282)  -   (174,607)  - 
Deemed dividend on accretion of Series D Convertible Preferred Stock to redemption value  (24,741)  -   (24,741)  - 
Deemed dividend on make whole provision on Series C Convertible Preferred Stock  (1,046,341)  -   (4,805,990)  - 
Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock  (10,979,863)  -   (20,362,772)  - 
                                
Net loss attributable to common stockholders $14,408,568  $34,470,016  $18,852,331  $35,022,397  $(31,410,571) $(14,408,568) $(49,972,199) $(18,852,331)
                                
Net loss per common share:                                
Basic and diluted loss per common share $(0.20) $(1.53) $(0.32) $(1.57) $(64.55) $(7,873.53) $(180.08) $(12,824.71)
Weighted average number of common shares outstanding, basic and diluted  73,162,495   22,538,341   58,764,491   22,246,616   486,579   1,830   277,506   1,470 

 

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)

 2022  2021  2022  2021  2022  2021  2022  2021 
 Three Months Ended December 31,  

Six Months Ended

December 31,

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
 2022  2021  2022  2021  2023  2022  2023  2022 
                  
Net loss $14,132,682  $34,334,629  $18,301,273  $34,887,010  $(17,048,073) $(14,132,682) $(21,846,225) $(18,301,273)
                                
Other comprehensive loss:                                
Foreign currency translation (gain) loss  (2,536,663)  791,539   (10,185)  2,216,525 
Foreign currency translation gain  559,946   2,536,663   224,704   10,185 
                                
Total comprehensive loss $11,596,019  $35,126,168  $18,291,088  $37,103,535  $(16,488,127) $(11,596,019) $(21,621,521) $(18,291,088)

 

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 Six Months Ended December 31, 20222023 and 20212022 (Unaudited)

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

Convertible

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  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   9,460  $9  $173,465,492  $(181,425,905) $(4,667,164) $4,796,259 
                                                                
Common stock and warrants issued in equity financing  -   -   -   -   -   -   -   -   -   -   2,500   3   193,497   -   -   193,500 
Proceeds from exercise of pre funded warrants  -   -   -   -   -   -   -   -   -   -   10,420   10   806,490   -   -   806,500 
Accretion of redemption value and issuance costs for 10% Series A cumulative redeemable convertible preferred stock  -   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)  -   -   124,792   125   12,405,889   -   -   - 
Delay Payment for Series D Convertible Preferred Stock  -   -   -   -   -   -   -   -   -   -   25   -   1,935   -   -   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   147,197  $147  $182,513,814  $(186,224,057) $(5,002,406) $407,808 
Accretion of redemption value and issuance costs  -   78,184   -   -   -   -   -   -   -   -   -   -   (78,184)  -   -   (78,184)
10% Series A cumulative redeemable convertible preferred stock cash dividend  -   -   -   -   -   -   -   -   -   -   -   -   (133,752)  -   -   (133,752)
Undeclared dividend on 10% Series A cumulative redeemable convertible preferred stock  -   66,876  -   -   -   -   -   -   -   -   -   -   (66,876)  -   -   (66,876)
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock dividends  -   -   -   -   -   -   -   125,459   -   87,282   -   -   (212,741)  -   -   - 
Deemed dividend on make whole provision on Series C  -   -   -   -   -   -   -   1,046,341   -   -   -   -   (1,046,341)  -   -     
Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Conversions of the Convertible preferred stock  -   -   -   -   -   -   (2,444)  (4,061,731)  -   -   401,711   402   4,061,329   -   -   - 
Redemption of Series D Convertible Preferred Stock and payment of dividend  -   -   -   -   -   -   -   -   (312)  (322,120)  -   -   -   -   -   (322,120)
Deemed dividend on accretion of redemption value and issuance costs for Series D Convertible Preferred Stock  -   -   -   -   -   -   -   -   -   24,741   -   -   (24,741)  -   -   - 
Delay Payment for Series D Convertible Preferred Stock  -   -   -   -   -   -   -   -   -   -   627   1   10,143   -   -   10,144 
Reclass of Series C Convertible Preferred Stock and Series D Convertible Preferred Stock to Mezzanine Equity  -   -   -   -   1,775   3,524,665  (1,775)  (3,524,665)  -   -   -   -   -   -   -   (3,524,665)
Bifurcation of derivative  -   -   -   -   -   (1,820,000)  -   -   -   -   -   -   -   -   -   - 
Accretion of discount on Series C Convertible Preferred Stock  -   -   -   -   -   1,820,000   -   -   -   -   -   -   (1,820,000)  -   -   (1,820,000)
Issuance of common stock under the ATM, net of issuance costs  -   -   -   -   -   -   -   -   -   -   515,394   515   5,248,371   -   -   5,248,886 
Stock based compensation  -   -   -   -   -   -   -   -   -   -   -   -   21,078   -   -   21,078 
Issuance of common stock due to the reverse stock split round-up  -   -   -   -   -   -   -   -   -   -   81,051   

81

   (81)   -   -   - 
Foreign exchange translation  -   -   -   -   -   -   -   -   -   -   -   -   -   -   559,946   559,946 
Net loss  -   -   -   -   -   -   -   -   -   -   -   -   -   (17,048,073)  -   

(17,048,073

)
Balance as of December 31, 2023  835,950  $8,306,371   -  $-   1,775  $3,524,665   -  $-   3,988  $2,495,617  1,145,980  $1,146  $188,472,019  $(203,272,130) $(4,442,460) $(16,745,808)
                                                                
Balance as of July 1, 2022  835,950  $7,781,380   -  $-   40,922,944  $40,923  $144,874,173  $(149,140,426) $(7,376,114) $(11,601,444)  835,950  $7,781,380   -  $-   -  $-    -  $-   -  $-   1,024  $1  $144,915,095  $(149,140,426) $(7,376,114) $(11,601,444)
                                                                
Accretion of redemption value and issuance costs  -   74,544   -   -   -   -   (74,544)  -   -   (74,544)  -   74,544   -   -   -   -   -   -   -   -   -   -   (74,544)  -   -   (74,544)
10% Series A cumulative redeemable convertible preferred stock cash dividend  -   -   -   -   -   -   (200,628)  -   -   (200,628)  -   -   -   -   -   -   -   -   -   -   -   -   (200,628)  -   -   (200,628)
Common stock and warrants issued in equity financing, net of issuance costs  -   -   -   -   30,000,000   30,000   1,538,130   -   -   1,568,130   -   -   -   -   -   -   -   -   -   -   750   1   

1,568,129

   -   -   1,568,130 
Stock based compensation  -   -   -   -   -   -   921,991   -   -   921,991   -   -   -   -   -   -   -   -   -   -   -   -   921,991   -   -   921,991 
Foreign exchange translation  -   -   -   -   -   -   -   -   (2,526,478)  (2,526,478)  -   -   -   -   -   -   -   -   -   -   -   -   -   -   (2,526,478)  (2,526,478)
Net loss  -   -   -   -   -   -   -   (4,168,591)  -   (4,168,591)  -   -   -   -   -   -   -   -   -   -   -   -   -   (4,168,591)  -   (4,168,591)
Balance as of September 30, 2022
Balance as at September 30, 2022  835,950  $7,855,924   -  $-   -  $-   -  $-   -  $-   1,774  $2  $147,130,043  $(153,309,017) $(9,902,592) $(16,081,564)
Balance  835,950  $7,855,924   -  $-           -  $-   -  $-   1,774  $2  $147,130,043  $(153,309,017) $(9,902,592) $(16,081,564)
Accretion of redemption value and issuance costs  -   75,258   -   -   -   -   (75,258)  -   -   (75,258)  -   75,258   -   -   -   -   -   -   -   -   -   -   (75,258)  -   -   (75,258)
10% Series A cumulative redeemable convertible preferred stock cash dividend  -   -   -   -   -   -   (200,628)  -   -   (200,628)  -   -       -   -   -   -   -   -   -   -   -   (200,628)  -   -   (200,628)
Proceeds from issuance of Series B redeemable preferred stock  -   -   100   1,000   -   -   -   -   -   -   -   -   100   1,000   -   -   -   -   -   -   -   -   -   -   -   - 
Common stock and pre-funded warrants issued in equity financing, net of issuance costs  -   -   -   -   7,065,000   7,065   2,139,620   -   -   2,146,685   -   -   -   -   -   -   -   -   -       177   -   2,146,685   -   -   2,146,685 
Common stock issued on exercise of Pre-funded warrants  -   -   -   -   

6,566,000

   

6,566

   -   -   -   

6,566

   -   -   -    -   -   -   -   -   -   -   165   -   6,566   -   -   6,566 
Stock based compensation  -   -   -   -   -   -   -   -   -   - 
Foreign exchange translation  -   -   -   -   -   -   -   -   2,536,663   2,536,663   -   -   -       -   -   -   -   -   -   -   -  -       2,536,663   2,536,663 
Net loss  -   -   -   -   -   -   -   (14,132,682)  -   (14,132,682)  -   -   -   -   -   -   -   -   -   -   -   -   -   (14,132,682)  -   (14,132,682)
Balance as of December 31, 2022 835,950  $7,931,182  100  $1,000   84,553,944  $84,554  $148,922,856  $(167,441,699) $(7,365,929) $(25,800,218)  835,950   $7,931,182   100   $1,000   -   $-   -  $ -   -   $-   2,116   $2   $149,007,408  $ 167,441,699   $(7,365,929) $(25,800,218)
                                        
Balance as of July 1, 2021  -  $-   -  $-   21,896,145  $21,896  $122,341,002  $(46,908,336) $(669,170) $74,785,392 
Common stock issued upon the exercise of stock options  -   -   -   -   8,500   8   40,961   -   -   40,969 
Common stock issued for services  -   -   -   -   78,527   79   574,220   -   -   574,299 
Stock based compensation  -   -   -   -   -   -   308,073   -   -   308,073 
Foreign exchange translation  -   -   -   -   -   -   -   -   (1,424,986)  (1,424,986)
Net loss  -   -   -   -   -   -   -   (552,381)  -   (552,381)
Balance as of September 30, 2021  -  $-   -  $-   21,983,172  $21,983  $123,264,256  $(47,460,717) $(2,094,156) $73,731,366 
Proceeds from issuance of 10% Series A cumulative redeemable convertible preferred stock  835,950   7,599,334   -   -   -   -   -   -   -   - 
Accretion of redemption value and issuance costs  -   35,073   -   -   -   -   (35,073)  -   -   (35,073)
10% Series A cumulative redeemable convertible preferred stock cash dividend  -   -   -   -           (100,314)  -   -   (100,314)
Conversion of Senior Convertible Note  -   -   -   -   1,701,841   1,702   8,241,752   -   -   8,243,454 
Issuance of common stock under the ATM, net of issuance costs  -   -   -   -   375,813   376   1,538,843   -   -   1,539,219 
Common stock and warrants issued in equity financing, net of issuance costs  -   -   -   -   5,500   5   26,505   -   -   26,510 
Common stock issued for services  -   -   -   -   4,000   4   (4)  -   -   - 
Stock based compensation  -   -   -   -   -   -   1,729,401   -   -   1,729,401 
Foreign exchange translation  -   -   -   -   -   -   -   -   (791,539)  (791,539)
Net loss  -   -   -   -   -   -   -   (34.334.629)  -   (34,334,629)
Balance as of December 31, 2021  835,950  $7,634,407   -  $-   24,070,326  $24,070   134,665,366  $(81,795,346) $(2,885,695) $50,008,395 
Balance  835,950   7,931,182   100   1,000           -   -   -   -   2,116   2   149,007,408   167,441,699   (7,365,929)  (25,800,218)

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)

 

 2022  2021  2023  2022 
 Six Months Ended December 31,  Six Months Ended December 31, 
 2022  2021  2023  2022 
Cash flows from operating activities:                
Net loss $(18,301,273) $(34,887,010) $(21,846,225) $(18,301,273)
Adjustments to reconcile net loss to net cash used in operating activities:                
Asset impairment charges  12,981,142   16,135,000 
Amortization and depreciation  3,788,874   6,429,961   2,163,005   3,788,874 
Asset impairment charges  16,135,000   - 
Right-of-use asset amortization  44,819   252,505   42,410   44,819 
Bad debt expense  

324,558

   - 
Stock-based compensation  921,991   2,611,773   42,156   921,991 
Deferred income taxes  -   (5,503,861)
Loss on conversion of senior convertible note  -   5,999,662 
Loss on extinguishment of senior convertible note  -   28,478,804 
Amortization of debt discount  -   3,389,055 
Change in fair value of warrant liability  (5,022,288)  (20,460,522)  (279,476)  (5,022,288)
Loss (gain) on contingent consideration  2,864,551   (1,851,446)
Change in fair value of contingent consideration  -   2,864,551 
Change in fair value of derivative liability  (8,599,666)  1,482,621   536,698   (8,599,666)
Changes in operating assets and liabilities:                
Accounts receivable  (575,781)  (668,265)  20,952   (575,781)
Receivables reserved for users  284,610  (1,931,354)  388,401   284,610 
Other receivables  (577,026)  (315,328)  19,587   (577,026)
Prepaid expenses and other current assets  251,743   900,016   333,965   251,743 
Other non-current assets  288,658   86,877   -   288,658 
Accounts payable and accrued expenses  1,844,155   4,889,778   1,355,659   1,844,155 
Liabilities to customers  (2,342,854)  3,110,848   (393,574)  (2,342,854)
Deferred revenue  515,236   644,701   278,655   515,236 
Operating lease liability  (61,727)  (258,027)  (46,403)  (61,727)
Net cash used in operating activities  (8,540,978)  (7,599,212)  (4,078,490)  (8,540,978)
                
Cash flows from investing activities:                
Cash consideration paid for Bethard acquisition, net of cash acquired  -   (20,067,871)
Purchase of intangible assets  -   (34,647)  (62,790)  - 
Purchases of equipment  (3,321)  (83,227)
Purchase of equipment  -   (3,321)
Net cash used in investing activities  (3,321)  (20,185,745)  (62,790)  (3,321)
                
Cash flows from financing activities:                
Proceeds from equity financing, net of issuance costs  9,001,103   7,599,334   193,500   9,001,103 
Proceeds from exercise of pre-funded warrants  6,566   - 
Proceeds from issuance of Series B redeemable preferred stock, net of issuance costs  1,000   - 
Proceeds from the exercise of pre-funded warrants  806,500   6,566 
Proceeds from issuance of Series B redeemable preferred stock  

-

   1,000 
Redemption of Series D redeemable preferred stock, net of issuance costs  (322,120)  - 
Payment of dividends on 10% Series A cumulative redeemable convertible preferred stock  (401,256)  (100,314)  (334,380)  (401,256)
Issuance of common stock under the ATM, net of issuance costs  -   1,362,011   5,248,886   

-

 
Payment of Bethard contingent consideration  -   (850,520)
Proceeds from exercise of stock options and warrants, net of issuance costs  -   67,479 
Repayment of senior convertible note  (2,778,427)  -   -   (2,778,427)
Repayment of notes payable and finance leases  (36,746)  (52,376)  -   (36,746)
Net cash provided by financing activities  5,792,240   8,025,614   5,592,386   5,792,240 
                
Effect of exchange rate on changes in cash and restricted cash  (697,641)  (148,357)  87,254   (697,641)
Net decrease in cash and restricted cash  (3,449,700)  (19,907,700)  1,538,360   (3,449,700)
Cash and restricted cash, beginning of period  4,809,808   23,360,368   1,913,602   4,809,808 
Cash and restricted cash, end of period $1,360,108  $3,452,668  $3,451,962  $1,360,108 

 

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

 

 December 31, 2022  December 31, 2021  December 31, 2023  December 31, 2022 
Cash $682,378  $1,040,051  $1,101,731  $682,378 
Restricted cash  677,730   2,412,617   2,350,231   677,730 
Cash and restricted cash, end of period $1,360,108  $3,452,668 
Cash and restricted cash $3,451,962  $1,360,108 

 

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

 

 June 30, 2022  June 30, 2021  June 30, 2023  June 30, 2022 
Cash $2,517,146  $19,917,196  $1,745,298  $2,517,146 
Restricted cash  2,292,662   3,443,172   168,304   2,292,662 
Cash and restricted cash, beginning of period $4,809,808  $23,360,368 
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)

 

  December 31, 2022   December 31, 2021 
 December 31, 2022  December 31, 2021  December 31, 2023  December 31, 2022 
SUPPLEMENTAL CASH FLOW INFORMATION:                
CASH PAID FOR:                
Interest $2,013,588  $1,146,977  $-  $2,013,588 
Income taxes $-  $-  $-  $- 
                
SUPPLEMENTAL DISLCOSURE OF NON-CASH FINANCING ACTIVITIES:        
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:        
Accretion of 10% Series A cumulative redeemable convertible preferred stock $149,802  $35,072  $155,626  $149,802 
Fair value of contingent consideration payable in cash and common stock for Bethard acquisition $-  $6,700,000 
Conversion of senior convertible notes to common stock $-  $8,243,454 
Settlement proceeds due from sale of common stock under the ATM $-  $177,208 
Right-of-use asset obtained in exchange for operating lease obligation $-  $1,112,960 
Undeclared dividend on 10% Series A cumulative redeemable convertible preferred stock $66,876  $- 
Conversion of Series C Convertible Preferred Stock to common stock $16,467,745  $- 
Common Stock issued to settle registration rights delay fee $12,078  $- 
Accretion of the discount on Series C convertible preferred stock $

1,820,000

  $- 
Bifurcation of derivative $1,820,000  $- 
Accretion of Series D convertible preferred stock issuance costs $24,741  $- 
Series C Convertible Preferred Stock dividends and Series D Convertible Preferred Stock dividends $555,589  $- 
Deemed dividend on make whole provision on Series C and Series D Convertible Preferred Stock $4,805,990  $- 
Deemed dividend from down round provision on Series C Convertible Preferred Stock and Series D Convertible Preferred Stock $20,362,772  $- 

 

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.business. 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”) 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 ofacquired Bethard Group LimitedLimited’s business-to-consumer operations that included the online casino and sports book business operating under the brand of Bethard (“Bethard”). Bethard’s business-to-consumer operations providesprovided sportsbook, casino, live casino and fantasy sport betting services. On February 14,

In the prior year ended June 30, 2023, the Company entered intocompleted a share purchase agreementseries of independent transactions to sellstreamline 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 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 it is expected to close inexited the second quarterEGL business as of fiscal 2023 (Note 19)June 30, 2023. The core businesses of the Company include Lucky Dino of EEG iGaming and GGC of EEG Games (see Reportable Segments).

On February 13, 2024, the Company announced it was voluntarily delisting from the Nasdaq Capital Markets, LLC (“Nasdaq”). On February 16, 2024, the Company received notice from Nasdaq that it was being suspended on Nasdaq on opening of trading on February 21, 2024. As a result of the suspension, on February 21, 2024 the Company began trading on the Over the Counter Market (the “OTC”). The Company is currently trading on the “Pink Market” of the OTC. On February 27, 2024, the Company filed a Form 25 with the SEC to effect the delisting of its securities from Nasdaq. At the time of announcing its delisting and suspension the Company was not in compliance with 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). The Company is now subject to listing requirements of the OTC and expects to be trading on the OTCQB tier level of the OTC upon filing of this report.

 

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, 2022.2023. 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 February 2023”). Effective December 22, 2023, the Company completed a one-for-four-hundred (1-for-400) reverse stock split of the Company’s issued and outstanding common stock (the “Reverse Stock Split December 2023”). The Reverse Stock Split January 2023 and the Reverse Stock Split December 2023 are together referred to as the “Reverse Stock Splits”. 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 Splits and are presented as if the Reverse Stock Splits 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.other functionality and services for iGaming customers. Currently, the Company operates the business to consumer segment primarily in Europe. iDefix, proprietary technology acquired in connection with the acquisition of Lucky Dino, is a Malta Gaming Authority (“MGA”) licensed iGaming platform with payments, payment automation manager, bonusing, loyalty, compliance and casino integrations that services Lucky Dino.

7

Alongside the esports focused platform, EEG owns and operates five online casino brands of Lucky Dino Gaming Limited and Hiidenkivi Estonia OU, its wholly-owned subsidiary (collectively referred to as “Lucky Dino”), licensed by the MGA on its in-house built iDefix casino-platform. We currently hold one Tier-1 gambling license in Malta. Our Lucky Dino business provides a foothold in mature markets in Europe into which we believe we can cross-sell our esports offerings.

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) online tournaments (through our EGL tournament platform), and (3) player-vs-player wagering.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 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.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 included in this report. One such factor considered by the Company is its compliance with certain debt covenants under terms of the Senior Convertible Note (the “Senior Convertible Note”), issued by the Company on February 22, 2022 in the principal amount of $35,000,000 with a December 31, 2022 outstanding carrying value of $32,221,573. The Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible Note. The Company repaid principal of $2,778,427 during the six months ended December 31, 2022, using proceeds from the September 2022 equity financing (“September 2022 Offering”). Subsequent to December 31, 2022 and through February 17, 2023, one business day preceding this filing, the Company has converted $18,861,575 of the Senior Convertible Note through the issuance of 217,159,442 shares of common stock (Note 19). In addition, on February 14, 2023, the Company entered into a Share Purchase Agreement (“SPA”) for the sale of the Bethard business (Note 19). On February 16, 2023, as a condition to the closing of the sale of the Bethard business, the Company entered into an Amendment and Waiver Agreement (the “Amendment”) with the of the Senior Convertible Note holder (the “Holder”) (Note 19). After including the impact of the conversions reducing the debt by $18,861,573 and the Amendment increasing the debt by $2,950,000, for fees of $450,000 and converted accrued liabilities of $2,500,000, on February 17, 2023, one business day preceding this filing, the Company has reduced its outstanding debt on the Senior Convertible Note to $16,310,000. The Company will continue to convert to further reduce this debt. The maturity date of the Senior Convertible Note is June 2, 2023. The Senior Convertible Note is classified as a current liability on the unaudited condensed consolidated balance sheet and due to the default it may be redeemed by the Holder prior to its maturity date. The Company has also recorded a derivative liability for the alternate conversion in the Senior Convertible Note of $799,954 in current liabilities on the unaudited condensed consolidated balance sheet that may be due to the Holder as part of the make-whole liability under the default terms of the Senior Convertible Note. The cash liability calculated under the terms of the Senior Convertible Note of approximately $933,000,000, is materially higher than the fair value of the derivative liability of $799,954 calculated at December 31, 2022. The calculated make-whole liability may differ materially from the amount at which the Company may be required to pay under the Senior Convertible Note.statements.

 

In addition to the conversions discussed above, the Company is in discussions with the Holder to restructure its payment obligations, including but not limited to eliminating the derivative liability on its unaudited condensed consolidated balance sheet and addressing the Company’s default status under the debt. In connection with the Company’s plan to maintain compliance with the Nasdaq Listing Rules, which includes actions to be taken to meet the minimum market value of listed securities or minimum stockholders’ equity, the Company may issue a perpetual convertible preferred stock by March 31, 2023, to cover the remaining principal balance due under the Senior Convertible Note at the time of entering the issuance.Although the Company and the Holder of the Senior Convertible Note are in discussions to determine the terms of the perpetual convertible preferred stock, such terms have not been finalized and there is no assurance that the Company and the Holder will come to an agreement on such terms. The ability of the Holder of the perpetual convertible preferred stock to convert such preferred stock into shares of our common stock was approved in the 2022 annual meeting of stockholders held on January 26, 2023. The Company will disclose the material terms of the perpetual convertible preferred stock in connection with the completion of the exchange transaction, including the filing of a certificate of designation with the State of Nevada to designate the terms of such preferred stock after the issuance of the stock. In addition, as part of the Company’s plan to maintain compliance with the Nasdaq Listing Rules, and as approved in the 2022 annual meeting of stockholders, the Company intends to effect a reverse stock split of our outstanding common stock. The Board has approved the reverse split at a ratio of one-for-one-hundred (1 for 100), without a corresponding reduction in the total number of authorized shares of common stock. Further, during the 2022 annual meeting of stockholders the Company obtained stockholder approval for the issuance of such shares of Common Stock to the Holder that would exceed 19.99% of the Company’s outstanding shares of Common Stock. See Note 11 for additional information regarding the Senior Convertible Note, and the potential effects on the Company’s business, financial condition, and results of operations.

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In addition to compliance with debt covenants, the Company considered that it had an accumulated deficit of $167,441,699203,272,130 as of December 31, 20222023 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 December 31, 2022,2023, the Company had total current assets$1,101,731 of $7,871,822available cash on-hand and totalnet current liabilities of $54,870,4147,765,798. Net cash used in operating activities for the six months ended December 31, 20222023 was $8,540,9784,078,490, which includes a net loss of $18,301,27321,846,225.

The Company also considered its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits. As of December 31, 2022, the Company had $682,378 of available cash on-hand and net current liabilities of $46,998,592. In addition to the Senior Convertible Note conversions that are reducing the debt outstanding, on December 21, 2022, the Company closed an offering (the “Registered Direct Offering”) in which it sold: (a) 7,065,000 shares of Common Stock to the Holder and (b) pre-funded warrants to purchase up to 17,850,000 at a price of $0.0937 per warrant, directly to the Holder, with all but $0.001 per warrant prepaid to the Company at the closing. The gross proceeds to us from the sale of the shares of Common Stock and pre-funded warrants before deducting underwriting discounts and commissions and offering expenses payable by the Company was $2,316,686. The Company remitted approximately $1,073,343 to the Holder to be applied to accrued interest and future interest payments under the Senior Convertible Note. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $1,073,343. On September 19, 2022 the Company closed the September 2022 Offering in which it sold: (a) 30,000,000 shares of Common Stock and (b) warrants to purchase up to 30,000,000 shares of Common Stock, at an exercise price of $0.25 per share (the “September 2022 Offering Warrants”), at an aggregate price of $0.25 per share and accompanying September 2022 Offering Warrant. The gross proceeds to us from the sale of the shares of Common Stock and Warrants before deducting underwriting discounts and commissions and offering expenses payable by the Company was $7,500,000. On the issuance date, the Company also granted an overallotment to the underwriters of the offering for 3,600,000 overallotment warrants (“September 2022 Overallotment Warrants”), at a purchase price of $0.01 per warrant, with an exercise price of $0.25 per warrant (the September 2022 Offering Warrants and September 2022 Overallotment Warrants are collectively referred to as the “September 2022 Warrants”). Total proceeds from the September 2022 Overallotment Warrants were $36,000. The Company remitted to the Holder an amount of $2,265,927 equal to fifty percent (50%) of all net proceeds above $2,000,000 following the payment of 7% in offering fees including underwriting discounts and commissions. In addition, as part of the September 2022 Offering, the Holder purchased $512,500 of securities (2,050,000 shares of Common Stock and 2,050,000 September 2022 Warrants) and the Company paid the Holder an additional $512,500. The proceeds remitted to the Holder of the Senior Convertible Note reduced the principal balance of the Senior Convertible Note on a dollar-for-dollar basis. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $4,075,991. On March 2, 2022 the Company closed an offering (the “March 2022 Offering”) in which it sold 15,000,000 units at $1.00 consisting of one share of Common Stock and one warrant for a total of 15,000,000 warrants with an exercise price of $1.00 (the “March 2022 Offering Warrants”). There was also an overallotment option exercised to purchase warrants to purchase an additional 2,250,000 shares of common stock (the “April 2022 Overallotment Warrants”) with an exercise price of $1.00 issued to the underwriters of the offering on April 1, 2022 (the March 2022 Offering Warrants and the April 2022 Overallotment Warrants are collectively referred to as the “March 2022 Warrants”). The March 2022 Offering provided net cash proceeds of $13,605,000.

The amount of available cash on hand on February 17, 2023, one business day preceding this filing, was $951,153.

The Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations without additional financing. Although the Company has financing available, as further described below, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the Company and the esports and iGaming industry. The combination of these conditions was determined to raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.

 

In determining whether the Company can overcome the presumption of substantial doubt about its ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes, depending on market conditions, may be available to fund its operations and drive future growth, which include (i) the potential expected proceeds from the recently filed S-1 where the amount of the offering has not yet been determinedincludes:, (ii) the potential proceeds from the exercise of the

33,600,000 September 2022 Warrants, exercisable at $0.25, outstanding at December 31, 2022, (iii) the potential proceeds from the exercise of the 17,250,000 March 2022 Warrants, exercisable at $1.00, outstanding at December 31, 2022, (iv) the ability to sell shares of Common Stock of the Company through various forms of offerings, and (v) the ability to raise additional financing from other sources. The Company is also continuing discussions with the Holder to restructure the payment terms and debt covenants.

(i)approximately $1,400,000 of net proceeds from the Secured Note with the holder of the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock (the “Holder”, 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.

 

COVID-19

The novel coronavirus (“COVID-19”) emerged in December 2019 and has since adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets.

The Company has previously indicated that a significant or prolonged decrease in consumer spendingamount of available cash on entertainment or leisure activities may have an adverse effecthand on demand for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and revenues, and thereby materially harming the Company’sMarch 26, 2024, one business financial condition and results of operations.day preceding this filing, was approximately $1,300,000.

 

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The ultimate impact of the COVID-19 pandemic on other areas of the business will depend on future developments, which are uncertain and may result in an extended period of continued business disruption and reduced operations. A materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on the Company’s business, financial condition and results of operations. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.

Nasdaq Continued Listing Rules or Standards

On April 11, 2022, the Company received a deficiency notification letter from the Listing Qualifications Staff of the Nasdaq Stock Market (“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.

On June 7, 2022, the Company received a further letter from Nasdaq notifying the Company that for the last 30 consecutive business days, the Company’s minimum Market Value of Listed Securities (“MVLS”) was below the minimum of $35,000,000 required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(b)(2).

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 Nasdaq’s minimum bid price, and the $2,500,000 stockholders’ equity requirement, as set forth in Nasdaq Listing Rules 5550(a)(2) and 5550(b)(1), respectively, on or before February 7, 2023 and March 31, 2023, respectively, and adhering to certain other conditions and requirements described below.

On December 6, 2022, the Company received a fourth letter from Nasdaq notifying the Company that it has not regained compliance with Listing Rule 5550(b)(2) requiring the Company to maintain a MVLS at a minimum of $35,000,000. This was addressed in the November 17, 2022, hearing before the Panel where the Company presented on its plan to comply with the Rule 5550(b)(2) or alternative criteria and was granted continued listing subject to the criteria noted above.

10

From the initial determination, the Company has completed conditions 1 and 2:

 1.On or before January 13, 2023, the Company shall file a Form S-1 registration statement with the SEC for a $10 million public offering;
2.On January 26, 2023, the Company shall obtain stockholder approval for a reverse stock split at a ratio that is sufficient to ensure compliance with the Bid Price Rule;

On January 13, 2023, the Company filed its S-1, subject to amendments, and on January 26, 2023, as part of the 2022 annual meeting, the Company obtained stockholder approval for the of the Common Stock at a ratio of not less than one-for-twenty (1-for-20) and not more than one-for-one-hundred (1-for-100). The Board has approved the reverse split at a ratio of one-for-one-hundred (1 for 100), without a corresponding reduction in the total number of authorized shares of Common Stock, and to be in effect no later than February 22, 2023 to meet the minimum bid price compliance milestone.

On February 8, 2023 the Company received notice from the Panel updating its remaining conditions as follows:

1.On February 20, 2023, the Company shall provide a written update to the Panel regarding the progress of its debt-to-equity conversion plan and its impact on the Company’s equity;
2.On March 7, 2023, the Company shall have demonstrated compliance with the Bid Price Rule, by evidencing a closing bid price of $1.00 or more per share for a minimum of ten consecutive trading sessions; and
3.On March 31, 2023, the Company shall demonstrate compliance with the shareholder equity requirement, as outlined in Equity Rule.

The Company is working towards meeting all other conditions related to regaining compliance with the Nasdaq Listing Rules including the conversion of the Senior Convertible Note.

Additionally, the Panel reserved the right to reconsider the terms of this exception. As a result, 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.

As discussed above, the Company is in the process of taking definitive steps to comply with all applicable conditions and criteria for continued listing on Nasdaq. There can be no assurances, however, that the Company will be able to do so. The Company must satisfy the time frame granted by the Panel or Nasdaq will provide written notification that its securities will be delisted. As part of the compliance plan the Company is negotiating with the Holder to restructure the Senior Convertible Note, including the derivative liability.

 

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 December 31, 2022 and June 30, 2022, the Company did not have any financial instruments classified as cash equivalents. At times, cash deposits inclusive of restricted cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. Accounts are insured by the FDIC up to $250,000 per financial institution. There have been no losses recognized on cash balances held at these financial institutions.

Restricted Cash

 

Restricted cash includes cash reserves maintained for compliance with gaming regulations that require adequate liquidity to satisfy the Company’s liabilities to customers.

Accounts Receivable

Accounts receivable is comprisedcustomers and amounts held in escrow related to the execution of the amounts billedan escrow agreement (as defined in Note 12) with an independent third-party escrow agent, that was entered into concurrent with a settlement agreement, dated October 6, 2023 (as defined in Note 12), pursuant to which Redemption Proceeds (as defined in Note 12) received from each closing of “at the market” sales from the Equity Distribution Agreement (as defined in Note 12) were deposited into a non-interest bearing escrow account. As of December 31, 2023, there was $54,409 and $2,295,822, for liabilities 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 changesdeposited in the allowance for credit losses are included in generalnon-interest bearing escrow account, respectively and administrative expense in the unaudited condensed consolidated statementsas of operations. At December 31, 2022 and June 30, 2022, the allowance2023, there was $168,304 for credit losses was not materialliabilities 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.

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Equipment

Equipment is stated at cost less accumulated depreciation. The Company capitalizes the direct cost of equipment as well as expenditures related to improvements and betterments that add to the productive capacity or useful life of the equipment. Depreciation is computed utilizing the straight-line method over the estimated useful life of the asset, or for leasehold improvements, the shorter of the initial lease term or the estimated useful life of the improvements. The estimated useful life of equipment by asset class follows:

Schedule of Estimated Useful Life of Asset

Computer EquipmentUp to 5 years
Furniture and fixturesUp to 7 years
Leasehold improvementsShorter of the remaining lease term or estimated life of the improvement

The estimated useful life and residual value of equipment are reviewed and adjusted, if appropriate, at the end of each reporting period. The costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the resulting gain or loss is recognized as a gain or loss on sale or disposition of assets in the unaudited condensed consolidated statements of operations.customers.

 

Business CombinationsDerivative financial instruments

 

The Company accounts for business combinations using the acquisition methodassesses classification of accounting. The Company records the assets acquired, liabilities assumed and acquisition-related contingent considerationits equity-linked instruments at fair value on theeach reporting 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 December 31, 2022 the Company’s business is classified into four reporting units: iGaming Malta (including Bethard and Lucky Dino), iGaming Argyll (UK), EGL, and GGC. The Helix business was sold as of June 10, 2022 and was previously its own reporting unit.

In testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether ita change in classification between equity and liabilities (assets) 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 Impairmentrequired (Note 9). The Company utilizes a discounted cash flow analysis, referredcan make an accounting policy election on the allocation order and choose the policy that management determines is most favorable. The Company elected to as an income approach, and uses internal and market multiples,reclassify outstanding instruments based on allocating the unissued shares to assess reasonableness of assumptions, to determinecontracts with 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 inherentlatest inception date resulting in the fair value estimates, which are based oncontracts with 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’s 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. Subsequent to the period end, the Company appointed a new CEO and a new interim CFO and on January 18, 2023 sold its EEG iGaming Spanish license. 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. This and uncertainties caused by inflation and world stability were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. For the three and six months ended December 31, 2022, the Company recognized total goodwill asset impairment charges of $16,135,000 in the unaudited condensed consolidated statements of operations, with asset impairment charges to the goodwill to the iGaming reporting unit of $14,500,000, which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1,635,000, which is part of the EEG Games segment (see Note 6 for additional information regarding the goodwill impairment, and the effects on the Company’s business, financial condition, and results of operations). Further downturns in economic, regulatory and operating conditions could result in additional goodwill impairment in future periods. There were no goodwill asset impairment charges recorded during the three and six months ended December 31, 2021.

Intangible assets

Intangible assets with determinable lives consist of player relationships, developed technology and software, tradenames and gaming licenses. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful lives of 5 years for player relationships and developed technology and software, 10 years for tradenames and 2 years for gaming licenses. The Company also capitalizes internal-use software costs such as external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software project and continues during the application development stage. Capitalization ceases when the software has been tested and is ready for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life cycle are expensed as incurred.

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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 dispositionearliest inception 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 six months ended December 31, 2022 and 2021, the Company determined that there was no impairment on its long-lived assets.

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 jackpot winnings. The jackpot liability is accrued monthly based on an estimate of the jackpot amount available for winning. The jackpot increases with each bet on a jackpot eligible iGaming casino machine and a portion of each losing bet is allocated towards the funding of the jackpot amount. Jackpots are programmed to be paid out randomly across certain casino brands. When a player wins a jackpot, the amount of the jackpot is reset to a defined amount that varies across eligible iGaming casino machines. Participating iGaming casino machines of the Company pool into the same jackpot and therefore the winning of a jackpot affects other players on the network of participating iGaming casino machines. Jackpot winnings reduce revenue at the time the entity has the obligation to pay the jackpot, which occurs when the jackpot is won by the player.

Leases

The Company leases office space through operating lease agreements that were a result of its acquisitions of Argyll and Lucky Dino. The Company previously leased 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 arebeing 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 Instrumentsfirst.

 

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)9). 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.sheet. In the event that the fair value is recorded as a liability (Note 14), the change in fair value is recorded in the unaudited condensed consolidated statements of operations as other income or expense (Note 17)14).

 

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 itstheir 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.

14

Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company adjusts contingent consideration resulting from a business combination, derivative financial instruments and warrant liabilities, to fair value on a recurring basis. Certain long-lived assets may be periodically required to be measured at fair value on a nonrecurring basis, including long-lived assets that are impaired. The fair values for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers have been determined to approximate their carrying amounts due to the short maturities of these instruments. The fair values of the Senior Convertible Note and lease liabilities approximate their carrying value based on current interest and discount rates.

 

Earnings Per Share

 

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

 

9

The following securities were excluded from weighted average diluted common shares outstanding for the three and six months ended December 31, 20222023 and 20212022 because their inclusion would have been antidilutive:

Schedule of Weighted Average Diluted Common Shares Outstanding

  2022  2021 
  As of December 31, 
  2022  2021 
Common stock options  763,501   1,530,151 
Common stock warrants(1)  56,200,558   5,350,588 
Common stock issuable upon conversion of senior convertible note  14,758,874   2,478,332 
10% Series A cumulative redeemable convertible preferred stock  835,950   835,950 
Total  72,558,883   10,195,021 

(1)Excludes the 11,284,000 Pre-funded warrants that were unexercised as of December 31, 2022 but were included in weighted average common shares outstanding used in calculating EPS.

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

  

December 31, 2023

  

December 31, 2022

 
Common stock options  75   20 
Common stock warrants  4,938   1,406 
Common stock issuable upon conversion of senior convertible note  -   369 
10% Series A cumulative redeemable convertible preferred stock  842,030   835,950 
Common stock issuable on conversion of Series C convertible preferred stock  991,467   - 
Common stock issuable on conversion of Series D convertible preferred stock  1,178,553   - 
Common stock issuable on conversion of Series D convertible preferred stock issuable from exercise of Series D preferred stock warrants issued in the Series D convertible preferred stock offering  1,209,564   - 
Total  4,226,627   837,745 
Anti-dilutive securities  4,226,627   837,745 

 

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 directorstable includes grantsthe number of restrictedshares of common 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 onpotentially issuable upon 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 lifeconversion of the equity award, the exercise priceSeries 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 conversion of the stock option as compared to the fair market valueSeries D Preferred Stock issuable upon exercise of the Commonpreferred 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 the grant date, and the estimated volatilityconversion of the CommonSeries D Convertible Preferred Stock over the termissuable from exercise of the equity award. The fair value of restricted stock is determined by the closing market priceSeries D Preferred Stock warrants (the “Series D Preferred Warrants”), was 90% of the Company’s Common StockNasdaq Official Closing Price of $3.95 on the dateDecember 31, 2023. Issuances of grant. The compensation cost for service-basedshares of common stock options granted to consultants is measured at the grant date, based on the fair valueupon conversion of the award,Series D Convertible Preferred Stock and is expensed on a straight-line basis over the requisite service period (the vesting period of the award).Common Warrants.

15

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. The revenue for jackpot games is recognized when the jackpot is won by the customer. The Company applies a practical expedient by accounting for its performance obligations on a portfolio basis as iGaming contracts have similar characteristics. The Company expects the application of the revenue recognition guidance to a portfolio of iGaming contracts will not materially differ from the application of the revenue recognition guidance on an individual contract basis.

The Company evaluates bets that its users place on websites owned by third party brands in order to determine whether it may recognize revenue on a gross basis, when acting as the principal provider of the wagering service, or on a net basis, when acting as an intermediary or agent. The principal in a wagering service involving a third party is generally the entity that controls the wagering service such that it has a right to the services being performed by the third party and can direct the third party in delivery of the service to its users. The Company records revenue on a gross basis as it has determined it is the principal in transactions involving third parties, such as revenue sharing arrangements, as it controls the wagering service being offered to the users such that it has a right to the service performed by third parties and can further direct third parties in providing services to users. The Company further records expenses related to its revenue sharing arrangements and other third-party iGaming expenses within costs of revenue in the unaudited condensed consolidated statements of operations.

16

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.

17

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.

18

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.

19

 

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 addition,October 2021, the FASB issued ASU amends the accounting2021-08, Business Combinations (Topic 805): Accounting for credit losses on available-for-sale debt securitiesContract Assets and purchased financialContract 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 credit deterioration. ASU 2016-13 was originallyAccounting Standards Codification Topic 606. The guidance is effective for public companies for fiscal years beginning after December 15, 2019. 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 November of 2019,December 2023, the FASB issued ASU 2019-10,2023-09, Financial Instruments—Credit LossesIncome Taxes—Income Taxes (Topic 326), Derivatives740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 modifies the rules on income tax disclosures to enhance the transparency and Hedging (Topic 815),decision-usefulness of income tax disclosures, particularly in the rate reconciliation table and Leases (Topic 842): Effective Dates, which delayeddisclosures about income taxes paid. The amendments are intended to address investors’ requests for income tax disclosures that provide more information to help them better understand an entity’s exposure to potential changes in tax laws and the implementation ofensuing risks and opportunities and to assess income tax information that affects cash flow forecasts and capital allocation decisions. The guidance also eliminates certain existing disclosure requirements related to uncertain tax positions and unrecognized deferred tax liabilities. ASU 2016-13 to fiscal years2023-09 is effective for public business entities for annual periods beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies.2024. All entities are required to apply the guidance prospectively but have the option to apply it retrospectively. 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.

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:

Schedule of Other Receivables

 December 31, 2022  June 30, 2022  December 31, 2023  June 30, 2023 
Indirect taxes $20,416  $306,040  $147,019  $21,024 
Other  1,272,360   66,243   146,855   476,579 
Other receivables $1,292,776  $372,283  $293,874  $497,603 

 

Note 4 – Prepaid Expenses and Other Current Assets

 

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

Schedule of Prepaid Expenses and Other Current Assets

 December 31, 2022  June 30, 2022  December 31, 2023  June 30, 2023 
Prepaid marketing costs $34,902  $298,300  $14,264  $53,365 
Prepaid insurance  245,062   230,404   281,532   265,974 
Prepaid gaming costs  283,221   575,113   25,934   375,082 
Prepaid interest  421,566   - 
Accrued income  -   110,613 
Other  374,057   328,623   80,660   11,609 
Prepaid expenses and other current assets $1,358,808  $1,543,053  $402,390  $706,030 

 

Note 5 – Equipment

 

The components of equipment are as follows:

Schedule of Equipment

 December 31, 2022  June 30, 2022  December 31, 2023  June 30, 2023 
Computer equipment $39,972  $35,911  $        -  $36,630 
Furniture and equipment  35,324   34,526   -   35,943 
Equipment, at cost  75,296   70,437       72,573 
Accumulated depreciation and finance lease amortization  (39,330)  (26,512)
Accumulated depreciation  -   (52,560)
Equipment, net $35,966  $43,925  $-  $20,013 

 

Depreciation expense and finance lease amortization expense was $13,8993,535 and $12,87213,899 for the three months ended December 31, 2023 and 2022 and 2021$8,757 and $36,312 and $59,608 for the six months ended December 31, 2023 and 2022, and 2021, respectively. All Equipment depreciation expense was for the EEG iGaming segment.

During the three and six months ended December 31, 2023, the Company recognized a total impairment charge of $13,192 on its Equipment long-lived assets. All Equipment asset impairment charges were for the EEG iGaming segment. There were no impairment charges on Equipment long-lived assets identified for the three and six months ended December 31, 2022.

2011

Note 6 – Goodwill and Intangible Assets

 

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

 

Schedule of Goodwill

  EEG iGaming  EEG Games  Total 
          
Goodwill, balance as of June 30, 2022  19,660,481   2,614,832   22,275,313 
Impairment charges  (14,500,000)  (1,635,000)  (16,135,000)
Foreign currency translation  443,801   -   443,801 
Goodwill, balance as of December 31, 2022 $5,604,282  $979,832  $6,584,114 
  EEG iGaming  EEG Games  Total 
          
Goodwill, balance as of June 30, 2023 $3,511,391  $979,832  $4,491,223 
Foreign currency translation  44,949   -   44,949 
Asset impairment charges  (3,556,340)  (979,832)  (4,536,172)
Goodwill, balance as of December 31, 2023 $-  $-  $- 

 

During the three months endedAt December 31, 2022,2023, the Company concluded that goodwill impairment indicators existed considering that the Company delisted from Nasdaq, had management changes in the EEG iGaming segment and continued to see revenues had declineddecline in the EEG iGaming segment and they were significantly down from levels seen in the previous year and in the previous quarters.quarters and EEG Games segment was not performing at the level previously expected. This, the decline in the Company’s stock price and uncertainties caused by inflation and world stabilityother factors 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, 2022,2023, the Company determined that all itsthe EEG Games asset groups wegroup was recoverable under the undiscounted cash flow recoverability test.test but the EEG iGaming asset group was not recoverable. Accordingly, the Company estimated the fair value of its EEG iGaming 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 considering the current results and impacts expected from the delisting from Nasdaq and concluded that the fair values of the EEG iGaming intangibles were no longer recoverable and recognized impairment totaling $1,380,280 for tradename, $2,546,981 for developed technology and software, $4,252,423 for player relationships and $252,094 for internal-use software. The table below reflects the adjusted gross carrying amounts for these intangible assets. There were no asset impairment charges for long-lived assets, including definite-lived intangible assets, for the three and six months ended December 31, 2022.

12

InFurther, in accordance with ASC 350, for goodwill, the Company performed an interima 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 teststest performed as of December 31, 2023, 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,At December 31, 2023, the Company recognized goodwill impairments of $3,556,340 for the iGaming Malta reporting unit of the EEG iGaming segment, and $979,832 for the GGC reporting unit, in the EEG Games segment, totaling $4,536,172 in asset impairment charges in the unaudited condensed consolidated statements of operations. This impaired all the remaining goodwill of the Company.

Similarly, at December 31, 2022, the Company recognized goodwill impairments of $14,500,000for the iGaming Malta reporting unit of the EEG iGaming segment, and goodwill of $1,635,000for the GGC reporting unit, in the EEG Games segment, totaling $16,135,000for the three and six months ended December 31, 2022 in asset impairment charges in the unaudited condensed consolidated statements of operations. There were

In total, as described in detail above, the Company recorded $no12,967,950 of goodwill and intangible asset impairment charges for goodwill or long-lived assets, including definite-lived intangible assets, for the three and six months ended December 31, 2021.2023 and $16,135,000 of goodwill asset impairment charges for the three and six months ended December 31, 2022.

The assumptions used in the cost and undiscounted and discounted cash flow analyses require significant judgment, including judgment about appropriate growth rates, and the amount and timing of expected future cash flows. The Company’s forecasted cash flows were based on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions used in the cash flows were revenue growth rates, operating expenses and gross margins and the discount rates in the discounted cash flows. The assumptions used consider the current early growth stage of the Company, the current investment levels projected.Company. The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its procedures for estimating future cash flows for each reporting unit, asset group and intangible asset are reasonable and consistent with current market conditions as of the testing date. If the markets that impact the Company’s business continue to deteriorate, the Company could recognize further goodwill and long-lived asset impairment charges.

The table below reflects the adjusted gross carrying amounts for these intangible assets. The intangible amounts comprising the intangible asset balance are as follows:

 Schedule of Intangible Assets

 December 31, 2022 June 30, 2022  December 31, 2023  June 30, 2023 
 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount  Gross Carrying Amount  Accumulated Amortization  Net Carrying Amount  Gross Carrying Amount  Accumulated Amortization  Net Carrying Amount 
Tradename $5,949,595  $(893,348) $5,056,247  $5,835,512  $(578,960) $5,256,552  $900,333   (171,882)  728,451  $2,801,963  $(566,501) $2,235,462 
Developed technology and software  10,244,592   (3,061,301)  7,183,291   10,109,366   (1,935,018)  8,174,348   3,400,333   (1,428,140)  1,972,193   9,240,018   (3,757,061)  5,482,957 
Gaming licenses  1,348,025   (1,129,676)  218,349   1,317,567   (774,760)  542,807   -   -   -   724,431   (724,431)  - 
Player relationships  21,395,918   (7,013,592)  14,382,326   20,920,029   (4,757,813)  16,162,216   333,334   (140,007)  193,327   10,022,587   (4,621,655)  5,400,932 
Internal-use software  225,847   (17,830)  208,017   225,086   (14,520)  210,566   -   -   -   226,438   (21,162)  205,276 
Total $39,163,977  $(12,115,745) $27,048,230  $38,407,560  $(8,060,653) $30,346,489  $4,634,000   (1,740,029)  2,893,971  $23,015,437  $(9,690,810) $13,324,627 

 

Amortization expense was $1,912,257During the three months and $3,186,353 for the threesix months ended December 31, 2022 and 2021 and2023, the Company recorded amortization expense for its intangible assets of $3,752,5621,072,521 and $6,291,6912,154,248, respectively. The amortization for EEG iGaming segment was $823,945 and $1,657,097, and for the EEG Games segment was $248,576 and $497,151, for the three and six months ended December 31, 2023, respectively. During the three months and six months ended December 31, 2022, the Company recorded amortization expense for its intangible assets of $1,912,257and 2021,$3,752,562, respectively. The amortization for EEG iGaming segment was $1,663,671 and $2,197,6913,255,411, and for the EEG Games segment was $248,586 and $910,000497,151, for the three months ended December 31, 2022 and 2021, respectively. The amortization for EEG iGaming segment was $3,255,411 and $4,471,691, and for the EEG Games segment was $497,151 and $1,820,000, for the six months ended December 31, 2022, and 2021, respectively.

 

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

Schedule of Future Amortization of Intangible Assets

        
Remainder of Fiscal 2023 $3,799,449 
Fiscal 2024  7,123,766 
Remainder of Fiscal 2024 $497,149 
Fiscal 2025  7,123,766   994,298 
Fiscal 2026  5,982,199   919,625 
Fiscal 2027  676,955   98,218 
Fiscal 2028  98,218 
Thereafter  2,342,095   286,463 
Total $27,048,230  $2,893,971 

 

Note 7 – Other Non-Current Assets

The components of other non-current assets are as follows:

Components of Other Non-Current Assets

  December 31, 2022  June 30, 2022 
iGaming regulatory deposits $1,517,582  $1,715,053 
iGaming deposit with service providers  -   261,825 
Rent deposit  -   80,520 
Other  4,746   4,778 
Other non-current assets $1,522,328  $2,062,176 

2113

Note 87 – Accounts Payable and Accrued Expenses

 

The components of accounts payable and accrued expenses are as follows:

 ComponentsSchedule of AccountsAccount Payable and Accrued Expenses

 December 31, 2022  June 30, 2022  December 31, 2023  June 30, 2023 
Trade accounts payable $6,689,344  $5,069,616  $4,512,575  $4,469,927 
Accrued marketing  2,304,264   2,388,987   2,012,710   1,054,085 
Accrued payroll and benefits  937,528   833,322   303,035   298,636 
Accrued gaming liabilities  540,621   446,626   123,243   145,393 
Accrued professional fees  78,855   555,967   480,000   286,314 
Accrued jackpot liabilities  

317,894

   

297,970

   -   91,892 
Accrued interest  

1,018,327

   - 
Accrued legal settlement (Note 10)  450,000   - 
Accrued other liabilities  2,512,535   2,751,564   606,557   759,947 
Total $14,399,368  $12,344,052  $8,488,120  $7,106,194 

Note 98 – Related Party Transactions

 

The Company’s Chief Executive Officer owns less than 5% of Oddin.gg, a vendor of the Company, that was owed $0 and $47,895 by the Company as of December 31, 2023 and June 30, 2023, respectively. The Company incurred no cost of revenue to Oddin.gg for the three and six months ended December 31, 2023 and $43,107 and $72,107 cost of revenue for the three and six months ended December 31, 2022. On October 3, 2023, the Company signed an agreement to integrate the Oddin.gg esports iFrame solution that is expected to allow the Company to offer esports wagering to its iGaming customers. The integration of the Oddin.gg’s esports iFrame solution has been completed by the Company and is expected to be utilized towards the end of fiscal 2024. The agreement requires the Company to pay Oddin.gg a revenue share based on the net gaming revenues generated from esports wagering.

The Company reimbursed the former CEOChief Executive Officer for office rent and related expenses. The Company incurred charges owed to the former CEOChief Executive Officer for office expense reimbursement of $0 and $1,200 for the three months and six months ended December 31, 2022, respectively, and $1,200 and $2,400 for the three months and six months ended December 31, 2021, respectively. As of December 31, 2022 and 2021, there were no amounts payable to the CEO. The former CEOChief Executive Officer was terminated for cause by the Board from his position as CEOChief Executive Officer on December 3, 2022. The former CEOChief Executive Officer resigned from the Board on December 23, 2022.

The Company retained Other than the services of its former CFO and COO through a consultancy agreement dated April 2, 2022 and an employment agreement dated April 2, 2022. The Company remitted monthly payments to its former CFO and COO of NZD 36,995 ($20,854 translated using the exchange rate in effect at December 31, 2022) under the consultancy agreement and $500 per month under the employment agreement. The former CFO and COO resigned from his roles on December 31, 2022. He will continue on in his role as a Directorremaining amount of the Company. Aslegal settlement of December 31, 2022 and 2021,$450,000 (as described in Note 10), there were no amounts payable to the former CFOChief Executive Officer as of December 31, 2023 and COO.June 30, 2023.

 

On May 4, 2017, the Company entered into a services agreement and a referral agreement with Contact Advisory Services Ltd., an entity that is partly owned by a member of the Board of Directors. The Company incurred general and administrative expenses of $1,3398,130 and $9,17312,194 for three and six months ended December 31, 20222023, respectively, and 2021,$1,339 and $4,274 for three and six months ended December 31, 2022, respectively, in accordance with these agreements. The Company incurred general and administrative expenses of $4,274 and $20,282 for six months ended December 31, 2022 and 2021, respectively, in accordance with these agreements As of December 31, 20222023 and 2021,June 30, 2023, there werewas approximately $6,43810,263 and $012,700 amounts payable to Contact Advisory Services Ltd, respectively.

 

The Company had retainedCompany’s Chief Operating Officer was previously its former Chief Financial Officer and Chief Operating Officer and his services from aas the former member of its Board who remained as an advisor to the Company with an annual fee of $60,000. The member wasChief Financial Officer and Chief Operating Officer were previously retained through a consultancy agreement dated August 1, 2020April 2, 2022 and an employment agreement dated June 15, 2020.April 2, 2022. The consultancy agreement requiredCompany remitted monthly payments to its former Chief Financial Officer of £NZD 18,00036,995 ($20,02823,524 translated using the exchange rate in effect at December 31,June 30, 2022) per month tounder the firm that is controlled by this member of the Board. The individual also received payroll ofconsultancy agreement and $500 per month throughunder the employment agreement as COO.agreement. In connection with this appointment the Company provided a one-time issuance of 2,000 shares of Common Stock to the former Chief Financial Officer and Chief Operating Officer. The memberformer Chief Financial Officer and Chief Operating Officer resigned from the Board of Directors and from his role as COOroles on MayDecember 31, 2022, and the consultancy agreement and the employment agreement were terminated.

During the year ended June 30, 2021, He later rejoined the Company engagedas the Chief Operating Officer on May 29, 2023 under a new employment agreement and subsequently has announced his resignation from his position as Chief Operating Officer, effective April 30, 2024, and will remain in transactions with Tilt, LLChis position as a game center operator controlled by the head of GGC. For the three months ended December 31, 2021 the Company had net sales to Tilt, LLC in the amount of $45,808 for game center equipment, and amounts paid to Tilt, LLC of $11,200 for equipment leased, $8,585 for services and $7,235 for cryptocurrency mining. For the six months ended December 31, 2021 the Company had net sales to Tilt, LLC in the amount of $199,621 for game center equipment, and amounts paid to Tilt, LLC of $22,400 for equipment leased, $12,111 for services and $16,854 for cryptocurrency mining. The individual was no longer employed by the Company during the six months ended December 31, 2022.

22

Note 10 – Leases

The Company leases office and building space and equipment under operating lease agreements. The Company previously leased computer equipment under finance lease agreements that was disposed of in June 2022. The Company’s lease agreements have terms not exceeding five years. Certain leases contain options to extend that are assessed by management at the commencementmember of the lease and are included in the lease term if the Company is reasonably certainCompany’s Board of exercising.Directors.

In July 2021, the Company commenced a lease for office space of approximately 284 square meters in Saint Julians, Malta over a 3-year lease term.The lease has an annual expense of €83,000 ($89,032 translated using the exchange rate in effect at December 31, 2022), increasing 4% annually. At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend. In October 2021, the Company commenced a lease for building space of approximately 3,200 square feet at the University of California in Los Angeles over a 5-year lease term (the “UCLA Lease”). The lease has an annual expense of $17,500, increasing 3% annually. At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend. On January 26, 2023, the Company agreed to terminate the UCLA lease and there are no further obligations going forward.

The consolidated balance sheet allocation of assets and liabilities related to operating and finance leases is as follows:

Schedule of Assets and Liabilities Related to Operating Lease

  

Condensed Consolidated Balance

Sheet Caption

 

December 31, 2022

(unaudited)

  June 30, 2022 
Assets:          
Operating lease assets Operating lease right-of-use assets $126,064  $164,288 
Total lease assets   $126,064  $164,288 
Liabilities:          
Current:          
Operating lease liabilities Operating lease liability - current $422,344  $364,269 
           
Long-term:          
Operating lease liabilities Operating lease liability - non-current  549,482   669,286 
Total lease liabilities   $971,826  $1,033,555 

 

2314

 

The operating lease expense for the three and six months ended December 31, 2022 was $36,154 and $73,408, respectively. The operating lease expense for the three and six months ended December 31, 2021 was $181,313 and $296,216, respectively. The finance lease expense for the three and six months ended December 31, 2021 was $8,430 and $23,182, respectively. The rent expense for short-term leases was not material to the unaudited condensed consolidated financial statements.

Weighted average remaining lease terms and discount rates follow:

Schedule of Weighted Average Remaining Lease Terms and Discount Rates

  December 31, 2022  June 30, 2022 
Weighted Average Remaining Lease Term (Years):        
Operating leases  3.43   3.87 
         
Weighted Average Discount Rate:        
Operating leases  8.00%  8.00%

The future minimum lease payments at December 31, 2022 follows:

Schedule of Future Minimum Lease Payments

  Operating Lease 
Remainder of fiscal 2023 $318,834 
Fiscal 2024  315,170 
Fiscal 2025  222,789 
Fiscal 2026  229,473 
Total lease payments  1,086,266 
Less: imputed interest  (114,440)
Present value of lease liabilities $971,826 

Note 119 – Long-Term Debt

 

Notes payable and other long-term debt

The components of notes payable and other long-term debt follows:

Schedule of Notes Payable and Other Long-term Debt

  Maturity 

Interest Rate as of

December 31, 2022

 December 31, 2022  June 30, 2022 
Notes payable April 30, 2023 3.49% $75,612  $139,538 
Total      75,612   139,538 
Less current portion of notes payable and long-term debt      (75,612)  (139,538)
Notes payable and other long-term debt     $-  $- 

In connection with its acquisition of Argyll on July 31, 2020, the Company assumed a note payable of £250,000 ($327,390 translated using the exchange rate in effect at the acquisition date). The term loan was issued on April 30, 2020 and has a maturity of 3 years, bears interest at 3.49% per annum over the Bank of England base rate, and is secured by the assets and equity of Argyll. The monthly principal and interest payments on the note payable commenced in June 2021 and continue through May 2023. The principal balance of the notes payable on December 31, 2022 was £62,500 ($75,612 translated using the exchange rate in effect at December 31, 2022). Interest expense on the note payable was $641 and $1,603 for the three and six months ended December 31, 2022, respectively. Interest expense on the note payable was $2,214 and $4,797 for the three and six months ended December 31, 2021, respectively.

The maturities of long-term debt are as follows:

Schedule of Maturities of Long-term Debt

     
Fiscal 2023 $75,612 
Total $75,612 
Long term debt $75,612 

24

Senior Convertible Note

OnIn the year ended June 30, 2022, on February 22, 2022, the Company exchanged the existing senior convertible note (the “Old Senior Convertible Note”) with a remaining principal of $29,150,001, with the Senior Convertible Note in the aggregate principal of $35,000,000.

On September 19, 2022 as part of the Company’s September 2022 Offering (Note 17)(defined below) of shares of common stock and warrants to purchase common stock, the Company remitted to the Holder an amount of $2,778,427 from the proceeds reducing the Senior Convertible Note principal balance to $32,221,573 as recorded in the unaudited condensed consolidated balance sheet as of December 31, 2022. .

On December 19, 2022, as part of the Registered Direct Offering (Note 12) the Company paid the Holder an amount ofequal to $1,073,343 for interest due and interest prepaid through February 28, 2023.

 

The Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible Note.

Subsequent to period end, onOn January 27, 2023, the Company received the written consent of the Holder to lower the conversion price of the Senior Convertible Note into shares of Common Stock under Section 7(g) of the Senior Convertible Note to 90% of the lowest VWAPvolume-weighted average price (“VWAP”) (as defined in the Senior Convertible Note) of the Common Stock for a trading day during the five (5)(5) consecutive trading day period ending, and including, the applicable date that the conversion price is lowered for purposes of a conversion, in accordance with Section 7(g) of the Senior Convertible Note (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events during such measuring period) until further written notice to the Holder from the Company. After includingFrom January 27, 2023 through April 28, 2023, the impactdate of the conversions reducing the Senior Convertible Note by $18,861,573 was converted to Series C Convertible Preferred Stock, pursuant to the debt for equity exchanges, and the Amendmentafter increasing the Senior Convertible Note by $2,950,0002,950,010, for fees of $450,000450,010 and converted accrued liabilities of $2,500,000, on pursuant to an amendment and waiver dated February 17,16, 2023 one business day preceding this filing,(the “Amendment”) related to the Company has reduced its outstanding debt onsale of the Senior Convertible Note toBethard Business, the Holder exchanged $16,310,000.

The interest rate on the Senior Convertible Note is 8.0%19,261,583 per annum (consistent with the Old Senior Convertible Note), and from and after the occurrence and during the continuance of any Event of Default (as defined in the Senior Convertible Note), the interest rate shall automatically be increased to 12.0% per annum. As further described below, the Company was not in compliance with certain debt covenants under the Senior Convertible Note as of September 30, 2021 or subsequently. The Company has been accruing interest expense at a rate of 12% beginning March 31, 2022, the date it was initially not in compliance with certain debt covenants, as compared to using the set rate of 8.0%, and has recorded the additional $1,025,672 interest accrual for the difference in rates in accounts payable and accrued expenses in the unaudited condensed consolidated balance sheet as of December 31, 2022, with $322,216 and $675,672 recorded in interest expense in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022, respectively. The maturity dateaggregate principal amount of the Senior Convertible Note is June 2, 2023, subject to extension in certain circumstances, including bankruptcy and outstanding eventsfor an aggregate of default. The Company may redeem the Senior Convertible Note, subject to certain conditions, at a price equal to 1002,242,143% of the outstanding principal balance outstanding, together with accrued and unpaid interest and unpaid late charges thereon.

In addition to the conversions discussed above, the Company is in discussions with the Holder to restructure its payment obligations, including but not limited to eliminating the derivative liability on its unaudited condensed consolidated balance sheet and addressing the Company’s default status under the debt. In connection with the Company’s plan to maintain compliance with the Nasdaq Listing Rules, which includes actions to be taken to meet the minimum market value of listed securities or minimum stockholders’ equity, the Company may issue a perpetual convertible preferred stock by March 31, 2023, to cover the remaining principal balance due under the Senior Convertible Note at the time of entering the issuance.Although the Company and the Holder of the Senior Convertible Note are in discussions to determine the terms of the perpetual convertible preferred stock, such terms have not been finalized and there is no assurance that the Company and the Holder will come to an agreement on such terms. The ability of the Holder of the perpetual convertible preferred stock to convert such preferred stock into shares of our common stock, was approved in the 2022 annual meeting of stockholders held on January 26, 2023. The Company will disclose the material terms of the perpetual convertible preferred stock in connection with the completion of the exchange transaction, including the filing of a certificate of designation with the State of Nevada to designate the terms of such preferred stock after the issuance of the stock. In addition, as part of the Company’s plan to maintain compliance with the Nasdaq Listing Rules, and as approved in the 2022 annual meeting of stockholders, the Company intends to effect a reverse stock split of our outstanding common stock, with our Board having approved the reverse split at a ratio of one-for-one-hundred (1 for 100), without a corresponding reduction in the total number of authorized shares of common stock. Further, during the 2022 annual meeting of stockholders the Company obtained stockholder approval for the issuance of such shares of Common Stock to the Holder that would exceed 19.99% of the Company’s outstanding shares of Common Stock.

The Senior Convertible Note is convertible, at the option of the Holder, into shares of the Company’s Common Stock at alowered conversion price of $17.50 per share. The Senior Convertible Note is subject to a most favored nations provision and standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue (or issues) any variable rate securities, the Holder has the additional right to substitute such variable price (or formula) for the conversion price.

If an Event of Default has occurred under the Senior Convertible Note, in addition to the default interest rate discussed above, the Holder may elect to alternatively convert the Senior Convertible Note at the Alternate Conversion Price (as defined in the Senior Convertible Note). In connection with an Event of Default, the Holder may require the Company to redeem in cash any or all of the Senior Convertible Note. The redemption price will equal the outstanding principal of the Senior Convertible to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, or an amount equal to market value of the shares of the Company’s Common Stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note, if greater. The Holder will not have the right to convert any portion of a Senior Convertible Note, to the extent that, after giving effect to such conversion, the Holder (together with certain related parties) would beneficially own in excess of 4.99% of the shares of the Company’s Common Stock outstanding immediately after giving effect to such conversion. The Holder may from time to time increase this limit to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase. The Company is currently in default and the Holder has not yet elected to alternatively convert.

25

Should the Holder convert the principal balance outstanding at December 31, 2022 at the Alternate Conversion Price that is currently available to the Holder, or a portion of the principal balance, the Company may be subject to remit amounts to the Holder materially in excess of the principal balance outstanding through payment of cash. Refer to the Alternate Conversion discussion below for further information of this settlement option available to the Holder.

In connection with a Change of Control (as defined in the Senior Convertible Note), the Holder may require the Company to redeem all or any portion of the Senior Convertible Note. The redemption price per share will equal the greatest of (i) 115% of the outstanding principal of the Senior Convertible Note to be redeemed, and accrued and unpaid interest and unpaid late charges thereon, (ii) 115% of the market value of the shares of the Company’s Common Stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note, and (iii) 115% of the aggregate cash consideration that would have been payable in respect of the shares of the Company’s Common Stock underlying the Senior Convertible Note, as determined in accordance with the Senior Convertible Note.

At any time after the date the Company provides notice to the Holder of the Company incurring additional debt, the Holder will have the right to have the Company redeem all or a portion of the Senior Convertible Note at a redemption price of 106% of the portion of the Senior Convertible Note subject to redemption.

If an Event of Default occurs, the Holder of the Senior Convertible Note has the right to alternate conversion (“Alternate Conversion”prices (the “Exchanges”) and may elect to convert the Senior Convertible Note in cash due upon such an acceleration of the applicable principal, at a price (“Alternate Conversion Price”) equal to the greater of the Conversion Floor Price of $2.1832 or a price derived from the volume weighted average price of the Company’s Common Stock at the time of Alternate Conversion. If the Alternate Conversion were to include the Conversion Floor Price of $2.1832 as the Alternate Conversion Price, the Company would be required to settle in cash any difference between the market value of the shares subject to the Alternate Conversion using the floor price and the market value of the shares using the Alternate Conversion Price, excluding any reference to the floor, based on the formula as stipulated in the Senior Convertible Note agreement.

The Senior Convertible Note agreement includes provision that should the Company be in both breach of its debt covenants and its price per common share trade below the conversion floor price of $2.1832 (the “Conversion Floor Price”), the Holder may elect the Alternate Conversion option that includes a make-whole provision payable to the Holder in cash. At March 31, 2022 and through the date of issuance of this report, the Company was in breach of its debt covenants and the price per share of its Common Stock had declined below the Conversion Floor Price. As a result, the make whole provision in the Senior Convertible Note was determined to represent an obligation of the Company under the terms of the Senior Convertible Note. At December 31, 2022 and June 30, 2022, the Company estimates it would be required to issue up to 14,758,874 and 16,031,513 shares of Common Stock under the Alternate Conversion make whole provision of the Senior Convertible Note, respectively. At December 31, 2022, the Company also estimates the fair value of the derivative liability, which gives effect to the cash amount payable to the Holder under the Alternate Conversion make-whole provisions of the Senior Convertible Note, to be $799,954. While the Company records a derivative liability at each reporting period for the amount contingently payable to the Holder under the Alternate Conversion make-whole provision, a strict application of the formula in the Senior Convertible Note indicates the cash liability to the Holder may be materially higher than the derivative liability. A calculation of the cash liability due to the Holder under the Alternate Conversion make-whole provision of the Senior Convertible Note indicated a liability of approximately $933,000,000 at December 31, 2022. The derivative liability amount recognized by the Company for its obligation to the Holder under the Alternate Conversion make-whole provision of the Senior Convertible Note is subject to material fluctuation at each reporting date. The output of the Monte Carlo model that is used to estimate the fair value of the derivative liability will fluctuate based on the Company’s share price, market capitalization, estimated enterprise value, and the Company’s estimate of credit and non-performance risk. The Company is currently in default and the Holder has not yet elected to alternatively convert. See further discussion in make-whole derivative liability below. See Note 17 for further discussion of the fair value determined for the derivative liability.

Under the Senior Convertible Note, and consistent with the Old Senior Convertible Note, the Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. The Company is also subject to certain financial debt covenants relating to available cash, minimum annual revenues, ratio of debt to market capitalization and minimum cash flow.

The Senior Convertible Note is subject to a most favored nation provision and standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction. If the Company enters into any agreement to issue, or issue any variable rate securities, the Holder of the Senior Convertible Note has the additional right to substitute such variable price (or formula) for the conversion price. If the Holder were to substitute a floor price of $2.1832 (“Conversion Floor Price”) as the variable price, the Company would be required to settle in cash any difference between the market value of the shares subject to conversion at the floor price and the market value of the shares using the variable price, excluding any reference to the floor. The Holder of the Senior Convertible Note also has the right to have the Company redeem all or a portion of the Senior Convertible Note should the Company provide notice of incurring additional debt.

26

At December 31, 2022, the Company is in default under the terms of the Senior Convertible Note. The Senior Convertible Note matures in less than 12 months from December 31, 2022, and the Company has continued to recognize its obligation under the Senior Convertible Note as a current liability in the unaudited condensed consolidated balance sheet. The Company has not remitted payment to the Holder of the Senior Convertible Note an amount equal to 30% of the gross proceeds from the March 2022 Offering to be applied as a reduction of principal.

The Old Senior Convertible Note was issued by the Company to the Holder on June 2, 2021 in the principal amount of $35,000,000 with the Company receiving proceeds at issuance of $32,515,000, net of debt issuance costs of $2,485,000 for an aggregate principal. The Old Senior Convertible Note was issued with 2,000,000 Series A Warrants and 2,000,000 Series B Warrants. On the date of issuance, the Company recorded the fair value of the Series A Warrants and Series B Warrants as a discount to the Old Senior Convertible Note totaling $26,680,000. The debt discount was amortized to interest expense over the term of the Old Senior Convertible Note using the effective interest method until extinguishment. The obligation resulting from the issuance of the Series A Warrants and Series B Warrants was determined to qualify for liability classification on the unaudited condensed consolidated balance sheet. See below for further discussion of the Series A Warrants and Series B Warrants. The Old Senior Convertible Note was convertible, at the option of the Holder, into shares of the Company’s Common Stock at a conversion price of $17.50 per share. The conversion amounts were calculated as the principal balance identified for conversion plus the Premium on Principal.

Prior to the default, it was previously determined that the Company was not in compliance with the Old Senior Convertible Note covenants at September 30, 2021 and subsequent reporting dates. The Company therefore requested and received a waiver dated October 13, 2021 for (i) any known breaches or potential breaches of financial covenants in effect related to the available cash test and minimum cash flow test through December 25, 2021, (ii) any known breach resulting from the placement of a lien on the outstanding share capital of Prozone Limited, the entity that holds the assets of Bethard, and (iii) any known breach which would result from the Company’s announcement that it would purchase an equity interest in Game Fund Partners Group LLC through the contribution of up to 200,000 shares of Common Stock. In addition, the Company requested and received an amendment to the Old Senior Convertible Note wherein the permitted ratio of outstanding debt to market capitalization was increased temporarily from 25% to 35% through December 25, 2021. In consideration for the October 13, 2021 waiver, the Company agreed to permit the conversion of up to $7,500,000 of the original principal balance of the Old Senior Convertible Note at the Alternate Conversion Price into shares of Common Stock, exclusive of the Premium on Principal and 15% premium payable that applies to an Alternate Conversion. During the year ended June 30, 2022, the Holder of the Old Senior Convertible Note had converted the full principal amount of $7,500,000 into 2,514,459 shares of Common Stock. As a result of these conversions of principal, the Company recorded a loss on conversion of Senior Convertible Notes of $5,722,915 in the unaudited condensed consolidated statement of operations for the three months and six months ended December 31, 2021. The loss on conversion included accelerated amortization of the debt discount of $4,515,273, accelerated amortization of the Premium on Principal of $288,300 and the Incremental Premium due on conversion of $919,342. The Company also recorded accrued interest on the converted principal amount of $16,986 for the three and six months ended December 31, 2021, as well as a loss of $1,482,621 resulting from the change in fair value of the Conversion Option at the Alternate Conversion Price for the three and six months ended December 31, 2021. Subsequent to December 31, 2021, the Holder converted the remaining principal amount of $1,734,000 into common stock under the waiver, exclusive of the Premium on Principal and Incremental Premium that applies to an Alternate Conversion. The conversion of the remaining principal amount under the waiver resulted in the issuance of 812,618 shares of common stock in three tranches on January 11, 2022, January 24, 2022 and January 31, 2022. The Company further recorded a loss on conversion of the senior convertible note of $276,747 for the three and six months ended December 31, 2021 for the Incremental Premium due on the conversions, as well as accrued interest on the conversions of $6,949 for the three and six months ended December 31, 2021.

The Company previously obtained a waiver from the Holder of the Old Senior Convertible Note on November 2, 2021 in connection with its announcement to commence an underwritten registered public offering of its 10.0% Series A Cumulative Redeemable Convertible Preferred Stock (see Note 14). In consideration for this waiver, the Company agreed to increase the cash price payable upon a redemption of the Old Senior Convertible Note by the Company to be equal to 10% of the conversion amount, as defined in Old Senior Convertible Note agreement as any unpaid principal, minimum return due to the Holder, and unpaid interest due on such redemption date. The Company agreed to pay the Holder of the Old Senior Convertible Note an amount of $1,500,000 under the terms of a registration rights agreement. The Company recognized the amount payable to the Holder of the Old Senior Convertible Note under the registration rights agreement in other non-operating income (loss), net, in the consolidated statement of operations for the year ended June 30, 2022 and the amount remains unpaid and recorded as accounts payable and accrued expenses in the unaudited condensed consolidated balance sheet as of December 31, 2022.

27

During the three months ended December 31, 2021, the Company had not maintained compliance with certain covenants of the Old Senior Convertible Note, having identified non-compliance with the covenants previously identified at September 30, 2021. In consideration for obtaining a waiver from the compliance with certain covenants, as of December 31, 2021 and through March 30, 2022, and as discussed above, the Company has agreed to enter into an exchange agreement whereby the Company has exchanged the Old Senior Convertible Note with the Senior Convertible Note resulting in the increase of the principal outstanding balance of indebtedness from the current carrying value $29,150,001, as adjusted for the conversions of principal and Premium on Principal through February 22, 2022, to $35,000,000. The increase in the principal balance of $5,849,999 was recognized as a loss on extinguishment of Senior Convertible Note on the unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2021. The Company has further accelerated the recognition of the remaining debt discount and Premium on Principal in connection with the exchange and issuance of the New Note. This resulted in the recognition of a loss on extinguishment of the Senior Convertible Note of $22,628,8053,616,372 forrelated to the threeconversions. Following the Exchanges and six months ended December 31, 2021the impact of the Amendment, $15,910,000 in aggregate principal amount of the unaudited condensed consolidated statement of operations.Senior Convertible Note remained outstanding until April 28, 2023, when it was converted to the Series C Convertible Preferred Stock.

 

Senior Convertible Note Make-Whole Derivative Liability

 

The Senior Convertible Note agreement includes provision that should both the Company be in breach of its debt covenants and its price per common share trade below the Conversion Floor Price of $2.1832, the Holder may elect the Alternate Conversion option that includes a make-whole provision payablePrior to the Holder in cash. At December 31, 2022, both the Company was in breachconversion of its debt covenants and the price per share of its Common Stock had declined below the Conversion Floor Price. While the Company previously obtained waivers from the Holder of the Old Senior Convertible Note for breach of covenants, as well as a waiver for breach of covenants through March 30, 2022 under the Senior Convertible Note into the Company was unable to comply with the debt covenants under the SeniorSeries C Convertible Note or otherwise obtain a debt waiver from March 31, 2022 through the six months ended December 31, 2022 and subsequent to the period end. As a result,Preferred Stock on April 28, 2023, the make-whole provision in the Senior Convertible Note agreement was determined to represent an obligation of the Company at December 31, 2022 under the terms of the Senior Convertible Note.

The make-whole provision in the Senior Convertible Note is a derivative liability. The Company’s obligation to make a payment under the make-whole provision was previously assessed as remote with an immaterial fair value. This considered that the Company had obtained debt waivers from the Holder for its breaches of debt covenants. The Company’s historical stock price had also traded at levels significantly in excess of the Conversion Floor Price. At December 31, 2022,

On April 28, 2023, the Company has been unable to complete an agreement to restructuredate of the terms and covenantsconversion of the Senior Convertible Note.Note into the Series C Convertible Preferred Stock the derivative liability was eliminated and no balance is recorded in the unaudited condensed consolidated balance sheet at December 31, 2023 and June 30, 2023. The stock price further continuesCompany recognized a gain in the Change in fair value of derivative liability on Senior Convertible Note of $8,324,802 and $8,599,666 as a gain in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022. No amounts were recognized in the three months ended December 31, 2023 due to trade materially below the Conversion Floor Priceelimination of the derivative liability.

Series C Convertible Preferred Stock and Series D Convertible Preferred Stock Make-Whole Derivative Liability Warrants

The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. The Company can make an accounting policy election on the allocation order and choose the policy that management determines is most favorable. The Company elected to reclassify outstanding instruments based on allocating the unissued shares to contracts with the latest inception date resulting in the contracts with the earliest inception date being recognized as liabilities first. Due to the issuances of shares during the three months ended December 31, 2023, and the lack of authorized and unissued shares available, the Company was required to assess its classification of its equity instruments during this period. On December 5, 2023 the Company determined it did not have enough authorized and unissued shares to satisfy the Series C Convertible Preferred Stock and using the last contract entered into sequencing election. Due to this the amounts of the carrying amounts of the Series C Convertible Preferred Stock was reclassed to Mezzanine equity in the balance sheet and the Company has also been unabledetermined that a derivative related to securethe conversion feature was required. This was recorded at fair value using a debt waiver.Monte-Carlo method with assumptions that will fluctuate based on the Company’s share price, market capitalization, assets carrying value, and the Company’s estimates of the discount rate, risk-free rate, remaining term of the conversion features and credit and non-performance risk. The valuations are derived from techniques which utilize inputs, certain of which are significant and unobservable, that result in classification of the change of control redemption liabilities as Level 3 fair value measurements and as such recorded a derivative liability of $1,820,000 on December 5, 2023 on the initial recognition the derivative liability. The fair value of the derivative liability atwas $2,356,698 on December 31, 2022 was determined using2023, with $536,698 (Note 14) recorded as a Monte Carlo valuation model. See Note 17 for further discussion of the fair value determined for the derivative liability.

At December 31, 2022, the Company estimates that it would be required to issue up to 14,758,874 shares of Common Stock under the Alternate Conversion provisions of the Senior Convertible Note. The Company further estimated the derivative liability to the Holder to be $799,954 and $9,399,620 at December 31, 2022 and June 30, 2022, respectively, which is included in the derivative liability in the unaudited condensed consolidated balance sheets and the expense was recorded in the change in fair value of derivative liability in the unaudited condensed consolidated statementsstatement of operations. The make-whole liability calculated underSeries D Convertible Preferred Stock, Series D Preferred Warrants and Series D Common Warrants were not reclassified as they were limited to the terms9.99% beneficial owner cap per the Series D Convertible Preferred Stock Certificate of Designations at December 31, 2023, and therefore the noteCompany had authorized and unissued shares to cover the contracted number. See Note 14 for further discussion of approximately $933,000,000 was materially higher than the fair value of $799,954determined as offor the derivative liability for the period ended December 31, 2022 and considers the difference in the market price of the Company’s shares and a floor price of $2023.2.1832 multiplied by a number of shares that is based on the outstanding principal and the market price of the Company’s Common Stock at December 31, 2022. The calculated make-whole liability may differ materially from the amount at which the Company may be required to pay under the Senior Convertible Note. The Company has held non-binding discussions with the Holder to restructure its obligation under the Senior Convertible Note. However, there can be no guarantee that the Company will be able to reach an agreement to restructure the Senior Convertible Note.

Warrants

 

September 2022 Warrants

 

On September 19, 2022, the Company completed, the September 2022 Offering, an equity offering in which it sold 30,000,000750 units at $0.25 10,000consisting of one share of Common Stock and one warrant for a total of 30,000,000750 September 2022 Warrants with an exercise price of $0.2510,000 (the “September 2022 Offering”). The Company also sold a further 3,600,000 90September 2022 Warrants in an overallotment with an exercise price of $0.25 10,000issued to the underwriters of the offering on September 19, 2022.

28

 

The September 2022 Warrants may be exercised at any time after issuance for one share of Common Stock of the Company at an exercise price of $0.2510,000. The September 2022 Warrants also contain a beneficial ownership limitation of 4.99% which may be increased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase. The warrants are not callable by the Company.

 

The Company determined the September 2022 Warrants should be classified as a liability as the warrants are redeemable for cash in the event of a fundamental transaction, as defined in the Warrant Agreement, pursuant to which the September 2022 Warrants were purchased, which includes a change in control. The Company has recorded a liability for the September 2022 Warrants at fair value on the issuance date with subsequent changes in fair value reflected in earnings. On September 19, 2022, the date of the Common Stock issuance, the Company determined the total fair value of the September 2022 Warrants to be $5,286,288. On December 31, 2022,2023 and June 30, 2023, the Company determined the total fair value of the September 2022 Warrants to be $2,267,4530. and $251,876, respectively. The change in fair value of the September 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2023 were gains of $22,361 and $251,876, respectively. The change in fair value of the September 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022 waswere gains of $1,536,732 and $3,018,834, respectively. See Note 1614 for additional disclosures related to the change in the fair value of the warrant liabilities.

15

 

March 2022 Warrants

 

On March 2, 2022, the Company completed the March 2022 Offering, an equity offering in which it sold 15,000,000375 units at $1.0040,000 consisting of one share of Common Stock and one warrant for a total of 15,000,000375 March 2022 Warrants with an exercise price of $1.0040,000. The Company also sold a further 2,250,00056 March 2022 Warrants in an overallotment with an exercise price of $1.0040,000 issued to the underwriters of the offering on April 1, 2022.

 

The March 2022 Warrants may be exercised at any time after issuance for one share of Common Stock of the Company at an exercise price of $1.0040,000. The March 2022 Warrants are callable by the Company should the volume weighted average share price of the Company exceed $3.00$120,000 for each of 20 consecutive trading days following the date such warrants become eligible for exercise. The March 2022 Warrants also contain a beneficial ownership limitation of 4.99% which may be increased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increaseincrease..

 

The Company determined the March 2022 Warrants should be classified as a liability as the warrants are redeemable for cash in the event of a fundamental transaction, as defined in the Common Stock Purchase Warrant Agreement pursuant to which the March 2022 Warrants were purchased, which includes a change in control. The Company has recorded a liability for the March 2022 Warrants at fair value on the issuance date with subsequent changes in fair value reflected in earnings. On March 2, 2022, the date of the Common Stock issuance, the Company determined the total fair value of the March 2022 Offering Warrants to be $9,553,500 and on the date of the Common Stock issuance, the Company determined the total fair value of the April 2022 Overallotment to be $607,500. On December 31, 2023 and June 30, 20222023, the Company determined the total fair value of the March 2022 Warrants to be $2,070,00086,250. On December 31, 2022, the Company determined the total fair value of the March 2022 Warrants to be and $172,500113,850., respectively. The change in fair value of the March 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2023, were gains of $51,750 and $27,600, respectively. The change in fair value of the March 2022 Warrants liability recorded in the unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2022, waswere gains of $1,035,000 and $1,897,500, respectively. See Note 1614 for additional disclosures related to the change in the fair value of the warrant liabilities.

 

Series A and Series B Warrants

 

On June 2, 2021, the Company issued 2,000,00050 Series A Warrants and 2,000,00050 Series B Warrants (the Series B Warrants expired June 2, 2023) to the holder of the Old Senior Convertible Note. The Exchange Agreement pursuant to which the Old Senior Convertible Note was exchanged for the Senior Convertible Note, the Note to Preferred Stock Exchange Agreement and conversion to the Series C Convertible Preferred Stock did not impact the Series A Warrants and Series B Warrants previously issued and outstanding. The Series A Warrants may be exercised at any time after issuance for one share of Common Stock of the Company at an exercise price of $17.50. The Series B Warrants may only be exercised to the extent that the indebtedness owing under the Senior Convertible Note is redeemed. As a result, for each share of Common Stock determined to be issuable upon a redemption of principal of the Senior Convertible Note, one Series B Warrant will vest and be eligible for exercise at an exercise price of $17.50700,000. The Series A Warrants and Series B Warrants are callable by the Company should the volume weighted average share price of the Company exceed $32.50$1,300,000 for each of 30 consecutive trading days following the date such warrants become eligible for exercise. The Series A Warrants and Series B Warrants also contain a beneficial ownership limitation of 4.99% which may be increased up to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increaseincrease..

 

2916

 

The Company determined the Series A and Series B Warrants should be classified as a liability as the warrants are redeemable for cash in the event of a fundamental transaction, as defined in the Senior Convertible Note, which includes a change in control. The Company has recorded a liability for the Series A Warrants and Series B Warrants at fair value on the issuance date with subsequent changes in fair value reflected in earnings. At December 31, 2023 and June 30, 20222023, the Company determined the total fair value of the Series A Warrants and Series B Warrants to be $122,7300, with a fair value of $117,340 determined for(Series B Warrants expired June 2, 2023). There was no change in the Series A Warrants, and a fair value of $5,390 and determined for the Series B Warrants. At December 31, 2022, the Company determined the total fair value of the Series A Warrants and Series B Warrants to be $16,777 with a fair valueliability recorded in the unaudited condensed consolidated statement of $16,486 determinedoperations for the Series A Warrantsthree and a fair value of $291 determined for the Series B Warrants.six months ended December 31, 2023. The change in fair value of the Series A Warrants and Series B Warrants liability recorded in the unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2022 was a decreasegain of $105,953 and for the three and six months ended December 31, 2021 was a decrease of $8,651,922 and $20,460,522, respectively.. See Note 1614 for additional disclosures related to the change in the fair value of the warrant liabilities.

The proceeds from the issuance of the Old Senior Convertible Note were allocated to the Series A Warrants and Series B Warrants using the with-and-without method. Under this method, the Company first allocated the proceeds from the issuance of the Old Senior Convertible Note to the Series A Warrants and Series B Warrants based on their initial fair value measurement, and then allocated the remaining proceeds to the Old Senior Convertible Note. The debt discount on the Old Senior Convertible Note was being amortized over its term of two years. The Company accelerated the amortization of the debt discount on the Old Senior Convertible Note and the amount was fully recognized in the prior year ended June 30, 2022.

Components of Long-Term Debt, including Senior Convertible Note

The components of the Company’s long-term debt, including the Senior Convertible Note follows:

Schedule of Components of Long-term Debt

         
  December 31, 2022  June 30, 2022 
Current portion of long-term debt, including the senior convertible note $32,297,185  $35,139,538 
Total $32,297,185  $35,139,538 
Carrying amount $32,297,185  $35,139,538 

 

Note 1210 – Commitments and contingencies

 

Commitments

On October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (the “Team”) to obtain certain sponsorship-related rights and benefits that include the ability to access commercial opportunities. The Company had agreed to initially pay the Team $516,000 in cash and $230,000 in Common Stock during the period from October 1, 2019 to June 30, 2022. On August 6, 2020, the Company entered into an amended and restated sponsorship agreement (the “Amended Sponsorship Agreement”) with the Team that included cash payments totaling $2,545,000 and the issuance of Common Stock totaling $825,000 for the term of the agreement ending January 31, 2023. On December 31, 2021, the Amended Sponsorship Agreement terminated. For the three and six months ended December 31, 2021, the Company recorded $102,851 and $424,893 in sales and marketing expense related to the Team sponsorship. There were no outstanding amounts payable to the Team as of December 31, 2022 or June 30, 2022.

 

On August 17, 2020, the Company entered into an agreement with Bally’s Corporation, an operator of various online gaming and wagering services in the state of New Jersey, USA, to assist the Company in its entrance into the sports wagering market in New Jersey under the State Gaming Law. The commencement date of the arrangement with Bally’s Corporation was March 31, 2021. The Company paid $1,550,000 and issued 50,0002 shares of Common Stock in connection with the commencement of the arrangement. The Bally’s Corporation agreement extends for 10 years from July 1, 2021, the date of commencement, requiring the Company to pay $1,250,000 and issue 10,0001 sharesshare of Common Stock on each annual anniversary date. As of December 31, 2022,2023, the future annual commitments by the Company under this agreement are estimated at $1,250,000 and 10,0001 sharesshare of Common Stock payable each year through the year ended June 30, 2030. During each of the three and six months ended December 31, 20222023 and 2021,2022, the Company recorded $342,333 and $684,665, respectively, in sales and marketing expense for its arrangement with Bally’s Corporation. There was approximately $684,6651,928,000 and $1,250,000 in accounts payable and accrued expenses in the unaudited condensed consolidated financial statements outstanding and payable to Bally’s Corporation as of December 31, 20222023 and no amounts outstanding as of June 30, 2022.2023, respectively. On October 28, 2022, the Company determined that it would close down its vie.gg New Jersey operations and exit its transactional waiver from the New Jersey Division of Gaming Enforcement. On September 28, 2023, the Company entered into an online wagering and services agreement with Delasport Limited that has an initial term of 18 months with subsequent annual renewals. The agreement has annual commitment of approximately $385,000.

 

3017

 

The Company has signed a subscription and operating agreement with Game Fund Partners LLC to support the development of a planned $300,000,000 game fund. Under the agreements, the Company will initially invest approximately $2,000,000 of Company shares into 20%20% of the general partnership of the fund, and the Company will become part of the management and investment committee that manages an investment fund focused on joint projects and investment vehicles to fuel growth in the areas of gaming, data, blockchain, online gaming, and joint casino hotel investments. The Company has agreed to contribute 100,0003 shares to the fund during the period in which the fund receives total capital commitments of $100,000,000. The Company has agreed to contribute an additional 100,0003 shares to the fund during the period in which the fund reaches total capital commitments of $200,000,000. As of December 31, 2022,2023, the Company has not contributed any shares of its Common Stock to the fund.

 

In the ordinary course of business, the Company enters into multi-year agreements to purchase sponsorships with professional teams as part of its marketing efforts to expand competitive esports gaming. During the three and six months ended December 31, 2022,2023, the Company recorded $578,49890,544 and $816,183181,088, respectively, and during the three and six months ended December 31, 2021,2022, the Company recorded $1,602,068578,498 and $2,824,102816,183, respectively, in sales and marketing expense for these arrangements. As of December 31, 2022,2023, the commitments under these agreements are estimated at approximately $397,425159,000 for the remainder of the year endedending June 30, 2023,2024 and approximately $400,300225,000 for the year ended June 30, 2024, $217,730 for year ended June 30, 2025, and $149,913 for the year ended June 30, 2026.2025.

 

Contingencies

 

On January 6,November 7, 2023, ourthe Company entered into a confidential settlement agreement and general release (the “Legal Settlement Agreement”) with Grant Johnson, the former Chairman of the board of directors and Chief Executive Officer Grantof the Company, with respect to all disputes and pending litigation between the Company and Mr. Johnson. Pursuant to the Legal Settlement Agreement, the parties have agreed to settle and resolve any and all disputes between the parties, including without limitation, disputes arising out of or relating to the following litigation:

(i)A complaint filed on December 23, 2022 by Mr. Johnson against the Company in the United States District Court for the Southern District of New York;
(ii)an amended complaint filed on February 28, 2023 by Mr. Johnson against the Company; and
(iii)a counterclaim filed on May 24, 2023 by the Company against Mr. Johnson (together with (i) and (ii) above, the “Actions”).

Pursuant to the Legal Settlement Agreement, Mr. Johnson filedand the Company settled the Actions and provided a lawsuitgeneral release of all claims, whether or not raised in the United State District Court forpending litigation, and included mutual non-disparagement agreements. No party admitted any liability by entering into the Southern District of New York againstLegal Settlement Agreement. Pursuant to the Company. The claim alleges breach byLegal Settlement Agreement, the Company has agreed to make an aggregate payment of Mr. Johnson’s employment agreement when it terminated him for “Cause” as defined$500,000 in the agreement on December 3, 2022.cash to Mr. Johnson seeks in excess(which among includes attorneys’ fees and costs), comprised of $1,000,000 million as well as 200,000 sharesan initial payment of our Common Stock, plus attorney’s fees. After consulting$50,000 beginning approximately thirty (30) days after the signing of the Legal Settlement Agreement, with legal counsel, the Company believes the claims are without merit and intends to defend against the claims vigorously.subsequent payments of $50,000 due on each subsequent thirtieth (30th) day of each month thereafter until fully paid. The case regarding the above Actions and settlement is captioned Grant Johnson v. Esports Entertainment Group, Inc. 1:22-cv-10861 (SDNY).

During October 2022, the Company entered into an amendment to the Bethard SPA where it agreed to pay €6,535,753 (equivalent to $7,010,732 using exchange rates at As of December 31, 2022) through installments equal to 12% of net gaming revenue until2023, the Company has paidrecorded $450,000 as a liability in accounts payable and other accrued expenses in the unaudited condensed consolidated balance or the Company spends €sheet and an expense of $13,120,0000 in marketing costs (equivalent to $14,073,483 using exchange rates at December 31, 2022). Due to this amendment, as of December 31, 2022 and June 30, 2022 the Company has estimated the present value of the amount owed to be $6,192,912 and $3,328,361500,000, respectively. During for the three and six months ended December 31, 2022, the Company recognized a loss of $3,044,019 2023, in general and $2,864,551, and during the three and six months ended December 31, 2021, the Company recognized a gain of $1,851,446 for both periods, in the change in fair value of contingent considerationadministrative expenses in the unaudited condensed consolidated statement of operations.

 

Since the acquisition of the Argyll UK EEG iGaming business on JulyOn March 31, 2020, the Company has responded to periodic requests for information from the UKGC in relation to information required to maintain its UK license following the change of corporate control. There have been no adverse judgments imposed by the UKGC against the Company. On November 10, 2022, the Company determined that it would close down its licensed remote gambling operationfiled a statement of claim against Metaverse Partners for breach of contract, fraud and defamation. The Company seeks damages in the UK market. On November 15, 2022, as part of the winding down of the Argyll UK iGaming operations, players were informed that they would no longer be able to place bets from November 30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8, 2022 Argyll UK surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022 and December 14, 2022 Argyll UK attempted to refund customer accounts that still had remaining balances. As of December 31, 2022, approximately $100,000 still remainedan amount to be refundeddetermined at the upcoming hearing, but not less than $50,000 plus interest at the statutory rate, and an order directing the defendant to customers. Going forward, Argyll UK will comply with requests for refunds to the extent required by lawdiscontinue their extortion and defamation. Subsequently, on May 17, 2022, Metaverse Partners filed counterclaims in accordance with Argyll UK’s terms and conditions.

On January 1, 2022, amendments to the Finnish Lotteries Act came into effect, further restricting marketing opportunities and enhancing the enforcement powers of the Finnish regulator. Prior to these amendments coming into effect, in the fiscal quarter ended December 31, 2021,arbitration against the Company has received communications from the Finnish regulator requesting clarification on its marketing and gaming practices related to its Finnish EEG iGaming operations.former CEO for breach of contract, fraud and defamation claiming damages of not less than $5,000,000. The Company respondedand Metaverse Partners have agreed to an arbitration hearing to take place in June 2024 to resolve any potential disputes pursuant to previous dealings between the initial communication in third quarter of fiscal year 2022companies. At this time we are unable to reasonably estimate a potential liability, if any, and received a second request for further clarification. On November 28, 2022, the Company provided its response, further addressing its business and marketing operations in Finland. Further powers allowing the Finnish regulatorexpect to require blocking by payment service providers of overseas operators who are targeting their marketing activities towards Finnish customers are also due to come into effect in 2023. Operations in Finland run under the MGA licensevigorously defend on the Lucky Dino in-house built iDefix casino-platform. On January 5, 2023, the Company received a communication that the Finnish regulator was satisfied with the Company’s response and no adverse judgments were imposed by the Finnish regulator against the Company.this matter.

The Company at times may be involved in pending or threatened litigation relating to claims arising from its operations in the normal course of business. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time.

 

In determining the appropriate level of specific liabilities, if any, the Company considers a case-by-case evaluation of the underlying data and updates the Company’s evaluation as further information becomes known. Specific liabilities are provided for loss contingencies to the extent the Company concludes that a loss is both probable and estimable. TheOther than related to the Legal Settlement Agreement discussed above, the Company did not have any liabilities recorded for loss contingencies as of December 31, 2022 or2023 and June 30, 2022.2023. However, the results of litigation are inherently unpredictable, and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on the Company’s financial position, results of operations or liquidity.

 

31

Other than as discussed above, the Company is currently not involved in any other litigation that it believes could have a material adverse effect on the Company’s financial condition or results of operations.

18

 

Note 1311 – Revenue and Geographic Information

 

The Company is a provider of iGaming, traditional sports betting and esports services that commenced revenue generating operations during the year ended June 30, 2021 with the acquisitions of Argyll, Flip Sports Limited (“FLIP”), EGL, Lucky Dino, GGC and Helix.GGC. The Company acquired Bethard in July 2021 adding to its revenue generating operations. The revenues and long-lived assets of Lucky Dino, Argyll (until November 30, 2022 when no further bets were taken as part of the winding down of the Argyll operations), EGL Lucky Dino and Bethard (Bethard’s operations are being sold in a transaction expected to close in(until February 2023 (See Note 19))when the operations of Bethard were sold), EGL (until disposed of on June 30, 2023), have been identified as the international operations as they principally service customers in Europe, inclusive of the United Kingdom. The revenues and long-lived assets of FLIP, GGC and Helix (until June 10, 2022 when the Helix Game Centers were disposed) principally service customers in the United States. The Company’s remaining businesses of Lucky Dino and GGC are the primary revenue generators for fiscal 2024.

 

A disaggregation of revenue by type of service for the three and six months ended December 31, 20222023 and 20212022 is as follows:

Schedule of Disaggregated by Revenue

                 2023  2022  2023  2022 
 

Three months ended

December 31,

  

Six months ended

December 31,

  

Three months ended

December 31,

 

Six months ended

December 31,

 
 2022  2021  2022  2021  2023  2022  2023  2022 
Online betting and casino revenues $5,538,486  $12,439,696  $14,133,832  $27,102,284  $1,840,958  $5,538,486  $3,797,007  $14,133,832 
Esports and other revenues  870,919   2,091,351   1,880,837   3,837,054   741,069   870,919   1,474,837   1,880,837 
Total $6,409,405  $14,531,047  $16,014,669  $30,939,338  $2,582,027  $6,409,405  $5,271,844  $16,014,669 
Revenue $6,409,405  $14,531,047  $16,014,669  $30,939,338  $2,582,027  $6,409,405  $5,271,844  $16,014,669 

 

A summary of revenue by geography follows for the three and six months ended December 31, 20212023 and 20202022 is as follows:

Schedule of Revenues with Customers and Long-lived Assets Disaggregated by Geographical Area

  2023  2022  2023  2022 
  

Three months ended

December 31,

  

Six months ended

December 31,

 
  2023  2022  2023  2022 
United States $741,069  $581,501  $1,474,837  $1,394,381 
International  1,840,958   5,827,904   3,797,007   14,620,288 
Total $2,582,027  $6,409,405  $5,271,844  $16,014,669 
Revenue $2,582,027  $6,409,405  $5,271,844  $16,014,669 

 

                 
  

Three months ended

December 31,

  

Six months ended

December 31,

 
  2022  2021  2022  2021 
United States $581,501  $1,688,578  $1,394,381  $3,208,843 
International  5,827,904   12,842,469   14,620,288   27,730,495 
Total $6,409,405  $14,531,047  $16,014,669  $30,939,338 
Revenue $6,409,405  $14,531,047  $16,014,669  $30,939,338 

The Company’s revenue from EEG iGaming is principally recognized at the point in time when gaming occurs. The Company’s EEG Games revenue is recognized at a point in time for hardware and equipment and consulting services typically when a customer obtains control or receives the service and over time for subscriptions, maintenance, licensing and event management using the input method of time lapsed to measure the progress toward satisfying the performance obligation. A summary of revenue by recognized at point in time or over time is for the three months ended December 31, 2023 and 2022 is as follows:

Schedule of Company’s Revenue Recognized at Point in Time or Over Time

  2023  2022  2023  2022 
  

Three months ended

December 31,

  

Six months ended

December 31,

 
  2023  2022  2023  2022 
Point in time $2,021,898  $6,154,472  $4,254,047  $15,380,944 
Over time  560,129   254,933   1,017,797   633,725 
Total $2,582,027  $6,409,405  $5,271,844  $16,014,669 
Revenue $2,582,027  $6,409,405  $5,271,844  $16,014,669 

The deferred revenue balances were as follows:

Schedule of Deferred Revenue

  December 31, 2023  December 31, 2022 
Deferred revenue, beginning of the year $989,027  $575,097 
Deferred revenue, end of the period $1,267,682  $1,090,333 
Revenue recognized in the six months ended from amounts included in deferred revenue at the beginning of the year $451,098  $428,107 
Deferred revenue $451,098  $428,107 

The majority of the deferred revenue at December 31, 2023 is expected to be recognized over the twelve months ending December 31, 2024.

 

A summary of long-lived assets by geography at December 31, 2023 and June 30, 2023 is as follows:

Schedule of Long-LivedLong-lived Assets by Geography

         
  December 31, 2022  June 30, 2022 
United States $5,592,080  $8,271,360 
International  29,724,622   46,620,831 
Total $35,316,702  $54,892,191 
Long-lived assets $35,316,702  $54,892,191 

Note 14 – 10% Series A Cumulative Redeemable Convertible Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock. On November 10, 2021, the Company designated 1,725,000 shares of preferred stock as 10% Series A Cumulative Redeemable Convertible Preferred Stock (“10% Series A Cumulative Redeemable Convertible Preferred Stock”), with a par value of $0.001 per share and liquidation value of $11.00. On November 11, 2021, the Company announced that it priced an underwritten public offering of preferred stock as 10% Series A Cumulative Redeemable Convertible Preferred Stock in the first series issuance of preferred stock, of which 800,000 shares were issued at $10 a share on November 16, 2021 for total gross proceeds of $8,000,000, before deducting underwriting discounts and other estimated offering expenses. Net proceeds from the sale, after deducting issuance costs totaled $7,265,000.

  December 31, 2023  June 30, 2023 
United States $2,893,971  $5,146,469 
International  43,305   12,911,774 
Total $2,937,276  $18,058,243 
Long-lived assets $2,937,276  $18,058,243 

 

3219

In addition, under the terms of the underwriting agreement for the public offering of the 10% Series A Cumulative Redeemable Convertible Preferred Stock, the Company granted the underwriters a 45-day option to purchase up to an additional 120,000 shares. On December 10, 2021, there was a partial exercise to purchase 35,950 shares. Net proceeds from the additional sale, after deducting issuance costs, totaled $334,335.

Conversion

Each share of 10% Series A Cumulative Redeemable Convertible Preferred Stock is convertible into one share of the Company’s Common Stock at a conversion price of $17.50 per common share. Subject to earlier conversion or redemption, the 10% Series A Cumulative Redeemable Convertible Preferred Stock matures five years from issuance, or November 15, 2026, at which point the Company must redeem the shares of 10% Series A Cumulative Redeemable Convertible Preferred Stock in cash.

Dividends

Dividends on the 10% Series A Cumulative Redeemable Convertible Preferred Stock accrue daily and are cumulative from the date of issuance. The dividends on the 10% Series A Cumulative Redeemable Convertible Preferred Stock are payable monthly in arrears on the last day of each calendar month, when, as and if declared by the Company’s Board of Directors, at the rate of 10.0% per annum. In the event the dividends are not paid in cash, the dividends shall continue to accrue at a dividend rate of 10.0%.

Redemption and Liquidation

The 10% Series A Cumulative Redeemable Convertible Preferred Stock is also redeemable, at the option of the Board of Directors, in whole or in part, at any time on or after January 1, 2023.

The 10% Series A Cumulative Redeemable Convertible Preferred Stock includes a change of control put option which allows the holders of the 10% Series A Cumulative Redeemable Convertible Preferred Stock to require the Company to repurchase such holders’ shares in cash in an amount equal to the initial purchase price plus accrued dividends.

The 10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable upon certain deemed liquidation events, such as a change in control. Because a deemed liquidation event could constitute a redemption event outside of the Company’s control, all shares of preferred stock have been presented outside of permanent equity in mezzanine equity on the unaudited condensed consolidated balance sheets. The instrument is initially recognized at fair value net of issuance costs. The Company reassesses whether the 10% Series A Cumulative Redeemable Convertible Preferred Stock is currently redeemable, or probable to become redeemable in the future, as of each reporting date. If the instrument meets either of these criteria, the Company will accrete the carrying value to the redemption value. The 10% Series A Cumulative Redeemable Convertible Preferred Stock has not been adjusted to its redemption amount as of December 31, 2022 because a deemed liquidation event is not considered probable.

33

The 10% Series A Cumulative Redeemable Convertible Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable, and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the 10% Series A Cumulative Redeemable Convertible Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares of 10% Series A Cumulative Redeemable Convertible Preferred Stock have been presented outside of permanent equity in mezzanine equity on the unaudited condensed consolidated balance sheets.

Voting Rights

The holders of the 10% Series A Cumulative Redeemable Convertible Preferred Stock will not have any voting rights, except whenever dividends on any share of any series of preferred stock (“Applicable Preferred Stock”) have not been paid in an aggregate amount equal to four monthly dividends on the shares, the holders of the Applicable Preferred Stock will have the exclusive and special right, voting separately as a class and without regard to series, to elect at an annual meeting of shareholders or special meeting held in place of it one member of the Board of Directors, until all arrearages in dividends and dividends in full for the current monthly period have been paid.

 

Note 15 – Series B Redeemable Preferred Stock

On December 20, 2022, the Company entered into a Subscription and Investment Representation Agreement with a member of management, the Interim CFO of the Company, pursuant to which the Company agreed to issue and sell one hundred (100) shares of the Company’s Series B Preferred Stock, par value $0.001 per share, for $10 per share in cash. The sale closed on December 21, 2022.

On December 21, 2022, the Company filed a certificate of designation (the “Certificate of Designation”) with the Secretary of State of Nevada, effective as of the time of filing, designating the rights, preferences, privileges and restrictions of the shares of Series B Preferred Stock. The Certificate of Designation provided that one hundred (100) shares of Series B Preferred Stock will have 25,000,000 votes each and will vote together with the outstanding shares of the Company’s common stock as a single class exclusively with respect to any proposal to effect a reverse stock split of the Company’s common stock. The Series B Preferred Stock was voted, without action by the holder, on the reverse stock proposal in our 2022 Annual Meeting on January 26, 2023, in the same proportion as shares of common stock are voted. The Preferred Stock otherwise had no voting rights except as otherwise required by the Nevada Revised Statutes. The reverse stock split proposal was approved during the 2022 Annual Meeting.

Conversion.

The Series B Preferred Stock are not convertible.

Dividends

The holder of Series B Preferred Stock, as such, is not entitled to receive dividends or distributions of any kind.

Voting Rights

Except as otherwise provided by the Company’s Amended and Restated Articles of Incorporation or required by law, the holder of Series B Preferred Stock has no voting rights, except that the holder of Series B Preferred Stock has the right to vote on any resolution or proposal presented to the stockholders of the Company to approve a decrease in the number of the Company’s issued and outstanding shares of Common Stock, or reverse stock split of such issued and outstanding shares, within a range as determined by the Board in accordance with the terms of such amendment (the “Reverse Stock Split Proposal”), or as otherwise required by the Nevada Revised Statutes. The outstanding shares of Series B Preferred Stock shall have 25,000,000 votes per share. The outstanding shares of Series B Preferred Stock shall vote together with the outstanding shares of Common Stock, par value $0.001 per share of Common Stock of the Company as a single class exclusively with respect to the Reverse Stock Split Proposal and are not entitled to vote on any other matter except to the extent required under the Nevada Revised Statutes.

The shares of Series B Preferred Stock are voted, without action by the holder, on the Reverse Stock Split Proposal in the same proportion as shares of Common Stock are voted (excluding any shares of Common Stock that are not voted), or otherwise, or which are counted as abstentions or broker non-votes) on the Reverse Stock Split Proposal (and, for purposes of clarity, such voting rights shall not apply on any other resolution presented to the stockholders of the Company).

Liquidation.

The Series B Preferred Stock shall have no rights as to any distribution of assets of the Company for any reason, including upon a liquidation, bankruptcy, reorganization, merger, acquisition, sale, dissolution or winding up of the Company, whether voluntarily or involuntarily, and shall not affect the liquidation or distribution rights of holders of any other outstanding series of preferred stock of the Company, if any.

34

Redemption.

The outstanding shares of Series B Preferred Stock will be redeemed in whole, but not in part, at any time (i) if such redemption is ordered by the Board in its sole discretion, automatically and effective on such time and date specified by the Board in its sole discretion, or (ii) automatically upon the stockholder approval of the Reverse Stock Split Proposal. As used herein, the “Redemption Time” shall mean the effective time of the redemption.

Each share of Series B Preferred Stock redeemed in the redemption will be redeemed in consideration for the right to receive an amount equal to $10 in cash (the “Redemption Price”) for each share of Series B Preferred Stock that is owned of record as of immediately prior to the applicable effective time of the redemption and redeemed pursuant to the Redemption, payable upon the applicable effective time of the redemption.

From and after the time at which the shares of Series B Preferred Stock are called for redemption (whether automatically or otherwise) in accordance with the above, such shares of Series B Preferred Stock will cease to be outstanding, and the only right of the former holder of such shares of Series B Preferred Stock, as such, will be to receive the applicable Redemption Price. The shares of Series B Preferred Stock redeemed by the Company will be automatically retired and restored to the status of authorized but unissued shares of preferred stock, upon such redemption. Notice of a meeting of the Company’s stockholders for the submission to such stockholders of any proposal to approve the Reverse Stock Split constitutes notice of the redemption of shares of Series B Preferred Stock and results in the automatic redemption of the shares of Series B Preferred Stock at the effective time of the redemption pursuant to the above. In connection with the issuance of the Series B Preferred Stock, the Company has set apart funds for payment for the redemption of the shares of Series B Preferred Stock. Pursuant to the terms of the Preferred Stock, the outstanding shares of Preferred Stock were redeemed in whole following the effectiveness of stockholder approval of the reverse stock split proposal at the Company’s 2022 annual meeting held on January 26, 2023. The holder of the Preferred Stock received consideration of $10 per share in cash, or $1,000 in the aggregate, on February 10, 2023.

The Series B Preferred Stock is not mandatorily redeemable, but rather is only contingently redeemable, and given that the redemption events are not certain to occur, the shares have not been accounted for as a liability. As the Series B Redeemable Preferred Stock is contingently redeemable on events outside of the control of the Company, all shares of Series B Cumulative Redeemable Preferred Stock have been presented outside of permanent equity in mezzanine equity on the unaudited condensed consolidated balance sheets.

Note 1612 – Equity

 

Common Stock

 

The authorized capitalfollowing is a summary of common stock ofissuances for the Company consists of 500,000,000 shares of Common Stock at a par value of $0.001 per share.six months ended December 31, 2023:

 

Dividend Rights
●

During the six months ended December 31, 2023, on August 15, 2023, the Company entered into a securities purchase agreement with the Holder (the “RD SPA”). The RD SPA related to an offering of (a) 2,500 shares of our common stock, $0.001 par value per share, for a price of $77.40 per share, directly to the Holder and (b) pre-funded warrants to purchase 10,420 shares of our common stock at a price of $77.40 per warrant, directly to the Holder (the “RD Pre-funded Warrants”), with all but $0.001 per warrant prepaid to the Company at the closing of the offering. The RD Pre-funded Warrants were exercisable immediately upon issuance. The exercise price of each RD Pre-funded Warrant was $77.40 per share of common stock, of which $77.00 was prepaid. The offering closed on August 15, 2023. On August 16, 2023 all the Pre-funded Warrants were exercised.

The RD SPA included the Holder waiving its rights to require the Company to cause a Subsequent Placement Optional Redemption (as defined in each of the Series C Convertible Preferred Stock Certificate of Designations (the “Series C Certificate of Designations”) and Series D Convertible Preferred Stock Certificate of Designations (the “Series D Certificate of Designations) (together the “Preferred Stock Certificates of Designations”) using the gross proceeds from the sale of the shares of common stock and warrants (including from the exercise thereof) and its rights to participate in an Eligible Subsequent Placement (as defined in each of the Preferred Stock Certificates of Designations) pursuant to Section 7(b) of the Preferred Stock Certificates of Designations, but only with respect to the offering and sale of the Securities contemplated by the RD SPA. As a result, the Company did not make any payments from the gross proceeds to the Holder. The gross proceeds from the issuance and sale of the shares of common stock were $193,500 and RD Pre-funded Warrants, were $806,500, before deducting the estimated offering expenses payable by the Company.

●

From July 1, 2023, through December 31, 2023, the Holder exchanged $16,309,814 in Series C Convertible Preferred Stock and $157,931 in accrued dividends, for 526,503 shares of our common stock at conversion prices equal to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of our common stock for a trading day during the ten consecutive trading day period ending, and including, the applicable date that the conversion price was lowered for purposes of a conversion, or the floor price then in effect. The reduction in the Series C Convertible Preferred Stock was offset by the aggregate Alternate Conversion Floor Amount of $4,805,990 and additional accrued dividends of $223,050 over the same period.

Under the Settlement Agreements, dated August 15, 2023 (the “August 2023 Settlement Agreement”), as described below and October 6, 2023 (the “October 2023 Settlement Agreement”), between the Company and the Holder, in the event that the conversion price then in effect, as may be adjusted under the Settlement Agreements, is greater than 90% of the lowest VWAP of the common stock during the ten consecutive trading day period ending and including the trading day of an applicable conversion notice, the accrued and unpaid dividends on the outstanding shares of preferred stock shall automatically increase, pro rata, by the applicable Alternate Conversion Floor Amount (as defined in the Preferred Stock Certificates of Designations) or, at the Company’s option, the Company shall deliver the applicable Alternate Conversion Floor Amount to the holder on the applicable date of conversion. The Company’s shares of common stock issued in connection with these conversions were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued to an existing Holder of the Company’s securities without commission or additional consideration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act. As of December 31, 2023, the following these conversions, the number Series C Convertible Preferred Stock shares outstanding reduced to 1,775 from 14,601 at June 30, 2023, and $3,524,665 in aggregate amount of the Series C Convertible Preferred Stock remained outstanding.

●

During the six months ended December 31, 2023, per the August 2023 Settlement Agreement entered into with the Holder for the Company to issue common stock in partial settlement of the Registration Rights Fees payable (“RRA Fees”) under the Registration Rights Agreement (the “Series D RRA”), in connection with a delay in the filing of a registration statement for the purpose of registering the resale of the common stock issuable under the Holder’s Series D Convertible Preferred Stock and common warrants, despite the Company’s best efforts to avoid such delay, the Company agreed to initially issue 25 shares at $40.00 per share in partial settlement of RRA Fees.

Further, on October 6, 2023, the Company entered into the separate October 2023 Settlement Agreement with the Holder for the Company to issue common stock in partial settlement of the RRA Fees by the Company under the Series D RRA, and replacing the August 2023 Settlement Agreement. As of December 31, 2023, the Company was obligated to pay to the Holder a Registration Delay Payment of approximately $119,500, (subject to increase with respect to any additional RRA Fees that may accrue, from time to time, under the Series D RRA and subject to decrease in accordance with the October 2023 Settlement Agreement as described below).

The Company agreed to issue an additional 25 shares at $20.00 per share on October 6, 2023, (“Continued Settlement Price Per Share”) in partial settlement of RRA Fees. The Company further agreed to settle an additional $1,000 (or such other amount as the parties shall mutually agree) (“Further Settlements”) on each seven day anniversary of the October 2023 Settlement Agreement (or another date mutually agreed between the parties), until the earlier of (i) the date that the parties mutually terminate the October 2023 Settlement Agreement in writing, and (ii) such time as the remaining balance of the RRA Fees are paid in full, as applicable, to satisfy up to the remaining balance of the RRA Fees at a price per share equal to the lower of (1) 90% of the lowest VWAP per share of the common stock during the ten consecutive trading day period ending and including the trading day immediately preceding the additional share settlement, and (2) the Continued Settlement Price Per Share. As part of the settlement, the Holder also agreed to continue to waive, in part, applicable antidilution provisions within the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock such that the issuances of any settlement shares in accordance with the October 2023 Settlement Agreement shall not result in a Conversion Price for the applicable Conversion Amount (as such terms are defined in the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock) subject to such conversion less than the lesser of (A) the Conversion Price then in effect (without giving effect to any adjustments to the Conversion Price arising solely as a result of the issuances of the settlement shares under the October 2023 Settlement Agreement) and (B) the greater of (x) the Conversion Price then in effect (after giving effect to all adjustments to the Conversion Price (including, without limitation, such adjustments arising as a result of the issuances of the settlement shares under the October 2023 Settlement Agreement)) and (y) 90% of the lowest VWAP of the common stock during the ten consecutive trading day period ending and including such applicable conversion date under the terms of the Series C Convertible Preferred Stock or Series C Convertible Preferred Stock, as applicable.

The October 2023 Settlement Agreement further provides that, notwithstanding anything in the applicable Preferred Stock Certificates of Designations to the contrary, with respect to any given conversion of any Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, to the extent such Conversion Price, as so adjusted, is greater than 90% of the lowest VWAP of the common stock during the ten (10) consecutive trading day period ending and including the trading day of the applicable conversion notice, a Conversion Floor Price Condition (as defined in the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock) shall be deemed to have occurred with respect to such conversion of the Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, as applicable.

During the six months ended December 31, 2023, in addition to the issuances on August 17, 2023, and on October 6, 2023, as part of the Further Settlements, the Company issued 200 shares at $20.00 per share on November 3, 2023, 65 shares at $15.41 per share on November 10, 2023, 91 shares at $10.92 per share on November 17, 2023, 103 shares at $9.72 per share on November 24, 2023, 143 shares at $7.00 per share December 1, 2023 at 90% of the lowest VWAP per share of the common stock during the ten consecutive trading day period ending and including the trading day immediately preceding the additional share settlement.

Due to the down round price protection provision on the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, the Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price in effect prior to the Further Settlements for both the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock to the conversion price as defined above, of $20,362,772 based on the incremental value to the Holder due to the conversion price reduction. This incremental value is presented on the unaudited condensed consolidated statement of operations as an addition to the net loss available to common stockholders of $10,979,863 and $20,362,772 in the three and six months ending December 31, 2023, respectively. The incremental value was determined by computing the additional shares the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock that would be received based on the conversion price reduction multiplied by the estimated fair value of common stock of $77.40 as of August 17, 2023, $38.60 as of October 6, 2023, $24.00 as of November 3, 2023, $17.04 as of November 10, 2023, $11.92 as of November 17, 2023, $10.88 as of November 24, 2023, $7.44 as of December 1, 2023.

20

 

Subject to the prior or equal rights of holders of all classes of stock at the time outstanding having prior or equal rights as to dividends, the holders of the Company’s Common Stock may receive dividends out of funds legally available if the Board of Directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that the Board of Directors may determine. The Company has not paid any dividends on the Company’s Common Stock and do not contemplate doing so in the foreseeable future.

Voting Rights

Each holder of the Common Stock is entitled to one vote for each share of Common Stock held by such stockholder.

No Preemptive or Similar Rights

The Company’s Common Stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.

Liquidation

In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the Common Stock.

35

As discussed below, the Company obtained a partial waiver of the Holder’s Redemption Amounts, for the six months ended December 31, 2023, the Company sold an aggregate of 515,394 shares through “at the market” (or “ATM”) sales (“ATM Sales”) for gross proceeds of $5,452,460. The net proceeds from these ATM Sales under the ATM equity offering program of approximately $5,248,886 were allocated 50% to the Company, and 50% to the Holder, pursuant to the October Settlement Agreement. Fees paid to the agent related to these ATM Sales were approximately $203,574.

As of December 31, 2023, there were $2,295,822 of Redemption Proceeds (as defined below) instructed for deposit into the Escrow Account for the Holder. During the three and six months ended December 31, 2023, there was $322,120 of the Redemption Proceeds (as defined below) disbursed from the Escrow Account to the Holder for redemption of $321,048 of Series D Convertible Preferred Stock and $1,072 in accrued dividends for 312 shares of Series D Convertible Preferred Stock. As of December 31, 2023, the following these conversions, the number Series D Convertible Preferred Stock shares outstanding reduced to 3,988 from 4,300 at June 30, 2023, and $4,189,754 in aggregate amount of the Series D Convertible Preferred Stock remained outstanding.

Subsequent to December 31, 2023, the remaining $2,295,822 of the Redemption Proceeds (as defined below) disbursed from the Escrow Account to the Holder for redemption of $2,237,643 of Series D Convertible Preferred Stock and $58,179 in accrued for 2,129 shares of Series D Convertible Preferred Stock.

During the six months ended December 31, 2023, in connection with the rounding up from the Reverse Stock Split December 2023, the Company issued 81,051 shares of common stock at par value.

 

The following is a summary of common stockCommon Stock issuances for the six months ended December 31, 2022:

 

●During the six months ended December 31, 2022, as part of the September 2022 Offering, the Company sold 30,000,000750 units at $0.2510,000, consisting of one share of Common Stock and one warrant with an exercise price of $0.2510,000, for gross proceeds of $7,536,000. The Company recorded the issuance of these shares at a fair value of $1,568,130 comprised of $6,854,418 of cash received from the offering equal to the gross proceeds, net of $681,582 issuance costs, and net of the fair value of the September 2022 Warrant liability of $5,286,288, calculated on issuance. The proceeds from the offering were designated for general working capital and to pay to the Holder of the Senior Convertible Note an amount of $2,778,427, including $2,265,928 equal to 50%50% of the gross proceeds over $2,000,000 following the payment of 7%7% in offering fees including underwriting discounts and $512,500 equal to the Holders participation in the September 2022 Offering, that was applied as a reduction of principal (see Note 11)9).
  
●During the six months ended December 31, 2022, as part of the December Registered Direct Offering, the Company sold On December 21, 2022, the Company closed an offering (the “Registered Direct Offering”) in which it sold: (a) 7,065,000177 shares of Common Stock to the Holder (the “Registered Direct Shares”) and (b) Pre-funded Warrants to purchase 17,850,000447 shares of our common stock at a price of $0.09373,748 per warrant (the “Pre-funded Warrants”), directly to the Holder, with all but $0.00140.00 per warrant prepaid to the Company at the closing. The Company recorded the issuance of these shares at a fair value of $2,316,686 comprised of $2,316,686 of cash received from the offering equal to the gross proceeds, net of $170,001 issuance costs, $2,146,685. The Company remitted approximately $1,073,343 to the Holder to be applied to accrued interest and future interest payments under the Senior Convertible Note. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $1,073,343. The Holder redeemed 6,566,000165 of the Pre-funded warrants through December 31, 2022 for additional net proceeds of $6,566. Subsequent to December 31, 2022, the remaining 11,284,000282 outstanding Pre-funded warrants were redeemed for net proceeds of $11,284.

The following is a summary of common stock issuances for the six months ended December 31, 2021:

●During the six months ended December 31, 2021, the Company issued 82,527 shares of Common Stock for services with a weighted average fair value of $7.28 per share or $574,299 in the aggregate.
●During the six months ended December 31, 2021, the Company issued 14,000 shares of Common Stock from the exercise of stock options with a weighted average exercise price of $4.82 or $67,479 in the aggregate.
●During the six months ended December 31, 2021, the Company issued 375,813 shares of Common Stock, with aggregate proceeds of $1,586,824, or $1,539,219 net of issuance costs, and a weighted average exercise price of $4.22, under its ATM program (See below).
●During the six months ended December 31, 2021, the holder of the Senior Convertible Note converted an aggregate conversion value of $8,243,454 into 1,701,841 shares of common stock, with a weighted average conversion price of $4.84.

 

At-the Market Equity Offering ProgramDistribution Agreement

 

On September 3, 2021,15, 2023, the Company entered “atinto an Equity Distribution Agreement with Maxim Group LLC (“Maxim Group”) under which the market”Company sold, from time to time at its sole discretion, shares of the Company’s common stock, par value $0.001 per share, with aggregate gross sales proceeds of up to $7,186,257 through an ATM equity offering program under which Maxim Group acted as sales agent.

Under the Equity Distribution Agreement, the Company set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitations on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. Subject to the terms and conditions of the Equity Distribution Agreement, Maxim Group sold the shares by methods deemed to be an ATM equity offering as defined in Rule 415 promulgated under the Securities Act, including by means of ordinary brokers’ transactions at market prices, in block transactions or as otherwise agreed by Maxim and us.

The Equity Distribution Agreement provided that Maxim Group was entitled to compensation for its services equal to 3.0% of the gross proceeds of any shares of common stock sold through Maxim Group under the Equity Distribution Agreement. The Company had no obligation to sell up to an aggregate of $any shares under the Equity Distribution Agreement, and could have at any time suspended solicitation and offers under the Equity Distribution Agreement.

20,000,000 of Common Stock.

The shares are beingwere issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252370) and theits registration on Form S-3 MEF (File No. 333-274542). The Company filed a prospectus supplement, dated September 3, 202115, 2023, with the SEC in connection with the offer and sale of the shares pursuant to the Equity Distribution Agreement (the “Prospectus Supplement”).

The Equity Distribution Agreement contained customary representations, warranties and agreements of the Company and customary conditions to completing future sale transactions, indemnification rights and obligations of the parties and termination provisions.

As part of the filing of the Equity Distribution Agreement, the Company entered into a waiver agreement (“EDA Waiver”) on September 15, 2023, with the broker. There were Holder of the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock, as a condition to filing the registration statement on Form S-3 MEF on September 15, 2023 and the prospectus supplement on September 15, 2023 for the “at the market” offering. The EDA Waiver allowed the Company to proceed with the initial filing of such registration statement and prospectus supplement with the SEC and not with respect to (x) any subsequent amendment or supplement thereto, (y) the issuance and sale of any of the Company’s securities contemplated by thereby or (z) any future Subsequent Placement (as defined in the Securities Purchase Agreement, dated April 30, 2023, among the Company and the buyers named therein).

noThe Company is unable to further use the ATM facility due to its voluntary delisting and suspension from Nasdaq and subsequent trading on the “Pink Market” of the OTC.

The Company also entered into a waiver agreement (“October 2023 Waiver”) on October 6, 2023, with the Holder, as a condition to access any net proceeds from the future sale of shares soldof common stock under the Company’s previously announced ATM equity offering program pursuant to a prospectus supplement that was filed with the SEC on September 15, 2023. The Holder agreed to partially waive its rights to ATM proceeds under the terms of a Subsequent Placement Optional Redemption, as defined in each of the Preferred Stock Certificates of Designations, but only with respect to sales under the ATM forequity offering program (“ATM Sales”) and not with respect to any other future Subsequent Placement (as defined in each of the threePreferred Stock Certificates of Designations) and, six months ended December 31, 2022 andfurther, only to the extent of a waiver that provide that 1,165,81350 shares sold under% of the net proceeds from ATM Sales (after deducting the agent’s commissions pursuant to the ATM during the year ended June 30, 2022 for gross proceeds of $4,005,267. The agreement betweenoffering and other reasonable and customary offering expenses) be retained by the Company and Maxim Group LLC governing the remaining 50% of the net proceeds from ATM expired on September 3, 2022. At this time,Sales be used by the Company does not plan to signredeem first, the outstanding shares of Series D Convertible Preferred Stock and second, the outstanding shares of Series C Convertible Preferred Stock (“Redemption Proceeds”), unless the Holder elects to change such allocations (or waive such redemption, in whole or in part, with respect to one or more ATM Sales) as evidenced by a newwritten notice to the Company (“Subsequent Placement Limited Waiver”). Concurrent with the execution of the October 2023 Settlement Agreement, the Company executed an escrow agreement (“Escrow Agreement”) with an independent third-party escrow agent (“Escrow Agent”), pursuant to which Redemption Proceeds received from each closing of ATM agreement.Sales shall be promptly deposited into a non-interest bearing escrow account (“Escrow Account”) and disbursed to the Holder under the terms and conditions contained in the August 2023 Settlement Agreement and the Escrow Agreement.

3621

Common Stock Warrants and Preferred Stock Warrants

 

On December 21, 2022,August 15, 2023, as described above, the Company entered into a securities purchaseclosed the August RD SPA agreement with an institutional investor.the Holder. The August RD SPA relates to the offering included (a) of

7,065,000 Registered Direct Shares and (b) 17,850,000

(i)2,500 shares of our common stock, at a price of $0.0937 per Pre-Funded Warrant, directly to such investor, with all but $0.001 par value per share, for a price of $77.40 per share, directly to the Holder, and
(ii)pre-funded warrants to purchase 10,420 shares of our Common Stock at a price of $77.40 per warrant, directly to such Holder, with all but $0.40 per warrant prepaid to the Company at the closing of the offering. The August RD Pre-funded Warrants were exercisable immediately upon issuance and were entirely exercised on August 16, 2023 at $77.40 per share of common stock, of which $77.00 was prepaid.

On May 22, 2023, as described below, the Company closed the issuance of the Series D Convertible Preferred Stock, that included the issuance of

(i)4,300 shares of Series D Convertible Preferred Stock for a price of $1,000 per share,
(ii)Common Warrants to purchase 3,583 shares of our common stock at a price of $784.00 per share (the “Series D Common Warrants”), and
(iii)preferred warrants to purchase 4,300 shares of our Series D Convertible Preferred Stock at a price of $1,000 per share,

for total gross proceeds to the Company at the closing of the offering. The exercise price$4,300,000 before deducting underwriting discounts and commissions of each Pre-funded Warrant is $0.001341,000 per share of common stock.

The Pre-funded Warrants may not be exercised to the extent they cause the purchaser of the Pre-funded Warrants to become a “beneficial owner” of more than 4.99% of our Common Stock for purposes of Section 13(d) of the Securities Exchange Act of 1934. The Beneficial Ownership Limitation may be increased at the discretion of the purchaser of the Pre-funded Warrants to any percentage less than or equal to 9.99% of our common stock upon 61 calendar days’ notice or decreased at any time.

The Company determined the Pre-funded Warrants should be classified as equity.

The Holder redeemed 6,566,000 of the Pre-funded warrants through the six months ended December 31, 2022, for net proceeds of $6,5663,959,000. There were 11,284,000 outstanding as of December 31, 2022. The Pre-funded Warrants expiration date was December 21, 2027. Subsequent to December 31, 2022,, with the remaining 11,284,000 outstanding Pre-funded warrants were redeemed for net proceeds of $11,284.

On September 19, 2022, the Company closed the September 2022 Offering, in which it sold 30,000,000 units at $0.25 consisting of one share of Common Stock and one September 2022 Warrant exercisable at any time after issuance for one share of Common Stock of the Company for a total of 30,000,000 September 2022 Warrants at an exercise price of $1.00. On the offering date the underwriters of the September 2022 Offering exercised the over-allotment option to purchase 3,600,000 additional September 2022Series D Preferred Warrants to purchase shares at a price of $0.01 per warrant. The Company received net proceeds of $36,000. There were no September 2022 Warrants exercised during the six months ended December 31, 2022 and all September 2022 Warrants were outstanding as of December 31, 2022. The September 2022 Warrants expire on September 19, 2027.

On March 2, 2022, the Company closed the March 2022 Offering, in which it sold 15,000,000 units at $1.00 consisting of one share of Common Stock and one March 2022 Warrant exercisable at any time after issuance for one share of Common Stock of the Company for a total of 15,000,000 March 2022 Warrants at an exercise price of $1.00. On April 1, 2022 the underwriters of the March 2022 Offering exercised the over-allotment option to purchase 2,250,000 additional March 2022 Warrants to purchase shares at a price of $0.01 per warrant. The Company received net proceeds of $20,925. There were no March 2022 Warrants exercised during the six months ended December 31, 2022 and all March 2022 Warrants were outstanding as of December 31, 2022. The March 2022 Warrants expire on March 2, 2027.

On June 2, 2021, the Company issued 2,000,000 Series A Warrants and 2,000,000 Series B Warrants with an exercise price of $17.50 per share to the Holder of the Senior Convertible Note. There were no Series A Warrants exercised during the six months ended December 31, 2022. At December 31, 2022, the Series B Warrants are exercisable to the extent the Company has redeemed the principal under the SeniorD Convertible Note. The Series A Warrants expire on June 2, 2025 and the Series B Warrants expire on June 2, 2023.

On April 16, 2020, the Company closed an offering, (the “April 2020 Offering”), in which it sold 1,980,000 units consistingPreferred Stock as a potential source of one share of Common Stock and one Unit A Warrant and one Unit B Warrant, for a total of 3,960,000 warrants, with each warrant entitling the holder to purchase one share of Common Stock priced at $4.25 per share. The Company issued an additional 209,400 Unit A Warrants and 209,400 additional Unit B Warrants to the underwriter pursuant to an over-allotment option each entitling the holder to purchase one share of Common Stock at $0.01 per share. There were 1,136,763 of Unit A Warrants outstanding on December 31, 2022. The Unit A Warrants expire on April 14, 2025. The Unit B Warrants expired one year from the date of issuance on April 19, 2021 and there were no Unit B Warrants outstanding at December 31, 2022.

In connection with the April 2020 Offering the Company also issued 1,217,241 shares of Common Stock and 2,434,482 warrants (“Conversion Warrants”) to purchase one share of Common Stock at $4.25 per share upon the conversion of $4,138,585 of the Company’s convertible debt and accrued interest. There were 40,582 Unit A Conversion Warrants outstanding at December 31, 2022. The Unit B Conversion Warrants have been fully exercised for shares of Common Stock.funds.

 

A summary of the common stock warrant activity follows:

 

Schedule of Warrant Activity

  

Number of

Warrants

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Life (Years)

  

Intrinsic

Value

 
Outstanding, July 1, 2021  5,350,558  $14.19   3.14   8,743,588 
Issued  17,250,000   1.00         
Exercised  -   -         
Forfeited or cancelled  -   -         
Outstanding, June 30, 2022  22,600,558  $4.12   4.07   - 
Issued  33,600,000   0.25         
Exercised  -   -         
Forfeited or cancelled  -   -         
Outstanding September 30, 2022  56,200,558  $1.81   4.51   - 
Issued  17,850,000   0.001         
Exercised  (6,566,000)  0.001         
Forfeited or cancelled  -   -         
Outstanding December 31, 2022  67,484,558  $1.51   4.38   - 

37

  

Number of

Warrants

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Life (Years)

  

Intrinsic

Value

 
Outstanding, June 30, 2022  565   567,600   4.07   — 
Issued  4,869   400         
Exercised  (446)  400         
Forfeited or cancelled  (50)  700,000         
Outstanding June 30, 2023  4,938   218,476   4.63   — 
Issued  10,420   77.40         
Exercised  (10,420)  77.40         
Forfeited or cancelled  -   -         
Outstanding December 31, 2023  4,938   218,476   4.12   — 

 

Common Stock Options

 

On September 10, 2020, the Company’s Board of Directors adopted the 2020 Equity and Incentive Plan (the “2020 Plan”) that provides for the issuance of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to officers, employees, directors, consultants, and other key persons. Under the 2020 Plan, the maximum number of shares of Common Stock authorized for issuance was 1,500,000 38shares. Each year on January 1, for a period of up to nine years, the maximum number of shares authorized for issuance under the 2020 Plan is automatically increased by 233,968 6 shares.shares. At December 31, 2022,2023, there was a maximum of 1,967,936 55shares of Common Stock authorized for issuance under the 2020 Plan. There were no additional equity awards eligible for issuance from the 2017 Stock Incentive Plan that had been adopted by the Company on August 1, 2017. The outstanding stock options granted under the 2017 Stock Incentive Plan were transferred to the 2020 Plan. As of December 31, 2022,2023, there were 1,204,43543 shares of Common Stock available for future issuance under the 2020 Plan. On January 3, 2023, separate from the 2020 Plan, the Company issued an award of 63 time-based stock options to the Chief Executive Officer with an exercise price of $2,944 per option. The Chief Executive Officer’s stock options will vest in equal quarterly installments over a one-year period subject to his continued employment with the Company on the applicable vesting dates.

22

 

A summary of the Company’s stock option activity is as follows:

 

Schedule of Stock Option Activity

 

Number of

Options

 

Weighted Average

Exercise Price

  Number of Options  Weighted Average Exercise Price 
Outstanding, June 30, 2021  474,676  $5.49 
Granted  1,120,150   6.71 
Exercised  (14,000)  4.82 
Cancelled  (470,300)  6.54 
Outstanding, June 30, 2022  1,110,526  $6.29   28  $49,440 
Granted  -   -   63   2,944 
Exercised  -   -   -   - 
Cancelled  (347,025)  6.56   (14)  246,617 
Outstanding, December 31, 2022
Outstanding, June 30, 2023  77  $49,552 
Granted  -   - 
Exercised  -   - 
Cancelled  (2)  270,059 
Outstanding, September 30, 2023  75  $44,429 
Granted  -   - 
Exercised  -   - 
Cancelled  -   - 
Outstanding, December 31, 2023  75  $44,429 

 

As of December 31, 2022,2023, the weighted average remaining life of the options outstanding was 3.62 7.98years. There are 763,50175 options exercisable at December 31, 2022,2023, with a weighted average exercise price of $6.2544,429. As of December 31, 2023, there was no remaining unamortized stock compensation for stock options.

 

Preferred Stock

The Company is authorized to issue 10,000,000 shares of blank check preferred stock.

Series C Convertible Preferred Stock Basedand Series D Convertible Preferred Stock

During the three and six months ended December 31, 2023, the Company recorded dividends in total of $212,741 and $555,589, and Alternate Conversion Floor Amounts (as defined in the Preferred Stock Certificates of Designations) of $1,046,341 and $4,805,990 for the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock, respectively. The Series C Convertible Preferred Stock, had a total value of $3,524,665 and $14,805,438, with cumulative dividends accrued, including the Alternative Conversion Floor Amounts (as defined in the Preferred Stock Certificates of Designations), in total of $1,749,665 and $204,414, and per share of $986 and $14, as of December 31, 2023 and June 30, 2023, respectively. The Series D Convertible Preferred Stock, had a total value of $4,189,753 and $4,337,267, with cumulative dividends accrued, (as defined in the Preferred Stock Certificates of Designations), in total of $201,753 and $37,267, and per share of $51 and $9, as of December 31, 2023 and June 30, 2023, respectively.

The incremental value of the Alternate Conversion Floor Amounts make whole provisions of $1,046,341 and $4,805,990, for the three and six months ended December 31, 2023, is presented on the unaudited condensed consolidated statement of operations as an addition to the net loss available to common stockholders.

The August 2023 Settlement Agreement provided that, notwithstanding anything in the applicable Certificate of Designations for the Series C Convertible Preferred Stock or Certificate of Designations for the Series D Convertible Preferred Stock to the contrary, with respect to any given conversion of any Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, to the extent such conversion price, as so adjusted, is greater than 90% of the lowest VWAP of the Common Stock during the ten consecutive trading day period ending and including the trading day of the applicable conversion notice, a conversion floor price condition (as defined in the Certificates of Designations governing the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock) shall be deemed to have occurred with respect to such conversion of the Series C Convertible Preferred Stock or Series D Convertible Preferred Stock, as applicable.

As part of the August 2023 Settlement Agreement and the October 2023 Settlement Agreement and subsequent Further Settlements, the Company triggered the anti-dilution down round price protection provisions of the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock that allows for the conversion at the conversion price described above. Due to the down round price protection provision on the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, the Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price in effect prior to each settlement to the price of the settlement, as applicable, of $10,979,863 and $20,362,772based on the incremental value to the Holder due to the conversion price reduction, for the three and six months ended December 31, 2023. This incremental value is presented on the unaudited condensed consolidated statement of operations as an addition to the net loss available to common stockholders in the three months ended December 31, 2023. The incremental value was determined by computing the additional shares the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock that would be received based on the conversion price reduction multiplied by the estimated fair value of common stock of $77.40 as of August 17, 2023, $38.60 as of October 6, 2023, $24.00 as of November 3, 2023, $17.04 as of November 10, 2023, $11.92 as of November 17, 2023, $10.88 as of November 24, 2023, $7.44 as of December 1, 2023 (as described above).

23

Registration Right Agreement

As discussed above, pursuant to a Series D RRA between the Holder and the Company, the Company granted certain registration rights to the Investor. The Series D SPA requires the Company to file a registration statement covering the resale of the shares of Common Stock underlying the shares of Series D Convertible Preferred Stock to be issued in the offering and the shares of common stock issued upon exercise of the Common Warrants. The Series D SPA also covers the conversion of any shares of Series D Convertible Preferred Stock issued upon exercise of the Series D Preferred Warrants. The Company was required to file the registration statement within 60 days from the closing of the transactions contemplated by the Series D SPA and cause the registration statement to be declared effective within 120 days after the closing of the transactions contemplated by the Securities Purchase Agreement. The Series D SPA contains mutual customary indemnification provisions among the parties and requires the Company to make certain cash payments in connection with the delay in the filing of a registration statement for the purpose of registering the resale of the common stock issuable under the Holder’s Series D Convertible Preferred Stock and common warrants, despite the Company’s best efforts.

Stock-Based Compensation

 

During the three and six months ended December 31, 2023, the Company recorded stock-based compensation expense of $21,078 and $42,156, respectively, for the amortization of stock options and the issuance of Common Stock to employees and contractors for services which has been recorded as general and administrative expense in the unaudited condensed consolidated statements of operations. During the three and six months ended December 31, 2022, the Company recorded stock-based compensation expense of $0 and $921,991, respectively, and during the three and six months ended December 31, 2021 the Company recorded stock-based compensation expense of $1,729,401 and $2,611,773, respectively, for the amortization of stock options and the issuance of Common Stock to employees and contractors for services which has been recorded as general and administrative expense in the unaudited condensed consolidated statements of operations.

 

As of December 31, 2022,2023, there was no remaining unamortized stock compensation for stock options. No options were granted during the three or six months ended December 31, 2022.2023.

Note 13 – Other Non-Operating Income (Loss), Net

Other non-operating income (loss), net, for the three and six months ended December 31, 2023 and 2022 was as follows:

Schedule of Other Non Operating Income Loss Net

  2023  2022  2023  2022 
  

Three months ended

December 31,

  

Six months ended

December 31,

 
  2023  2022  2023  2022 
Foreign exchange gain (loss) $(39,844) $38,640  $(11,702) $49,494 
Other non-operating income (loss)  (15,096)  447,746   (33,614)  483,342 
Total $(54,940) $486,386  $(45,316) $532,836 

 

Note 1714 – Fair Value Measurements

 

The following financial instruments were measured at fair value on a recurring basis:

 

Schedule of Fair Value of Financial Instruments

  December 31, 2022 
  Total  Level 1  Level 2  Level 3 
Contingent consideration (Note 12) $6,192,912  $-  $-  $6,192,912 
Liability for the September 2022 Warrants (Note 11) $2,267,454   -   -  $2,267,454 
Liability for the March 2022 Warrants (Note 11) $172,500  $172,500  $-  $- 
Liability for the Series A and Series B Warrants (Note 11) $16,777  $-  $-  $16,777 
Derivative liability on Senior Convertible Note (Note 2 and Note 11) $799,954 $-  $-  $799,954
  Total  Level 1  Level 2  Level 3 
  December 31, 2023 
  Total  Level 1  Level 2  Level 3 
Liability for the March 2022 Warrants (Note 9) $86,250  $86,250  $—  $— 
Liability for the September Warrants (Note 9) $—  $—  $—  $— 
Derivative Liability (Note 9) $2,356,698  $—  $—  $2,356,698 

  Total  Level 1  Level 2  Level 3 
  June 30, 2023 
  Total  Level 1  Level 2  Level 3 
Liability for the March 2022 Warrants (Note 9) $113,850  $113,850  $—  $— 
Liability for the September Warrants (Note 9) $251,876  $—  $—  $251,876 
Liability $251,876  $—  $—  $251,876 

 

3824

  June 30, 2022 
  Total  Level 1  Level 2  Level 3 
Contingent consideration (Note 12) $3,328,361  $-  $-  $3,328,361 
Liability for the March 2022 Warrants (Note 11) $2,070,000  $2,070,000  $-  $- 
Liability for the Series A and Series B Warrants (Note 11) $122,730  $-  $-  $122,730 
Derivative liability on Senior Convertible Note (Note 2 and Note 11) $9,399,620  $-  $-  $9,399,620 

 

A summary of the changes in Level 3 financial instruments for the six months ended December 31, 20222023 and the year ended June 30, 2023 is as follows:

 

Schedule of Changes in Level 3 Financial Instruments

  

Warrant

Liability

  

Contingent

Consideration

  

Derivative liability

on Senior

Convertible Note

 
Balance at June 30, 2022 $122,730  $3,328,361  $9,399,620 
Fair value of the September 2022 Warrants (Note 11)  5,286,288   -   - 
Change in fair value of September 2022 Warrants (Note 11)  (1,482,103)  -   - 
Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 11)  (105,953)  -   - 
Change in fair value of Bethard contingent consideration liability (Note 12)  -   (179,468)  - 
Change in the fair value of the derivative liability on Senior Convertible Note (Note 2 and Note 11)  -   -   (274,864)
Balance at September 30, 2022  3,820,962   3,148,893   9,124,756
Change in fair value of September 2022 Warrants (Note 11)  (1,536,732)  -   - 
Loss (gain) on Bethard contingent consideration liability (Note 12)  -   3,044,019   - 
Change in the fair value of the derivative liability on Senior Convertible Note (Note 2 and Note 11)  -   -   (8,324,802)
Balance at December 31, 2022 $2,284,230   6,192,912   799,954
  Warrant Liability  Contingent Consideration  Derivative liability 
Balance at June 30, 2022  122,730   3,328,361   9,399,620 
Fair value of the September 2022 Warrants (Note 9)  5,286,288   —   — 
Change in fair value of September 2022 Warrants (Note 9)  (5,034,412)  —   — 
Change in fair value of Series A and Series B Warrants issued with Senior Convertible Note (Note 9)  (122,730)  —   — 
Change in fair value of Bethard contingent consideration liability  —   2,864,551   — 
Elimination of Bethard contingent consideration liability on sale of Bethard  —   (6,192,912)  — 
Change in the fair value of the derivative liability (Note 9)  —   —   (9,399,620)
Balance at June 30, 2023  251,876  $—  $— 
Change in fair value of September 2022 Warrants (Note 9)  (229,515)  —   — 
Balance at September 30, 2023 $22,361  $—  $— 
Change in fair value of September 2022 Warrants (Note 9)  (22,361)  —   — 
Bifurcation of the derivative liability  —   —   1,820,000 
Change in the fair value of the derivative liability (Note 9)  —   —   536,698 
Balance at December 31, 2023 $—  $—  $2,356,698 

The contingent consideration was settled on February 24, 2023, as part of the disposal of the Bethard Business and the derivative liability were eliminated on the April 28, 2023, on the conversion of the Senior Convertible Note to the Series C Convertible Preferred Stock (Note 9). A derivative liability was recorded on the Series C Convertible Preferred Stock as the Company did not have enough authorized and unissued shares to settle all the outstanding balance (Note 9).

 

The September 2022 Warrants were classified as Level 3 as they are plain vanilla warrants and are not callable by the Company (Note 11)9). The September 2022 Warrants were valued using a Black Scholes valuation model on issuance at September 19, 2022 and for the warrants outstanding at December 31, 20222023 and June 30, 2023 with the following assumptions:

 

Schedule of Warrants Outstanding Fair Value AssumptionAssumptions

 December 31, 2022  September 19, 2022  December 31, 2023  June 30, 2023 
Contractual term, in years  5.00   5.00   -   5.00 
Expected volatility  162%  167%  144%  154%
Risk-free interest rate  4.02%  3.69%  3.95%  4.27%
Dividend yield  -   -   -   - 
Conversion / exercise price $0.25  $0.25  $10,000  $10,000 

 

The March 2022 Warrants were classified as Level 1 as they are publicly traded. They are callable by the Company if certain criteria are met (Note 11)9). At December 31, 2023, the Company was still trading on the Nasdaq. The March 2022 Warrants outstanding at December 31, 20222023 and June 30, 20222023 were valued using the following assumptions:

 

 December 31, 2022  June 30, 2022  December 31, 2023  June 30, 2023 
Contractual term, in years  5.00   5.00   5.00   5.00 
Active market  Nasdaq   Nasdaq    Nasdaq    Nasdaq 
Market price $0.01  $0.12  $200  $264 

 

The Series A and Series B Warrants outstanding at December 31, 20222023 and June 30, 2022 are callable by the Company if certain criteria are met (Note 11) and2023 were valued using a Monte Carlo valuation model with the following assumptions:

 

 December 31, 2022 June 30, 2022  December 31, 2023  June 30, 2023 
Contractual term, in years  2.00 – 4.00 2.00 – 4.00   4.00   4.00 
Expected volatility  135-190% 125% – 133%  172%  152%
Risk-free interest rate  3.96-4.24% 2.75% – 2.98%  4.55%  4.90%
Dividend yield  - -   —   — 
Conversion / exercise price $17.50  $17.50  $700,000  $700,000 

The Series B Warrants expired on June 2, 2023.

 

3925

 

The value of the derivative liability on the Senior Convertible NoteSeries C Preferred Stock at December 31, 20222023 and June 30, 2022December 5, 2023 was valued using a nonperformance risk adjusted Monte Carlo valuation model using total assets less goodwill and an estimate of the Company’s total enterprise value with the following valuation assumptions:

 Schedule of Derivative Liability

 December 31, 2022  June 30, 2022  December 31, 2023 & December 5, 2023 
Contractual term remaining, in years  0.42   0.92   1.00 
Expected volatility  162.78%  137.11%
De-leveraged volatility  32.81%  62.88%
Discount rate  25.00%
Risk-free interest rate  4.55%  2.72   4.67 
Dividend yield  —   — 
Dividend rate  8.00%
Dividend rate as of valuation date  8.50%
Conversion / exercise price $2.1832  $2.1832  $7.00 

 

The fair value of a derivative instrument in a liability position includes measures of the Company’s nonperformance risk. Significant changes in nonperformance risk used in the fair value measurement of the derivative liability may result in significant changes to the fair value measurement. The cash liability calculated under the terms of the Senior Convertible Note of approximately $933,000,000 is materially higher than the fair value of the derivative liability of $799,954 calculated at December 31, 2022. The calculated make-whole liability may differ materially from the amount the Company may be required to pay under the Senior Convertible Note. The Company has held non-binding discussions with the Holder to restructure its obligation under the Senior Convertible Note. However, there can be no guarantee that the Company will be able to reach an agreement to restructure the Senior Convertible Note.Series C Preferred Stock.

 

The following is information relative to the Company’s derivative instruments in the unaudited condensed consolidated balance sheetssheet as of December 31, 2022 and June 30, 2022:2023:

 

Schedule of Derivative Instruments in the Unaudited Condensed Consolidated Balance Sheet Derivative Instruments

Derivatives Not Designated as

Hedging Instruments

 

Balance

Sheet Location

 December 31, 2022  June 30, 2022  

Balance

Sheet Location

 December 31, 2023 
Derivative liability on Senior Convertible Note (Note 2 and 11) Derivative liability $799,954 $9,399,620 
Derivative liability on Series C Preferred Stock (Note 9) Derivative liability $2,356,698 

 

The effect of the derivative instruments on the unaudited condensed consolidated statements of operations is as follows:

 

Schedule of Statement of Operation Derivative Instruments

Derivatives Not Location of Gain or (Loss) Amount of Gain (Loss) Recognized in Income on Derivatives 

Designated as

Hedging

 

Recognized in

Income on

 

Three months ended

December 31,

  

Six months ended

December 31,

 
Instruments Derivatives 2022  2021  2022  2021 
Derivative liability on Senior Convertible Note (Note 2 and 11) Change in fair value of derivative liability on Senior Convertible Note $8,324,802 $(1,482,621) $8,599,666 $(1,482,621)

40

  Amount of Loss Recognized in Income on Derivatives 

Derivatives Not Designated as

Hedging Instruments

 

Location of Loss

Recognized in

Income on Derivatives

 

Three months ended

December 31, 2023

  

Six months ended

December 31, 2023

 
Derivative liability (Note 9) Change in fair value of derivative liability (Note 9) $536,698  $536,698 

 

Assets Measured on a Nonrecurring Basis

 

Assets that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment. The Company’s estimates of fair value required it to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain. The carrying value of the assets after any impairment approximates fair value.

 

The Company assesses the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The Company evaluates goodwill for impairment at least annually or when triggering events occur. The Company assesses the fair value of goodwill using the income approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant.

 

The Company uses undiscounted future cash flows of the asset or asset group for equipment and intangible assets. DuringThe Company estimated the three and six months ended December 31, 2022,fair value when conducting the Company recognizedlong-lived asset impairment charges to the goodwilltests primarily using an income approach and used a variety of unobservable inputs and underlying assumptions consistent with those discussed above for purposes of the EEG iGaming Malta reporting unit in the EEG iGaming segment, and to theCompany’s goodwill of the GGC reporting unit in the EEG Games segmentimpairment test (See Note 5 and Note 6).

 

Note 1815 – Segment Information

 

The Company operates its business and reports its results through two complementary operating and reportable segments: EEG iGaming and EEG Games, in accordance with ASC Topic 280, Segment Reporting.

 

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

 

EEG Games’ focus is on providing esports entertainment experiences to gamers through a combination of: (1) our proprietary infrastructure software, GGC, which underpins our focus on esports and is a leading provider of local area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, and (2) online tournaments (through our EGL tournament platform), and (3) player-vs-player wagering.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.

 

Operating segments are components of the Company for which separate discrete financial information is available to and evaluated regularly by the chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The CODM assesses a combination of metrics such as revenue and Adjusted Segment EBITDA to evaluate the performance of each operating and reportable segment.

The Company has recast previously reported information to conform to the current management view for all prior periods presented. The changes to reportable segments had no impact to the Company’s unaudited condensed consolidated financial statements.

 

The Company utilizes Adjusted Segment EBITDA (as defined below) as its measure of segment profit or loss.the performance of its operating segments. The following table highlights the Company’s revenues and Adjusted Segment EBITDA for each reportable segment and reconciles Adjusted Segment EBITDA on a consolidated basis to net loss. Total capital expenditures for the Company were not material to the unaudited condensed consolidated financial statements.

 

4126

 

A measure of segment assets and liabilities has not been currently provided to the Company’s CODM and therefore is not shown below. Segment assets are shown due to the significant asset impairment charges recorded during the six months ended December 31, 2023. The following tables present the Company’s segment information:

Schedule of Segment Information

  2022  2021  2022   2021 
  

For the three months ended

December 31,

  

For the six months ended

December 31,

 
  2022  2021  2022   2021 
              
EEG iGaming segment $5,538,486  $12,439,696  $14,133,832  $27,102,284 
EEG Games segment $870,919  $2,091,351  $1,880,837  $3,837,054 
                 
Total $6,409,405  $14,531,047  $16,014,669  $30,939,338 
                 
Adjusted EBITDA                
EEG iGaming segment $(1,150,938) $(2,909,585) $(1,612,133) $(3,853,812)
EEG Games segment $(561,742) $(845,807) $(1,108,538) $(1,722,315)
Other(1) $(1,744,816) $(3,009,435) $(3,959,264) $(5,505,577)
Total Adjusted EBITDA $(3,457,496) $(6,764,827) $(6,679,935) $(11,081,704)
                 
Adjusted for:                
Interest expense $(971,374) $(2,412,716) $(2,029,782) $(4,757,912)
Loss on conversion of senior convertible note $-  $(5,999,662) $-  $(5,999,662)
Loss on extinguishment of senior convertible note $-  $(28,478,804)     $(28,478,804)
Change in fair value of derivative liability $8,324,802  $(1,482,621) $8,599,666  $(1,482,621)
Change in fair value of warrant liability $2,571,732  $8,651,922  $5,022,288  $20,460,522 
Change in fair value of contingent consideration $(3,044,019) $1,851,446  $(2,864,551) $1,851,446 
Other non-operating income (loss), net $486,386  $58,770  $532,836  $(1,352,415)
Depreciation and amortization $(1,887,729) $(3,199,225) $(3,750,447) $(6,429,961)
Right of use asset amortization $(19,984) $(140,889) $(38,427) $(252,505)
Asset impairment charges $(16,135,000) $-  $(16,135,000) $- 
Stock-based Compensation $-  $(1,729,401) $(921,991) $(2,611,773)
Cost of acquisition $-  $(192,483)  (35,930) $(255,482)
Income tax benefit (expense) $-  $5,503,861  $-  $5,503,861 
Net loss $(14,132,682) $(34,334,629) $(18,301,273) $(34,887,010)
  

December 31,

2023

  

June 30,

2023

 
  (Unaudited)    
Assets:        
EEG iGaming $886,939  $15,275,501 
EEG Games $3,048,490  $4,486,563 
Other Corporate $3,668,980  $2,339,227 
         
Total $7,604,409  $22,101,291 
Total Assets $7,604,409  $22,101,291 

 

  2023  2022  2023  2022 
  

For the three months ended

December 31,

  

For the six months ended

December 31,

 
  2023  2022  2023  2022 
Revenues:            
EEG iGaming segment $1,840,958  $5,538,486  $3,797,007  $14,133,832 
EEG Games segment $741,069  $870,919  $1,474,837  $1,880,837 
                 
Total $2,582,027  $6,409,405  $5,271,844  $16,014,669 
                 
Adjusted EBITDA(1) (2)                
EEG iGaming segment $(202,562) $(1,150,938) $(454,965) $(1,612,133)
EEG Games segment $(109,175) $(561,742) $(210,642) $(1,108,538)
Total Adjusted EBITDA $(311,737) $(1,712,680) $(665,607) $(2,720,671)
                 
Adjusted for:                
                 
Other corporate and overhead costs $(2,116,384) $(1,744,816) $(5,149,367) $(3,914,445)
Interest expense $-  $(971,374) $-  $(2,029,782)
Change in fair value of derivative liability $(536,698) $8,324,802  $(536,698) $8,599,666 
Change in fair value of warrant liability $74,111  $2,571,732  $279,476  $5,022,288 
Change in fair value of contingent consideration $-  $(3,044,019) $-  $(2,864,551)
Other non-operating income (loss), net $(54,940) $486,386  $(45,316) $532,836 
Depreciation and amortization $(1,076,056) $(1,887,729) $(2,163,005) $(3,788,874)
Right of use asset amortization $(24,149) $(19,984) $(42,410) $(44,819)
Asset impairment charges $(12,981,142) $(16,135,000) $(12,981,142) $(16,135,000)
Stock-based Compensation $(21,078) $-  $(42,156) $(921,991)
Legal Settlement $-  $-  $(500,000) $- 
Cost of acquisition $-  $-   -  $(35,930)
Income tax benefit (expense) $-  $-  $-  $- 
Net loss $(17,048,073) $(14,132,682) $(21,846,225) $(18,301,273)

(1)Other comprises of corporate and overhead costs.
(2)The Company has no intersegment revenues or costs and thus no eliminations required.
(3)(2)The Company defines Adjusted Segment EBITDA as earnings (loss) before, as applicable to the particular period, other corporate and overhead costs, interest expense; income taxes; depreciation and amortization, including right of use asset amortization; stock-based compensation; legal settlements; cost of acquisition;acquisitions; asset impairment charges; loss on extinguishment of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair value of warrant liability; change in fair value of contingent consideration; and other non-operating income (loss), net, and certain other non-recurring, non-cash or non-core items (included in table above).

 

42

Note 16 – Income Taxes

During the three and six months ended December 31, 2023, and the year ended June 30, 2023, the Company recorded no material current taxes, remained in a cumulative loss position in all jurisdictions, and maintained a full valuation allowance position against any deferred tax assets in the jurisdictions it operated in, thus recording no deferred tax benefits or expenses.

 

Note 1917 – Subsequent Events

 

AppointmentSeries E Redeemable Preferred Stock

On January 5, 2024, the Company entered into a Subscription and Investment Representation Agreement with a member of Alex Igelmanmanagement, pursuant to which the Company agreed to issue and sell one hundred (100) shares of the Company’s Series E Redeemable Preferred Stock, par value $0.001 per share, for $10 per share in cash (the “Series E Preferred Stock”). The sale closed on January 5, 2024.

On January 5, 2024, the Company filed a certificate of designations (the “Series E Certificate of Designations”) with the Secretary of State of Nevada, effective as of the time of filing, designating the rights, preferences, privileges and restrictions of the shares of Series E Preferred Stock. The Certificate of Designation provided that one hundred (100) shares of Series E Preferred Stock will have 6,000,000 votes each and will vote together with the outstanding shares of the Company’s common stock as a single class exclusively  with respect to any proposal of an amendment to the Company’s articles of incorporation to increase the authorized shares of Common Stock (the “Authorized Share Increase Proposal”) or any proposal to adjourn the annual or special meeting related to an Authorized Share Increase Proposal, if applicable.

27

Resignation of Chief ExecutiveFinancial Officer, Chief Operating Officer and Chief People Officer

 

Effective January 3, 2023On February 1, 2024, the Board appointed Alex Igelman as CEO. InCompany, in connection with Mr. Igelman’s appointment as CEO, Mr. Igelmancost reductions and streamlining of business operations at the Company, entered into an employment agreement, which included the grantreceived notice from Michael Villani, Chief Financial Officer, Damian Mathews, Chief Operating Officer, and Jenny Pace, Chief People Officer of common stock and stock options. These stock awards are being granted as inducement equity awards outside the Company’s Esports Entertainment Group, Inc. 2020 Equity Incentive Plan in accordance with Nasdaq Listing Rule 5635(c)(4). The Company has granted Mr. Igelman an award of 2,500,000 shares of common stock and an award of 2,500,000 time-based stock options. Mr. Igelman’s shares of common stock may not be sold or transferred until the six-month anniversary of the date of grant. Mr. Igelman’s stock options will vest in equal quarterly installments over a one-year period subject to his continued employmenttheir resignations from their respective positions with the Company, on the applicable vesting dates. The stock awards are subject to the terms of an award agreement outlining the specific termseffective April 30, 2024. Mr. Mathews shall remain in his position as a member of the stock awards.

AppointmentCompany’s Board of Michael Villani as Interim Chief Financial Officer

Effective January 6, 2023, the Company announced the appointmentDirectors. The resignations of Michael Villani as the Interim CFO, in addition to his current role as the Financial Controller. Mr. Villani, will also serve as the Company’s principal financial officer.

The previous COO and CFO, Damian Mathews resigned from his positions on December 31, 2022. Mr. Mathews didand Ms. Pace were not resign as athe result of any disagreementdisagreements with the Company on any matter relating to the Company’s operations, policies, or practices. Mr. Mathews will continue on in his role as a Director of the Company.

 

Approval of reverse stock splitSecured Note Purchase Agreement

 

On January 26, 2023, heldMarch 13, 2024, the Company announced that it had entered into an agreement, dated March 7, 2024 (the “Secured Note Purchase Agreement”) and a Secured Promissory Note Agreement (the “Secured Note Agreement”), with the holder of its 2022 annual meeting of stockholdersSeries C Preferred Stock and Series D Preferred Stock, for approximately $1,420,000 (the “Annual Meeting”“Secured Note”) and the stockholders approved a reverse stock split. The key terms of the Common Stock at a ratio of not less than one-for-twenty (1-for-20) and not more than one-for-one-hundred (1-for-100), with our Board having the discretion as to the exact ratio of any reverse stock split to be set within the above range, without a corresponding reduction in the total number of authorized shares of Common Stock, and to be in effect no later than February 22, 2023 to meet the minimum bid price compliance milestone.Secured Note Agreement include:

 

●Security of the balance by a first priority security interest in all of the Company’s tangible and intangible personal property;
●A maturity date of March 7, 2026;
●Accrued interest to the outstanding principal balance of the Secured Note at a rate of 10% per annum. All interest shall be payable quarterly in-kind by adding the amount of accrued interest to the outstanding principal balance of the Secured Note on the last Business Day of each calendar quarter;

Senior Convertible Note consent to lower the conversion price and Amendment and Waiver Agreement for the sale of the Bethard business

28

 

On January 27, 2023,Agreement to Amend and Restate the Company received the written consentTerms of the holder of its outstanding SeniorSeries C Convertible Note to lower the conversion price of the SeniorPreferred Stock and Series D Convertible Note into shares of CommonPreferred Stock under Section 7(g) of the Senior Convertible Note to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of the Common Stock for a trading day during the five (5) consecutive trading day period ending, and including, the applicable date that the conversion price is lowered for purposes of a conversion (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events during such measuring period) until further written notice to the holder from the Company. The Company has converted $18,861,575 of the Senior Convertible note through the issuance of 217,159,442 shares of common stock. The outstanding balance of the Senior Convertible Note as of February 17, 2023, one day preceding this filing, was also impacted by the Amendment and Waiver Agreement discussed below.

Sale of Spanish iGaming Operations

On January 18, 2023, the Company closed the transaction and sold its Spanish iGaming operations, including its Spanish iGaming license. The Company received approximately $1,200,000 in proceeds and $1,000,000 in cash from the return of a deposit held with the Spanish regulator. Sixty-five percent (65%) of the proceeds and cash received is required to be remitted to the Holder. The gain on sale was approximately $800,000.

Sale of Bethard iGaming Operations

 

On February 14, 2023,March 7, 2024, in connection with the Secured Note Agreement, the Company entered into a Shareamended and restated its Series C Preferred Stock and Series D Preferred Stock Certificates of Designations (the “Preferred Stock CODs, as amended and restated”) to include the following key amendments:

●A six month standstill on certain conversions through September 7, 2024;
●After the standstill a limit on certain conversions to $150,000 per month;
●Removal of the Floor Price and Conversion Floor Price Condition, as defined in the previous filed Preferred Stock CODs;
●A Maturity Date of March 7, 2026, was added, at what time the Preferred Stock becomes redeemable for cash;
●No dividends on the outstanding balances through the new Maturity Date unless there is a triggering event as defined in the Preferred Stock CODs, as amended and restated;
●Amendments to the Subsequent Placement Optional Redemption, as defined in the Preferred Stock CODs, such that the first $10,000,000 raised by the Company, (including the $1,420,000 from the Secured Note), would be excluded from being used to repay down the Preferred Stock, per the terms of the Preferred Stock CODs, as amended and restated, if it is used on operating expenses in its ordinary course of business.

The transactions contemplated by the Secured Note Purchase Agreement (“SPA”) to sell its Bethard iGaming business, an operatorand the Secured Note Agreement and Preferred Stock CODs, as amended and restated, were approved by our Board of online casino and sportsbook brands that is licensed in Malta and Sweden. Directors.The sale of the Bethard business is expected to close within two weeks of signing the SPA. The total purchase consideration in the SPA was determined by the parties to be approximately €

9,600,000 (equivalent to approximately $

10,300,000 using exchange rates at February 14, 2023) comprised of €1,650,000 (equivalent to approximately $1,770,000 using exchange rates at February 14, 2023) of cash proceeds payable to the Company at closing, with an additional €6,500,000 (equivalent to approximately $7,000,000 using exchange rates at February 14, 2023) of purchase consideration identified to a release of the Company’s obligations from payment of the contingent consideration originating from the Bethard acquisition. The purchaser of the Bethard business will also assume liabilities of approximately €1,200,000 (equivalent to approximately $1,290,000 using exchange rates at February 14, 2023). The terms of sale allow for a cash holdback of €150,000 (equivalent to approximately $160,000 using exchange rates at February 14, 2023) for a period of two months that may be used by the purchaser to compensate it for the assumption of liabilities above agreed upon amounts under the SPA. Amounts owed by the purchaser to the Company of €1,260,000 (equivalent to approximately $1,350,000 using exchange rates at February 14, 2023) will be settled as part of the transaction.

 

The value of the Series C Preferred Stock and Series D Preferred Stock as of March 7, 2024, was $3,549,177 and $1,903,252, respectively.

On February 16, 2023, the Company entered into the Amendment as a condition to the closing of the sale of the Bethard business. The Amendment requires the Company to deposit 50% of the proceeds from the sale of the Bethard business in a bank account in favor of the Holder. The Amendment also requires the Company to deposit 50% of the proceeds of any permitted future sale of assets or any subsequent debt or equity offer or sale (a “Securities Transaction”) and 100% of the proceeds of any additional indebtedness incurred in the future, into such bank account in favor of the Holder, or, at the option of the Holder, redeem amounts under the Senior Convertible Note using such proceeds.

The Amendment also modifies the Senior Convertible Note to increase the principal balance by $2,950,000 for additional interest and other amounts previously recorded by the Company as liabilities to the Holder, as well as for fees for the Amendment. The Amendment further provides for a voluntary reduction in the Conversion Price (as defined in the Senior Convertible Note) when the Company issues or is deemed to issue common stock in a future registered offering at a price below the Conversion Price then in effect, to the lower issuance price in such offering, subject to certain exceptions. The Amendment also provides rights to the Holder to participate in future Securities Transactions for a period of two years from the later of the date of the Amendment and the date that no payment amounts due to the Holder remain outstanding. The Company incurred fees of $460,000 as part of the amendment.

After including the impact of the conversions reducing the Senior Convertible Note by $18,861,573 and the Amendment increasing the Senior Convertible Note by $2,950,000, for fees of $450,000 and converted accrued liabilities of $2,500,000, on February 17, 2023, one business day preceding this filing, the Company has reduced its outstanding debt on the Senior Convertible Note to $16,310,000.

4329

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

 

The following discussion and analysis should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This section of this report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like:such as, but not limited to, believe, expect, estimate, anticipate, intend, plan, project targets, likely, aim, will, would, could, and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

 

These risks and uncertainties include those described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report and in our 2023 Annual Report on Form 10-K, including those described under “Risk Factors” therein, as may be updated in our filings we make with the SEC. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned to not place undue reliance on forward-looking statements, which reflect management’s view only as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, unless required by law.

Overview

 

Esports is skill based,a skill-based, competitive, and organized form of video gaming by professional players, playing individually or as teams. Esports typically takes the form of organized, multiplayer video games that include genres such as real-time strategy, fighting, first-person shooter and multiplayer online battle arena games. As of December 31, 2022, the most popular esports games in the industry include Dota 2 and League of Legends (each multiplayer online battle arena games), and Counter-Strike: Global Offensive (a first-person shooter game). Fortnite, Call of Duty¸ Overwatch, and Apex Legends are other well-known popular esports games in the industry. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including twitch.tv and youtube.com.

 

EEGEsports Entertainment Group (the “Company” or “EEG) is an esports focusedesports-focused iGaming and entertainment company with a global footprint. EEG’s strategy is to build and acquire betting and related platforms, and lever them into the rapidly growing esports vertical. We are focused on driving growth in two markets that include iGaming (“EEG iGaming”) and esports (“EEG Games”).

We have financed operations primarily through the sale of equity securities and short-term debt. Until revenues are sufficient to meet our needs, we will continue to attempt to secure financing through equity or debt securities.

 

Basis of Presentation

 

We operate two complementary business segments: Our EEG iGaming business and our EEG Games business.

 

EEG iGaming

Our EEG iGaming business is comprised of our casino and sportsbook product offerings. Currently, we operate our EEG iGaming segment primarily in Europe.

 

EEG iGaming includes the esports betting platform with fullCompany’s iGaming casino and sportsbookother functionality and services for EEG iGaming customers. Our in-house gambling softwareCurrently, the Company operates the business to consumer segment primarily in Europe. iDefix, proprietary technology acquired in connection with the acquisition of Lucky Dino, is an MGA licensed iGaming platform Phoenix, is a modern reimagined sportsbookwith payments, payment automation manager, bonusing, loyalty, compliance and casino integrations that caters to both millennial esports bettors as well as traditional sports bettors. Phoenix is being developed through the assets and resources from our FLIP Sports Limited acquisition.services Lucky Dino.

 

EEG’s goal is to be a leader in the large and rapidly growing sector of esports real-money wagering, offering fans the ability to wager on professionalapproved esports events in a licensed and secure environment. From February 2021, under the terms of our MGA license, we are now able to accept wagers from residents of over 180 jurisdictions including countries within the EU, Canada, New Zealand and South Africa, on our ‘‘Vie.bet’’ platform.

 

Alongside the Vie.bet esports focused platform, EEG owns and operates:

●five online casino brands of Lucky Dino Gaming Limited and Hiidenkivi Estonia OU, its wholly-owned subsidiary (collectively referred to as “Lucky Dino”), licensed by the MGA on its in-house built iDefix casino-platform, and
●Bethard Group Limited (“Bethard”) online sportsbook and casino brands, operating under MGA, Spanish, Irish and Swedish licenses. The Company has entered into a share purchase agreement to sell the Bethard business and it is expected to close in the second quarter of fiscal 2023.

In total, weoperates five online casino brands of Lucky Dino Gaming Limited and Hiidenkivi Estonia OU, its wholly-owned subsidiary (collectively referred to as “Lucky Dino”), licensed by the MGA on its in-house built iDefix casino-platform. We currently hold threeone Tier-1 gambling licenses (Malta, Ireland, and Sweden (Swedish License will be sold as part of the Bethard sale)).license in Malta. Our core assets in Lucky Dino providebusiness provides a foothold in mature markets in Europe into which we believe we can cross-sell our esports offerings.

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 LANlocal area network (“LAN”) center management software and services, enabling us to seamlessly manage mission critical functions such as game licensing and payments, and (2) online tournaments (through our Esports Gaming League tournament platform), and (3) player-vs-player wagering.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.

 

We believe that as the size of the market and the number of esports enthusiasts continues to grow, so will the number of esports enthusiasts who gamble on events, which would likely increase the demand for our platform.

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Impact of COVID-19

COVID-19 emerged in December 2019 and has since adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets.

The Company has previously indicated that a significant or prolonged decrease in consumer spending on entertainment or leisure activities may have an adverse effect on demand for the Company’s product offerings, including in-person access to game centers and tournaments, reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations.

The ultimate impact of the COVID-19 pandemic on our business will depend on future developments, which are uncertain and may result in an extended period of continued business disruption and reduced operations. A materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on the Company’s business, financial condition and results of operations. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.

 

Recent Developments:

Leadership changes

Appointment of Michael Villani as Interim Chief Financial Officer

Effective January 6, 2023, the Company announced the appointment of Michael Villani as the Interim CFO, in addition to his current role as the Financial Controller. Mr. Villani will also serve as the Company’s Principal Financial Officer.

Resignation of Damian Mathews as Chief Operating Officer and Chief Financial Officer

On December 31, 2022, Damian Mathews resigned from his position as COO and CFO of the Company. Mr. Mathews did not resign as a result of any disagreementCompliance with the Company on any matter relating to the Company’s operations, policies or practices. Mr. Mathews will continue on in his role as a Director of the Company.

Appointment of Alex Igelman as Chief Executive Officer

On December 22, 2022, the Board of the Company appointed Alex Igelman as CEO, effective January 3, 2023.

Termination of Grant Johnson as Chairman and Chief Executive Officer

On December 23, 2022, Grant Johnson resigned from the Board. Mr. Johnson resigned following his termination for cause, by the Board, from his position as Chairman and CEO of the Company, effective December 3, 2022. As a result, Mr. Johnson is no longer an officer or director of the Company.

Sale and Restructuring in the iGaming business and Amendment and Waiver for the Sale of the Bethard Business

We have initiated a process to evaluate the strategic options for the iGaming business, including exploring a sale of iGaming assets due to increasing regulatory burdens and competition. Our new CEO is tasked with assessing the value of the iGaming assets and determining next steps. The Company has also taken the following actions:

Closure of Argyll and vie.ggListing Requirements

 

On November 10, 2022,February 13, 2024, the Company determined thatannounced it would close down its licensed remote gambling operation in the UK market. The Company will surrender its UK license as part of the winding down of the Argyll UK iGaming operations. On November 15, 2022, as part of the winding down of the Argyll UK iGaming operations, players were informed that they would no longer be able to place bets from November 30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8, 2022 Argyll UK surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022 and December 14, 2022 Argyll UK attempted to refund customer accounts that still had remaining balances. As of December 31, 2022, approximately $0.1 million still remained to be refunded to customers. Going forward, Argyll UK will comply with requests for refunds to the extent required by law and in accordance with Argyll UK’s terms and conditions. The Company had previously fully impaired the goodwill, intangible assets and other long-lived assets of the Argyll UK in the fiscal year ended June 30, 2022.

On October 28, 2022, the Company determined that it would close down its vie.gg New Jersey operations and exit its transactional waivervoluntarily delisting from the New Jersey Division of Gaming Enforcement.

45

Senior Convertible Note consent to lower the conversion price and Amendment and Waiver Agreement for the sale of the Bethard business

Nasdaq Capital Markets, LLC (“Nasdaq”). On January 27, 2023,February 16, 2024, the Company received the written consentnotice from Nasdaq that it was being suspended on Nasdaq on opening of trading on February 21, 2024. As a result of the holdersuspension, on February 21, 2024 the Company began trading on the Over the Counter Market (the “OTC”). The Company is currently trading on the “Pink Market” of the OTC. On February 27, 2024, the Company filed a Form 25 with the SEC to effect the delisting of its outstanding Senior Convertible Note (“securities from Nasdaq. At the Holder”) to lower the conversion pricetime of the Senior Convertible Note into shares of Common Stock under Section 7(g) of the Senior Convertible Note to 90% of the lowest VWAP (as defined in the Senior Convertible Note) of the Common Stock for a trading day during the five (5) consecutive trading day period ending,announcing its delisting and including, the applicable date that the conversion price is lowered for purposes of a conversion (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events during such measuring period) until further written notice to the holder from the Company. The Company has converted $18.9 million of the Senior Convertible note through the issuance of 217.2 million shares of common stock. The outstanding balance of the Senior Convertible Note as of February 17, 2023, one day preceding this filing, was also impacted by the Amendment and Waiver Agreement discussed below.

Sale of Spanish iGaming Operations

On January 18, 2023, the Company closed the transaction and sold its Spanish iGaming operations, including its Spanish iGaming license. The Company received approximately $1.2 million in proceeds and $1.0 million in cash from the return of a deposit held with the Spanish regulator. Sixty-five percent (65%) of the proceeds and cash received is required to be remitted to the Holder. The gain on sale was approximately $0.8 million.

Sale of Bethard iGaming Operations

On February 14, 2023, the Company entered into a Share Purchase Agreement (“SPA”) to sell its Bethard iGaming business, an operator of online casino and sportsbook brands that is licensed in Malta and Sweden.

The sale of the Bethard business is expected to close within two weeks of signing the SPA. The total purchase consideration in the SPA was determined by the parties to be approximately €9.6 million (equivalent to approximately $10.3 million using exchange rates at February 14, 2023) comprised of €1.7 million (equivalent to approximately $1.8 million using exchange rates at February 14, 2023) of cash proceeds payable to the Company at closing, with an additional €6.5 million (equivalent to approximately $7.0 million using exchange rates at February 14, 2023) of purchase consideration identified to a release of the Company’s obligations from payment of the contingent consideration originating from the Bethard acquisition. The purchaser of the Bethard business will also assume liabilities of approximately €1.2 million (equivalent to approximately $1.3 million using exchange rates at February 14, 2023). The terms of sale allow for a cash holdback of €0.15 million (equivalent to approximately $0.16 million using exchange rates at February 14, 2023) for a period of two months that may be used by the purchaser to compensate it for the assumption of liabilities above agreed upon amounts under the SPA. Amounts owed by the purchaser to the Company of €1.3 million (equivalent to approximately $1.4 million using exchange rates at February 14, 2023) will be settled as part of the transaction.

On February 16, 2023, the Company entered into an Amendment and Waiver Agreement (“Amendment”) as a condition to the closing of the sale of the Bethard business. The Amendment requires the Company to deposit 50% of the proceeds from the sale of the Bethard business in a bank account in favor of the Holder. The Amendment also requires the Company to deposit 50% of the proceeds of any permitted future sale of assets or any subsequent debt or equity offer or sale (a “Securities Transaction”) and 100% of the proceeds of any additional indebtedness incurred in the future, into such bank account in favor of the Holder, or, at the option of the Holder, redeem amounts under the Senior Convertible Note using such proceeds.

The Amendment also modifies the Senior Convertible Note to increase the principal balance by $3.0 million for additional interest and other amounts previously recorded by the Company as liabilities to the Holder, as well as for fees for the Amendment. The Amendment further provides for a voluntary reduction in the Conversion Price (as defined in the Senior Convertible Note) when the Company issues or is deemed to issue common stock in a future registered offering at a price below the Conversion Price then in effect, to the lower issuance price in such offering, subject to certain exceptions. The Amendment also provides rights to the Holder to participate in future Securities Transactions for a period of two years from the later of the date of the Amendment and the date that no payment amounts due to the Holder remain outstanding. The Company incurred fees of $0.5 million as part of the amendment.

After including the impact of the conversions reducing the Senior Convertible Note by $18.9 million and the Amendment increasing the Senior Convertible Note by $3.0 million, for fees of $0.5 million and converted accrued liabilities of $2.5 million, on February 17, 2023, one business day preceding this filing, the Company has reduced its outstanding debt on the Senior Convertible Note to $16.3 million.

Nasdaq Continued Listing Rules or Standards

Compliance with Nasdaq Listing Requirements

On April 11, 2022, the Company received a deficiency notification letter from the Listing Qualifications Staff of the Nasdaq Stock Market (“Nasdaq”) indicating thatsuspension 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.

On June 7, 2022, the Company received a further letter from Nasdaq notifying the Company that for the last 30 consecutive business days, the Company’s minimum Market Value of Listed Securities (“MVLS”) was below the minimum of $35,000,000 required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(b)(2).

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 Nasdaq’s minimum bid price, and the $2.5 million$2,500,000 stockholders’ equity requirement (the “Equity Rule”), as set forth in Nasdaq Listing Rules 5550(a)(2) and 5550(b)(1), respectively, on or before February 7, 2023 and March 31, 2023, respectively, and adhering to certain other conditions and requirements described below.

On December 6, 2022, the Company received a fourth letter from Nasdaq notifying the Company that it has not regained compliance with Listing Rule 5550(b)(2) requiring the Company to maintain a MVLS at a minimum of $35,000,000. This was addressed in the November 17, 2022, hearing before the Panel where the Company presented on its plan to comply with the Rule 5550(b)(2) or alternative criteria and was granted continued listing subject to the criteria noted above.

From the initial determination, the Company has completed conditions 1 and 2:

1.On or before January 13, 2023, the Company shall file a Form S-1 registration statement with the SEC for a $10 million public offering;
2.On January 26, 2023, the Company shall obtain stockholder approval for a reverse stock split at a ratio that is sufficient to ensure compliance with the Bid Price Rule;

On January 13, 2023, the Company filed its S-1, subject to amendments, and on January 26, 2023, as part of the 2022 annual meeting, the Company obtained stockholder approval for the of the common stock at a ratio of not less than one-for-twenty (1-for-20) and not more than one-for-one-hundred (1-for-100), with our Board having approved the reverse split at a ratio of one-for-one-hundred (1 for 100), without a corresponding reduction in the total number of authorized shares of common stock, and to be in effect no later than February 22, 2023 to meet the minimum bid price compliance milestone.

On February 8, 2023 the Company received notice from the Panel updating its remaining conditions as follows:

1.On February 20, 2023, the Company shall provide a written update to the Panel regarding the progress of its debt-to-equity conversion plan and its impact on the Company’s equity;
2.On March 7, 2023, the Company shall have demonstrated compliance with the Bid Price Rule, by evidencing a closing bid price of $1.00 or more per share for a minimum of ten consecutive trading sessions; and
3.On March 31, 2023, the Company shall demonstrate compliance with the shareholder equity requirement, as outlined in Equity Rule.

. The Company is working towards meeting all other conditions relatednow subject to regaining compliance with the Nasdaq Listing Rules including the conversion of the Senior Convertible Note.

46

Additionally, the Panel reserved the right to reconsider the terms of this exception. As a result, any failure to regain and maintain compliance with the continued listing requirements of Nasdaq could result in delisting of our common stock from Nasdaqthe OTC and negatively impact our company and holders of our common stock, including by reducingexpects to be trading on the willingness of investors to hold our common stock becauseOTCQB tier of the resulting decreased price, liquidity and tradingOTC upon filing 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.

As discussed above, the Company is in the process of taking definitive steps to comply with all applicable conditions and criteria for continued listing on Nasdaq. There can be no assurances, however, that the Company will be able to do so. The Company must satisfy the time frame granted by the Panel or Nasdaq will provide written notification that its securities will be delisted. As part of the compliance plan the Company is negotiating with the Holder of its Senior Convertible Note to restructure the Senior Convertible Note, including the derivative liability.

Regulatory Environment

We operate in both emerging and well-established competitive markets. We expect that our future growth will come from online gaming and sports betting via expansions of gaming in existing jurisdictions; entrance into new jurisdictions and, improvements and expansions of our existing properties and strategic acquisitions of gaming properties, expanded software sales to more screens in game centers including in universities, entertainment centers and casinos, as well as increased esports adoption and events, particularly in North America. We continue to adjust operations and cost structures to reflect the changing economic conditions. We also continue to focus on revenue and cost synergies from our acquisitions, and offering our customers additional gaming experiences through our affiliates. The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including game centers; riverboat casinos; dockside casinos; land-based casinos; video lottery; iGaming; online and retail sports betting; sports media companies; gaming at taverns; gaming at truck stop establishments; sweepstakes and poker machines not located in casinos; the potential for increased fantasy sports; significant growth of Native American gaming tribes, historic racing or state-sponsored i-lottery products in or adjacent to states we operate in; and other forms of gaming.

United Kingdom

Since the acquisition of the Argyll UK EEG iGaming business on July 31, 2020, the Company has responded to periodic requests for information from the UKGC in relation to information required to maintain its UK license following the change of corporate control. There have been no adverse judgments imposed by the UKGC against the Company. In recent months, the Company reduced its spending on marketing and was focused on retaining existing customers and reactivating past customers. On November 10, 2022, the Company determined that it would close down its licensed remote gambling operation in the UK market. On November 15, 2022, as part of the winding down of the Argyll UK iGaming operations, players were informed that they would no longer be able to place bets from November 30, 2022 and that they could withdraw their balances through December 7, 2022. On December 8, 2022 Argyll UK surrendered its UK license and the surrender was confirmed by the UKGC on December 9, 2022. Between December 7, 2022 and December 14, 2022 Argyll UK attempted to refund customer accounts that still had remaining balances. As of December 31, 2022, approximately $0.1 million still remained to be refunded to customers. Going forward, Argyll UK will comply with requests for refunds to the extent required by law and in accordance with Argyll UK’s terms and conditions.

Netherlands

A new licensing regime was implemented in the Netherlands for online gaming operators, with applications being accepted from April 1, 2021. EEG did not apply for a license after assessing the criteria for applying. The first licenses took effect on October 1, 2021. In a surprise to the market, the Dutch Minister for Legal Protection issued guidance warning that even those operators that were not targeting the Dutch market but were passively accepting Dutch customers would be punished, with authorities given the power to issue increased fines. Prior to this guidance, operators had understood that passive acceptance of bets was permissible. The vast majority of unlicensed operators (including EEG’s brands) promptly withdrew from the Dutch market completely on October 1, 2021, closing all active Dutch customer accounts. The sudden and earlier than anticipated withdrawal from the Dutch market had a negative impact on the unlicensed operators in the region. The sole period in which the Company had revenues from its EEG iGaming operations in the Netherlands was in the fiscal quarter ended September 30, 2021.

Finland

On January 1, 2022, amendments to the Finnish Lotteries Act came into effect, further restricting marketing opportunities and enhancing the enforcement powers of the Finnish regulator. Prior to these amendments coming into effect, in the fiscal quarter ended December 31, 2021, the Company has received communications from the Finnish regulator requesting clarification on its marketing and gaming practices related to its Finnish EEG iGaming operations. The Company responded to the initial communication in third quarter of fiscal year 2022 and received a second request for further clarification. On November 28, 2022, the Company provided its response, further addressing its business and marketing operations in Finland.

47

Further powers allowing the Finnish regulator to require blocking by payment service providers of overseas operators who are targeting their marketing activities towards Finnish customers are also due to come into effect in 2023. Operations in Finland run under the MGA license on the Lucky Dino in-house built iDefix casino-platform.

On January 5, 2023, the Company received a communication that the Finnish regulator was satisfied with the Company’s response and no adverse judgments were imposed by the Finnish regulator against the Company.

Other

In July 2020, the Swedish Ministry for Finance implemented a number of restrictive measures on online casino operators in reaction to the impact of COVID-19 restrictions. These included caps on deposits and bonuses. This had a negative impact on revenues across the industry during that period. These restrictions were lifted on November 14, 2021.

The State of Ontario’s licensing regime came into force on April 4, 2022, meaning that any operator of gambling sites taking bets from customers in Ontario will require a license to do so. Whilst EEG iGaming may wish to apply for a license in the future, it has decided not to apply for a license at this time and therefore we blocked access to our site for users based in the territory in advance of that date.

The Company continues to monitor developments related to regulatory activities.report.

 

Key Performance Indicators

 

In the esports and gaming industry, revenue is driven by discretionary consumer spending. We have no way of determining why customers spend more or less money; therefore, we are unable to quantify a dollar amount for each factor that impacts our customers’ spending behaviors. However, some insight into the factors that we believe are likely to account for such changes and which factors may have a greater impact than others, include decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions, such as lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market and high fuel or other transportation costs. Such insights are based solely on our judgment and professional experience, and no assurance can be given as to the accuracy of our judgments. The vast majority of our revenues is EEG iGaming revenue, which is highly dependent upon the number and volume and spending levels of customers.

 

Reportable Segments

 

At December 31, 2022,2023, the Company has two reportable segments: EEG iGaming and EEG Games, consistent with our reportable segments at June 30, 2022. Prior periods presented have been recast to reflect any change in reportable segments from the corresponding period.2023.

31

 

Financial Highlights

 

The following table setstables set forth a summary of our financial results for the periods indicated and isare derived from our unaudited condensed consolidated financial statements for the three and six months ended December 31, 2023 and 2022, and 2021:respectively:

 

 

Three Months Ended

December 31,

 

Six Months Ended

December 31,

  

Three Months Ended

December 31,

 

Six Months Ended

December 31,

 
 2022 2021 2022 2021  2023  2022  2023  2022 
                  
Net revenue $6,409,405  $14,531,047  $16,014,669  $30,939,338  $2,582,027  $6,409,405  $5,271,844  $16,014,669 
Total operating expenses (excluding Asset impairment charges) $11,774,614  $26,557,872  $27,441,399  $51,570,763  $6,131,431  $11,774,614  $13,834,389  $27,441,399 
Asset impairment charges  16,135,000   -   16,135,000   -   12,981,142   16,135,000   12,981,142   16,135,000 
Total other income (expense), net $7,367,527  $(27,811,665) $9,260,457  $(19,759,446) $(517,527) $7,367,527  $(302,538) $9,260,457 
Income tax expense $-  $5,503,861  $-  $5,503,861  $-  $-  $-  $- 
Net loss $14,132,682  $34,334,629  $18,301,273  $34,887,010  $(17,048,073) $(14,132,682) $(21,846,225) $(18,301,273)
Net loss attributable to common stockholders $(31,410,571) $(14,408,568) $(49,972,199) $(18,852,331)

48

Non-GAAP Information

 

This report includes Adjusted EBITDA, which is a non-accounting principlenon-U.S. GAAP (“U.S. GAAP” is defined as accounting principles generally accepted in the United States of America (“GAAP”)America) financial performance measure that we use to supplement our results presented in accordance with U.S. GAAP. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. The Company uses this non-GAAPnon-U.S. GAAP financial measure for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that it provides useful information about operating results, enhances the overall understanding of past financial performance and future prospects, and allows for greater transparency with respect to key metrics used by management in its financial and operational decision making. Adjusted EBITDA, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. We define Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense, net;expense; income taxes; depreciation and amortization including right of use asset amortization; stock-based compensation; cost of acquisition;acquisitions; asset impairment charges; loss on extinguishment of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair value of warrant liability; change in fair value of contingent consideration; and other non-operating income (loss), net and certain other non-recurring, non-cash or non-core items, as described in the reconciliation below, if not covered above.

 

Adjusted EBITDA excludes certain expenses that are required in accordance with U.S. GAAP because they are non-recurring items (for example, in the case of transaction-related costs), non-cash expenditures (for example, in the case of depreciation and amortization, stock-based compensation, legal settlements, asset impairment charges, change in fair value of derivative liability and change in fair value of warrant liability), or are not related to our underlying business performance (for example, in the case of interest income and expense and litigation settlement and related costs).

 

Segment Revenues and Adjusted EBITDA

 

The table below presents our Segment Revenues and Adjusted EBITDA reconciled to our net loss, for the periods indicated:

 

 

For the three months ended

December 31,

 

For the six months ended

December 31,

  

For the three months ended

December 31,

 

For the six months ended

December 31,

 
 2022 2021 2022 2021  2023  2022  2023  2022 
Revenues:                         
EEG iGaming segment $5,538,486  $12,439,696` $14,133,832   27,102,284  $1,840,958  $5,538,486  $3,797,007  $14,133,832 
EEG Games segment $870,919  $2,091,351  $1,880,837   3,837,054  $741,069  $870,919  $1,474,837  $1,880,837 
                                
Total $6,409,405  $14,531,047  $16,014,669   30,939,338  $2,582,027  $6,409,405  $5,271,844  $16,014,669 
                                
Net loss: $(14,132,682) $(34,334,629) $(18,301,273)  (34,887,010) $(17,048,073) $(14,132,682) $(21,846,225) $(18,301,273)
                                
Adjusted for:                                
Interest expense $971,374  $2,412,716  $2,029,782  $4,757,912  $-  $971,374  $-  $2,029,782 
Loss on conversion of senior convertible note  -  $5,999,662  $-  $5,999,662 
Loss on extinguishment of senior convertible note $-  $28,478,804  $-  $28,478,804 
Change in fair value of derivative liability $(8,324,802) $1,482,621  $(8,599,666) $1,482,621  $536,698  $(8,324,802) $536,698  $(8,599,666)
Change in fair value of warrant liability $(2,571,732) $(8,651,922) $(5,022,288) $(20,460,522) $(74,111) $(2,571,732) $(279,476) $(5,022,288)
Change in fair value of contingent consideration $3,044,019  $(1,851,446) $2,864,551  $(1,851,446) $-  $3,044,019  $-  $2,864,551 
Other non-operating income (loss), net $(486,386) $(58,770) $(532,836) $1,352,415  $54,940  $(486,386) $45,316  $(532,836)
Depreciation and amortization $1,887,729  $3,199,225  $3,750,447  $6,429,961  $1,076,056  $1,887,729  $2,163,005  $3,750,447 
Right of use asset amortization $19,984  $140,889  $38,427  $252,505  $24,149  $19,984  $42,410  $38,427 
Asset impairment charges $16,135,000  $-  $16,135,000  $-  $12,981,142  $16,135,000  $12,981,142  $16,135,000 
Stock-based compensation $-  $1,729,401  $921,991  $2,611,773  $21,078  $-  $42,156  $921,991 
Legal settlements $-  $-  $500,000  $- 
Cost of acquisition $-  $192,483  $35,930  $255,482  $-  $-  $-  $35,930 
Income tax benefit $-  $(5,503,861) $-  $(5,503,861) $-  $-  $-  $- 
Total Adjusted EBITDA $(3,457,496) $(6,764,827) $(6,679,935) $(11,081,704) $(2,428,121) $(3,457,496) $(5,814,974) $(6,679,935)
                                
Adjusted EBITDA                
Adjusted EBITDA(1)                
EEG iGaming segment $(1,150,938) $(2,909,585) $(1,612,133) $(3,853,812) $(202,562) $(1,150,938) $(454,965) $(1,612,133)
EEG Games segment $(561,742) $(845,807) $(1,108,538) $(1,722,315) $(109,175) $(561,742) $(210,642) $(1,108,538)
Other(1) $(1,744,816) $(3,009,435) $(3,959,264) $(5,505,577)
Other(2) $(2,116,384) $(1,744,816) $(5,149,367) $(3,959,264)
Total Adjusted EBITDA $(3,457,496) $(6,764,827) $(6,679,935) $(11,081,704) $(2,428,121) $(3,457,496) $(5,814,974) $(6,679,935)

 

(1) Other comprises of corporate and overhead costs.

(2) We have no intersegment revenues or costs and thus no eliminations were required.

(3) We define Adjusted EBITDA as earnings (loss) before, as applicable to the particular period, interest expense; income taxes; depreciation(2) Other comprises corporate and amortization including right of use asset amortization; stock-based compensation; cost of acquisition; asset impairment charges; loss on extinguishment of senior convertible note; loss on conversion of senior convertible note; change in fair value of derivative liability; change in fair value of warrant liability; change in fair value of contingent consideration; and other non-operating income (loss), net and certain other non-recurring, non-cash or non-core items (included in table above).overhead costs.

 

4932

 

Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The financial data is at the consolidated and reporting segment levels and reported in U.S. DollarDollars ($).

 

Comparison onof the three months ended December 31, 20222023 and 20212022

 

Net Revenue

 

RevenueNet revenue totaled $6.4$2.6 million in the three months ended December 31, 2022,2023, a decrease of $8.1$3.8 million, or 56%59%, from the $14.5$6.4 million recorded in the three months ended December 31, 2021.2022. The decrease is primarily attributable to the decreased insale of the Bethard Business on February 24, 2023 and the wind down and eventual liquidation of the Argyll entities where revenue producing operations were ceased on December 8, 2022. The iGaming operations of Lucky Dino, Bethard and Argyll that(before Bethard and Argyll were disposed of) were also impacted by worsening investment and market conditions and regulatory changes in the Netherlands, Finland and the UK from fiscal 2023, and the worsening investment and market conditions. The decrease in the iGaming segment revenue was $6.9$3.7 million, falling from $12.4$5.5 million to $5.5$1.8 million. Revenue in the EEG Games segment also decreased $1.2$0.1 million from $2.1$0.9 million to $0.9$0.8 million due to the disposaltiming of the Helix Holdings, LLC game center assets in Foxboro, MA and North Bergen, NJ that occurred in June 2022 and lower other revenues.hardware installations.

 

Cost of Revenue

 

Cost of revenue totaled $2.4$0.7 million in the three months ended December 31, 2022,2023, a decrease of $4.1$1.7 million, or 63%70%, from the $6.5$2.4 million recorded in the three months ended December 31, 2021.2022. The decrease is primarily attributable to the previously mentioned disposals of the Bethard Business and the Argyll operating entities and the decrease in the iGaming operations of Lucky Dino Bethard and Argyll in the EEG iGaming segment and includes corresponding EEG iGaming decreases in line with revenue of $2.3revenue. The iGaming decreases include $1.0 million forlower payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $0.8$0.2 million for thelower game provider expenses and $0.2$0.5 million for lower other direct expenses related to the delivery of services. EEG Games also had a reduction in costs with $0.7 million lower game provider costs.

 

Sales and Marketing

 

Sales and marketing expense totaled $1.8$0.7 million in the three months ended December 31, 2022,2023, a decrease of $5.1$1.1 million, or 74%61%, compared to the $6.9$1.8 million recorded for the three months ended December 31, 2021.2022. The decrease was primarily attributable to a $0.8 million reduction in marketing and $3.3$1.1 million lower affiliate costs related to the EEG iGaming segment and a $1.0 million reduction in Corporate expense driven by $0.9 million less incurred for sponsorship agreements with professional sports clubs and our service partners.segment.

 

General and Administrative

 

General and administrative expense totaled $7.6$4.8 million for the three months ended December 31, 2022,2023, a decrease of $5.6$2.8 million, or 42%37%, compared to the $13.2$7.6 million recorded for the three months ended December 31, 2021.2022. The decrease was primarily attributable to decreases of $0.8$1.5 million in payroll costs, $0.6$0.8 million depreciation and amortization, and $0.8$0.3 million decrease related to other general and administrative cost primarily from cost savings in information technology related disbursementscosts from the EEG iGaming segment, and further decreases of $0.7$0.5 million depreciationin payroll costs and amortization, and $0.4$0.1 million related to other general and administrative costs from the EEG Games segment. Corporatesegment, offset by a $0.4 million increase in other general and administrative costs decreased $1.8 million lower share based compensation expense and $0.7 million less other general and administrative cost primarily including lower professional fees and legalin corporate expenses.

 

Asset Impairment Charges

 

During the three months endedAt December 31, 2022,2023, the Company’s initiated a process to evaluateCompany concluded that impairment indicators existed considering that the strategic options forCompany delisted from Nasdaq, had management changes in the EEG iGaming business, including exploring a sale of EEG iGaming assets duesegment and continued to increasing regulatory burdens and competition. In December 2022, the Company closed down its licensed remote gambling operationsee revenues decline 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. Subsequent to the period end, the Company appointed a new CEO and a new interim CFO and on January 18, 2023 sold its EEG iGaming Spanish license. As part of these changes the Company has been focused on reducing costs in its businesses as it has seen the EEG iGaming revenues declinesegment and that they were significantly down from levels seen in the previous year and in the previous quarters.quarters, and EEG Games was not performing at the level previously expected. This, the decline in the Company’s stock price and uncertainties caused by inflation and world stabilityother factors were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. ForThe Company recognized total asset impairment charges of $13.0 million, including $3.6 million of goodwill and $8.4 million of other intangible assets from the threeEEG iGaming segment and six$1.0 million in of goodwill from the EEG Games. Further downturns in economic, regulatory and operating conditions could result in additional impairment in future periods.

During the three months ended December 31, 2022, the Company initiated a process to evaluate the strategic options for the EEG iGaming business and subsequent to the period end, the Company appointed a new CEO and a new CFO and on January 18, 2023 sold its EEG iGaming Spanish license. This and uncertainties caused by inflation and world instability were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. The Company recognized total goodwill asset impairment charges of $16.1 million, withincluding asset impairment charges to the goodwill to the iGaming reporting unit of $14.5 million, which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1.6 million, which is part of the EEG Games segment. Further downturns in economic, regulatory and operating conditions could result in additional goodwill impairment in future periods. There were no goodwill asset impairment charges recorded during the three months ended December 31, 2021.

5033

Other Income (expense)

 

Other income (expense), net changed $35.2decreased by $7.9 million from a loss of $27.8 million for the three months ended December 31, 2021 to income of $7.4 million for the three months ended December 31, 2022.2023 to an expense of $0.5 million for the three months ended December 31, 2023. The other expense for the three months ended December 31, 2023 resulted primarily from $0.5 million of expense from the recognition of the derivative liability related to the Series C Convertible Preferred Stock after the reclass to mezzanine equity caused by lack of authorized and unissued shares and $0.1 million other non-operating losses, offset by a $0.1 million gain from the fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $0.1 million for the September 2022 resultsWarrants issued as part of the September 2022 Offering.

The other income (expense), net for the three months ended December 31, 2022 resulted primarily from $1.0 million of interest expense related to the Senior Convertible Note and an increase of $3.0 million for the change in the fair value of the contingent consideration due as part of the Bethard agreement,transaction from the prior year, offset by other income primarily made up of $8.3 million for the change in the fair value of the derivative liability on Senior Convertible Note (as defined below)due to its elimination on the exchange to Series C Convertible Preferred Stock, and $2.6 million from the reduction in fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $1.5 million for the September 2022 Warrants (as defined below) issued as part of the September 2022 Offering (as defined below) that decreased from the $3.8 million valued on issuance at September 30, 2022 to $2.3 million at December 31, 2022, and a decrease of $1.0 million for the March 2022 Warrants from $1.2 million at SeptemberJune 30, 2022 to $0.2 million at December 31, 2022.

Other income (expense) for the three months ended December 31, 2021 was an expense2022 and a decrease of $27.8 million. The other expense for the three months ended December 31, 2021 results primarily from $6.0 million loss on the conversion of the Senior Convertible Note and $1.5 million loss from the change in value of the related derivative liability, driven by the conversion of a principal amount of approximately $5.7 million into 1.7 million shares of common stock, respectively, of the $7.5 million immediate conversion option provided to the Senior Convertible Note holder as part of the October 13, 2021 waiver provided on the covenants related to the Senior Convertible Note and $28.5 million of loss on extinguishment primarily attributable to amortization of the debt discount and the consideration to the holder for the February 22, 2022 waiver provided on the covenants related to the Senior Convertible Note and $2.4$0.1 million in interest expense. These expenses were offset by other income primarily made up of $8.7 million from the reduction in fair value of the warrant liability established for warrants convertible into shares of common stock that had been issued to the holder of the Senior Convertible Note and the recognition of $1.9 million of income for the change in the fair value of the contingent consideration due as part of the Bethard transaction.

Results of Operationswarrants.

 

Comparison onof the six months ended December 31, 20222023 and 20212022

 

Net Revenue

 

RevenueNet revenue totaled $16.0$5.3 million in the six months ended December 31, 2022,2023, a decrease of $14.9$10.7 million, or 48%67%, from the $30.9$16.0 million recorded in the six months ended December 31, 2021.2022. The decrease is primarily attributable to the decreased insale of the Bethard Business on February 24, 2023 and the wind down and eventual liquidation of the Argyll entities where revenue producing operations were ceased on December 8, 2022. The iGaming operations of Lucky Dino, Bethard and Argyll that(before Bethard and Argyll were disposed of) were also impacted by worsening investment and market conditions and regulatory changes in the Netherlands, Finland and the UK from fiscal 2023, and the worsening investment and market conditions. The decrease in the iGaming segment revenue was $13.0$10.3 million falling from $27.1$14.1 million to $14.1$3.8 million. Revenue in the EEG Games segment also decreased $0.4 million from $1.9 million from $3.8 million to $1.9$1.5 million due to the disposal of EGL and the Helix Holdings, LLC game center assets in Foxboro, MA and North Bergen, NJ that occurred in June 2022 and lower other revenues.timing of hardware installations.

 

Cost of Revenue

 

Cost of revenue totaled $6.1$1.3 million in the six months ended December 31, 2022,2023, a decrease of $6.9$4.8 million, or 53%79%, from the $13.0$6.1 million recorded in the six months ended December 31, 2021.2022. The decrease is primarily attributable to the previously mentioned disposals of the Bethard Business and the Argyll operating entities and the decrease in the iGaming operations of Lucky Dino Bethard and Argyll in the EEG iGaming segment and includes corresponding EEG iGaming decreases in line with revenue of $3.7revenue. The iGaming decreases include $3.2 million forlower payment processing fees, platform costs, gaming duties and costs related to revenue sharing arrangements, $1.2$0.5 million for thelower game provider expenses and $0.4$1.0 million for lower other direct expenses related to the delivery of services. EEG Games also had a reduction in costs with $1.4$0.1 million lower platformhosting, hardware and game provider costs.equipment costs and other direct expenses.

 

Sales and Marketing

 

Sales and marketing expense totaled $4.3$1.6 million in the six months ended December 31, 2022,2023, a decrease of $10.0$2.7 million, or 69%63%, compared to the $14.3$4.3 million recorded for the six months ended December 31, 2021.2022. The decrease was primarily attributable to a $1.1$0.3 million reduction in marketing $0.2and $2.6 million lower affiliate costs and $6.4 million lower sponsorship costs related to the EEG iGaming segment, andoffset by a $1.8$0.2 million reductionincrease in Corporatecorporate expense driven by $1.5 million less incurred for sponsorship agreements with professional sports clubs and our service partners, offset by $1.0 million higher other sales and marketing costs.partners.

 

General and Administrative

 

General and administrative expense totaled $17.0$11.0 million for the six months ended December 31, 2022,2023, a decrease of $7.3$6.0 million, or 30%35%, compared to the $24.3$17.0 million recorded for the six months ended December 31, 2021.2022. The decrease was primarily attributable to decreases of $1.9$2.7 million in payroll costs, $1.4$1.6 million depreciation and amortization, $0.9 million in information technology related costs and $0.5$0.3 million decrease related to other general and administrative cost primarily including incremental costs for information technology related disbursements from the EEG iGaming segment, and further decreases of $1.5$1.0 million depreciationin payroll costs and amortization, and $0.8$0.2 million related to other general and administrative costs from the EEG Games segment. Corporatesegment, and $0.9 million decrease in share based compensation, $0.2 million decrease in payroll offset by $1.1 million increase related to the legal settlement with the former CEO and related legal costs, $0.4 million increase in other professional fees and $0.3 million increase in other general and administrative costs decreased $1.3 million with $0.5 million higher payroll costs, offset by $1.2 million lower share based compensation expense and $0.6 million less other general and administrative cost primarily including lower professional fees and legalin corporate expenses.

Asset Impairment Charges

During the six months ended

At December 31, 2022,2023, the Company’s initiated a process to evaluateCompany concluded that impairment indicators existed considering that the strategic options forCompany delisted from Nasdaq, had management changes in the EEG iGaming business, including exploring a sale of EEG iGaming assets duesegment and continued to increasing regulatory burdens and competition. In December 2022, the Company closed down its licensed remote gambling operationsee revenues decline 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. Subsequent to the period end, the Company appointed a new CEO and a new interim CFO and on January 18, 2023 sold its EEG iGaming Spanish license. As part of these changes the Company has been focused on reducing costs in its businesses as it has seen the EEG iGaming revenues declinesegment and that they were significantly down from levels seen in the previous year and in the previous quarters.quarters and EEG Games was not performing at the level previously expected. This, the decline in the Company’s stock price and uncertainties caused by inflation and world stabilityother factors were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. ForThe Company recognized total asset impairment charges of $13.0 million, including $3.6 million of goodwill and $8.4 million of other intangible assets from the threeEEG iGaming segment and $1.0 million in of goodwill from the EEG Games. Further downturns in economic, regulatory and operating conditions could result in additional impairment in future periods.

During the six months ended December 31, 2022, the Company initiated a process to evaluate the strategic options for the EEG iGaming business and subsequent to the period end, the Company appointed a new CEO and a new CFO and on January 18, 2023 sold its EEG iGaming Spanish license. This and uncertainties caused by inflation and world instability were determined to be a triggering event and the long-lived assets of the Company were quantitatively tested for impairment. The Company recognized total goodwill asset impairment charges of $16.1 million, withincluding asset impairment charges to the goodwill to the iGaming reporting unit of $14.5 million, which is part of the EEG iGaming segment, and to the goodwill of the GGC reporting unit of $1.6 million, which is part of the EEG Games segment. Further downturns in economic, regulatory and operating conditions could result in additional goodwill impairment in future periods. There were no goodwill asset impairment charges recorded during the six months ended December 31, 2021.

 

5134

Other Income (expense)

 

Other income (expense), net changed $29.1decreased by $9.6 million from a loss of $19.8 million for the six months ended December 31, 2021 to income of $9.3 million for the six months ended December 31, 2022.2022 to an expense of $0.3 million for the six months ended December 31, 2023. The other expense for the six months ended December 31, 2023 resulted primarily from $0.5 million of expense from the recognition of the derivative liability related to the Series C Convertible Preferred Stock after the reclass to mezzanine equity caused by lack of authorized and unissued shares and $0.1 million other non-operating losses, offset by a $0.3 million gain from the fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $0.3 million for the September 2022 Warrants issued as part of the September 2022 Offering. This was offset by a $0.1 million other non-operating gains.

The other income (expense), net for the three months ended December 31, 2022 results primarily from $2.0 million of interest expense related to the Senior Convertible Note and an increase of $2.9 million for the change in the fair value of the contingent consideration due as part of the Bethard agreement,transaction from the prior year, offset by other income primarily made up of $8.6 million for the change in the fair value of the derivative liability on Senior Convertible Note (as defined below) anddue to its elimination on the exchange to Series C Convertible Preferred Stock, $5.0 million from the reduction in fair value of the warrant liability. The driver of the change in fair value of the warrants was a decrease of $3.0 million for the September 2022 Warrants (as defined below) issued as part of the September 2022 Offering (as defined below) that decreased from the $5.3 million valued on issuance at September 19, 2022 to $2.3 million at December 31, 2022, and a decrease of $1.9 million for the March 2022 Warrants from $2.1 million at June 30, 2022 to $0.2 million at December 31, 2022.

Other income (expense) for the six months ended December 31, 2021 was an expense2022 and a decrease of $19.8 million. The other expense for the six months ended December 31, 2021 results primarily from $6.0 million loss on the conversion of the Senior Convertible Note and $1.5 million loss from the change in value of the related derivative liability, driven by the conversion of a principal amount of approximately $5.7 million into 1.7 million shares of common stock, respectively, of the $7.5 million immediate conversion option provided to the Senior Convertible Note holder as part of the October 13, 2021 waiver provided on the covenants related to the Senior Convertible Note and $28.5 million of loss on extinguishment primarily attributable to amortization of the debt discount and the consideration to the holder for the February 22, 2022 waiver provided on the covenants related to the Senior Convertible Note and $4.8$0.1 million in interest expense. These expenses were offset by other income primarily made up of $20.5 million from the reduction in fair value of the warrant liability established for warrants convertible into shares of common stock that had been issued to the holder of the Senior Convertible Note and the recognition of $1.9 million of income for the change in the fair value of the contingent consideration due as part of the Bethard transaction.

warrants.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies.

Liquidity and Capital Resources and Liquidity

 

Liquidity and Going Concern

 

The Company must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date theaccompanying unaudited condensed consolidated financial statements included in this report are issued.of the Company have been prepared assuming the Company will continue as a going concern. The evaluation of going concern underbasis of presentation assumes that the accounting guidance requires significant judgment.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 is its compliance with certain debt covenants under terms of the Senior Convertible Note (the “Senior Convertible Note”), issued by the Company on February 22, 2022 in the principal amount of $35.0 million with a December 31, 2022 outstanding carrying value of $32.2 million. The Company has not maintained compliance with certain debt covenants and is currently in default under the terms of the Senior Convertible Note. The Company repaid principal of $2.8 million during the six months ended December 31, 2022, using proceeds from the September 2022 equity financing (“September 2022 Offering”). Subsequent to December 31, 2022 and through February 17, 2023, one business day preceding this filing, the Company has converted $18.9 million of the Senior Convertible Note through the issuance of 217.2 million shares of Common Stock. In addition, on February 14, 2023, the Company entered into the SPA for the sale of the Bethard business. On February 16, 2023, as a condition to the closing of the sale of the Bethard business, the Company entered into the Amendment with the of the Holder. After including the impact of the conversions reducing the Senior Convertible Note by $18.9 million and the Amendment increasing the Senior Convertible Note by $3.0 million, for fees of $0.5 million and converted accrued liabilities of $2.5 million, on February 17, 2023, one business day preceding this filing, the Company has reduced its outstanding debt on the Senior Convertible Note to $16.3 million. The Company will continue to convert to further reduce this debt. The maturity date of the Senior Convertible Note is June 2, 2023. The Senior Convertible Note is classified as a current liability on the unaudited condensed consolidated balance sheet and due to the default it may be redeemed by the Holder prior to its maturity date. The Company has also recorded a derivative liability for the alternate conversion in the Senior Convertible Note of $0.8 million in current liabilities on the unaudited condensed consolidated balance sheet that may be due to the Holder as part of the make-whole liability under the default terms of the Senior Convertible Note. The cash liability calculated under the terms of the Senior Convertible Note of approximately $933.0 million, is materially higher than the fair value of the derivative liability of $0.8 million calculated at December 31 2022. The calculated make-whole liability may differ materially from the amount at which the Company may be required to pay under the Senior Convertible Note.

In addition to the conversions discussed above, the Company is in discussions with the Holder to restructure its payment obligations, including but not limited to eliminating the derivative liability on its unaudited condensed consolidated balance sheet and addressing the Company’s default status under the debt. In connection with the Company’s plan to maintain compliance with the Nasdaq Listing Rules, which includes actions to be taken to meet the minimum market value of listed securities or minimum stockholders’ equity, the Company may issue a perpetual convertible preferred stock by March 31, 2023, to cover the remaining principal balance due under the Senior Convertible Note at the time of entering the issuance. Although the Company and the Holder of the Senior Convertible Note are in discussions to determine the terms of the perpetual convertible preferred stock, such terms have not been finalized and there is no assurance that the Company and the Holder will come to an agreement on such terms. The ability of the Holder of the perpetual convertible preferred stock to convert such preferred stock into shares of our common stock was approved in the 2022 annual meeting of stockholders held on January 26, 2023. The Company will disclose the material terms of the perpetual convertible preferred stock in connection with the completion of the exchange transaction, including the filing of a certificate of designation with the State of Nevada to designate the terms of such preferred stock after the issuance of the stock. In addition, as part of the Company’s plan to maintain compliance with the Nasdaq Listing Rules, and as approved in the 2022 annual meeting of stockholders, the Company intends to effect a reverse stock split of our outstanding common stock, with our Board having the discretion as to the exact ratio of any reverse stock split, without a corresponding reduction in the total number of authorized shares of common stock. Further, during the 2022 annual meeting of stockholders the Company obtained stockholder approval for the issuance of such shares of Common Stock to the Holder that would exceed 19.99% of the Company’s outstanding shares of Common Stock.

statements.

 

52

In addition to compliance with debt covenants, theThe Company considered that it had an accumulated deficit of $167.4$203.3 million as of December 31, 20222023 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 December 31, 2022,2023, the Company had total current assets$1.1 million of $7.9 millionavailable cash on-hand and totalnet current liabilities of $54.9$7.8 million. Net cash used in operating activities for the six months ended December 31, 20222023 was $8.5$4.1 million, which includes a net loss of $18.3$21.8 million.

The Company also considered its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits. As of December 31, 2022,

In determining whether the Company had $0.7 millioncan overcome the presumption of available cash on-hand and net current liabilities of $47.0 million. In additionsubstantial doubt about its ability to the Senior Convertible Note conversions that are reducing the debt outstanding, on December 21, 2022,continue as a going concern, the Company closed an offering (the “Registered Direct Offering”) inmay 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 it sold: (a) 7.1 million shares of Commonincludes:

(i)approximately $1.4 million of net proceeds from the Secured Note with the holder of the Series C Convertible Preferred Stock and the Series D Convertible Preferred Stock;
(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 the Holder and (b) pre-funded warrants to purchase up to 17.9 million at a price of $0.0937 per warrant, directly to the Holder, with all but $0.001 per warrant prepaid torequire the Company atto place reliance on several factors, including favorable market conditions, to access additional capital in the closing.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 gross proceeds to usunaudited condensed consolidated financial statements do not reflect any adjustments that might result from the saleoutcome of the shares of Common Stock and pre-funded warrants before deducting underwriting discounts and commissions and offering expenses payable by the Company was $2.3 million. The Company remitted approximately $1.1 million to the Holder to be applied to accrued interest and future interest payments under the Senior Convertible Note. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $1.1 million. On September 19, 2022 the Company closed the September 2022 Offering in which it sold: (a) 30.0 million shares of Common Stock and (b) warrants to purchase up to 30.0 million shares of Common Stock, at an exercise price of $0.25 per share (the “September 2022 Offering Warrants”), at an aggregate price of $0.25 per share and accompanying September 2022 Offering Warrant. The gross proceeds to us from the sale of the shares of Common Stock and Warrants before deducting underwriting discounts and commissions and offering expenses payable by the Company was $7.5 million. On the issuance date, the Company also granted an overallotment to the underwriters of the offering for 3.6 million overallotment warrants (“September 2022 Overallotment Warrants”), at a purchase price of $0.01 per warrant, with an exercise price of $0.25 per warrant (the September 2022 Offering Warrants and September 2022 Overallotment Warrants are collectively referred to as the “September 2022 Warrants”). Total proceeds from the September 2022 Overallotment Warrants were less than $0.1 million. The Company remitted to the Holder an amount of $2.3 million equal to fifty percent (50%) of all net proceeds above $2.0 million following the payment of 7% in offering fees including underwriting discounts and commissions. In addition, as part of the September 2022 Offering, the Holder purchased $0.5 million of securities (2.1 million shares of Common Stock and 2.1 million September 2022 Warrants) and the Company paid the Holder an additional $0.5 million. The proceeds remitted to the Holder of the Senior Convertible Note reduced the principal balance of the Senior Convertible Note on a dollar-for-dollar basis. The net proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company and amounts remitted to the Holder was $4.1 million. On March 2, 2022 the Company closed an offering (the “March 2022 Offering”) in which it sold 15.0 million units at $1.00 consisting of one share of Common Stock and one warrant for a total of 15.0 million warrants with an exercise price of $1.00 (the “March 2022 Offering Warrants”). There was also an overallotment option exercised to purchase warrants to purchase an additional 2.3 million shares of common stock (the “April 2022 Overallotment Warrants”) with an exercise price of $1.00 issued to the underwriters of the offering on April 1, 2022 (the March 2022 Offering Warrants and the April 2022 Overallotment Warrants are collectively referred to as the “March 2022 Warrants”). The March 2022 Offering provided net cash proceeds of $13.6 million.

this uncertainty.

 

The amount of available cash on hand on February 17, 2023,March 26, 2024, one business day preceding this filing, was approximately $1.0 million.$1,300,000.

 

35

The Company believes that its current level of cash and cash equivalents areis not sufficient to fund its operations and obligations without additional financing. Although the Company has financing available, as further described below,above, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the Company and the esports and iGaming industry. The combination of these conditions was determined to raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of thesethe unaudited condensed consolidated financial statements.statements included in this report.

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.Our material cash requirements include sponsorships with professional teams and an online wagering and services agreement. The Company identified additional financing sources it believes, depending on market conditions, may be availableis expected to fund its operations and drive future growth, which include (i)incur $0.5  million in sponsorship obligations with various sports teams, with $0.3 million being incurred within the potential expected proceeds from the recently filed S-1 where the amount of the offering has not yet been determined, (ii) the potential proceeds from the exercise of the 33.6 million September 2022 Warrants, exercisable at $0.25, outstanding at December 31, 2022, (iii) the potential proceeds from the exercise of the 17.3 million March 2022 Warrants, exercisable at $1.00, outstanding at December 31, 2022, (iv) the ability to sell shares of Common Stock of the Company through various forms of offerings, and (v) the ability to raise additional financing from other sources.next 12 months. The Company is also continuing discussionsrequired to pay $1.25 million and issue 1 share of common stock annually under the Bally’s Corporation wagering and services agreement that extends for 10 years from July 1, 2021 and the Company has minimum annual commitments of approximately $0.4 million under the online wagering and services agreement with Delasport Limited that has an initial term of 18 months with subsequent annual renewals. Further, the Company is required to pay $0.05 million monthly for the first 9 months of the calendar year related to the legal settlement with the Holder to restructureformer CEO, until the payment terms and debt covenants.

remaining $0.45 million outstanding, as of December 31, 2023, is paid in full.

 

The Company’s sources and (uses) of cash for the six months ended December 31, 2022 and 2021 are shown below:

  2022  2021 
Cash used in operating activities $8,540,978  $7,599,212 
Cash used in investing activities $3,321  $20,185,745 
Cash provided by financing activities $5,792,240  $8,025,614 

53

As noted above, at December 31, 2022, we had total current assets of $7.9 million and total current liabilities of $54.9 million. Net cash used in operating activities for the six months ended December 31, 20222023 was $8.5$4.1 million, which includes a net loss of $18.3$21.8 million, offset by net non-cash and balance sheet adjustments of $9.8$15.8 million and changes in operating assets and liabilities of $2.0 million.

 

There was less than $0.1 million netNet cash used in investing activities for the six months ended December 31, 2022.2023 totaled less than $0.1 million principally related to the purchase of intangible assets.

 

Net cash provided by financing activities for the six months ended December 31, 20222023 totaled $5.8$5.6 million, which related to $9.0included $5.2 million from use of the ATM facility, $1.0 million in net proceeds from the December 2022 Registered Direct OfferingAugust 15, 2023 offering of common stock and the September 2022 Offering,exercise of the related warrants, offset by the repayments of$0.3 million used to redeem part of the Senior Convertible Note principal of $2.8Series D Preferred Stock and $0.3 million repayments of notes payable and finance lease for less than $0.1 million and the payments of the dividends on the 10% Series A cumulative redeemable convertible preferred stock of $0.4 million.stock.

 

These above plans are likely Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies 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.unaudited condensed consolidated financial statements.

 

Critical Accounting PoliciesEstimates

 

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our unaudited condensed consolidated financial statements and the accompanying notes to unaudited condensed consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, including, with respect to the sixthree months ended December 31, 2022,2023, related regulatory and government mandates and restrictions. Actual results may differ from these estimates.

 

Our critical accounting policiesestimates are those that are both material to the presentation of our financial condition and results of operations and require management’s most subjective and complex judgments. ThereOther than as described below, there have been no material changes or updates to our critical accounting policies and estimates during the six months ended December 31, 20222023 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 10-K.2023.

 

Derivative financial instruments

The Company assesses classification of its equity-linked instruments at each reporting date to determine whether a change in classification between equity and liabilities (assets) is required. The Company can make an accounting policy election on the allocation order and choose the policy that management determines is most favorable. The Company elected to reclassify outstanding instruments based on allocating the unissued shares to contracts with the latest inception date resulting in the contracts with the earliest inception date being recognized as liabilities first.

The Company evaluates its convertible notes, equity instruments and warrants, to determine if those contracts or embedded components of those contracts qualify as derivatives. 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 in the balance sheet. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument. The Company records the fair value of the remaining embedded derivative at each balance sheet date and records the change in the fair value of the remaining embedded derivative as other income or expense in the consolidated statements of operations.

The fair value of the derivative liability is determined using the Monte-Carlo method and the Company’s estimates for the discount rate, risk-free rate, remaining term of the conversion features and credit and non-performance risk. The valuations are derived from techniques which utilize inputs, certain of which are significant and unobservable, that result in classification of the derivative liability as Level 3 fair value measurements in the unaudited condensed consolidated financial statements.

Off Balance Sheet Arrangements

 

None.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.As a “smaller reporting company” (as defined in Exchange Act Rule 12b-2), we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. For the reasons set forth below, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective.effective as of December 31, 2023. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Previously identified material weakness

 

During fiscal 2022,2023, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not operating effectively at a reasonable assurance level. The material weaknesses identified during management’s assessment included, but were not limited to, (a) not performing an ongoing and/or separate formal evaluation to determine whether the components of internal control are present and functioning within the period under audit; (b) not having sufficient period-end financial reporting controls in place as it relates to segregation of duties, reviews of certain completed or nonrecurring transactions, accounting for income taxes, and certain procedures for preparing the financial statements and disclosures; and (c) not having sufficient controls in place as it relates to information technology (“IT”) controls and that the IT technology controls were not formally evaluated to determine operating effectiveness, including the evaluation of system organization controls and related complementary user entity controls.

 

Remediation Plans and Actions

 

During the six months ended December 31, 2022,2023, and for fiscal 2023,2024, we continued and plan to continue to implementwork on implementing remediation initiatives in response to the previously identified material weakness, including, but not limited to, (a) revising the recently hired internal audit executive continuingrisk assessment to establish an internal audit functionconsider the significant changes in business composition and guide management’s efforts related tooperations which occurred during the identification, implementation, execution, and monitoring of an effective internal control environment;year ending June 30, 2023; (b) developing plans and templates for executing the design, documentation, and implementation of internal controls; (c) conducting training for process and control owners about the system of internal control and Sarbanes-Oxley (“SOX”) requirements and control design and execution best practices; (d) continuing the implementation of EGRC softwareengaging and experienced income tax consultant to execute management’s internal control assessment process;assist management; (e) reinforcing accountability and retaining required supporting control documentation, including the evaluation and implementation of a more controlled repository for retaining evidence; (f) implementing reporting tools and procedures for the monitoring of SOX compliance throughout the organization; (g) performing detailed analysis of segregation of duties to minimize duty conflicts where possible as well as properly mitigatemitigating risks of any unavoidable conflicts; and (h) performing detailed assessment and evaluation of information technology general controls to ensure that proper controls are designed and implemented including the evaluation of third-party system and organization control reports.

 

While we believe the Company’s remediation efforts to-date have improved and will continue to improve our disclosure controls and procedures, remediation of the material weakness will require validation and testing of the operating effectiveness of disclosure of internal controls over a sustained period of financial reporting cycles. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine additional measures are necessary to address control deficiencies or determine that it is necessary to modify the remediation plan described above. Management cannot provide assurance as to when the Company will remediate such weaknesses, nor can management be certain of whether additional actions will be required or the costs of any such actions.

 

Our remediation efforts and activities are ongoing and are subject to continued management review supported by ongoing design and testing. Notwithstanding the material weaknesses, our management has concluded that the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.

 

Changes in internal control over financial reporting

 

Other than our ongoing remediation efforts with respect to our disclosure controls and procedures, which extend to our internal control over financial reporting, there were no changes during the three months ended December 31, 20222023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting during this interim reporting period and until a thorough evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).

 

Inherent limitation on the effectiveness of internal control

 

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On January 6,November 7, 2023, ourthe Company entered into a confidential settlement agreement and general release (the “Legal Settlement Agreement”) with Grant Johnson, the former Chairman of the board of directors and Chief Executive Officer Grantof the Company, with respect to all disputes and pending litigation between the Company and Mr. Johnson. Pursuant to the Legal Settlement Agreement, the parties have agreed to settle and resolve any and all disputes between the parties, including without limitation, disputes arising out of or relating to the following litigation:

(i)A complaint filed on December 23, 2022 by Mr. Johnson against the Company in the United States District Court for the Southern District of New York;
(ii)an amended complaint filed on February 28, 2023 by Mr. Johnson against the Company; and
(iii)a counterclaim filed on May 24, 2023 by the Company against Mr. Johnson (together with (i) and (ii) above, the “Actions”).

Pursuant to the Legal Settlement Agreement, Mr. Johnson filedand the Company settled the Actions and provided a lawsuitgeneral release of all claims, whether or not raised in the United State District Court forpending litigation, and included mutual non-disparagement agreements. No party admitted any liability by entering into the Southern District of New York againstLegal Settlement Agreement. Pursuant to the Company. The claim alleges breach byLegal Settlement Agreement, the Company has agreed to make an aggregate payment of Mr. Johnson’s employment agreement when it terminated him for “Cause” as defined$500,000 in the agreement on December 3, 2022.cash to Mr. Johnson seeks in excess(which among includes attorneys’ fees and costs), comprised of $1,000,000 million as well as 200,000 sharesan initial payment of our Common Stock, plus attorney’s fees. After consulting$50,000 beginning approximately thirty (30) days after the signing of the Legal Settlement Agreement, with legal counsel,subsequent payments of $50,000 due on each subsequent thirtieth (30th) day of each month thereafter until fully paid. The case regarding the Company believes the claims are without meritabove Actions and intends to defend against the claims vigorously. The casesettlement is captioned Grant Johnson v. Esports Entertainment Group, Inc. 1:22-cv-10861 (SDNY).

 

On March 31, 2022, the Company filed a statement of claim against Metaverse Partners for breach of contract, fraud and defamation. The Company seeks damages in an amount to be determined at the upcoming hearing, but not less than $50,000 plus interest at the statutory rate, and an order directing the defendant to discontinue their extortion and defamation. Subsequently, on May 17, 2022, Metaverse Partners filed counterclaims in arbitration against the Company and former CEO for breach of contract, fraud and defamation claiming damages of not less than $5,000,000. The Company and Metaverse Partners have agreed to an arbitration hearing to take place in June 2024 to resolve any potential disputes pursuant to previous dealings between the companies. At this time we are unable to reasonably estimate a potential liability, if any, and expect to vigorously defend on this matter.

The Company at times may be involved in litigation relating to claims arising from its operations in the normal course of business. Other than disclosed above, theThe Company is currently not involved in any litigation that it believes could have a material adverse effect on our financial condition or results of operations. ThereOther than as discussed above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companiescompany’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors

 

As a “smaller reporting company” (as defined in Exchange Act Rule 12b-2), we are not required to provide the information required by this Item.

 

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

 

WeDuring the six months ended December 31, 2023, and subsequently through March 26, 2023, the day preceding this filing, we sold the following shares of unregistered common stock on the date and for the consideration shown to the identified individuals pursuant to Section 4(a)(2) of the Securities Act or Section 3(a)(9), as applicable, which shares are restricted shares as defined in the Securities Act. The purchasers or recipients of our securities in these transactions are were accredited investors,investors, as defined in Regulation D.

 

During the three months ended December 31, 2022:

Date  Owner  Type Number of shares  Consideration 
December 21, 2022  Member of management  Preferred Stock (Series B)  100  $1,000 

Subsequent to the three months ended December 31, 2022:

DateOwnerTypeNumber of sharesConsideration
January 3, 2023Alex Igelman, Chief Executive OfficerCommon Stock2,500,000New hire inducement grant for services
Date Purchaser/Recipient Security Type Number of
Securities		 Consideration
July 1, 2023 – December 31, 2023 Holder of Series C Convertible Preferred Stock Common Stock 526,503 Conversions of Series C Convertible Preferred Stock for shares of common stock
         
August 15, 2023 Holder of Series D Convertible Preferred Stock Common Stock 25 

Settlement of $1,000 in Registration Delay Fees under the

August 2023 Settlement Agreement

         
October 6, 2023 Holder of Series D Convertible Preferred Stock Common Stock 25 

Settlement of $500 in Registration Delay Fees under the

October 2023 Settlement Agreement

         
November 3, 2023 Holder of Series D Convertible Preferred Stock Common Stock 200 

Settlement of $4,000 in Registration Delay Fees under the

October 2023 Settlement Agreement

         
November 10, 2023 Holder of Series D Convertible Preferred Stock Common Stock 65 

Settlement of $1,000 in Registration Delay Fees under the

October 2023 Settlement Agreement

         
November 17, 2023 Holder of Series D Convertible Preferred Stock Common Stock 91 

Settlement of $1,000 in Registration Delay Fees under the

October 2023 Settlement Agreement

         
November 24, 2023 Holder of Series D Convertible Preferred Stock Common Stock 103 

Settlement of $1,000 in Registration Delay Fees under the

October 2023 Settlement Agreement

         
December 1, 2023 Holder of Series D Convertible Preferred Stock Common Stock 143 

Settlement of $1,000 in Registration Delay Fees under the

October 2023 Settlement Agreement

         
January 5, 2024 Member of management Preferred Stock (Series E) 100 $1,000

Item 3. Defaults Upon Senior Securities

 

TheOn December 8, 2023, the Company has not maintained complianceannounced that its Board of Directors temporarily suspended the Company’s monthly cash dividend on its 10% Series A Cumulative Redeemable Convertible Preferred Stock, commencing with certain debt covenants and is currently in default under the termsDecember 2023 dividend. As of the Senior Convertible Note. See Note 2 and Note 11date of the unaudited condensed consolidated financial statements for additional information.this Quarterly Report on Form 10-Q, an aggregate of $66,876 in dividends had accrued.

 

Item 4. Mine Safety Disclosure

 

Not Applicable.

38

 

Item 5. Other Information

 

During the second quarter of 2024, none of the Company’s officers or directors Noneadopted or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

 

Item 6. Exhibits.

 

Exhibit No. Description
3.1 CertificateAmended and Restated Articles of Designation of Series B Preferred StockIncorporation (incorporated herein by reference to Exhibit 3.1 to the current report on Form 8-K filed with the SEC on May 2, 2019).
3.2Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to the current report on Form 8-K filed with the SEC on May 2, 2019).
3.3Form of the Series C Convertible Preferred Note Certificate of Designations, as amended and restated (incorporated herein by reference to Exhibit 3.1 to the current report on Form 8-K filed with the SEC on March 13, 2024).
3.4Form of the Series D Convertible Preferred Note Certificate of Designations, as amended and restated (incorporated herein by reference to Exhibit 3.2 to the current report on Form 8-K filed with the SEC on March 13, 2024).
3.5Certificate of Change (incorporated herein by reference to Exhibit 3.1 to the current report on Form 8-K filed with the SEC on December 27, 2022)22, 2023).
4.1 

Pre-Funded Warrant Agency Agreement by and between Esports Entertainment Group, Inc. and VStock Transfer, LLC including Form of Warrant, dated December 21, 2022 (incorporated herein by reference to Exhibit 4.1 to the current report on Form 8-K, filed with the SEC on December 27, 2022)August 16, 2023).

10.1 Securities Purchase Agreement, dated December 21, 2022August 15, 2023 by and between Esports Entertainment Group, Inc. and Alto Opportunity Master Fund (incorporated herein by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on December 27, 2022)August 16, 2023).
10.2 

SubscriptionPartial Settlement of Registration Delay Payments under Registration Rights Agreement; dated August 15, 2023 by and Investment Representation Agreement, dated December 20, 2022between Esports Entertainment Group, Inc. and Alto Opportunity Master Fund, SPC-Segregated Master Portfolio B (incorporated herein by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on December 27, 2022)August 16, 2023).

10.3 EmploymentEquity Distribution Agreement, with Alex Igelmandated as of September 15, 2023, by and between Esports Entertainment Group, Inc. and Maxim Group LLC (incorporated herein by reference to Exhibit 10.441.1 to the current report on Form S-18-K, filed with the SEC on January 13,September 18, 2023).
10.4 Form of Letter of ConsentWaiver dated September 15, 2023 by and between the CompanyEsports Entertainment Group, Inc. and the Holder of the Senior Convertible Note.Alto Opportunity Master Fund, SPC-Segregated Master Portfolio B (incorporated herein by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on January 27,September 18, 2023).
10.5 Share Purchase AgreementPartial Settlement of Registration Delay Payments under Registration Rights Agreement; Subsequent Placement Optional Redemption Waiver dated February 14, 2023 by and among Esports Entertainment Group, Inc. and Gameday Group PLC (incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on February 17, 2023).
10.6Amendment and Waiver Agreement dated February 16,October 6, 2023 by and among Esports Entertainment Group, Inc. and Alto Opportunity Master Fund, SPC-Segregated Master Portfolio B (incorporated herein by reference to Exhibit 10.210.1 to the current report on Form 8-K, filed with the SEC on February 17,October 10, 2023).
10.6Escrow Agreement, dated October 6, 2023, by and among the Company, Maxim Group LLC, Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B, CORPORATE ESCROW MANAGEMENT INC and InBank (incorporated herein by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on October 10, 2023).
10.7Form of Secured Note Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on March 13, 2024).
10.8Form of Secured Note Agreement (incorporated herein by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on March 13, 2024).
31.1* Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
31.2* Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1** Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*Filed herewith
  
**Furnished herewith

5639

SIGNATURES

 

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

 

 ESPORTS ENTERTAINMENT GROUP, INC.
   
Date: February 21, 2023March 27, 2024By:/s/ Alex Igelman

Alex Igelman

Chief Executive Officer (Principal
(Principal Executive Officer)

   
Date: February 21, 2023March 27, 2024By:/s/ Michael Villani
  

Michael Villani

Interim

Chief Financial Officer and Financial Controller

(Principal Accounting Officer and
Principal Financial Officer)

 

5740