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Esports Entertainment Group, Inc. – ‘10-Q’ for 12/31/19

On:  Wednesday, 2/19/20, at 4:07pm ET   ·   For:  12/31/19   ·   Accession #:  1213900-20-4240   ·   File #:  0-55954

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/19/20  Esports Entertainment Group, Inc. 10-Q       12/31/19   65:3.2M                                   Edgar Agents LLC/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    290K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     23K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     23K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     19K 
 5: EX-32.2     Certification -- §906 - SOA'02                      HTML     19K 
63: R1          Document and Entity Information                     HTML     51K 
32: R2          Condensed Consolidated Balance Sheets               HTML     80K 
24: R3          Condensed Consolidated Balance Sheets               HTML     28K 
                (Parenthetical)                                                  
40: R4          Condensed Interim Consolidated Statements of        HTML     64K 
                Operations and Comprehensive Loss (Unaudited)                    
59: R5          Condensed Interim Consolidated Statements of        HTML     71K 
                Changes in Stockholders Equity (Deficit)                         
                (Unaudited)                                                      
29: R6          Condensed Interim Consolidated Statements of Cash   HTML    111K 
                Flows (Unaudited)                                                
21: R7          Nature of Operations                                HTML     24K 
43: R8          Basis of Presentation and Going Concern             HTML     25K 
57: R9          Summary of Significant Accounting Policies          HTML     39K 
61: R10         Fixed Assets                                        HTML     25K 
41: R11         Intangible Assets                                   HTML     25K 
22: R12         Related Party Transactions                          HTML     26K 
30: R13         Commitments and Contingencies                       HTML     32K 
62: R14         Convertible Debt                                    HTML     86K 
42: R15         Common Stock                                        HTML     31K 
23: R16         Warrants                                            HTML     41K 
31: R17         Stock Options                                       HTML     36K 
58: R18         Segment Information                                 HTML     43K 
44: R19         Subsequent Events                                   HTML     23K 
15: R20         Summary of Significant Accounting Policies          HTML     44K 
                (Policies)                                                       
38: R21         Summary of Significant Accounting Policies          HTML     24K 
                (Tables)                                                         
55: R22         Fixed Assets (Tables)                               HTML     24K 
51: R23         Intangible Assets (Tables)                          HTML     24K 
16: R24         Convertible Debt (Tables)                           HTML     61K 
39: R25         Warrants (Tables)                                   HTML     43K 
56: R26         Stock Options (Tables)                              HTML     40K 
52: R27         Segment Information (Tables)                        HTML     44K 
17: R28         Basis of Presentation and Going Concern (Details)   HTML     23K 
37: R29         Summary of Significant Accounting Policies          HTML     28K 
                (Details)                                                        
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26: R34         Related Party Transactions (Details)                HTML     37K 
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45: R36         Convertible Debt (Details)                          HTML     28K 
64: R37         Convertible Debt (Details 1)                        HTML     31K 
28: R38         Convertible Debt (Details 2)                        HTML     32K 
18: R39         Convertible Debt (Details 3)                        HTML     34K 
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54: R43         Warrants (Details)                                  HTML     46K 
34: R44         Warrants (Details 1)                                HTML     52K 
13: R45         Warrants (Details Textual)                          HTML     21K 
48: R46         Stock Options (Details)                             HTML     37K 
53: R47         Stock Options (Details 1)                           HTML     34K 
36: R48         Stock Options (Details 2)                           HTML     23K 
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25: R50         Segment Information (Details)                       HTML     35K 
33: R51         Subsequent Events (Details)                         HTML     21K 
60: XML         IDEA XML File -- Filing Summary                      XML    113K 
50: EXCEL       IDEA Workbook of Financial Reports                  XLSX     63K 
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47: ZIP         XBRL Zipped Folder -- 0001213900-20-004240-xbrl      Zip     99K 


‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Condensed Consolidated Balance Sheets at December 31, 2019 (unaudited) and June 30, 2019
"Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended December 31, 2019 and 2018 (unaudited)
"Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Six Months Ended December 31, 2019 and 2018 (unaudited)
"Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018 (unaudited)
"Notes to the Unaudited Interim Condensed Consolidated Financial Statements
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures about Market Risk
"Controls and Procedures
"Legal Proceedings
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Other Information
"Exhibits
"Signatures

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2019

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to____________

 

Commission File Number: 0-54853

 

ESPORTS ENTERTAINMENT GROUP, INC
(Exact name of registrant as specified in its charter)

 

Nevada   26-3062752
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
identification No.)
     

170 Pater House, Psaila Street

Birkirkara, Malta, BKR 9077

  89109
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (268) 562-9111

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on
which registered
N/A   N/A   N/A

 

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $0.001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

 

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 transaction 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 Act). ☐ Yes ☒ No

 

As of February 19, 2020, there were 6,226,432 shares of common stock, par value $0.001 issued and outstanding.

 

 

 

 C: 

 

  

ESPORTS ENTERTAINMENT GROUP, INC.

 

Quarterly Report on Form 10-Q for the Quarter ended December 31, 2019

 

TABLE OF CONTENTS

 

INDEX TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

PART I  
FINANCIAL STATEMENTS  
   
Condensed Consolidated Balance Sheets at December 31, 2019 (unaudited) and June 30, 2019 1
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended December 31, 2019 and 2018 (unaudited) 2
   
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Six Months Ended December 31, 2019 and 2018 (unaudited) 3
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018 (unaudited) 4
   
Notes to the Unaudited Interim Condensed Consolidated Financial Statements 5
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
   
Quantitative and Qualitative Disclosures about Market Risk 23
   
Controls and Procedures 23
   
PART II  
FINANCIAL STATEMENTS  
   
Legal Proceedings 25
   
Risk Factors 25
   
Unregistered Sales of Equity Securities and Use of Proceeds 25
   
Defaults Upon Senior Securities 25
   
Mine Safety Disclosures 25
   
Other Information 25
   
Exhibits 26
   
Signatures 27

 

 C: 

 C: i

 

 

PART I – FINANCIAL INFORMATION

 

Esports Entertainment Group, Inc.

Condensed Consolidated Balance Sheets

 

   December 31,
2019
   June 30,
2019
 
   (Unaudited)     
         
ASSETS        
         
Current assets          
Cash  $53,283   $43,412 
Prepaid expenses and other current assets - related parties   69,390    190,280 
Prepaid expenses and other current assets   154,342    213,817 
Total current assets   277,015    447,509 
           
Fixed assets   12,145    16,577 
Intangible assets   3,000    81,226 
Other non-current assets   6,833    16,480 
           
TOTAL ASSETS  $298,993   $561,792 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Accounts payable and accrued expenses  $833,662   $607,448 
Due to shareholder   1,551    1,551 
Convertible note   3,356,054    290,720 
Derivative liabilities   5,590,540    4,655,031 
           
Total liabilities   9,781,807    5,554,750 
           
Stockholders’ equity (deficit)          
Common stock $0.001 par value; 500,000,000 shares authorized, 5,937,670 and 5,849,208 shares issued and outstanding as of December 31, 2019 and June 30, 2019, respectively   5,938    5,849 
Additional paid-in capital   6,573,865    4,955,380 
Equity to be issued   30,000    230,000 
Accumulated deficit   (16,092,617)   (10,184,187)
Total stockholders’ deficit   (9,482,814)   (4,992,958)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $298,993   $561,792 

 

 C: 

 C: 1

 

 

Esports Entertainment Group, Inc.

Condensed Interim Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2019   2018   2019   2018 
                 
Operating expenses:                    
General and administrative  $668,878   $514,781   $1,361,812   $1,387,560 
                     
Total operating expenses   668,878    514,781    1,361,812    1,387,560 
                     
Operating loss   (668,878)   (514,781)   (1,361,812)   (1,387,560)
                     
Interest expense   (1,550,418)   (797,509)   (2,262,313)   (797,652)
Net amortization of debt discount and premium on convertible debt   (840,170)   (55,621)   (550,259)   (55,621)
Change in fair market value of derivative liabilities   16,631    (756,053)   1,087,347    (756,053)
Loss on extinguishment of debt   -    -    (2,795,582)   - 
Impairment of intangible asset   (67,131)        (67,131)     
Gain on settlement of debt   42,896    -    42,896      
Foreign Exchange Loss   (1,577)   -    (1,577)   - 
                     
Loss before income taxes   (3,068,646)   (2,123,964)   (5,908,430)   (2,996,886)
                     
Income tax expense   -    -    -    - 
                     
Net loss and comprehensive loss  $(3,068,646)  $(2,123,964)  $(5,908,430)  $(2,996,886)
Basic and diluted loss per common share  $(0.52)  $(0.37)  $(1.00)  $(0.52)
                     
Weighted average number of common shares outstanding, basic and diluted   5,924,230    5,811,900    5,893,513    5,749,997 

 

 

 C: 

2

 

 

Esports Entertainment Group, Inc.

Condensed Interim Consolidated Statements of Changes in Stockholders Equity (Deficit)

(Unaudited)

 

   Common Stock   Additional paid-in   Equity to    Accumulated    
   Shares   Amount   capital   be issued   Deficit   Total 
                        
Balance as at July 1, 2019   5,849,208   $5,849   $4,955,380   $230,000   $(10,184,187)  $(4,992,958)
Common stock and warrants issued for services   16,667    17    199,983    (200,000)   -    - 
Stock based compensation   -    -    55,672    -    -    55,672 
Net loss for the period   -    -    -    -    (2,839,784)   (2,839,784)
Balance as at September 30, 2019   5,865,875    5,866    5,211,035    30,000    (13,023,971)   (7,777,070)
Common stock issued for services   8,889    9    57,991    -    -    58,000 
Common stock issued for waiver agreement   5,435    5    26,897    -    -    26,902 
Warrants exercised for cash   4,444    4    9,996    -    -    10,000 
Non-cash warrant exercised   

53,027

    53    1,222,549    -    -    1,222,602 
Stock based compensation   -    -    45,397    -    -    45,397 
Net loss for the period   -    -    -    -    (3,068,646)   (3,068,646)
Balance as at December 31, 2019   

5,937,670

   $5,938   $6,573,865   $30,000   $(16,092,617)  $(9,482,814)
                               
Balance as at July 1, 2018   5,572,084   $5,572   $3,684,266   $379,102   $(3,802,822)  $266,118 
Common stock issued for services   11,000    11    139,489    (127,500)   -    12,000 
Reduction in equity to be issued upon issuance of common stock   13,778    14    30,986    (31,000)   -    - 
Warrants exercised for cash   195,111    195    468,804    (220,602)   -    248,397 
Issuance of stock options   -    -    126,829    -    -    126,829 
Equity to be issued   -    -    -    62,000    -    62,000 
Net loss for the period   -    -    -    -    (872,923)   (872,923)
Balance as at September 30, 2018   5,791,973    5,792    4,450,374    62,000    (4,675,745)   (157,579)
Common stock issued for services   9,000    9    88,491    -    -    88,500 
Warrants exercised for cash   17,568    18    39,878    -    -    39,896 
Issuance of stock options   -    -    41,630    -    -    41,630 
Equity to be issued   -    -    -    (62,000)   -    (62,000)
Net loss for the period   -    -    -    -    (2,123,963)   (2,123,963)
Balance as at December 31, 2018   5,818,541   $5,819   $4,620,374   $-   $(6,799,708)  $(2,173,516)

 

 C: 

3

 

 

Esports Entertainment Group, Inc. 

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Six Months Ended December 31, 
   2019   2018 
Cash flows from operating activities:          
Net loss  $(5,908,430)  $(2,996,886)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation   329,960    268,959 
Amortization and depreciation   15,527    25,664 
Impairment of intangible asset   67,131    - 
Net amortization of debt discount and premium on convertible debt   550,259    55,621 
Change in the fair market value of derivative liabilities   (1,087,347)   756,053 
Loss on extinguishment of debt   2,795,582    - 
Non-cash interest expense   2,064,749    436,273 
Gain on settlement of debt   (42,896)   - 
Changes in operating assets and liabilities:          
Accounts receivable   -    (835)
Prepaid expenses   19,123    164,141 
Accounts payable and accrued expenses   226,214    352,453 
Net cash used in operating activities   (970,129)   (938,557)
           
Cash flows from investing activities:          
           
Rent security deposit   -    (16,480)
Purchase of intangible assets   -    (1,869)
Purchase of equipment   -    - 
Net cash used in investing activities   -    (18,349)
           
Cash flows from financing activities:          
           
Proceeds from promissory convertible note   1,160,000    2,050,000 
Repayment of promissory convertible note   (105,000)   (56,500)
Deferred financing costs   (85,000)   (410,772)
Proceeds from exercise of warrants   10,000    288,290 
Net cash provided by financing activities   980,000    1,871,018 
           
Net increase in cash   9,871    914,112 
           
Cash, beginning of period   43,412    100,167 
           
Cash, end of period  $53,283   $1,014,279 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
CASH PAID FOR:          
Interest  $-   $- 
Income taxes  $-   $- 
           
SUPPLEMENTAL DISLCOSURE OF NON-CASH FINANCING ACTIVITIES:          
Extinguishment of derivative liability associated with extinguishment of convertible notes  $1,426,323   $- 
Extinguishment of debt discount associated with extinguishment of convertible notes  $1,909,280   $- 
Debt discount and derivative liability associated with amended and restated note  $1,565,617   $- 
Increase in principal amount of convertible debt associated with amended and restated note  $660,000   $- 
Derivative liability associated with convertible notes entered into  $1,136,231   $- 
Debt discount associated with convertible notes entered into  $1,276,000   $- 
Extinguishment of derivative liability associated with cashless warrant exercise  $1,222,602   $- 
Original issuance discount of convertible notes  $116,000   $  

 

 C: 

4

 

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

Note 1 – Nature of Operations

 

Esports Entertainment Group, Inc. (formerly VGambling Inc.) (the “Company”) was incorporated in the state of Nevada on July 22, 2008. On April 18, 2017, the majority of the shareholders of the Company’s common stock voted to approve a change of the name of the Company from VGambling, Inc. to Esports Entertainment Group, Inc.

 

The Company operates a licensed online gambling platform focused purely on the esports industry. Utilizing our peer-to-peer wagering system, we offer real money betting exchange style wagering on esports events from around the world in a secure environment. A betting exchange allows players to bet against one another rather than a bookmaker. Players can offer odds to, or request odds from, other players who wish to wager. Where traditional bookmakers risk going head-to-head with gamblers on markets, a betting exchange takes on no risk on the particular outcome of an event. Instead, a betting exchange provides the platform for its customers to match bets against one another and takes a small commission on winnings. Betting exchanges are becoming an increasingly integral part of the global gambling landscape, in many cases enabling customers to obtain better odds, more transparency and an experience that feels intuitively fairer. Further, the platform also facilitates gambling through “pool betting” whereby a group of people, be it a fan base of a team or a player or a group of friends and family, can pay a fixed price into a “pool” and then make a selection on an outcome, related to a tournament or game in esport. After the event has finished, those that selected the winner get an equal share of the pool.

 

At the current time, under our existing Curacao license, we are able to accept wagers from residents of over 149 jurisdictions including Canada, Japan, Germany and South Africa. We do not accept wagers from United States residents at this time.

 

Note 2 – Basis of Presentation and Going Concern

 

The Company is in the development stage and has not yet realized profitable operations and has relied on non-operational sources to fund operations. The Company has incurred recurring losses and additional future losses are anticipated as the Company has not yet been able to generate revenue. The Company’s activities are subject to significant risks and uncertainties, including failing to obtain the licenses required to operate its gambling business, failing to secure the additional funding required to fully operationalize the Company’s business, and the risk of existing or future competitors offering similar or more advanced technology.

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of December 31, 2019, the Company had an accumulated deficit of $16,092,617 and a working capital deficiency of $9,504,792. The Company has not generated any revenues during the six months ended December 31, 2019 and 2018. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations.

 

These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s evaluations are based on relevant conditions and events that are known and reasonably to be knowable as of February 19, 2020. Based on the information above, management believes that it is probable that management will be unable to meet its obligations as they come due within one year that the financial statements are issued.

 

These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.

 

 C: 

5

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

Note 3 – Summary of Significant Accounting Policies

 

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:

 

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. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These 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, 2019. The consolidated balance sheet as of June 30, 2019 was derived from the audited consolidated financial statements as of and for the year ended. The consolidated statements include the accounts of the Company and its wholly owned subsidiaries Esports Services Antigua Ltd., Vie Esports Services B.V., Esports Services (Malta) Limited and Esports Entertainment (Malta) Ltd. All material intercompany transactions and balances have been eliminated on consolidation. Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing net loss attributable to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.

 

The following securities were excluded from weighted average diluted common shares outstanding for the six months ended December 31, 2019 and 2018 because their inclusion would have been antidilutive.

 

   As of December 31, 
   2019   2018 
Common stock equivalents:        
Common stock options   51,942    46,608 
Warrants issued with notes and placement agent warrants   807,717    436,765 
Convertible notes   375,834    537,778 
Equity to be issued   2,667    - 
Totals   1,238,160    1,021,151 

 

Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements.

 

 C: 

6

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

In February 2016, the FASB issued Accounting Standards Codification (ASC) 842, Leases, which requires lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. The Company adopted the standard effective July 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company adopted all practical expedients and elected the following accounting policies related to this standard:

 

  Short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of twelve months or less; and

 

  The option to not separate lease and non-lease components for equipment leases.

 

The package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii) not reassessing initial direct costs for any existing leases.

 

Adoption of this standard did not result in the recognition of operating lease right-of-use assets or liability as of July 1, 2019. The Company’s accounting for finance leases remained substantially unchanged. The standard did not materially impact operating results or liquidity.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share- based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The guidance was adopted effective July 1, 2019, and the adoption of this ASU did not have a material effect on its consolidated financial statements.

 

In July 2017 the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. On July 1, 2019, the Company adopted this standard, as a result, freestanding equity-linked financial instruments (or embedded conversion options) no longer are accounted for as a derivative liability at fair value as a result of the existence of a down round feature.

 

The following are new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s financial statements.

 

 C: 

7

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s financial statements.

 

Note 4 – Fixed Assets

 

Fixed assets as of December 31, 2019 and June 30, 2019 consists of the following:

 

   December 31,
2019
   June 30,
2019
 
Computer equipment  $14,450   $14,450 
Furniture and equipment   20,241    20,241 
Total   34,691    34,691 
Accumulated depreciation   (22,546)   (18,114)
Net carrying value  $12,145   $16,577 

 

During the six months ended December 31, 2019 and 2018, the Company recorded total depreciation expense of $4,432 and $4,477, respectively.

 

Note 5 – Intangible Assets

 

Intangible assets as of December 31, 2019 and June 30, 2019 consists the following:

 

   December 31,
2019
   June 30,
2019
 
Online gaming website  $127,133   $127,133 
Accumulated amortization   (63,002)   (45,907)
Impairment of intangible assets   (67,131)   - 
Net carrying value  $3,000   $81,226 

 

During the six months ended December 31, 2019 and 2018, the Company recorded total amortization expense of $11,095 and $21,187, respectively.

 

During the six months ended December 31, 2019 and 2018, the Company recorded total impairment expense of $67,131 and $0, respectively.

  

Note 6. Related Party Transactions

 

The Company entered into transactions and owes balances related to cash to officers and directors.

 

a) The Company currently leases office space from the Chief Executive Officer of the Company, Grant Johnson. During the six months ended December 31, 2019 and 2018, the Company incurred rent of $4,800 for both periods, charged by its Chief Executive Officer. As of December 31, 2019 and 2018, the Company owed $0 and $1,200, respectively, to its Chief Executive Officer related to rent payments.

 

 C: 

8

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

b) The Company provides an expense advance to David Watt, a Director of the Company. For the six months ended December 31, 2019 and 2018, the Company had provided an expense advance of $19,337 and $16,023, respectively, to Mr. Watt. As of December 31, 2019 and June 30, 2019, the Company included in prepaid expenses and other current assets – related party $16,050 for both periods related to David Watt’s expense advance.

 

c) During the six months ended December 31, 2019 and 2018, Swiss Interactive Software GmbH (“Swiss”) charged the Company software consulting fees of $20,505 and $0, respectively, related to the development of the Company’s online gaming website. Mr. Rozum is the controlling shareholder of Swiss and was a director and the CTO of the Company until his resignation on September 19, 2019. As of December 31, 2019 and June 30, 2019, the Company owed $36,650 and $93,265, respectively to Swiss.

 

d) During the six months ended December 31, 2019 and 2018, Ardmore Software SP.Z.O.O. (“Ardmore”) charged the Company IT consulting fees of $0 and $243,426, respectively and rent expense, totaling $0 and $35,379, respectively. Mr. Rozum is the controlling shareholder of Ardmore and was a director and the CTO of the Company until his resignation on September 19, 2019. As of December 31, 2019 and June 30, 2019, the Company owed $0 and $9,230, respectively.

 

Note 7 – Commitments and contingencies

 

Swiss Interactive – Related Party

 

On April 7, 2019, we entered into the Software Transfer Agreement with Swiss Interactive for the purchase of the Licensed Software for consideration of $1,700,000, the consummation of which was contingent upon either the Company’s completion of (i) any private placement offerings or registered public offerings pursuant to which the Company receives proceeds in excess of $6,000,000 or (ii) any private or public offerings in connection with the listing of the Company’s securities on a national securities exchange (“Qualified Offering”). If the Company did not complete a Qualified Offering within six months of the execution date of the transfer agreement, such agreement would become void and the Company and Swiss Interactive would continue to abide by the terms of the existing Betting Gaming Platform Software Agreement entered into with Swiss Interactive Software GmbH on June 12, 2014 (the “Original Software Licensing Agreement”). On November 6, 2019 the Software Transfer Agreement was terminated.

 

Consultant Agreements

 

On June 12, 2014, the Company entered into a Betting Gaming Platform Software Agreement with Swiss Interactive Software GmbH. The monthly fees due under the agreement are based on the percentage of total revenues per month ranging from 5.0% to 10.0%. Monthly fees for platform support and maintenance services are set at a minimum of 2,500 Euros ($2,859) and a maximum of 25,000 Euros ($28,595). The Company must provide 30 days’ notice to terminate the agreement. During the quarter ended December 31, 2019, the Betting Gaming Platform Software Agreement was terminated

 

On August 1, 2017, the Company entered into a consulting agreement with a consultant for compensation of $48,000 per year. If the Company’s generates revenues exceeding $1,000,000 per month for six consecutive months the base annual compensation will increase to $72,000 per year.

 

On July 13, 2018, the Company entered into an agreement in principle with a third party, to assist the Company with an offering of common stock of the Company or any other financing. Pursuant to this agreement, the Company advanced $50,000 for expenses which has been included in prepaid expenses as a deferred financing cost as of December 31, 2019 and June 30, 2019. In the event the agreement is terminated, the Company has agreed to reimburse the third party for the full amount of accountable expenses incurred to such date, up to a maximum of $200,000. This agreement is subject to completion of an offering.

 

 C: 

9

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

Contingencies

 

Boustead Securities, LLC (“Boustead”) has notified the Company that it owes Boustead $192,664, as well as warrants to purchase 94,528 shares of common stock of the Company, as compensation for their acting as the placement agent for the sale of Company securities between June 2017 and 2018. Unless this matter is settled, Boustead has notified us that they plan to file an arbitration claim to resolve this dispute. Management believes this claim to be without merit as it is management’s position that Boustead has been paid in full for the services provided and that no further cash or warrants are owed. The JAMS arbitration was originally scheduled for the end of January 2020 and has since been deferred to April 2020.

 

The Company was notified that a claim was made against the Company for approximately $117,000, as compensation for financing commissions in 2017. It is our position that we have paid Boustead in full for the services it provided to us. We have denied that we owe Boustead any additional cash or warrants and have filed motions to dismiss these claims as well as filed counterclaims against Boustead. We plan to continue to vigorously defend the Company against these claims.

 

On December 19, 2018, Mr. Bryan Whatley, filed the first amended complaint against the Company (the “Defendant”) in the United States District Court in the District of Nevada for breach of contract in connection with its acting as a finder to assist the Company in finding potential investors. In their complaint, they sought damages in excess of $85,000 plus warrants to purchase shares of the Company’s common stock. The Company filed an answer to the first amended complaint denying the existence of a contract between the Company and Mr. Whatley, among other things. Management believes this claim to be without merit as it is management’s position that there was no contract. We plan to continue to vigorously defend the Company against this claim. The deadline for Mr. Whatley to respond to the Company’s answer was April 12, 2019, and no such response was filed. On April 23, 2019, the Company filed a motion to dismiss with the United States District Court of the State of Nevada. On August 27, 2019, an order that the Defendant’s motion to dismiss was granted.

 

Note 8 – Convertible Debt

 

$2,200,000 Secured Convertible Note

 

On November 13, 2018 (the November 13, 2018 Offering”), the Company issued face value $2,200,000 5% Senior Convertible Notes issued at a 10% original issue discount along with 244,445 warrants for net proceeds of $2,000,000 (the “Notes”). Cash fees paid for financing costs were $336,193. The Notes are secured by all of our assets and accrues interest at 5% per annum, payable in cash at maturity. However, the principal amount may be converted at the option of the holder at any time during the term to maturity into shares of our common stock at a conversion price of $9.0 per share subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $9.0. The Notes also contain certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the Notes contain an embedded conversion option that is indexed to the Company’s stock which contain an optional cash settlement feature. Therefore, the embedded conversion option is subject to classification in the Company’s financial statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815.

 

In connection with the issuance of the Note, the Company issued the holders warrants to purchase our common stock. The warrant is exercisable until November 13, 2021 for 244,445 of shares at a purchase price of $11.25 per share subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25. The Company has concluded that the Warrants contain an optional cash settlement feature. Therefore, the Warrants are subject to classification in the Company’s financial statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815.

 

 C: 

10

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

Additionally, the Company issued its placement agents warrants to purchase its common stock. The warrant is exercisable until December 12, 2023 for 48,889 of shares at a purchase price of $11.25 per share subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25. The Company has concluded that the Warrants contain an optional cash settlement feature. Therefore, the Warrants are subject to classification in the Company’s financial statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815.

 

On July 17, 2019, the Company and the investors (the “Investors”) in its November 13, 2018 Offering entered into Waiver Agreements (the “Waiver Agreements”). Pursuant to the terms of the Waiver Agreement, the Investors waived the exercise of remedies with regard to certain breaches of agreements and any and all events of defaults between the Company and the Investors, including the Notes, Warrants, and Securities Purchase Agreements (the “Transaction Documents”).

 

In consideration for the Investors entrance into the Waiver Agreements, the Company increased the principal amount of each Note issued in the November 13, 2018 Offering by 30%, in the form of an Amended and Restated Senior Secured Convertible Promissory Note (the “Amended and Restated Note”). Additionally, for its role as lead investor, facilitator and negotiating the terms of the Waiver Agreement, the Company issued to Cavalry Fund I LP warrants to purchase 3,333 shares of Common Stock exercisable on or after October 1, 2019 for a term of three (3) years from such date at an exercise price of $11.25 per share (the “Cavalry Warrant”).

 

The Company evaluated the debt modification for the Amended and Restated Note in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment as the 10% cash flow test was met. As a result, the $2,200,000 Secured Convertible Note was written off and the Amended and Restated Note was recorded at fair value as of July 17, 2019. On July 17, 2019 the Company wrote off the remaining principal balance of $2,200,000 and recorded the Amended and Restated Note at fair market value in the amount of $4,476,412. On July 17, 2019, of the $4,476,412 fair market value, $2,860,000 represents the face amount of the Amended and Restated Note and $1,616,412 represents the deemed premium paid for the Amended and Restated Note which was recorded as additional debt principal to be amortized over the remaining life of the Amended and Restated Note. The Company accelerated the remaining amortization of the July 17, 2019 premium on November 19, 2019. For the six months ended December 31, 2019, the Company recorded a reduction to amortization expense in the amount of $1,616,412 for the amortization of the deemed premium and a loss on extinguishment of debt in the amount of $2,795,582.

 

On November 19, 2019, the Company and the Investors in its November 13, 2018 Offering have agreed to or entered into subsequent Waiver Agreements (the “November Waiver Agreements”). Pursuant to the terms of the November Waiver Agreement, the Investors agreed to waive the exercise of remedies with regard to any and all events of default between the Company and the Investors, in connection with the Transaction Documents and agreed to extend the maturity of their Notes until February 14, 2020. In connection with the November Waiver Agreement, two investors received partial repayment.

 

In consideration for the Investors entrance into the Waiver Agreements, the Company has agreed to issue to each Investor an additional Warrant (the “Additional Warrant”) to purchase such number of shares of the Company’s Common Stock equal to 5% of the Warrant Shares initially issuable to such Investor under the Warrant issued to such Investor in the November 13, 2018 Offering, as amended. The Additional Warrant shall have an exercise price of $11.25 per share and shall be in form substantially the same as the Warrants issued in the November 13, 2018 Offering, provided that no cashless provision, ratchet provision or piggyback registration provisions shall be contained in the Additional Warrants.

 

The Company evaluated the debt modification for the Amended and Restated Note in accordance with ASC 470-50 and concluded that the debt did not qualify for debt extinguishment as the 10% cash flow test was not met. As a result, the additional warrants issued in connection with the waiver were fair valued and recorded as a debt discount, and are being amortized to interest expense over the remaining term of the debt. In addition, the Company incurred $50,000 of deferred financing fees in connection with the modification and expensed the fees to interest expense immediately.

 

These notes matured on February 14th and the Company is in active good faith discussions with the noteholders to extend the maturity date. No defaults have been called.

 

 C: 

11

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

Private Placement Offerings

 

On August 14, 2019 and August 29, 2019, the Company consummated the initial closings (“Initial Closings”) of a private placement offering (the “Offerings”) whereby the Company entered into those certain securities purchase agreement (the “August 2019 Purchase Agreements”) with seven (7) accredited investors (the “August Investors”). Pursuant to the August 2019 Purchase Agreements, the Company issued the August Investors those certain convertible promissory notes (the “August Convertible Promissory Notes”) in the aggregate principal amount of $522,500 (including a 10% original issue discount) and warrants (the “August Investor Warrants”) to purchase 58,057 shares of the Company’s common stock for aggregate gross proceeds of $475,000.

 

On October 11, 2019 and December 16, 2019, Company consummated additional closings of the Offerings whereby the Company entered into certain securities purchase agreement accredited investors (the “Q2 Closings”). Pursuant to the Q2 Closings, the Company issued the investors those certain convertible promissory notes (the “Q2 Promissory Notes”) in the aggregate principal amount of $753,500 (including a 10% original issue discount) and to purchase 92,278 shares of the Company’s common stock for aggregate gross proceeds of $685,000.

 

The August Convertible Promissory Notes and Q2 Promissory Notes, together and in the aggregate the (“Bridge Notes”) accrue interest at a rate of 5% per annum and are initially convertible into shares of the Company’s common stock at a conversion price of $9.00 per share, subject to adjustment (the “Conversion Price”). The Bridge Notes contain a mandatory conversion mechanism whereby unpaid principal and accrued interest on the Bridge Notes, upon the closing of a Qualified Offering (as defined therein) converts into the securities offered in such a Qualified Offering at the lower of (i) the Conversion Price and (ii) 80% of the offering price in the Qualified Offering. The Bridge Notes contain customary events of default (each an “Event of Default”) and mature on August 14, 2020, August 29, 2020, October 16, 2020 and December 6, 2020. If an Event of Default occurs, the outstanding principal amount of the Bridge Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Bridge Notes will become, at the holder’s election, immediately due and payable in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means the sum of 130% of the outstanding principal amount of the Bridge Notes plus accrued and unpaid interest, including default interest of 18% per year, and all other amounts, costs, expenses and liquidated damages due in respect of the Bridge Notes.

 

Pursuant to the Bridge Notes, each investor was entitled to 100% warrant coverage, such that investor in the Bridge Notes received the same number of warrants to purchase shares of Common Stock as is the number of shares of Common Stock initially issuable upon conversion of the Bridge Notes as of the date of issuance. The warrants issued in accordance with the Bridge Notes are exercisable at a price of $11.25 per share, subject to adjustment from the date of issuance through August 14, 2022, August 29, 2022, October 11, 2022 and December 16, 2022.

 

Joseph Gunnar & Co., LLC (the “Placement Agent”) acted as placement agent for the Offerings and received cash compensation of $85,000 and warrants to purchase 20,778 shares of the Company’s common stock, at an initial exercise price of $11.25 per share, subject to adjustment (“Agent Warrants”). The Agent Warrants may be exercised on a “cashless” basis and expire in August 14, 2024 and August 29, 2024.

 

Accounting for the Amended and Restated Notes and Convertible Promissory Notes

 

The Company evaluated the terms and conditions of the Amended and Restated Notes and Convertible Promissory Notes issued in the private placement offerings under the guidance of ASC 815. Because the economic characteristics and risks of the equity-linked conversion options are clearly and closely related to a debt-type host and the conversion features contain an optional cash settlement, the conversion features require classification and measurement as derivative financial instruments. Further, these features individually were not afforded the exemption normally available to derivatives indexed to a company’s own stock. Accordingly, our evaluation resulted in the conclusion that this compound derivative financial instrument requires bifurcation and liability classification, at fair value. The compound derivative financial instrument consists of an embedded conversion feature. Current standards contemplate that the classification of financial instruments requires evaluation at each report date.

 

 C: 

12

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

The following tables reflect the allocation of the purchase on the financing dates:

 

Secured Convertible Notes  Face Value 
   December 31,
2019
   June 30,
2019
 
Face value of Amended and Restated Note  $2,755,000   $2,200,000 
Face value of Bridge Notes   1,276,000    - 
Total face value   4,031,000    2,200,000 
Aggregate debt discount   (674,946)   (1,919,280)
Carrying value  $3,356,054   $290,720 

 

The carrying value of the aggregate secured convertible notes at December 31, 2019 and June 30, 2019 was $3,356,054and $290,720, respectively.

 

Discounts and premiums on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is greater than face value. Discounts and premiums are amortized through charges to and reductions to amortization of interest expense using the effective interest rate method over the term of the debt agreement. Amortization of debt discounts amounted to $2,166,670 and amortization of debt premium amounted to $1,616,411, which resulted in expense from net amortization in the amount of $550,259 during the six months ended December 31, 2019. During the six months ended December 31, 2018, the Company recorded amortization of debt discount in the amount of $55,621.

 

Derivative Liabilities

 

The carrying value of the compound embedded derivative and warrant derivative liabilities are on the balance sheet, with changes in the carrying value being recorded as a change in fair market value of derivative liabilities on the statements of operations and comprehensive loss.

 

The components of the compound embedded derivative and warrant derivative liabilities as of December 31, 2019 are as follows:

 

Our financing giving rise to derivative financial instruments  Indexed Shares   Fair Values 
Compound embedded derivatives:        
$4,031,000 face value secured convertible notes   447,889   $1,958,893 
Warrant derivative liabilities (Issued with Notes)   310,496    3,079,230 
Warrant derivative liabilities (Placement agent Warrants)   73,000    552,417 
    831,385   $5,590,540 

 

 C: 

13

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

The components of the compound embedded derivative and warrant derivative liabilities as of June 30, 2019 are as follows:

 

Our financing giving rise to derivative financial instruments  Indexed Shares   Fair Values 
Compound embedded derivatives:        
$2,200,000 face value secured convertible notes   244,444   $1,777,363 
Warrant derivative liabilities (Issued with Notes)   244,445    2,398,057 
Warrant derivative liabilities (Placement agent Warrants)   48,889    479,611 
    537,778   $4,655,031 

 

Fair Value Considerations

 

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

 

Level 1 valuations: Quoted prices in active markets for identical assets and liabilities.

Level 2 valuations: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3 valuations: Significant inputs to valuation model are unobservable.

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

Financial liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of December 31, 2019.

 

   Amounts at   Fair Value Measurement
Using Level 3 Inputs Total
 
Liabilities  Fair Value   Level 1   Level 2   Level 3 
Derivative liability – conversion feature  $1,958,893   $         -   $         -   $1,958,893 
Derivative liability – warrants   3,631,647    -    -    3,631,647 
Total  $5,590,540   $-   $-   $5,590,540 

  

Financial liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of June 30, 2019.

 

   Amounts at   Fair Value Measurement
Using Level 3 Inputs Total
 
Liabilities  Fair Value   Level 1   Level 2   Level 3 
Derivative liability – conversion feature  $1,777,363   $       -   $          -   $1,777,363 
Derivative liability – warrants   2,877,668    -    -    2,877,668 
Total  $4,655,031   $-   $-   $4,655,031 

  

The table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended December 31, 2019:

 

   Amount 
Balance at June 30, 2019  $4,655,031 
Change due to warrant exercise   (1,222,602)
Change due to extinguishment of debt   (1,426,323)
Change due to acquired amended and restated note   3,513,920 
Change due to issuance of warrants   2,210,550 
Change in fair value of derivative liabilities   (1,863,171)
Change in fair value of warrant liabilities   (233,969)
Change due to redemption of convertible debt   (42,896)
   $5,590,540 

 

 C: 

14

 

 

Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

The fair value of the derivative conversion features and warrant liabilities as of December 31, 2019 were calculated using a Monte-Carlo option model valued with the following assumptions:

 

    December 31,
2019
Dividend yield   0%
Expected volatility   171.4% - 244.6%
Risk free interest rate   1.9% - 2.3%
Contractual term (in years)   0.12 – 5.02
Conversion/Exercise price   $4.20 - $12.00

  

Changes in the observable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments.

 

The features embedded in the secured convertible notes and the warrants were valued using a Monte Carlo based valuation model. The Monte Carlo valuation technique was utilized because it embodies all of the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes.

  

Note 9 – Common Stock

 

Issued Common Stock

 

During the six months ended December 31, 2018, the Company issued 110,667 shares of its common stock related to the exercise warrants with a weighted average exercise price of $2.55 per share.

 

During the six months ended December 31, 2018, the Company issued 84,444 shares of its common stock related equity to be issued for the exercise of warrants in a previous period with an exercise price of $2.55 per share. The Company recorded these shares as equity to be issued at June 30, 2018 and did not receive any cash proceeds during the six months ended December 31, 2018. For the six months ended December 31, 2018, the Company recorded $220,602 as a reduction in equity to be issued.

 

During the six months ended December 31, 2018, the Company issued 13,778 shares of its common stock related to a subscription agreement entered into in a previous period. The Company recorded these shares as equity to be issued at June 30, 2018 and did not receive any cash proceeds during the six months ended December 31, 2018. For the six months ended December 31, 2018, the Company recorded $31,000 as a reduction in equity to be issued.

 

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Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

During the six months ended December 31, 2018, the Company issued 11,000 shares of its common stock related to services received in a previous period. The Company recorded these shares as equity to be issued at June 30, 2018. For the six months ended December 31, 2018, the Company recorded $127,500 as a reduction in equity to be issued and $6,000 as stock based compensation

 

On October 1, 2019, the Company issued 2,222 shares of its common stock in relation to a sponsorship agreement

 

On October 8, 2019, the Company issued 41,780 shares of its common stock upon the exercise of 79,444 warrants upon a cashless exercise.

 

On October 9, 2019, the Company issued 11,248 shares of its common stock upon the exercise of 21,389 warrants upon a cashless exercise.

 

On October 30, 2019, the Company issued 6,667 shares of its common stock in relation to a consulting agreement.

 

On November 19, 2019, the Company and the Investors in its November 13, 2018 Offering have agreed to or entered into subsequent Waiver Agreements (the “November Waiver Agreements”). Pursuant to the terms of the November Waiver Agreement, the Investors agreed to waive the exercise of remedies with regard to any and all events of default between the Company and the Investors, in connection with the Transaction Documents and agreed to extend the maturity of their Notes until February 14, 2020. Certain of the November Waiver Agreements are subject to continuing discussions regarding partial repayment.

 

In consideration for the Investors entrance into the Waiver Agreements, the Company has agreed to issue to each Investor an additional Warrant (the “Additional Warrant”) to purchase such number of shares of the Company’s Common Stock equal to 5% of the Warrant Shares initially issuable to such Investor under the Warrant issued to such Investor in the November 13, 2018 Offering, as amended. The Additional Warrant shall have an exercise price of $11.25 per share and shall be in form substantially the same as the Warrants issued in the November 13, 2018 Offering, provided that no cashless provision, ratchet provision or piggyback registration provisions shall be contained in the Additional Warrants.

 

During the six months ended December 31, 2019, the Company issued 4,444 shares of its common stock related to the exercise warrants with a weighted average exercise price of $2.25 per share.

 

During the six months ended December 31, 2019, the Company issued 16,667 shares of its common stock related to a consulting agreement dated June 4, 2019. These shares were recorded as equity to be issued at June 30, 2019, and during the six months ended December 31, 2019, the Company recorded $230,000 as a reduction to equity to be issued. As of December 31, 2019, the Company recorded a prepaid expense in the amount of $150,000 related to the value of the common stock granted for future services to be rendered.

 

Note 10 – Warrants

 

A summary of the Company’s warrant activities is as follows:

 

   Number of
Warrants
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life
   Intrinsic
Value
 
Outstanding, June 30, 2019   727,779   $6.30    2.09 years   $2,563,939 
Issued   190,996    11.25    -    - 
Exercised   (105,279)   7.65    -    - 
Expired   (5,779)   13.35    -    - 
Outstanding and Exercisable, December 31, 2019   807,717   $6.75    2.15 years   $655,231 

 

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Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

There were 105,279 warrants exercised during the six months ended December 31, 2019. The intrinsic value of the warrants exercised during the six months December 31, 2019 and 2018 was $0 and $1,789,666, respectively.

 

As at December 31, 2019, the following warrants were outstanding:

 

Expiry Date  Number of
Warrants
Issued and
Exercisable
   Weighted
Average Exercise
Price
 
February 2020   23,333    2.25 
March 2020   81,111    2.25 
June 2020   30,000    2.70 
July 2020   45,333    3.30 
August 2020   66,667    3.90 
November 2021   143,661    11.25 
March 2022   177,777    2.25 
August 2022   63,556    11.25 
October 2022   3,333    11.25 
December 2023   48,889    11.25 
August 2024   3,056    11.25 
November 2024   121,051    11.25 
    807,717   $6.75 

  

Note 11 – Stock Options

 

On August 1, 2017, the Company adopted the 2017 Stock Incentive Plan (the “2017 Plan”) whereby incentive stock options issued to employees, officers, and directors of the Company shall not exceed 2,500,000 of which the purchase price of the stock options shall not be less than 100% of the fair market value of the Company’s common stock and the period for exercising the stock options not exceed 10 years from the date of grant. The option price per share with respect to each option shall be determined by the committee for non-qualified stock options.

 

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

 

   Number of Options   Weighted Average Exercise Price 
Outstanding, June 30, 2019   51,942   $10.50 
Granted   -    - 
Exercised   -    - 
Cancelled   -    - 
Outstanding, December 31, 2019   51,941   $10.50 

  

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Esports Entertainment Group, Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

(Expressed in U.S. dollars)

 

As of December 31, 2019, the following options were outstanding:

 

Expiry Date  Number of Options Issued   Number of Options Exercisable   Weighted Average Exercise Price 
             
August 2020   3,333    3,333   $10.50 
June 2021   13,334    13,334    10.50 
August 2023   35,275    35,275    10.50 
    51,942    51,942   $10.50 

 

As of December 31, 2019, the weighted average remaining life of the options was 4.9 years.

 

During the six months ended December 31, 2019 and 2018, the Company recorded stock-based compensation expense of $329,960 and $268,959, respectively, which has been recorded as stock based compensation in the statements of operations. As of December 31, 2019 and 2018, there was $165,677 and $207,321, respectively, of unrecognized expense related to non-vested stock-based compensation arrangements.

 

The following table provides the details of the total stock-based payments expense during the six months ended December 31, 2019 and 2018:

 

   December 31,
2019
   December 31,
2018
 
Employees and directors’ stock-based payments  $101,070   $268,959 
Amortization of prepaid expense   228,890    - 
Total  $329,960   $268,959 

  

Note 12 – Segment Information

 

The following tables summarizes financial information by geographic segment.

 

For the six months ended December 31, 2019:

 

   Antigua   Malta   Curacao   U.S.   Total 
Net Loss  $26,462   $38,978   $94,549   $5,748,441   $5,908,430 

  

For the six months ended December 31, 2018:

 

   Antigua   Malta   Curacao   U.S.   Total 
Net Loss  $          -   $71,517   $39,591   $2,885,778   $2,996,886 

 

As of December 31, 2019:

 

   Antigua   Malta   Curacao   U.S.   Total 
Assets  $106,816   $54,853   $2,257   $135,067   $298,993 

 

As of June 30, 2019:

 

   Antigua   Malta   Curacao   U.S.   Total 
Assets  $202,546   $6,833   $7,095   $345,318   $561,792 

  

Note 13 – Subsequent Events

  

On January 22, 2020, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Nevada to effect a one-for-fifteen reverse stock split of the Company’s outstanding shares of common stock. As a result of the reverse stock split, every fifteen shares of the Company’s outstanding pre-reverse split common stock were combined and reclassified into one share of common stock. Unless otherwise noted, all share and per share data included in these financial statements retroactively reflect the 1-for-15 reverse stock split.

 

On January 17, 2020 the Company entered into Exchange Agreements with 18 of its investors whereby the investors agreed to exchange warrants to purchase an aggregate of 288,722 shares of common stock for 288,722 shares of the Company’s restricted common stock.

 

On February 14, 2020 the notes matured without an amendment to the terms. The Company is not in compliance with the covenants and is in active good faith discussions with the noteholders to extend the maturity date. No defaults have been called.

 

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

 

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: believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

 

Overview

 

Esports is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online battle arena games. As of March 20, 2019, the three largest selling esports games are Dota 2, League of Legends (both multiplayer online battle arena games) and Counter Strike: Global Offensive (a first-person shooter game). Other popular games include Smite, StarCraft II, Call of Duty¸ Heroes of the Storm, Hearthstone and Fortnite. Esports also includes games which can be played, primarily by amateurs, in multiplayer competitions on the Sony PlayStation, Microsoft Xbox and WII Nintendo systems. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including twitch.tv, azubu.tv, ustream.tv and youtube.com.

 

Esports Entertainment Group, Inc. (“Esports,” “EEG,” “we,” “us,” “our,” or the “Company”) operates a licensed online gambling platform focused purely on the esports industry. Utilizing our peer-to-peer wagering system, we offer real money betting exchange style wagering on esports events from around the world in a secure environment. A betting exchange allows players to bet against one another rather than a bookmaker. Players can offer odds to, or request odds from, other players who wish to wager. Where traditional bookmakers risk going head-to-head with gamblers on markets, a betting exchange takes on no risk on the particular outcome of an event. Instead, a betting exchange provides the platform for its customers to match bets against one another and takes a small commission on winnings. Betting exchanges are becoming an increasingly integral part of the global gambling landscape, in many cases enabling customers to obtain better odds, more transparency and an experience that feels intuitively fairer. Further, the platform also facilitates gambling through “pool betting” whereby a group of people, be it a fan base of a team or a player or a group of friends and family, can pay a fixed price into a “pool” and then make a selection on an outcome, related to a tournament or game in esport. After the event has finished, those that selected the winner get an equal share of the pool.

 

At the current time, under our existing Curacao license, we are able to accept wagers from residents of over 149 jurisdictions including Canada, Japan, Germany and South Africa. We do not accept wagers from United States residents at this time. We have applied for an online gaming service license from the Malta Gaming Authority. If our application is approved and a license is issued, we expect that residents in a number of European Union member states will be able to place bets on our website. We are also able to accept payments from additional third party payment providers. Money Matrix, a licensed regulated financial institution and our third party payment platform, updates the jurisdictions we are able to accept bets from on a real time basis as these changes occur.

 

Although official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a global surge in popularity over the last few years with the rapid growth of online streaming. The advent of online streaming technology has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously watched in person in stadiums, and by online viewers, which regularly exceed 1,000,000 viewers for major tournaments. Much like how there is a worldwide gaming market for the sports industry, there has now developed a worldwide gaming market for the esports industry. The impact has been so significant that many video game developers are now building features into their games designed to facilitate competition.

 

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According to Newzoo, a global leader in esports, games and mobile intelligence, it is expected that the total global esports audience will reach 453.8 million in 2019. Esports Enthusiasts, which are people who watch professional esports content at least once a month, will make up 201.2 million of the total up from 143.2 million in 2017, with a compound annual growth rate (“CAGR”) (2017-2022) of +15.7% to reach almost 297 million in 2022. The global average revenue per Esports Enthusiast, which includes not only gaming revenue, but also sponsorships advertising and all other esports related revenues, is projected to be $5.45 in 2019, up +8.9% from $5.00 in 2018. The number of occasional esports viewers, (people who watch professional esports content less than once a month), is expected to reach 252.6 million in 2019, up from 221.6 million in 2018, and is projected to grow with a CAGR of +12.6% to surpass 347 million in 2022. The number of people who are aware of esports worldwide is expected to reach 1.8 billion in 2019, up from 1.6 billion in 2018. China is expected to contribute most to global esports awareness, with 500.2 million people aware of esports in 2019. The increasing prominence of esports as a mainstream entertainment industry is driving the growth in awareness in most regions. Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia, and Rest of Asia is largely driven by improving IT infrastructure and urbanization. We believe the rise of new franchises, such as Player Unknown’s Battlegrounds or PubG, is an important global growth factor as the influx of millennials should continue to drive the growth of the esports industry’s audience and in turn, the esports gaming industry.

 

In 2018, there were 737 major esports events that generated an estimated $54.7 million in ticket revenues, up from $32 million in 2016, but down from $58.9 million in 2017. The total prize money of all esports events held in 2018 reached $150.8 million, after breaking the $100 million mark for the first time in 2017. The League of Legends World Championship was 2018’s biggest tournament by live viewership hours on Twitch, with 53.8 million hours. It also produced $1.9 million in ticket revenues. The Overwatch League was the most-watched league by live viewership hours on Twitch, generating 79.5 million hours.

 

According to Statista, the amounts wagered on esports betting is expected to grow from $315 million in 2015 to $23.5 billion in 2020. Forbes magazine projects fans of esports will wager $23 billion on professional esports events by 2020.

 

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. 

 

Going Concern

 

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, including the sale of securities in this offering. We continue to incur negative cash flows from operating activities and net losses. We had minimal cash, negative working capital, and negative total equity as of December 31, 2019 and June 30, 2019. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements included in this 10-Q do not include any adjustments that might result from the outcome of this uncertainty.

 

In order for us to eliminate substantial doubt about our ability to continue as a going concern, we must achieve profitability, generate positive cash flows from operating activities and obtain the necessary debt or equity funding to meet our projected capital investment requirements. Our management’s plans with respect to this uncertainty consist of raising additional capital by issuing debt or equity securities and increasing the sales of our products and services. If we are successful in completing the offering, we believe the net proceeds of the offering together with anticipated growth of the business will be sufficient to eliminate substantial doubt about our ability to continue as a going concern. There can be no assurance, however, that we will be able to complete the offering, raise sufficient additional capital or that revenues will increase rapidly enough to offset operating losses. If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of our products and services and may have to cease operations.

 

Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. Material changes in line items in our Statement of Operations for the period ended December 31, 2019 as compared to the same period last year, are discussed below.

 

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Revenue and Expenses

 

Our operating expenses are classified into several categories:

 

Directors Compensation
Consulting Fees
Professional Fees
General and Administrative Expenses
Stock Based Compensation

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   December 31,   December 31,   December 31,   December 31, 
   2019   2018   2019   2018 
   $   $   $   $ 
                 
Directors’ compensation   16,250    13,270    37,767    26,541 
Consulting Fees   100,066    93,822    238,275    260,137 
General and administrative   250,291    317,696    609,110    858,066 
Professional fees   92,220    48,363    146,700    74,357 
Stock based compensation   210,051    41,630    329,960    168,459 
                     
Total operating expenses   668,878    514,781    1,361,812    1,387,560 
                     
Other expenses                    
Interest expense   (1,550,418)   (797,509)   (2,262,313)   (797,652)
Amortization expense   (840,170)   (55,621)   (550,259)   (55,621)
Change in fair value of derivative liabilities   16,631    (756,053)   1,087,347    (756,053)
Loss on extinguishment of debt             (2,795,582)     
Gain on settlement of debt   42,896         42,896      
Impairment of intangible asset   (67,131)        (67,131)     
Foreign Exchange Loss   (1,576)        (1,576)     
                     
Net loss and comprehensive loss   (3,068,646)   (2,123,964)   (5,908,430)   (2,996,886)

  

Directors Compensation is comprised of cash and stock based compensation paid to the directors of the Company. Directors compensation during the three months ended December 31, 2019 totaled $16,250, an increase of $2,980, compared to $13,270 recorded for the three months ended December 31, 2018. Directors compensation during the six months ended December 31, 2019 totaled $37,767, an increase of $11,226, compared to $26,541 recorded for the six months ended December 31, 2018. The increase in director’s compensation period over period is attributable primarily to the change of the board with the addition of a new independent director in December 2019, and partially offset by a reversal of a previous quarter over accrual.

 

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Consulting fees during the three months ended December 31, 2019 totaled $100,066, an increase of $6,244, compared to $93,822 recorded for the three months ended December 31, 2018. Consulting fees during the six months ended December 31, 2019 totaled $238,275, an decrease of $21,862, compared to $260,137 recorded for the six months ended December 31, 2018 . The decrease in consulting fees period over period is attributable primarily to decreased fees of outside services in connection with platform services, offset by increases in fees to support the preparation of SEC filings combined with consulting costs related to the potential public offering of its securities.

 

Professional Fees consist primarily of our contracted accounting, legal and audit fees. Professional Fees during the three months ended December 31, 2019 totaled $92,220, an increase of $43,857, compared to $48,363 recorded for the three months ended December 31, 2018. Professional Fees during the six months ended December 31, 2019 totaled $146,700, an increase of $72,343, compared to $74,357 recorded for the six months ended December 31, 2018. This increase in professional fees period over period is attributable primarily to increases in accounting and audit fees for preparation and review of our filings with the SEC

 

General and Administrative Expenses refers to our salaries, occupancy costs, marketing costs, travel costs, office supplies, telephone expenses, bank charges, fees to process and file documents with the SEC, stock transfer fees, investors relations costs, corporate filing fees with the State of Nevada, and other administrative expenses. General and Administrative Expenses during the three months ended December 31, 2019 totaled $250,291, a decrease of $67,405, compared to $317,696 recorded for the three months ended December 31, 2018. General and Administrative Expenses during the six months ended December 31, 2019 totaled $609,110, a decrease of $248,956, compared to $858,066 recorded for the six months ended December 31, 2018. The decrease in General and Administrative Expenses is attributable primarily to the decrease in business development activities combined with the reduced activities in Antigua. 

 

Stock based compensation refers to shares and stock options issued to employees and consultants as part of the compensation package. Stock based compensation during the three months ended December 31, 2019 totaled $210,051, an increase of $168,421, compared to $41,630 recorded for the three months ended December 31, 2018. Stock based compensation during the six months ended December 31, 2019 totaled $329,960, an increase of $161,501, compared to $168,459 recorded for the six months ended December 31, 2018. The increase in stock based compensation is primarily attributable to the vesting of options issued in prior years, the amortization of stock based compensation recorded for services rendered in the current year and recorded as a prepaid expense in prior year, and for the issuance of common stock issued for services.

 

Capital Resources and Liquidity

 

The Company’s sources and (uses) of cash for the six months ended December 31, 2019 and 2018 are shown below:

 

   2019   2018 
Cash used in operating activities  $(970,129)  $(938,557)
Cash used in investing activities   -    (18,349)
Cash provided by financing activities   980,000    1,871,018 

 

Our projected capital requirements during the next 18 months are as follows:

 

Project  Estimated Cost 
Launch our skill-based video game tournaments for play on mobile devices  $500,000 
Launch our skill-based video game tournaments for play on PCs and video game consoles  $1,000,000 
Obtain online gaming license from, and establish operations in, Malta  $1,000,000 
Obtain online gaming license from, and establish operations in, an Asian country to be selected by us.  $500,000 
Market our online betting services  $5,000,000 

 

Our auditor’s report on our June 30, 2019 financial statements expresses an opinion that substantial doubt exists as to whether we can continue as an ongoing business.

 

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Other than the foregoing, we do not know of any trends that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Off Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

We conducted an evaluation, with the participation of our Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2019, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive/principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer/Chief Financial Officer have concluded that as of December 31, 2019, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described below.

  

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management identified the following three material weaknesses that have caused management to conclude that, as of December 31, 2019, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

 

  1. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Based on the current magnitude of our operations, it is impractical to employ sufficient staff to fully address the separation of duties issue. As the business plan is implemented and additional staff is required, we will be able to and intend to address this identified weakness.

 

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  2. Effective controls over the control environment have not been fully implemented. Specifically, management has not developed and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors has only three independent members. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. As the expansion plans are implemented, we intend to communicate our accounting policies and procedures to our employees.
     
  3. We do not employ accounting staff with the technical capabilities to identify non-routine complex transactions including transactions which involve issuance of debt and equity.

 

As a result of the material weaknesses identified above, our internal control over financial reporting was not effective as of December 31, 2019.

 

The Company plans to initiate a program to address the above weakness. While segregation of duties is very difficult in a small company. The Company has an internal policy that all major expenditures must be approved by a majority of the Board of Directors. In addition, the Company has constituted an Audit Committee, consisting of two non-management directors with an Independent Director as the Chair.

 

We plan to document our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending December 31, 2019. We plan to progressively implement the written policies and procedures commencing in the immediate future.

 

To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

As part of the implementation strategy for the expansion of the Company we have engaged a third-party firm to assist us with the development of any additional systems required. We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees as funding becomes available to implement the business plan in order to segregate duties in a manner that establishes effective internal controls. All such required remedies are dependent on having the financial resources available to complete them.

 

Changes in internal controls.

 

No change in our system of internal control over financial reporting occurred during the period covered by this report, the six months ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

 C: 

24

 

 

Item 1. Legal Proceedings

 

From time to time, we are a defendant or plaintiff in various legal actions that arise in the normal course of business.

 

In September 2018, Boustead Securities, LLC (“Boustead”) notified us via letter of a claim that they were owed $192,664, as well as warrants to purchase 94,527 shares of our common stock as compensation for their acting as the placement agent for the sale of our securities between June 2017 and 2018. This matter was then brought to JAMS pursuant to an arbitration clause in the placement agent agreement entered into by the Company and Boustead. It is our position that we have paid Boustead in full for the services it provided to us. We have denied that we owe Boustead any additional cash or warrants and have filed motions to dismiss these claims as well as filed counterclaims against Boustead. We plan to continue to vigorously defend the Company against these claims.

 

The JAMS arbitration was originally scheduled for the end of January 2020 but has since been postponed until April.

 

On December 19, 2018, Mr. Bryan Whatley, filed the first amended complaint against the Company in the United States District Court in the District of Nevada for breach of contract in connection with its acting as a finder to assist the Company in finding potential investors. In their complaint, they sought damages in excess of $85,000 plus warrants to purchase shares of the Company’s common stock. The Company filed an answer to the first amended complaint denying the existence of a contract between the Company and Mr. Whatley, among other things. Management believes this claim to be without merit as it is management’s position that there was no contract. We plan to continue to vigorously defend the Company against this claim. The deadline for Mr. Whatley to respond to the Company’s answer was April 12, 2019, and no such response was filed. On April 23, 2019, the Company filed a motion to dismiss with the United States District Court of the State of Nevada. On August 27, 2019, an order that the Defendant’s motion to dismiss was granted.

 

With the exception of the foregoing, we are not involved in any material disputes and do not have any material litigation matters.

  

Item 1A. Risk Factors

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Registration Statement on Form S-1, filed with the SEC on May 2, 2019.

 

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

 

During the six months ended December 31, 2019, the Company issued 16,667 shares of its common stock to a consultant for services.

 

During the six months ended December 31, 2019, the Company issued 4,444 shares of its common stock related to the exercise warrants with a weighted average exercise price of $2.25 per share.

 

On October 1, 2019, the Company issued 2,222 shares of its common stock in connection with a sponsorship agreement.

 

On October 8, 2019, the Company issued 41,780 shares of its common stock upon the exercise of 79,444 warrants upon a cashless exercise.

 

On October 9, 2019, the Company issued 11,248 shares of its common stock upon the exercise of 21,389 warrants upon a cashless exercise.

 

On October 30, 2019, the Company issued 6,667 shares of its common stock in connection with a consulting agreement.

  

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not Applicable.

 

Item 5. Other Information

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

 C: 

25

 

 


Item 6. Exhibits.

 

Exhibit No.   Description
     
10.1   Form of Waiver Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on December 20, 2019).
10.2   Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on August 20, 2019).
10.3   Form of Convertible Promissory Note (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on August 20, 2019).
10.4   Form of Warrant (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on August 20, 2019).
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*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith
**Furnished herewith

 

 C: 

26

 

  

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 19, 2020

By: /s/ Grant Johnson
 

 

Grant Johnson

Chief Executive Officer

   

Date: February 19, 2020

By: /s/ Christopher Malone
 

 

Christopher Malone

Chief Financial Officer

 

 

27

 

 


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
8/29/24
8/14/24
12/12/23
12/16/22
10/11/22
8/29/22
8/14/22
11/13/21
12/6/20
10/16/20
8/29/20
8/14/20
Filed on:2/19/20
2/14/20NT 10-Q
1/22/20
1/17/20
For Period end:12/31/19NT 10-Q
12/16/19
12/15/19
11/19/1910-Q
11/6/19
10/30/19CORRESP,  S-1/A
10/11/19
10/9/19
10/8/19
10/1/19
9/30/1910-K,  10-Q,  NT 10-Q
9/19/198-K
8/29/198-K
8/27/19
8/14/198-K
7/17/198-K
7/1/19
6/30/1910-K
6/4/19
5/2/19S-1
4/23/198-K
4/12/19
4/7/19
3/20/19
12/31/1810-Q,  NT 10-Q
12/19/18
11/13/188-K
9/30/1810-Q,  10-Q/A,  NT 10-Q
7/13/18
7/1/18
6/30/1810-K,  10-K/A,  NT 10-K
8/1/17
4/18/178-K
6/12/14
7/22/08
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