You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the financial statements and the
related notes appearing elsewhere in this Form 10-K. This discussion contains
forward-looking statements reflecting our current expectations that involve
risks and uncertainties, including those set forth under "Cautionary Statement
About Forward-Looking Statements." Actual results and experience could differ
materially from the anticipated results and other expectations expressed in our
forward-looking statements as a result of a number of factors, including but not
limited to those discussed in this Item and in Item 1A - "Risk Factors." Actual
results and the timing of events could differ materially from those discussed in
our forward-looking statements as a result of many factors, including those set
forth under "Risk Factors" and elsewhere in this Form 10-K.
21
Overview
We operate platforms to provide a real money online gambling experience focused
on i-gaming including casino, sportsbook and esports events. We operate under a
Curacao gaming sublicense and under an operator services agreement with Aspire
Global plc ("Aspire") allowing us to provide online betting services to various
countries around the world.
Acquisition of Aspire Global Plc's ("Aspire") Business to Consumer ("B2C")
Business
In order to accelerate the growth and expand market access for our esports
product offerings, on November 29, 2021, we acquired Aspire's B2C Business, for
€65,000,000 payable as follows: (i) a cash amount of €50,000,000; (ii)
€10,000,000, payable in accordance with the terms of an unsecured subordinated
promissory note; and (iii) 186,838 shares of our common stock, which were valued
at €5,000,000.
The acquisition of Aspire's B2C business provides the following strategic
benefits:
· ownership of Aspire's portfolio of B2C proprietary online casino and
sportsbook brands consisting of Karamba, Hopa, Griffon Casino,
BetTarget, Dansk777, and GenerationVIP;
· market access for our esports products in key regulated markets
including the United Kingdom, Germany, Ireland, Malta, and Denmark,
among others, allowing us to cross-sell esports wagering
opportunities;
· enhanced strategic partnership with Aspire who provides the on-line
gaming platform and a managed services offering, including customer
service, customer on-boarding and payment processing ensuring
operational stability and continuity.
Our gaming sub-license from the Curacao Gaming Authority and the licenses made
available to us from the acquisition of the Aspire B2C business allows us to
accept esports and sports wagers from residents of more than 160 jurisdictions.
Focus on I-Gaming Operations
During the quarter ending September 30, 2022, we took significant measures to
increase the profitability of our business in the short term. These actions
include optimizing the efficiency of marketing campaigns, reducing the total
number of employees and contractors by approximately 45 positions, terminating
software and other immaterial contracts as well as generally reducing the
operating costs of the business. While these efforts focus on the goal of
attaining profitability of our business, it is likely to reduce overall revenue
growth in the short to medium term. In addition, even after these efforts, we
are not currently generating sufficient cash from our operations to settle our
debts as they fall due and continue to require near term financing to fund our
operations and continue our business. These efforts have also resulted in an
increased focus on our i-gaming business and the halting of investment in the
Company's esports products and technologies. As a result of these actions as
referenced above, we do not expect to launch our esports products in the
foreseeable future.
We recorded a restructuring charge of approximately $1.0 million that included
severance and other costs associated with termination of the employment
contracts, consultant contracts and any costs to terminate software licenses and
other commitments. Of these costs, $388,000 are included in general and
administrative expenses, $521,000 are included in Product and technology
expenses, and $130,000 are included in sales and marketing expenses. In
connection with the preparation of our financial statements for inclusion in
this annual report, we completed an impairment review of our property and
equipment and intangible assets related to our esports product and technologies
and recognized an impairment loss of $3.9 million.
22
Results of Operations for the Year Ended September 30, 2022, compared to the
Year Ended September 30, 2021
Results of Operations
Results of operations in dollars and as a percentage of net revenue were as
follows:
Years Ended September 30,
2022 2021
$ % $ %
Revenue $ 58,596,620 100% $ 164,807 100%
Cost of revenue (36,014,055 ) -61% (37,744 ) -23%
Gross profit 22,582,565 39% 127,063 77%
Operating expenses:
Sales and marketing expenses 27,500,618 47% 3,221,218 1,955%
Product and technology expenses 3,993,846 7% 3,103,611 1,883%
Acquisition costs 2,240,147 4% 147,616 90%
Impairment loss 3,851,503 7% - 0%
General and administrative
expenses 17,640,728 30% 7,103,943 4,310%
Total operating expenses 55,226,842 94% 13,576,388 8,238%
Income (loss) from operations (32,644,277 ) -56% (13,449,325 ) -8,161%
Other expenses:
Interest expense (9,894,531 ) -17% (1,704,395 ) -1,034%
Gain on derivative instruments 1,239,510 2 - 0%
Foreign currency loss and other (128,311 ) 0% (46,304 ) -28%
Total other expense (8,783,332 ) -15% (1,750,699 ) -1,062%
Income (loss) before provision
for income taxes (41,427,609 ) -71% (15,200,024 ) -9,223%
Provision for income taxes - 0% - 0%
Net loss $ (41,427,609 ) -71% $ (15,200,024 ) -9,223%
Revenue
For the year ended September 30, 2022, we generated $58,596,620 in revenue
compared to $164,807 in revenue during the year ended September 30, 2021. The
increase in revenue in the year ended September 30, 2022, when compared with the
same period in the prior year, was driven by the acquisition of the Aspire B2C
business in November 2021 which continues to generate significant revenue in the
UK, Germany, Denmark, Ireland, Austria and other regulated markets, and
accounted for substantially all of the increase in revenue for the year ended
September 30, 2022, as compared to the year ended September 30, 2021. As a
result of the Company's restructuring of the business to improve its immediate
profitability, certain inefficient sales and marketing efforts will be
curtailed, which may adversely impact revenue growth in the short to medium
term.
Cost of Revenue
During the year ended September 30, 2022, cost of sales was $36,014,055 as
compared with $37,744 in the same period in the prior year. The increase in cost
of sales is due entirely to the acquisition of the Aspire B2C business in
November 2021 and is consistent with the increase in revenue and consists of
third-party costs associated with the betting software platform and gaming
taxes.
23
Sales and Marketing Expense
Sales and marketing expense was $27,500,618 for the year ended September 30,
2022 compared to $3,221,218 for the year ended September 30, 2021, an increase
of $24,279,400. The increase in sales and marketing expense is driven by
increase in revenue from the acquisition of the Aspire B2C business, increase in
stock-based compensation and increased levels of staff. Sales and marketing
expenses also included $2,819,973 and $1,170,115 of stock-based compensation
costs to employees and consultants for the years ended September 30, 2022 and
2021, respectively, payroll costs of $2,453,387 and $378,352, respectively, and
external consultants of $1,128,213 and $1,654,100 for the years ended September
30, 2022 and 2021, respectively, and the initial roll out of our marketing
campaigns focused primarily on our free to play game in the previous year. We
expect sales and marketing expenses to increase in future periods as our
marketing campaigns increase in both number and volume.
Product and Technology Expense
Product and technology expense was $3,993,846 for the year ended September 30,
2022 compared to $3,103,611 for the year ended September 30, 2021, an increase
of $890,235. The increase is due to increased spending related to development of
the esports operations that were abandoned in the fourth quarter of the current
period. Product and technology expenses for the year ended September 30, 2022,
included payroll-related costs of $2,199,267, stock-based compensation of
$767,004 and other development costs of $1,027,575 consisting primarily of
consulting and other development costs. Product and technology expenses for the
year ended September 30, 2021, included payroll-related costs of $1,604,651,
stock-based compensation of $625,443 and other development costs of $873,517
consisting primarily of consulting and other development costs.
Acquisition Costs
Acquisition costs were $2,240,147 for the year ended September 30, 2022, as
compared to $147,616 for the year ended September 30, 2021. Acquisition costs
included a non-cash hedging loss of $1,570,000 from executing a forward contract
on the purchase price of the acquisition of the Aspire B2C business to hedge
exposure to fluctuations in the Euro. Acquisition costs also included various
legal and consultant fees associated with completing the acquisition.
Impairment loss
During the year ended September 30, 2022, we recognized an impairment loss of
$3,851,503, comprised of impairment of property and equipment of $569,260 and
impairment of intangible assets of $3,282,243. The impairments relate to the
write down of our esports assets as of September 30, 2022.
General and Administrative Expense
General and administrative expense was $17,640,728 for the year ended September
30, 2022, as compared to $7,103,943 for the same period in the prior year.
General and administrative expense for the year ended September 30, 2022
included payroll-related costs of $3,078,089, $1,860,395 of stock-based
compensation cost, and professional fees including legal, accounting, investor
relations and other professional fees, depreciation and amortization of
intangible assets. General and administrative expense for the year ended
September 30, 2021 included payroll-related costs of $1,696,435, $2,392,753 of
stock-based compensation cost (of which $1,486,725 was to outside consultants),
and professional fees of approximately $1,858,297. The increase in payroll costs
over the prior period is due to the expansion of support staff associated with
the growth from the Aspire B2C business acquisition.
Interest and Other Expenses
During the years ended September 30, 2022 and 2021, we recognized interest
expense of $9,894,531 and $1,704,395, respectively, which included amortization
of debt discounts and deferred finance costs of $4,778,405 and $1,508,482
related to the Senior Notes issued to acquire the Aspire business, and
convertible debt issued to acquire certain intangible assets in the previous
year. During the year ended September 30, 2022 we recognized a gain on
derivative instruments related to foreign exchange rate swaps of $1,239,510. We
also incurred a foreign currency loss of $128,311 and $46,304 during the years
ended September 30, 2022 and 2021, respectively.
24
Net Income/Loss
Net loss for the year ended September 30, 2022, was $41,427,609 compared to a
net loss of $15,200,024 for the same period in the prior year. The increase in
net loss was primarily due to the significant increase in general and
administrative expenses of $10,536,785, an increase in product and technology
expenses of $890,235 and an increase in our sales and marketing costs of
$24,279,400 as we expand our business and develop new products and services,
plus acquisition costs of $2,240,147 and an impairment loss of $3,851,503 as
described above. The increase in interest expense of $8,190,136 also contributed
to the increase in net loss.
Liquidity and Capital Resources
On September 30, 2022, we had cash and cash equivalents of $5,486,210, and had a
working capital deficit of $25,837,758. We have historically funded our
operations from proceeds from debt and equity sales, and funds received from
customers. Our forecasts for fiscal year 2023 indicate that we will need near
term additional funding in order to have sufficient financial resources to
satisfy our outstanding debts and to continue to settle our debts as they fall
due. We do not have any commitments for such funding and there is no assurance
that we will be able to raise additional financing on favorable terms, if at
all.
The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. Our continuation as a going concern is
dependent upon our ability to obtain equity or debt financings to continue
operations. We have a history of and expect to continue to report negative cash
flows from operations and a net loss. Our forecasts for 2023 and beyond
indicate that we will need additional funding in order to have sufficient
financial resources to continue to settle our debts as they fall due. We have
taken significant measures to increase the profitability of our business in the
short term, but we are not currently generating sufficient cash from our
operations to settle our debts as they fall due and continue to require near
term financing. These actions include optimizing the efficiency of marketing
campaigns, reducing the total number of employees and contractors, terminating
software and other immaterial contracts as well as generally reducing the
operating costs of the business. These efforts have also resulted in an
increased focus on our i-gaming business and a significant reduction in the
investment of our esports products and technologies, which resulted in the
recognition of an impairment loss on certain intangible assets and fixed assets.
As a result of our actions as referenced above, we do not expect to launch our
esports products in the short or medium term. These factors raise substantial
doubt regarding our ability to continue as a going concern. 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 we be unable to continue as a going concern. We may
seek additional funding through a combination of equity offerings, debt
financings, government or other third-party funding, commercialization,
marketing and distribution arrangements, other collaborations, strategic
alliances and licensing arrangements and delay planned cash outlays or a
combination thereof. Management cannot be certain that such events or a
combination thereof can be achieved.
Acquisition of Aspire Global Business to Consumer ("B2C") Business
In order to accelerate the growth, on November 29, 2021, we completed the
acquisition of Aspire Global's B2C business for €65,000,000 payable as follows:
(i) a cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with
the terms of an unsecured subordinated promissory note; and (iii) 186,838 shares
of our common stock, which were valued at €5,000,000.
On September 30, 2021, we entered into subscription agreements (the
"Subscription Agreements") with certain investors (the "Investors"). Pursuant to
the Subscription Agreements, the Investors agreed to subscribe for and purchase,
and we agreed to issue and sell to such Investors, simultaneous with the closing
of the Acquisition Agreement, shares of Series A Convertible Preferred Stock
(the "Preferred Stock") for a purchase price of $1,000.00 per share (the
"Private Placement"). For each share of Preferred Stock issued, we issued the
Investor a warrant to purchase 150% of the shares of common stock underlying the
Preferred Stock (the "Warrants"). The aggregate Private Placement, which was
completed on the closing date of the Acquisition Agreement was $37.7 million.
On November 29, 2021, we entered a credit agreement (the "Credit Agreement")
with CP BF Lending, LLC ("Lender"), pursuant to which the Lender agreed to make
a single loan to us of $30.0 million (the "Senior Note"). The Senior Note bears
interest on the unpaid principal amount at a rate per annum equal to 15.0% as
follows: (1) cash interest on the unpaid principal amount of the Senior Note at
a rate equal to 14.0% per annum, plus (2) payable-in-kind interest ("PIK
Interest") on the unpaid principal amount of the Senior Note at a rate equal to
1.0% per annum. We paid to Lender on the closing date a non-refundable
origination fee in an amount equal to $750,000. To date, we have entered into
multiple waiver agreements with the Lender to maintain compliance with certain
financial and other covenants pursuant to the Credit Agreement. On January 10,
2023, the Company repaid $3,000,000 on the Senior Notes pursuant to the most
receive waiver agreement with the Lender, which in turn reduced the minimum cash
balance requirement under the Senior Notes to $1,500,000. These waivers will
expire on January 31, 2023. We do not expect to satisfy the financial covenants
prior to January 31, 2023 and are currently in discussions with the Lender on
modifying the financial covenants. There is no assurance that we will be
successful in making such modifications to the Credit Agreement.
25
On June 16, 2022, we issued, in a private placement priced at-the-market under
Nasdaq rules: (i) 977,657 shares of common stock, and (ii) warrants to purchase
up to an aggregate of 977,657 shares of common stock. The combined purchase
price of one share of common stock and accompanying warrant is $3.58. The gross
proceeds to us from the private placement were approximately $3.5 million,
before deducting fees and other offering expenses, and excluding the proceeds,
if any, from the exercise of the warrants.
As of March 31, 2022, we had not maintained compliance with the covenants of the
Senior Notes and obtained a waiver from the Lender which waiver was contingent
on the completion an equity raise of at least $3.5 million, which was completed
in June 2022. In consideration for obtaining a waiver from the compliance with
certain covenants, we agreed to amend the Senior Notes such that $5 million of
principal loan balance becomes convertible at $3.58 per share commencing after
we raised the $5,000,000 of common equity (including the foregoing $3.5
million).
During fiscal year September 30, 2021, we completed two private placements
totaling 2,250,000 shares of our common stock for gross proceeds of $4.75
million.
In April 2021, we completed our IPO and issued 2,400,000 shares of common stock
for gross cash proceeds of $14,400,000. We paid underwriting fees and other
expenses of $885,800 and issued 168,000 warrants to purchase shares of common
stock at a price of $7.20 per share for a period of five years.
As of September 30, 2022, we have incurred an accumulated deficit of $62,827,744
since inception and have not yet generated any meaningful income from
operations.
Cash used in operating activities
Net cash used in operating activities was $11,394,834 for the year ended
September 30, 2022, as compared to cash used in operating activities of
$8,308,198 for the same period in the prior year. Net cash used in operating
activities during the year ended September 30, 2022, included payments made for
employee costs, professional fees to our consultants, attorneys and accountants
for services related to completion of our audit, development of our new wagering
platform and preparation of our public offering filings. Net cash used in
operations was also a result of our increase in accounts receivable due to the
growth in our business. Cash flow from operations also benefitted from deferred
payments for professional fees to our consultants, attorneys and accountants
primarily required to complete the acquisition of the Aspire B2C business in
November 2021.
Cash used in investing activities
Net cash used in investing activities was $57,436,408 during the year ended
September 30, 2022 related to the completion of the acquisition of the Aspire
B2C business in November 2021. Also contributing to the cash used in investing
activities were purchase of fixed assets of $1,200,882 due primarily to opening
of our office in Malta and purchase of software assets to support the new
wagering platform. Net cash used in investing activities was $577,811 for the
year ended September 30, 2021 and was related to the purchase of software assets
to support the new wagering platform, and the purchase of long-term assets
related to intellectual property rights.
Cash used provided by financing activities
Net cash provided by financing activities was $63,655,757 for the year ended
September 30, 2022 due to the issuance of the Preferred Stock and Senior Notes
which resulted in cash proceeds of $33,516,000 and $26,627,111, respectively, as
well as the net cash proceeds of $3,492,450 raised in June 2022 from a private
placement. Net cash provided by financing activities was $17,896,957 for the
year ended September 30, 2021 and was related to the sale of 2,000,000 shares of
common stock at $2.00 per share in a private placement, partially offset by
commissions to brokers of $351,929 as well as private placements of our common
stock completed in January and February 2021, at $3.00 per share for gross
proceeds of $750,000. In April 2021, we completed our IPO and issued 2,400,000
shares of common stock for gross cash proceeds of $14,400,000. We paid
underwriting fees and other expenses of $885,800 and issued 168,000 warrants to
purchase shares of common stock at a price of $7.20 per share for a period of
five years.
Off Balance Sheet Arrangements
None.
26
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates, assumptions and judgments that affect the amounts reported in the
financial statements, including the notes thereto. We consider critical
accounting policies to be those that require more significant judgments and
estimates in the preparation of our financial statements, including the
following: long lived assets; intangible assets valuations; and income tax
valuations. Management relies on historical experience and other assumptions
believed to be reasonable in making its judgment and estimates. Actual results
could differ materially from those estimates.
Management believes its application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made when facts and
circumstances dictate a change.
Stock-based Compensation
Our historical and outstanding stock-based compensation awards, including the
issuances of options and other stock awards under our equity compensation plans,
have typically included service-based or performance-based vesting conditions.
For awards with only service-based vesting conditions, we record compensation
cost for these awards using the straight-line method over the vesting period.
For awards with performance-based vesting conditions, we recognize compensation
cost on a tranche-by-tranche basis.
Stock-based compensation expense is measured based on the grant-date fair value
of the stock-based awards and is recognized over the requisite service period of
the awards. The Black-Scholes model requires management to make a number of key
assumptions, including expected volatility, expected term, risk-free interest
rate and expected dividends. The risk-free interest rate is estimated using the
rate of return on U.S. treasury notes with a life that approximates the expected
term. The expected term assumption used in the Black-Scholes model represents
the period of time that the options are expected to be outstanding and is
estimated using the midpoint between the requisite service period and the
contractual term of the option.
The assumptions underlying these valuations represent management's best
estimates, which involve inherent uncertainties and the application of
management judgment. As a result, if factors or expected outcomes change and our
management uses significantly different assumptions or estimates, our
stock-based compensation expense for future periods could be materially
different, including as a result of adjustments to stock-based compensation
expense recorded for prior period.
Impairment of Long-Lived Assets
We regularly review our long-term assets, comprising intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Determination of
recoverability generally requires us to estimate the fair value of the long-term
asset, including making assumptions and judgments on several items including,
but not limited to, the future cash flows that will be generated by these
assets. Measurement of any impairment loss for long-lived assets is based on the
amount by which the carrying value exceeds the fair value of the asset.
Business Combinations
We allocate the fair value of purchase consideration to the assets acquired and
liabilities assumed in the companies acquired based on their fair values at the
acquisition date. The excess of the fair value of purchase consideration over
the fair value of these assets acquired and liabilities assumed is recorded as
goodwill and may involve engaging independent third parties to perform an
appraisal. When determining the fair values of assets acquired and liabilities
assumed in the acquired company, management makes significant estimates and
assumptions, especially with respect to intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to,
expected future cash flows, which includes consideration of future growth rates,
and discount rates. Fair value estimates are based on the assumptions management
believes a market participant would use in pricing the asset or liability.
Amounts recorded in a business combination may change during the measurement
period, which is a period not to exceed one year from the date of acquisition,
as additional information about conditions existing at the acquisition date
becomes available.
27
Goodwill
We review goodwill for impairment annually or whenever events or changes in
circumstances indicate the carrying amount of goodwill may not be recoverable. A
qualitative assessment is first performed to determine if the fair value of a
reporting unit is more likely than not to be less than its carrying amount.
Judgment in the assessment of qualitative factors of impairment may include
changes in business climate, market conditions, or other events impacting the
reporting unit. If we determine an impairment is more likely than not based on
our qualitative assessment, a quantitative assessment of impairment is
performed.
Performing a quantitative goodwill impairment test includes the determination of
the fair value of a reporting unit and involves significant estimates and
assumptions. These estimates and assumptions include, among others, revenue
growth rates and operating margins used to calculate projected future cash
flows, risk-adjusted discount rates, future economic and market conditions, and
the determination of appropriate market comparables. If we determine the
carrying amount exceeds fair value, goodwill is impaired, and the excess is
recognized as an impairment loss.
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