The following discussion and analysis should be read in conjunction with other
sections of this Annual Report, including "Item 1. Business" and the
accompanying Consolidated Financial Statements and related Notes included
elsewhere in this Report. Unless otherwise indicated, the terms "we," "us," or
"our" refer to Esports Entertainment Group, Inc. (the "Company" or "EEG"), a
Nevada corporation, together with its consolidated subsidiaries.
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. As the Company's acquisition of Bethard took place early during the
fiscal year ended June 30, 2022 and the Company's acquisitions of ggCircuit, LLC
("GGC"), Helix Holdings, LLC ("Helix"), Lucky Dino Gaming Limited ("Lucky
Dino"), Esports Gaming League ("EGL"), FLIP and Argyll Entertainment ("Argyll")
took place during the fiscal year ended June 30, 2021, this Management
Discussion and Analysis of Financial Condition and Results of Operations speaks
only to the historical operations of the Company during the 2022 fiscal year end
and the Company's historical business prior such acquisitions. 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 skill based, competitive, organized video gaming by professional
players, individually or as teams. Esports typically takes the form of
organized, multiplayer video games that include genres such as real-time
strategy, fighting, first-person shooter and multiplayer online battle arena
games. As of June 30, 2022, the most popular esports games in the industry
include Dota 2 and League of Legends (each multiplayer online battle arena
games), and Counter-Strike: Global Offensive (a first-person shooter game).
Fortnite, Call of Duty¸ Overwatch, and Apex Legends are other well-known popular
esports games in the industry. Most major professional esports events and a wide
range of amateur esports events are broadcast live via streaming services
including twitch.tv and youtube.com.
44
EEG is an esports focused iGaming and entertainment company with a global
footprint. EEG's strategy is to build and acquire betting and related platforms,
and lever them into the rapidly growing esports vertical. We are focused on
driving growth in two markets that include iGaming ("EEG iGaming") and esports
("EEG Games").
We have financed operations primarily through the sale of equity securities and
short-term debt. Until revenues are sufficient to meet our needs, we will
continue to attempt to secure financing through equity or debt securities.
Basis of Presentation
We operate two complementary business segments: Our EEG iGaming business and our
EEG Games business. See below for a discussion of the Company's change from one
reportable segment.
EEG iGaming
Our EEG iGaming business is comprised of our casino and sportsbook product
offerings. Currently, we operate our EEG iGaming segment primarily in Europe.
EEG iGaming includes the esports betting platform with full casino and
sportsbook functionality and services for EEG iGaming customers. Our in-house
gambling software platform, Phoenix, is a modern reimagined sportsbook that
caters to both millennial esports bettors as well as traditional sports bettors.
Phoenix is being developed through the assets and resources from our FLIP
acquisition.
EEG's goal is to be a leader in the large and rapidly growing sector of esports
real-money wagering, offering fans the ability to wager on professional esports
events in a licensed and secure environment. From February 2021, under the terms
of our MGA license, we are now able to accept wagers from residents of over 180
jurisdictions including countries within the European Union, Canada, New Zealand
and South Africa, on our ''Vie.bet'' platform.
Alongside the Vie.bet esports focused platform, EEG owns and operates:
? Argyll's flagship Sportnation.bet online sportsbook and casino brand, licensed
in the UK and Ireland,
? Lucky Dino's 5 online casino brands licensed by the MGA on its in-house built
iDefix casino-platform, and
? The recently acquired Bethard online sportsbook and casino brands, operating
under MGA, Spanish, Irish and Swedish licenses.
On August 17, 2020, we announced entry into a multi-year partnership with Twin
River Worldwide Holdings, Inc, now Bally's Corporation, to launch their
proprietary mobile sports betting product, ''Vie.gg', in the state of New
Jersey, as a real money wagering "skin" of Bally's Atlantic City, the holder of
a New Jersey Casino License, Internet Gaming Permit and a Sports Wagering
License. We were granted approval to operate pursuant to a transactional waiver
order issued by the New Jersey Division of Gaming Enforcement (''DGE'') on
January 21, 2022.
In total, we currently hold five Tier-1 gambling licenses (Malta, UK, Ireland,
Spain and Sweden). Our acquisitions of Argyll, Lucky Dino and Bethard provide a
foothold in mature markets in Europe into which we believe we can cross-sell our
esports offerings.
EEG Games
EEG Games' focus is on providing esports entertainment experiences to gamers
through a combination of 1) our proprietary infrastructure software, GGC, which
underpins our focus on esports and is a leading provider of local area network
("LAN") center management software and services, enabling us to seamlessly
manage mission critical functions such as game licensing and payments, 2) online
tournaments (through our EGL tournament platform), and 3) player-vs-player
wagering (through our yet to be released Betground our proprietary wagering
product). Currently, we operate our esports EEG Games business in the United
States and Europe.
We believe that as the size of the market and the number of esports enthusiasts
continues to grow, so will the number of esports enthusiasts who gamble on
events, which would likely increase the demand for our platform.
45
COVID-19
The novel coronavirus ("COVID-19") emerged in December 2019 and has since
adversely impacted global commercial activity, disrupted supply chains and
contributed to significant volatility in financial markets. The ongoing impacts
of the COVID-19 pandemic has introduced material uncertainty and risk with
respect to the Company and its performance, especially as it relates to
in-person attendance at events and game centers.
The Company has previously indicated that a significant or prolonged decrease in
consumer spending on entertainment or leisure activities may have an adverse
effect on demand for the Company's product offerings, including in-person access
to game centers and tournaments, reducing cash flows and revenues, and thereby
materially harming the Company's business, financial condition and results of
operations. During the year ended June 30, 2022, the Company determined that
in-person attendance at its Helix and customer game centers was not expected to
attain levels previously forecasted for such period. Additionally, projections
for the Argyll business included continued losses into fiscal 2023 due to high
levels of competition in the UK market and high regulatory burdens placed on the
EEG iGaming businesses in the UK market. Further, the levels of investment by
the Company that are necessary to achieve the previous revenue and EBITDA
projections impacted a number of the Company's businesses. As such, the Company
recognized an impairment of long-lived assets held by its Argyll, GGC, EGL, and
Helix businesses and impairment of goodwill held by its EGL, GGC and Helix
businesses. On June 10, 2022, the Company disposed of the assets and related
liabilities of two Helix Game Centers located in New Jersey and Massachusetts.
The ultimate impact of the COVID-19 pandemic on other areas of the business will
depend on future developments, which are uncertain and may result in an extended
period of continued business disruption and reduced operations. A materially
disruptive resurgence of COVID-19 cases or the emergence of additional variants
or strains of COVID-19 could cause other widespread or more severe impacts
depending on where infection rates are highest. Any resulting financial impact
cannot be reasonably estimated at this time but may have a material adverse
impact on our business, financial condition and results of operations. The
Company will continue to monitor developments relating to disruptions and
uncertainties caused by COVID-19.
Operating, Regulatory and Competitive Environment
We operate in both emerging and well established competitive markets. We expect
that our future growth will come from online gaming and sports betting via
expansions of gaming in existing jurisdictions; entrance into new jurisdictions
and, improvements/expansions of our existing properties and strategic
acquisitions of gaming properties, expanded software sales to more screens in
game centers including in universities, entertainment centers and casinos, as
well as increased esports adoption and events, particularly in North America. We
continue to adjust operations and cost structures to reflect the changing
economic conditions. We also continue to focus on revenue and cost synergies
from our acquisitions, and offering our customers additional gaming experiences
through our affiliates. The gaming industry is characterized by an increasingly
high degree of competition among a large number of participants, including game
centers, riverboat casinos; dockside casinos; land-based casinos; video lottery;
iGaming; online and retail sports betting; sports media companies; gaming at
taverns; gaming at truck stop establishments; sweepstakes and poker machines not
located in casinos; the potential for increased fantasy sports; significant
growth of Native American gaming tribes, historic racing or state-sponsored
i-lottery products in or adjacent to states we operate in; and other forms of
gaming.
United Kingdom
Since the acquisition of the Argyll EEG iGaming business on July 31, 2020, the
Company has been responding to periodic requests for information from the UK
Gambling Commission ("UKGC") in relation to information required to maintain its
UK license following the change of corporate control. The Company continues to
operate in the UK market and there have been no adverse judgments imposed by the
UKGC against the Company. In recent months, the Company has reduced its spending
on marketing and has been focused on retaining existing customers and
reactivating past customers. We believe these efforts will have a positive
effect on our results of operations.
46
Netherlands
In the Netherlands, a new licensing regime was implemented in the Netherlands
for online gaming operators, with applications being accepted from April 1,
2021. EEG did not apply for a license after assessing the criteria for applying.
The first licenses took effect on October 1, 2021. In a surprise to the market,
the Dutch Minister issued guidance warning that even those operators that were
not targeting the Dutch market but were passively accepting Dutch customers
would be punished, with authorities given the power to issue increased fines.
Prior to this guidance, operators had understood that passive acceptance of bets
was permissible. The vast majority of unlicensed operators (including EEG's
brands) promptly withdrew from the Dutch market completely on October 1, 2021,
closing all active Dutch customer accounts. The sudden and earlier than
anticipated withdrawal from the Dutch market had a negative impact on the
unlicensed operators in the region. The sole period in which the Company had
revenues from its EEG iGaming operations in the Netherlands was in the fiscal
quarter ended September 30, 2021. As a result of these regulatory developments
in the Netherlands, net revenues for our Bethard business declined from
approximately $5.7 million for the three months ended September 30, 2021 to
approximately $3.5 million for the three months ended December 31, 2021. Net
revenues for our Bethard business represented approximately 35% and 24% of our
total net revenues for, respectively, the three months ended September 30, 2021
and three months ended December 31, 2021. The Company may re-enter the Dutch
market in the second half of fiscal year 2023.
Finland
On January 1, 2022, amendments to the Finnish Lotteries Act came into effect,
further restricting marketing opportunities and enhancing the enforcement powers
of the Finnish regulator. Prior to these amendments coming into effect, in the
fiscal quarter ended December 31, 2021, the Company received a communication
from the Finnish regulator requesting clarification on its marketing and gaming
practices related to its Finnish EEG iGaming operations. The Company responded
to the communication in Q3 of fiscal year 2022 and starting in the fiscal
quarter ended June 30, 2022, the Company has changed its business operations in
Finland as part of its response.
Further powers allowing the Finnish regulator to require blocking by payment
service providers of overseas operators who are targeting their marketing
activities towards Finnish customers are also due to come into effect in
calendar year starting January 1, 2023. The Company believes that the changes
that it has made to its business operations in Finland will allow it to avoid
being adversely affected by the Finnish regulator's new powers.
While there have been no adverse judgments imposed by the Finnish regulator
against the Company, as a result of these Finnish regulatory developments, we
estimate that net revenues for our Lucky Dino business have declined from
approximately $6.5 million for the three months ended March 31, 2022 to
approximately $4.2 million for the three months ended June 30, 2022 (a
preliminary estimate based on currently available information and subject to
change). Net revenues for our Lucky Dino business represented approximately 42%
of our consolidated net revenues for the three months ended March 31, 2022.
Operations in Finland run under the MGA license on the Lucky Dino in-house built
iDefix casino-platform. The Company continues to launch new brands and offer new
products on its various sites tailoring the experience towards each of its
markets including new markets in Central American and South America. We believe
revenues will be generated by these new brands and new products.
Other
In July 2020, the Swedish Ministry for Finance implemented a number of
restrictive measures on online casino operators in reaction to the impact of
COVID-19 restrictions. These included caps on deposits and bonuses. This had a
negative impact on revenues across the industry during that period. These
restrictions were lifted on November 14, 2021.
The State of Ontario's licensing regime came into force on April 4, 2022,
meaning that any operator of gambling sites taking bets from customers in
Ontario will require a license to do so. Whilst EEG iGaming may wish to apply
for a license in the future, it has decided not to apply for a license at this
time and therefore we blocked access to our site for users based in the
territory in advance of that date.
The Company continues to monitor developments related to regulatory activities.
Recent Developments
On July 13, 2021, the Company completed the acquisition of the
business-to-consumer operations of Bethard Group Limited ("Bethard") that
provides sportsbook, casino, live casino and fantasy sport betting services with
gaming licenses to customers in Sweden, Spain, Malta and Ireland (the "Bethard
Business"). The acquisition of Bethard expands the EEG iGaming operations of the
Company in Europe and provides the Company with increased opportunity to
cross-sell its esports offerings to a larger customer base. The acquisition of
Bethard resulted in the Company acquiring the outstanding share capital of
Prozone Limited, a public liability company registered in Malta, that had
previously received the assets of Bethard in a pre-closing restructuring by the
Seller, for approximately $26.8 million including $6.7 million of contingent
consideration valued at the time of closing.
On June 10, 2022, the Company disposed of the assets of the Helix Game Centers
to focus on the esports technology assets on the online gaming. The gain of $1.1
million recorded includes the amount of cash received and liabilities assumed by
the purchaser, including leases and sponsorship liabilities over the carrying
value of the assets sold.
September 2022 Financing
On September 15, 2022, the Company entered into a underwriting agreement (the
"Underwriting Agreement") with Maxim Group LLC and Joseph Gunnar & Co., LLC, as
representative of the several underwriters identified therein (collectively, the
"Underwriters"), relating to a firm commitment public offering of (a) 30 million
shares of the Company's Common Stock and (b) Warrants ("September 2022
Warrants") to purchase up to 30 million shares of Common Stock, at an exercise
price of $0.25 per share, at an aggregate price of $0.25 per share and
accompanying Warrant (the "September 2022 Offering"). Under the terms of the
Underwriting Agreement, the Company granted the Underwriters a 45-day option an
option to purchase up to an additional 4.5 million of Common Stock (the
"September 2022 Overallotment Common Stock") and/or Warrants (the "September
2022 Overallotment Warrants") (collectively, the "September 2022
Overallotment"). The closing of the offering took place on September 19, 2022.
The gross proceeds received from the sale of the shares of the Common Stock and
September 2022 Warrants in the September 2022 Offering, before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company and before any overallotment, was $7.5 million.
The underwriters exercised their option for 3.6 million September Overallotment
Warrants, at a purchase price of $0.01 per warrant, with an exercise price of
$0.25 per warrant. Total proceeds from the September 2022 Overallotment Warrants
was less than $0.1 million.
The Company remitted to the Holder of the Senior Convertible Note an amount of
$2.3 million equal to fifty percent (50%) of all net proceeds above $2.0 million
following the payment of 7% in offering fees including Underwriting discounts
and commissions. In addition, as part of the September 2022 Offering, the Holder
purchased $0.5 million of securities (2.1 million shares of Common Stock and 2.1
million Warrants) and the Company paid the Holder an additional $0.5 million.
The proceeds remitted to the Holder of the Senior Convertible Note reduced the
principal balance of the Senior Convertible Note on a dollar-for-dollar basis.
The net proceeds received by the Company, after deducting underwriting discounts
and commissions and offering expenses payable by the Company and amounts
remitted to the Holder of the Senior Convertible Note was $4.1 million.
The shares of Common Stock and the September 2022 Warrants, including the 2022
Overallotment Warrants, sold by the Company have been registered pursuant to a
registration statement on Form S-3 (File No. 333-252370), which the SEC declared
effective on February 5, 2021. A final prospectus supplement and accompanying
base prospectus relating to the offering were filed with the SEC on September
19, 2022.
The Company does not intend to list the September 2022 Warrants, including the
2022 Overallotment Warrants, sold in the offering on any securities exchange or
other trading market.
On September 19, 2022, prior to the closing of the offering, the Company entered
into a warrant agency agreement (the "Warrant Agency Agreement") with Vstock
Transfer, LLC ("Vstock"), to serve as the Company's warrant agent for the
September 2022 Warrants, including September 2022 Overallotment Warrants. Upon
the closing of the offering. The September 2022 Warrants, including September
2022 Overallotment Warrants are exercisable upon issuance and expire five years
from the date they first became exercisable.
Key Performance Indicators
In the industry, revenue is driven by discretionary consumer spending. We have
no way of determining why customers spend more or less money; therefore, we are
unable to quantify a dollar amount for each factor that impacts our customers'
spending behaviors. However, some insight into the factors that we believe are
likely to account for such changes and which factors may have a greater impact
than others, include, decreases in discretionary consumer spending have
historically been brought about by weakened general economic conditions, such as
lackluster recoveries from recessions, high unemployment levels, higher income
taxes, low levels of consumer confidence, weakness in the housing market, high
fuel or other transportation costs, and the effects of the COVID-19 pandemic.
Such insights are based solely on our judgment and professional experience, and
no assurance can be given as to the accuracy of our judgments. The vast majority
of our revenues is EEG iGaming revenue, which is highly dependent upon the
number and volume and spending levels of customers.
47
Reportable Segments
During the fourth quarter of fiscal year ending June 30, 2022, the Company
evaluated its reportable segments and changed from one reportable segment to two
reportable segments: EEG iGaming and EEG Games. The Company reorganized its
management structure resulting in changes to key executives and other employees
creating its two distinct segments. Prior periods presented have been recast to
reflect the change in reportable segments. See Notes 1 and 20 of the Notes to
the Consolidated Financial Statements included herein for a description of each
of our reportable segments.
Comparability of Financial Results
During the year ended June 30, 2022 we completed one acquisition. This was the
acquisition of Bethard, on July 13, 2021 (the "Bethard Acquisition). During the
year ended June 30, 2021, we completed multiple acquisitions throughout the
period. This included the acquisitions of GGC and Helix on June 1, 2021 (we sold
the two Helix Game Centers acquired in the acquisition on June 10, 2022, see
recent developments above), Lucky Dino on March 1, 2021 and EGL on January 21,
2021, Argyll on July 31, 2020 and FLIP on September 3, 2020 (the "2021
Acquisitions"). Together these are referred to as the "Business Acquisitions".
The business Acquisitions resulted in, among other things, a considerable
increase in revenue and related costs of revenue, amortizable intangible assets
and goodwill. The amortization of acquired intangibles has materially increased
our consolidated general and administrative expenses (and adversely affected our
consolidated net loss) for periods after the acquisitions and is expected to
continue to do so for the foreseeable future. We are listed on The Nasdaq Stock
Market LLC (the "Nasdaq") and have hired personnel and incurred costs that are
necessary and customary for our operations as a public company, which has
contributed to, and is expected to continue to contribute to, higher general and
administrative costs.
The following discussion of our results of operations for the year ended June
30, 2022, includes the financial results of the Bethard Acquisition and the
comparison year ended June 30, 2021 includes approximately one month of GGC and
Helix, four months of Lucky Dino, five months of EGL and 11 months of Argyll.
Accordingly, our consolidated results of operations for the year ended June 30,
2022 are not comparable to our consolidated results of operations for the prior
period.
Financial Highlights
The following table sets forth a summary of our financial results for the
periods indicated and is derived from our consolidated financial statements for
the years ended June 30, 2022 and 2021:
Year Ended June 30,
2022 2021
Net revenue $ 58,351,650 $ 16,783,914Total operating expenses excluding asset impairment
charges
$ 101,214,859 $ 42,510,352
Asset impairment charges $ 46,498,689 $ -
Total other income (expense), net $ (18,544,634 ) $ (4,457,832 )
Net loss $ 102,232,090 $ 26,372,734
Non-GAAP Information
This report includes Adjusted EBITDA, which is a non-GAAP performance measure
that we use to supplement our results presented in accordance with U.S. GAAP.
The presentation of this financial information is not intended to be considered
in isolation or as a substitute for, or superior to, the financial information
prepared and presented in accordance with U.S. GAAP. The Company uses this
non-GAAP financial measure for financial and operational decision making and as
a means to evaluate period-to-period comparisons. The Company believes that it
provides useful information about operating results, enhances the overall
understanding of past financial performance and future prospects, and allows for
greater transparency with respect to key metrics used by management in its
financial and operational decision making. Adjusted EBITDA, as calculated, may
not be comparable to other similarly titled measures of performance of other
companies in other industries or within the same industry. We define Adjusted
EBITDA as earnings (loss) before interest expense, net; income taxes;
depreciation and amortization; stock-based compensation; cost of acquisition;
asset impairment charges; loss on extinguishment of senior convertible note;
loss on conversion of senior convertible note; change in fair value of
derivative liability; change in fair value of warrant liability; change in fair
value of contingent consideration; and other income (loss), and certain other
non-recurring, non-cash or non-core items, as described in the reconciliation
below, if not covered above.
48
Adjusted EBITDA excludes certain expenses that are required in accordance with
U.S. GAAP because they are non-recurring items (for example, in the case of
transaction-related costs), non-cash expenditures (for example, in the case of
depreciation and amortization, stock-based compensation, asset impairment
charges, change in fair value of derivative liability and change in fair value
of warrant liability), or are not related to our underlying business performance
(for example, in the case of interest income and expense and litigation
settlement and related costs).
Segment Revenues and Adjusted EBITDA
The table below presents our Segment Revenues and Adjusted EBITDA reconciled to
our net loss, for the periods indicated:
For the year ended June 30,
2022 2021
Revenues:
EEG iGaming segment 53,104,795 16,231,028
EEG Games segment 5,246,855 552,886
Total 58,351,650 16,783,914
Net loss: (102,232,090 ) (26,372,734 )
Adjusted for:
Interest expense 6,423,039 698,973
Loss on conversion of senior convertible note 5,999,662 -
Loss on extinguishment of senior convertible note 28,478,804 -
Change in fair value of derivative liability 10,882,241 -
Change in fair value of warrant liability (31,468,270 ) 1,549,924
Change in fair value of contingent consideration (2,355,308 ) 1,748,607
Other non-operating income (loss), net
584,466 460,328
Income tax benefit (expense) (5,674,442 ) (3,811,536 )
Depreciation and amortization 12,026,581 3,416,252
Asset impairment charges 46,498,689 -
Stock-based Compensation 5,165,653 4,129,726
Cost of acquisition 269,012 3,509,365
Total Adjusted EBITDA (25,401,963 ) (14,671,095 )
Adjusted EBITDA
EEG iGaming segment (7,526,205 ) (6,740,890 )
EEG Games segment (4,915,549 ) (454,467 )
Other(1) (12,960,209 ) (7,475,738 )
Total Adjusted EBITDA (25,401,963 ) (14,671,095 )
(1) Other comprises of corporate and overhead costs.
(2) We have no intersegment revenues or costs and thus no eliminations required.
(3) We define Adjusted EBITDA as earnings (loss) before, as applicable to the
particular period, interest expense, net; income taxes; depreciation and
amortization; stock-based compensation; cost of acquisition; asset impairment
charges; loss on extinguishment of senior convertible note; loss on conversion
of senior convertible note; change in fair value of derivative liability; change
in fair value of warrant liability; change in fair value of contingent
consideration; and other income (loss), and certain other non-recurring,
non-cash or non-core items (included in table above).
Results of Operations
Comparison on Year ended June 30, 2022 and 2021
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. The financial data is at the
consolidated level and reported in U.S. Dollar ($).
Revenue
Revenue totaled $58.4 million in the year ended June 30, 2022, an increase of
$41.6 million, or 248%, from the $16.8 million recorded in the year ended June
30, 2021. The increase is primarily attributable to the iGaming operations of
Lucky Dino and Argyll that were acquired during the fiscal year ended June 30,
2021 and Bethard that was acquired in July 2021 of fiscal year ended June 30,
2022, increasing the iGaming segment revenue by $36.9 million from $16.2 million
to $53.1 million and GGC that was also acquired during the fiscal year ended
June 30, 2021 and was the primary factor in the increase in EEG Games revenue of
$4.7 million from $0.6 million to $5.3 million.
Cost of Revenue
Cost of revenue totaled $24.2 million in the year ended June 30, 2022, an
increase of $16.3 million, or 206%, from the $7.9 million recorded in the year
ended June 30, 2021. The increase is primarily attributable to the EEG iGaming
segment of Lucky Dino, Argyll and Bethard acquisitions and includes $9.2 million
for additional payment processing fees, platform costs, gaming duties and costs
related to revenue sharing arrangements, $3.0 million additional for the game
provider expenses and $1.3 million higher other direct expenses related to the
delivery of services. EEG Games incurred $1.6 million higher platform costs,
$1.1 million higher game provider costs and $0.1 million other direct expenses
across the segment.
Sales and Marketing
Sales and marketing expense totaled $25.7 million in the year ended June 30,
2022, an increase of $15.7 million, or 157%, over the $10.0 million recorded for
the year ended June 30, 2021. The increase was primarily attributable to $12.0
million higher marketing and $0.9 million higher affiliate costs related to EEG
iGaming segment and $2.8 million in additional Corporate expense for sponsorship
agreements with professional sports clubs and our service partners.
49
General and Administrative
General and administrative expense totaled $51.3 million for the year ended June
30, 2022, an increase of $26.7 million, or 109%, over the $24.6 million recorded
for the year ended June 30, 2021. The increase was primarily attributable to
increases of $8.7 million in payroll costs, $5.8 million depreciation and
amortization, $2.5 million related to other general and administrative cost
primarily including incremental costs for information technology related
disbursements from the EEG iGaming segment, and $4.6 million in payroll costs,
$2.9 million depreciation and amortization, and $1.5 million related to other
general and administrative cost including professional fees from the EEG Games
segment. Corporate general and administrative costs increased $0.7 million with
$2.0 million in higher payroll costs, $1.1 million higher stock based
compensation, and $0.8 million increase in other general and administrative cost
including other, professional fees and legal fees, offset by $3.2 million less
in acquisition related costs due to Bethard being the sole acquisition at the
beginning of the year ended June 30, 2022 compared to the multiple acquisitions
in the year ended June 30, 2021.
Impairment
During the third quarter the Company concluded that goodwill impairment
indicators existed based on the significant volatility in the Company's stock
price where the Company experienced a sustained reduction from the middle of the
third quarter through March 31, 2022 and subsequently. As of March 31, 2022, the
Company determined that in-person attendance at its Helix and customer game
centers was not expected to attain levels previously forecasted and that under
the current liquidity and investment constraints is the Company was less likely
to reach the previously forecasted revenue and profits for EGL and GGC. These
factors and the continuing impacts of the COVID-19 pandemic, uncertainties
caused by inflation and world stability, resulted in the Company evaluating its
goodwill and long-lived assets, including intangible assets, for impairment as
of March 31, 2022. During the third quarter the Company recognized $38.6 million
of asset impairment charges, including $23.1 million of goodwill and $15.5
million of other long-lived assets in the EGL, GGC and Helix reporting units
from the EEG Games segment. The Company tests its goodwill for impairment
annually on April 1. There was no further impairment identified as of the annual
testing date from that recognized as of March 31, 2022. In the three months
ending June 30, 2022, while implementing cost saving initiatives, and with the
continuing liquidity and investment restraints and further reduction in the
Company's already deflated stock price, the Company again concluded that as of
June 30, 2022, goodwill impairment indicators existed, and the Company evaluated
its goodwill and long-lived assets, including intangible assets, for further
impairment. The Company identified that with the additional regulation and
expected costs of continuing in the UK market that the iGaming Argyll (UK)
goodwill and asset group intangible assets and equipment were impaired resulting
in additional asset impairment charges of $7.9 million, including $3.9 million
of goodwill and $4.0 million of other long-lived assets in the iGaming Argyll
reporting unit from the EEG iGaming segment, for a total for the year ended June
30, 2022 of $46.5 million. There were no impairment charges for the year ended
June 30, 2021.
Other Income (expense)
Other income (expense), net changed $14.0 million from an expense of $4.5
million for the year ended June 30, 2021 to an expense of $18.5 million for the
year ended June, 2022. The other expense for the year ended June 30, 2022
results primarily from the $10.9 million expense for derivative liabilities on
senior convertible note, $28.5 million of loss on extinguishment primarily
attributable to amortization of the debt discount, $6.0 million loss on the
conversion of the Senior Convertible Note, driven by the conversion of a
principal provided to the Senior Convertible Note holder as part of the October
13, 2021 waiver provided on the covenants related to the Senior Convertible Note
and $6.4 million in interest expense. These expenses were offset by other income
primarily made up of $2.4 million for the change in the fair value of the
contingent consideration due as part of the Bethard transaction and $31.5
million from the reduction in fair value of the warrant liability. The Series A
and Series B Warrants fair value decreased from $23.5 million as of June 30,
2021 to $0.1 million and the March 2022 Warrants and the April 2022
Overallotment Warrants decreased from initial fair value of $10.2 million to
$2.1 million as of June 30, 2022, resulting in a total gain of $31.5 million.
The other expense for the year ended June 30, 2021 primarily included a charge
of $4.7 million related to the revaluation of the warrant liability recorded in
connection with the acquisition of Argyll through issuance of Common Stock, a
charge of $1.7 million related to the settlement of the contingent consideration
liability for the FLIP and EGL acquisitions through the issuance of Common
Stock, and interest expense of $0.7 million related primarily to the Senior
Convertible Note. This was partially offset by a benefit of $3.2 million related
to the revaluation of Series A and Series B warrants issued in connection with
the Senior Convertible Note dated June 2, 2021.
Income Tax
The income tax benefit for the year ended June 30, 2022 and 2021 was $5.7
million and $3.8 million, respectively. The income tax benefit recorded for the
year ended June 30, 2022 results primarily from the release of valuation
allowance of $5.7 million that followed an assessment of the realizability of
our deferred tax assets subsequent to the completion of the Bethard
acquisitions. The income tax benefit recorded for the year ended June 30, 2021
results primarily from the release of valuation allowance of $4.1 million that
followed an assessment of the realizability of our deferred tax assets
subsequent to the completion of the Argyll, EGL, GGC and Helix acquisitions. It
is anticipated that our deferred tax assets will be realized through future
reversal of deferred tax liabilities. The income tax benefit was offset by
income tax expense related to one of our foreign subsidiaries as well as the
estimated exposure for accrued interest and penalties that may be imposed
related to tax filings.
50
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2, Summary of
Significant Accounting Policies to the consolidated financial statements.
Capital Resources and Liquidity
Liquidity and Going Concern
The Company must evaluate whether there are conditions or events, considered in
the aggregate, that raise substantial doubt about the Company's ability to
continue as a going concern for one year from the date the consolidated
financial statements included in this report are issued. The evaluation of going
concern under the accounting guidance requires significant judgment.
The Company has determined that certain factors raise substantial doubt about
its ability to continue as a going concern for a least one year from the date of
issuance of these consolidated financial statements. One such factor considered
by the Company is its compliance with certain debt covenants under terms of the
Senior Convertible Note (the "Senior Convertible Note" or "New Note"). The
Company has not maintained compliance with certain debt covenants and is
currently in default under the terms of the Senior Convertible Note. On February
28, 2022 the Company exchanged the existing Senior Convertible Note (the "Old
Senior Convertible Note") with the New Note resulting in the increase of the
principal outstanding balance of indebtedness from the carrying value of $29.1
million, as adjusted for the conversions of principal and Premium on Principal
through February 22, 2022, to $35.0 million. The New Note is classified as a
current liability on the consolidated balance sheet as it may be redeemed by the
Holder prior to its maturity date. The Company has also recorded a derivative
liability for the alternate conversion in the Senior Convertible Note of $9.4
million in current liabilities on the consolidated balance sheet million that
may be due to the Holder as part of the make-whole liability under the default
terms of the Senior Convertible Note. The cash liability calculated under the
terms of the New Note of approximately $180.0 million is materially higher than
the fair value of the derivative liability of $9.4 million calculated at June
30, 2022. The calculated make-whole liability may differ materially from the
amount at which the Company may be required to pay under the New Note. The
Company has held non-binding discussions with the Holder to restructure its
obligation under the New Note. However, there can be no guarantee that the
Company will be able to reach an agreement to restructure the New Note.
The evaluation of going concern under the accounting guidance requires
significant judgment. In addition to compliance with debt covenants, the Company
considered that as of June 30, 2022 it had an accumulated deficit of 149.1
million and that in recent years it has had a history of recurring losses from
operations and recurring negative cash flows from operations as it has prepared
to grow its esports business through acquisition and new venture opportunities.
At June 30, 2022, the Company had total current assets of $10.0 million and
total current liabilities of $65.8 million. Net cash used in operating
activities for the year ended June 30, 2022 was $21.0 million, which includes a
net loss of $102.2 million. The Company must also consider its current liquidity
as well as future market and economic conditions that may be deemed outside the
control of the Company as it relates to obtaining financing and generating
future profits. On March 2, 2022 the Company closed an offering (the "March 2022
Offering") in which it sold 15.0 million units at $1.00 consisting of one share
of Common Stock and one warrant for a total of 15.0 million warrants with an
exercise price of $1.00 (the "March 2022 Warrants"). There was also an
overallotment option exercised to purchase warrants to purchase an additional
2.3 million shares of common stock (the "April 2022 Overallotment Warrants")
with an exercise price of $1.00 issued to the underwriters of the offering on
April 1, 2022.The March 2022 Offering provided net cash proceeds of $13.6
million. As of June 30, 2022, the Company had $2.5 million of available cash
on-hand and net current liabilities of $55.9 million. On September 19, 2022 the
Company closed an offering (the "September 2022 Offering") in which it sold (a)
30 million shares of Common Stock, $0.001 par value per share and (b) warrants
to purchase up to 30 million shares of Common Stock, at an exercise price of
$0.25 per share (the "September 2022 Warrants"), at an aggregate price of $0.25
per share and accompanying September 2022 Warrant. The gross proceeds to us from
the sale of the shares of Common Stock and Warrants before deducting
underwriting discounts and commissions and offering expenses payable by the
Company was $7.5 million. The Company also sold an Overallotment for 3.6 million
September 2022 Overallotment Warrants, at a purchase price of $0.01 per warrant,
with an exercise price of $0.25 per warrant. Total proceeds from the September
2022 Overallotment Warrants were less than $0.1 million. The Company remitted to
the Holder of the Senior Convertible Note an amount of $2.3 million equal to
fifty percent (50%) of all net proceeds above $2.0 million following the payment
of 7% in offering fees including Underwriting discounts and commissions. In
addition, as part of the September 2022 Offering, the Holder purchased $0.5
million of securities (2.1 million shares of Common Stock and 2.1 million
Warrants) and the Company paid the Holder an additional $0.5 million. The
proceeds remitted to the Holder of the Senior Convertible Note reduced the
principal balance of the Senior Convertible Note on a dollar-for-dollar basis.
The net proceeds received by the Company, after deducting underwriting discounts
and commissions and offering expenses payable by the Company and amounts
remitted to the Holder of the Senior Convertible Note was $4.1 million. The
Company intends to use the balance of the net proceeds for working capital and
general corporate purposes to support ongoing business operations. The amount of
available cash on hand on October 12, 2022, one business day preceding this
filing, was $2.6 million.
51
The Company believes that its current level of cash and cash equivalents are not
sufficient to fund its operations and obligations without additional financing.
Although the Company has financing available, as further described below, the
ability to raise financing using these sources is subject to several factors,
including market and economic conditions, performance, and investor sentiment as
it relates to the Company and the esports and iGaming industry. The combination
of these conditions was determined to raise substantial doubt regarding our
ability to continue as a going concern for a period of at least one year from
the date of issuance of these consolidated financial statements.
In determining whether the Company can overcome the presumption of substantial
doubt about its ability to continue as a going concern, the Company may consider
the effects of any mitigating plans for additional sources of financing. The
Company identified additional financing sources it believes are currently
available to fund its operations and drive future growth that include (i) the
potential proceeds from the exercise of the 15.0 million March 2022 Warrants and
2.25 million April 2022 Overallotment Warrants, exercisable at $1.00,
outstanding at June 30, 2022, (ii) the potential proceeds from the exercise of
the 30.0 million September 2022 Warrants and 3.6 million September Overallotment
Warrants, exercisable at $0.25, that were issued subsequent to June 30, 2022
(iii) the ability to sell shares of Common Stock of the Company, and (iv) the
ability to raise additional financing from other sources. The Company is also in
discussions with the Holder of the Senior Convertible Note to restructure the
payment terms and debt covenants. These above plans are likely to require the
Company to place reliance on several factors, including favorable market
conditions, to access additional capital in the future. These plans were
therefore determined not to be sufficient to overcome the presumption of
substantial doubt about the Company's ability to continue as a going concern.
The Company's sources and (uses) of cash for the year ended June 30, 2022 and
2021 are shown below:
2022 2021
Cash used in operating activities $ 21,006,437 $ 18,883,006
Cash used in investing activities $ 20,080,376 $ 56,133,256
Cash provided by financing activities $ 23,488,285 $ 86,356,201
As noted above, at June 30, 2022, we had total current assets of $10.0 million
and total current liabilities of $65.8 million. Net cash used in operating
activities for the year ended June 30, 2022 was $21.0 million, which includes a
net loss of $102.2 million, offset by net non-cash adjustments of $72.4 million.
Net cash used in investing activities for the year ended June 30, 2022 totaled
$20.1 million principally related to the Bethard acquisition.
Net cash provided by financing activities for the year ended June 30, 2022
totaled $23.5 million, which related to proceeds from the issuance of 15 million
units, each consisting of one share of Common Stock and one March 2022 Warrant,
as part of the March 2022 Offering, the issuance of the shares of the 10% Series
A cumulative redeemable convertible preferred stock and the issuance of Common
Stock of 1.2 million shares through the at-the-money, partially offset by the
payment of the dividends on the 10% Series A cumulative redeemable convertible
preferred stock, the contingent consideration of Bethard and repayments of notes
payable and finance lease.
52
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP"). The preparation of these consolidated financial
statements requires our management to make assumptions and estimates about
future events and apply judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These estimates are based on management's historical and
industry experience and on various other assumptions that are believed to be
reasonable under the circumstances. On a regular basis, we evaluate these
accounting policies, assumptions, estimates and judgments to ensure that our
financial statements are presented fairly and in accordance with U.S. GAAP.
However, because future events and their effects cannot be determined with
certainty, actual results may differ from our estimates, and such differences
could be material.
A full discussion of our significant accounting policies is contained in Note 2
to our consolidated financial statements, which is included in Item 8 -
"Financial Statements and Supplementary Data" of this report. We believe that
the following accounting estimates are the most critical to aid in fully
understanding and evaluating our financial results. These estimates require our
most difficult, subjective or complex judgments because they relate to matters
that are inherently uncertain. We have reviewed these critical accounting
policies and estimates and related disclosures with our Audit Committee.
Revenue recognition
Revenue and Cost Recognition
The revenue of the Company is currently generated from online casino and sports
betting (referred to herein as "EEG iGaming Revenue"), and esports revenue
(referred to herein as "EEG Games Revenue"), consisting of the sales of
subscriptions to access cloud-based software used by independent operators of
game centers, from consulting and data analytic services provided to game
operators ("EEG Games Esports and Other Revenue"), and from the provision of
esports event and team management services ("EEG Games Esports Event Management
and Team Service Revenue"). The Company recognizes revenue in accordance with
Accounting Standards Codification ("ASC") Topic 606 - Revenue from Contracts
with Customers ("ASC 606") when control of a product or service is transferred
to a customer. The amount of revenue is measured at the transaction price, or
the amount of consideration that the Company expects to receive in exchange for
transferring a promised good or service. The transaction price includes
estimates of variable consideration to the extent that it is probable that a
significant reversal of revenue recognized will not occur.
Revenue generating activities of the Company may be subject to value added tax
("VAT") in certain jurisdictions in which the Company operates. Revenue is
presented net of VAT in the consolidated statements of operations. VAT
receivables and VAT payables are included in other receivables and accounts
payable and accrued expenses, respectively on the consolidated balance sheets.
Sales to customers do not have significant financing components or payment terms
greater than 12 months.
EEG iGaming Revenue
EEG iGaming revenue is derived from the placement of bets by end-users, also
referred to as customers, through online gaming sites. The transaction price in
an iGaming contract, or Net Gaming Revenue ("NGR"), is the difference between
gaming wins and losses, as further reduced by any nondiscretionary incentives
awarded to the customer. Gaming transactions involve four performance
obligations, namely the settlement of each individual bet, the honoring of
discretionary incentives available to the customer through loyalty reward
programs, the award of free spin and deposit match bonuses, and the winning of a
casino jackpot. The total amount wagered by a customer is commonly referred to
as the win or Gross Gaming Revenue ("GGR"). The GGR is allocated to each
performance obligation using the relative standalone selling price ("SSP")
determined for iGaming contracts.
53
Revenue recognition for individual wagers is recognized when the gaming occurs,
as such gaming activities are settled immediately. The revenue allocated to
incentives, such as loyalty points offered through a rewards program, is
deferred and recognized as revenue when the loyalty points are redeemed. Revenue
allocated to free spins and deposit matches, referred to as bonuses, are
recognized at the time that they are wagered. The revenue for jackpot games is
recognized when the jackpot is won by the customer. The Company applies a
practical expedient by accounting for its performance obligations on a portfolio
basis as iGaming contracts have similar characteristics. The Company expects the
application of the revenue recognition guidance to a portfolio of iGaming
contracts will not materially differ from the application of the revenue
recognition guidance on an individual contract basis.
The Company evaluates bets that its users place on websites owned by third party
brands in order to determine whether it may recognize revenue on a gross basis,
when acting as the principal provider of the wagering service, or on a net
basis, when acting as an intermediary or agent. The principal in a wagering
service involving a third party is generally the entity that controls the
wagering service such that it has a right to the services being performed by the
third party and can direct the third party in delivery of the service to its
users. The Company records revenue on a gross basis as it has determined it is
the principal in transactions involving third parties, such as revenue sharing
arrangements, as it controls the wagering service being offered to the users
such that it has a right to the service performed by third parties and can
further direct third parties in providing services to users. The Company further
records expenses related to its revenue sharing arrangements and other
third-party iGaming expenses within costs of revenue in the consolidated
statements of operations.
EEG Games Revenue
EEG Games Esports and Other Revenue
The Company derives revenue sales of subscriptions to access cloud-based
software used by independent operators of game centers, as well as from
consulting and data analytic services provided to game operators. The revenue
derived from the sale of subscription services to cloud-based software used by
game centers is recognized over the term of the contract, which generally can
range from one month to one year in duration, beginning on the date the customer
is provided access to the Company's hosted software platform. The revenue from
the operation of game centers by the Company was recognized when a customer
purchased time to use the esports gaming equipment at each center. The revenue
from time purchased by a customer and from the sale of concessions was
recognized at the point of sale.
The software subscriptions also allow for game center operators to enable their
equipment to mine cryptocurrency when gaming stations are not in use by the end
user. The software allows the participating game center operators to contribute
their computer power for the purpose of adding a block to the blockchain within
a mining pool where the Company and the participating game center operators are
participants. The Company's software enables the participating game center
operators to enter into mining pools with mining pool operators to provide
computing power to the mining pool to mine cryptocurrency digital assets. The
Company and the participating game center operators are entitled to a fractional
share of the fixed cryptocurrency digital asset award the mining pool operator
receives (less transaction fees to the mining pool operator) for successfully
adding a block to the blockchain. The Company and participating game center
operators' fractional share is based on the proportion of computing power
contributed to the mining pool operator to the total computing power contributed
by all mining pool participants in solving the current algorithm. A digital
asset award is received by the Company from the mining pool, in the form of
cryptocurrency (i.e., Ethereum), for successfully adding a block to the
blockchain. The Company records a payable for the amount due to each
participating game center operator, in the form of U.S. dollars, based on the
participating game center operators' computing power contributed toward the
mining of the award less a fee charged by the Company. The amounts due to the
participating game center operators are paid in U.S. dollars. The Company
recognizes the fair value of the digital awards, net of fees and amounts payable
to the game center operators, as revenue at the time the digital award is added
to the blockchain using the price of the digital coin quoted in U.S. dollars.
The transaction consideration of the digital award the Company receives, if any,
is non-cash consideration. The Company records revenue on a net basis as it has
determined it is the agent in the transactions with the mining pool and
facilitates the provision of the computing power and payments for the
participating game center operators. The transaction consideration for the
mining of cryptocurrency is variable consideration as it is based on the number
of blocks added to the blockchain and the amount of the digital asset received
from the mining pool. Because it is not probable that a significant reversal of
cumulative revenue will not occur, the consideration is constrained until the
mining pool operator successfully places a block and the Company receives
confirmation of the consideration it will receive, at which time revenue is
recognized. There is currently no specific definitive guidance under U.S. GAAP
or alternative accounting framework for the accounting for digital assets
recognized as revenue or held, and management has exercised significant judgment
in determining the appropriate accounting treatment. In the event authoritative
guidance is enacted by the Financial Accounting Standards Board ("FASB"), the
Company may be required to change its policies, which could impact the Company's
consolidated financial position and results from operations.
54
The Company further provides consultation services related to the use of
hardware and equipment for gaming operations together with implementation
services that include sourcing, training, planning, and installation of
technology. The Company considers services related to hardware and equipment,
implementation, and any design of user interface for the customer as separate
performance obligations. Revenue for hardware equipment and design of custom
user interface is recognized at a point in time upon delivery and completion.
Implementation services are recognized over time, as services are performed.
The Company also has contracts with software companies to provide talent data
analytics and related esports services, which include analytic development,
other related services to develop software and applications for tournaments, to
provide data support, data gathering, gameplay analysis and reporting which
includes talent analytics and related esports services, including analytic
development, data analysis, survey design, interview services, player dossiers,
and expert services. The Company recognizes revenue from its data analytic
services over the life of the contract utilizing the output method, using a
direct measurement of the value to the customer of the goods or services
transferred to date relative to the remaining goods or services promised under
the contact. The Company elected to use the right to invoice practical expedient
and recognize revenue based on the amounts invoiced. The payment terms and
conditions vary by contract; however, the Company's terms generally require
payment within 30 to 60 days from the invoice date.
The Company has partnership contracts with strategic customers within the
esports industry. The partnership contracts are negotiated agreements, which
contain both licensing arrangements of intellectual property and development
services, including fixed and variable components. The variability of revenue is
driven by development plans and results of sales as specified by the partnership
contract, which are known as of an invoice date. Partnership contracts generally
do not have terms that extend beyond one year. The Company considers licensing
arrangements and development services as separate performance obligations.
Licensing revenues are recorded over time. Revenue associated with development
is recognized over time, as labor is incurred.
Contracts that contain multiple performance obligations require an allocation of
the transaction price to each distinct performance obligation based on a
relative standalone selling price basis unless the transaction price is variable
and meets the criteria to be allocated entirely to a performance obligation or
to a distinct good or service that forms part of a single performance
obligation. The Company determines standalone selling price based on the price
at which the performance obligation is sold separately. If the standalone
selling price is not observable through past transactions, the Company estimates
the standalone selling price taking into account the Company's overall pricing
objectives, considering market conditions and other factors, including the value
of the deliverables in the contracts, customer demographics, geographic
locations, and the number and types of users within the contracts.
EEG Games Esports Event Management and Team Service Revenue
The Company derives revenue from esports event management and team services.
Esports event management services support the creation, production and delivery
of an esports event by providing event staffing, gaming consoles, and other
technical goods and services for a customer event that is either hosted live in
person or online. The revenue generated from esports event management services
is generally earned on a fixed fee basis per event.
The esports team services offerings of the Company include recruitment and
management services offered to sports clubs to facilitate their entrance into
esports tournament competition. Team services provided to a customer may include
player recruitment, administration of player contracts, processing of tournament
admission, providing logistical arrangements, as well as providing ongoing
support to the team during the event. Team services are earned on a fixed fee
basis per tournament.
Esports event management and team services revenues are recognized over the term
of the event or the relevant contractual term for services as this method best
depicts the transfer of control to the customer. The Company recognizes revenue
for event management services based on the number of days completed for the
event relative to the total days of the event. Revenue from team management
services is recognized from inception of the contract through the end of the
tournament using the number of days completed relative to the total number of
days in the contract term. Revenue collected in advance of the event management
or team services is recorded as deferred revenue on the consolidated balance
sheets. The Company may also enter into profit sharing arrangements which are
determined based on the net revenue earned by the customer for an event in
addition to a fixed fee. Revenue recognition for profit sharing arrangements is
recognized at the time the revenue from the event is determined, which is
generally at the conclusion of the event. An event or team services contact may
further require the Company to distribute payments to event or tournament
attendees resulting in the recognition of a processing fee by the Company. The
Company does not recognize revenue from the processing of payments until the
conclusion of the event or tournament.
The Company evaluates the service being provided under an esports event and team
services contract to determine whether it should recognize revenue on a gross
basis as the principal provider of the service, or on a net basis in a manner
similar to that of an agent. The Company has determined that for esports event
and team services contracts that allow for the assignment of individual tasks to
a third-party contractor, the Company acts as the principal provider of the
service being offered to the customer as it remains primarily responsible for
fulfilling the contractual promise to the customer. In profit sharing
arrangements, such as events that allow for the Company to share in the revenue
earned by a customer for an event, the Company has determined it acts in the
role of an agent to the customer as the event creator. The Company has also
determined it acts as an agent when it collects a processing fee for performing
the service of distributing prize money on behalf of its customers to event or
tournament winners.
55
Contract Liabilities
Liabilities to customers include both player liabilities, consisting of a free
spin bonus and a deposit match bonus, and the player reward liabilities. The
free spin bonus provides the user the opportunity to a free play, or otherwise
spin, on an iGaming casino slot machine without withdrawing a bet amount from
the player's account. The deposit match bonus matches a player's deposit up to a
certain specified percentage or amount. These bonuses represent consideration
payable to a customer and therefore are treated as a reduction of the
transaction price in determining NGR. The Company also offers non-discretionary
loyalty rewards points to customers that can be redeemed for free play or cash.
The Company allocates revenue from wagers to loyalty points rewards earned by
users, thereby deferring a portion of revenue from users that participate in a
loyalty reward program. The amount of revenue deferred related to loyalty points
available to users is based on the estimated fair value of the loyalty point
incentive available to the user.
The Company also records payments received in advance of performance under an
esports gaming services contract or event management or team services contract
as deferred revenue.
Business Combinations
The Company accounts for business combinations using the acquisition method of
accounting. The Company records the assets acquired, liabilities assumed and
acquisition-related contingent consideration at fair value on the date of
acquisition. The difference between the purchase price, including any contingent
consideration, and the fair value of net assets acquired is recorded as
goodwill. The Company may adjust the preliminary purchase price and purchase
price allocation, as necessary, during the measurement period of up to one year
after the acquisition closing date as it obtains more information as to facts
and circumstances that impact the determination of fair value at the acquisition
date. Any change in fair value of acquisition-related contingent consideration
resulting from events after the acquisition date is recognized in earnings.
Acquisition-related costs are recognized separately from the acquisition and are
expensed as incurred.
Impairment of Goodwill and long-lived assets
Goodwill represents the excess of fair value of consideration paid for an
acquired entity over the fair value of the assets acquired and liabilities
assumed in a business combination. Goodwill is not amortized but rather it is
tested for impairment at the reporting unit level on an annual basis on April 1
for each fiscal year, or more often if events or changes in circumstances
indicate that more likely than not the carrying amount of the asset may not be
recoverable. A reporting unit represents an operating segment or a component of
an operating segment. In accordance with ASC Topic 350 Intangibles - Goodwill
and Other, our business is classified into four reporting units: iGaming
(including Argyll, Bethard and Lucky Dino), EGL, GGC, and Helix.
In testing goodwill for impairment, we have the option to begin with a
qualitative assessment, commonly referred to as "Step 0," to determine whether
it is more likely than not that the fair value of a reporting unit containing
goodwill is less than its carrying value. This qualitative assessment may
include, but is not limited to, reviewing factors such as macroeconomic
conditions, industry and market considerations, cost factors, entity-specific
financial performance and other events, including changes in our management,
strategy and primary user base. If we determine that it is more likely than not
that the fair value of a reporting unit is less than its carrying value, we then
perform a quantitative goodwill impairment analysis by comparing the carrying
amount to the fair value of the reporting unit. If it is determined that the
fair value is less than its carrying amount, the excess of the goodwill carrying
amount over the implied fair value is recognized as an impairment loss in
accordance with Accounting Standards Update ("ASU") No. 2017-04, Goodwill and
Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The
Company utilizes a discounted cash flow analysis, referred to as an income
approach, and uses internal and market multiples, to assess reasonableness of
assumptions, to determine the estimated fair value of our reporting units. For
the income approach, significant judgments and assumptions including anticipated
revenue growth rates, discount rates, gross margins, operating expenses, working
capital needs and capital expenditures are inherent in the fair value estimates,
which are based on our operating and capital forecasts. As a result, actual
results may differ from the estimates utilized in our income approach. The use
of alternate judgments and/or assumptions could result in a fair value that
differs from our estimate and could result in the recognition of additional
impairment charges in the financial statements. As a test for reasonableness,
the Company also considers the combined fair values of our reporting units to a
reasonable market capitalization of the Company. The Company may elect not to
perform the qualitative assessment for some or all reporting units and perform a
quantitative impairment test.
In accordance with ASC 350, for goodwill, after considering the asset impairment
charges to the asset groups, the Company performed its interim and annual
goodwill impairment tests, that compared the estimated fair value of each
reporting unit to their respective carrying values. The estimated fair value of
each reporting unit was derived primarily by utilizing a discounted cash flows
analysis. The results of the impairment tests performed indicated that the
carrying value of the EGL, GGC and Helix reporting units exceeded their
estimated fair values determined by the Company. Based on the results of the
goodwill impairment testing procedures, the Company recognized impairments of
goodwill of $1,895,164 for the EGL reporting unit, $8,831,000 for the GGC
reporting unit, $12,393,591 for the Helix reporting unit, for a total of
$23,119,755 for the EEG Games segment, and $3,852,876 for the iGaming Argyll UK
reporting unit of the iGaming segment, totaling $26,972,631 for the year ended
June 30, 2022 in asset impairment charges in the consolidated statements of
operations. As of June 30, 2022, the Company determined there was no impairment
related to the remaining goodwill of the Company consisting of $19,660,481 in
the iGaming Malta reporting unit and EEG iGaming segment and $2,614,832 in the
GGC reporting unit and EEG Games segment. The fair value of the iGaming Malta
reporting unit exceeded the carrying value in total by approximately 29.3% and
the fair value of the GGC reporting unit exceeded the carrying value in total by
approximately 12.2%. A decrease of 1.0% in our terminal growth rate would not
result in impairment of goodwill for the iGaming Malta or the GGC reporting
units. An increase of 1.0% in our discount rate would not result in impairment
of goodwill for iGaming Malta or the GGC reporting units.
Equipment and other long-lived assets, including finite lived intangibles, are
evaluated for impairment periodically or when events and circumstances indicate
that the carrying amount of an asset may not be recoverable. If an evaluation is
required, an estimate of future undiscounted cash flows are determined through
estimated disposition date of the asset. To the extent that estimated future
undiscounted net cash flows attributable to the asset are less than the carrying
amount, an impairment loss is recognized equal to the difference between the
carrying value of such asset and its fair value, considering external market
participant assumptions. An estimation of future cash flows requires significant
judgment as the Company makes assumptions about future results and market
conditions. Since the determination of future cash flows is an estimate of
future performance, there may be impairments recognized in future periods in the
event future cash flows do not meet expectations.
During the year ended June 30, 2022, the Company had concluded the fair values
of certain equipment and other long-lived assets, including finite lived
intangible assets were lower than their current carrying values, and had
recognized impairment totaling $3,644,048 and $12,100,997 for the Argyll, EGL,
GGC and Helix tradenames and developed technology and software, respectively,
$1,675,580 for the Argyll and EGL player relationships, $35,519 for the Argyll
gaming licenses, $653,107 for the Argyll, EGL and Helix Game Centers computer
equipment, leasehold improvements, furniture and equipment and finance lease
assets and $1,416,807 for the impairment of the Helix Game Centers operating
lease right-of-use assets.
The total asset impairment charges in the consolidated statements of operations
for the year ended June 30, 2022 for equipment and other long-lived assets,
including finite lived intangible assets was $19,526,058, including $4,016,503
from EEG iGaming segment and $15,509,555 from the EEG Games segment.
56
Derivative financial instruments
The Company evaluates its convertible notes, equity instruments and warrants, to
determine if those contracts or embedded components of those contracts qualify
as derivatives. The result of this accounting treatment is that the fair value
of the embedded derivative is recorded at fair value each reporting period and
recorded as a liability in the balance sheet. In the event that the fair value
is recorded as a liability, the change in fair value is recorded in the
statements of operations as other income or expense.
In circumstances where the embedded conversion option in a convertible
instrument is required to be bifurcated and there are also other embedded
derivative instruments in the convertible instrument that are required to be
bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of each
reporting period. Equity instruments that are initially classified as equity
that become subject to reclassification are reclassified to a liability at the
fair value of the instrument on the reclassification date. Derivative instrument
liabilities are classified in the balance sheet as current or non-current to
correspond with its host instrument. The Company records the fair value of the
remaining embedded derivative at each balance sheet date and records the change
in the fair value of the remaining embedded derivative as other income or
expense in the consolidated statements of operations.
Off Balance Sheet Arrangements
None.
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ESPORTS ENTERTAINMENT GROUP, INC. 
