ESPORTS ENTERTAINMENT GROUP, INC. - Quarter Report: 2020 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: December 31, 2020

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number: 000-55954

ESPORTS ENTERTAINMENT GROUP, INC.

(Exact name of registrant as specified in its charter)

13/14 Penthouse Office, Mannarino Road

Birkirkara, Malta, BKR 9080

(Address of principal executive offices)

356 2713 1276

(Registrant’s telephone number, including area code)

170 Pater House, Psaila Street

Birkirkara, Malta, BKR 9077

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of February 16, 2021, there were 17,331,014 shares of common stock, par value $0.001 issued and outstanding.

ESPORTS ENTERTAINMENT GROUP, INC.

Quarterly Report on Form 10-Q

For the Quarter ended December 31, 2020

TABLE OF CONTENTS

Esports Entertainment Group, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Esports Entertainment Group, Inc.

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

For the Three and Six Months Ending December, 2020 and 2019

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Esports Entertainment Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Note 1 – Nature of Operations

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

Esports Entertainment Group is a diversified operator of esports, sports and igaming businesses with a global footprint. The Company’s strategy is to build and acquire betting and related platforms in the businesses of igaming and sports betting, and to lever them into the rapidly growing esports business. The Company is primarily focused on three vertical markets, namely esports entertainment, esports wagering, and iGaming and traditional sports betting. On July 31, 2020, the Company commenced substantive revenue generating operations with the acquisition of LHE Enterprises Ltd, the holding company for an online sportsbook and casino operator Argyll Entertainment (“Argyll”). The Company also recently acquired Phoenix Games Network Limited, the holding company for the Esports Gaming League (“EGL”) on January 21, 2021 and has announced the acquisitions of Lucky Dino Gaming Limited (“Lucky Dino”), an online casino operator, Helix Holdings, LLC (“Helix”), an owner and operator of esports centers that provide esports programming and gaming infrastructure, and ggCircuit, a business-to-business software company that provides cloud-based management for gaming centers, a tournament platform and integrated wallet and point-of-sale solutions. The acquisition of Lucky Dino is expected to close by March 31, 2021, the Company’s third fiscal quarter, and the acquisitions of Helix and ggCircuit  are expected to close prior to the Company’s fiscal year ended June 30, 2021. The acquisitions of Lucky Dino, Helix and ggCircuit are discussed further in Note 16, Subsequent Events.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Note 2 – Summary of Significant Accounting Policies

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These unaudited condensed consolidated financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the annual period ended June 30, 2020. The consolidated balance sheet as of June 30, 2020 was derived from the audited consolidated financial statements as of and for the year then ended.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated on consolidation.

Reportable Segment

The Company determined it has one reportable segment. This determination considers the organizational structure of the Company and the nature of financial information available and reviewed by the chief operating decision maker to assess performance and make decisions about resource allocations.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported results of operations. The Company reclassified taxes payable on its unaudited condensed consolidated balance sheet from accounts payable and accrued expenses. The Company also reclassified sales and marketing expenses on its unaudited condensed consolidated statements of operations and comprehensive loss from general and administrative expenses.

Use of estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates  include the valuation and accounting for equity awards related to warrants and stock-based compensation, determination of fair value for derivative instruments, the accounting for business combinations and allocating purchase price, estimating the useful life of fixed assets and intangible assets, as well as the estimates related to accruals and contingencies.

Liquidity and Going Concern

The Company has historically incurred losses and negative cash flows as it prepared to grow its esports business through acquisitions and new venture opportunities. As of December 31, 2020, the Company had approximately $5.6 million of available cash on-hand and has raised additional funding of $10.7 million subsequent to December 31, 2020 from the exercise of certain warrants. The Company also raised aggregate gross proceeds of $30.0 million from an equity offering on February 16, 2021. Considering the cash on-hand as well as these additional sources of financing, the Company currently expects that its cash will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months after February 16, 2021. While the Company expects revenues and cash flows to increase related to current and planned acquisitions, the Company expects to incur an annual operating loss and annual negative operating cash flows during the growth phase of the business.

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally. Due to the outbreak of Covid-19, almost all major sports events and leagues were postponed or put-on hold, for the period of Apr 2020-June 2020. The cancelation of major sports events had a significant short-term negative effect on betting activity globally. As a result, iGaming operators faced major short-term losses in betting volumes. Online casino operations have generally continued as normal without any noticeable disruption due to the Covid-19 outbreak. The virus’s expected effect on online casino activity globally is expected to be overall positive or neutral.

Travel restrictions and border closures have not materially impacted the Company’s ability to manage and operate the day-to-day functions of the business. Management has been able to operate in a virtual setting. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm the business over the long term. Travel restrictions impacting people can restrain the ability to operate, but at present we do not expect these restrictions on personal travel to be material to the Company’s operations or financial results.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption and reduced operations. 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.

Cash

Cash includes cash on hand. Cash equivalents consist of highly liquid debt instruments purchased with an original maturity of three months or less. As of December 31, 2020 and June 30, 2020 there were no cash equivalents. At times, cash deposits inclusive of restricted cash may exceed FDIC-insured limits. At December 31, 2020 and June 30, 2020, the amount the Company had on deposit funds that exceeded the FDIC-insured limits were approximately $7,250,000 and $12,000,000, respectively.

Restricted Cash

Restricted cash includes cash reserves maintained by the Company in satisfaction of regulatory requirements related to user account balances. The Company presents 90% of its liabilities to customer as restricted cash.

Receivables Reserved for Users

User deposit receivables are stated at the amount the Company expects to collect from a payment processor. These arise due to the timing differences between a user’s deposit and the receipt of the payment into the Company’s bank accounts. Receivables also arise as the result of the securitization policies of certain payment processors.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Equipment

Equipment is stated at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the asset. Additions and improvements that significantly extend the useful lives of assets are capitalized.

Repairs and maintenance costs are charged to expense during the year in which they are incurred.

Depreciation is provided for over the estimated useful life of the asset as follows:

Useful lives and residual values are reviewed and adjusted, if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The cost and accumulated depreciation of assets retired or sold are removed from the respective accounts and any gain or loss is recognized in operations.

Business Acquisition Accounting

The Company applies the acquisition method of accounting for business acquisitions. The Company allocates the purchase price of its business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference between the total cost of the acquisition and the sum of the fair values of acquired tangible and identifiable intangible assets less liabilities is recorded as goodwill. Transaction costs are expensed as incurred in general and administrative expenses.

Goodwill and Intangible Assets

The Company has recorded intangible assets, including goodwill, in connection with business acquisitions. Estimated useful lives of amortizable intangible assets are determined by management based on an assessment of the period over which the asset is expected to contribute to future cash flows.

In accordance with U.S. GAAP for goodwill and other indefinite-lived intangibles, the Company tests these assets for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred. For the purposes of that assessment, the Company has determined to assign assets acquired in business combinations to a single reporting unit including all goodwill and indefinite-lived intangible assets acquired in business combinations. The Company did not record any impairment of goodwill or intangible assets during the six months ending December 31, 2020. The Company recorded an impairment of intangible assets of $67,131 during the six months ending December 31, 2019.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”), which requires lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. The Company adopted the standard effective July 1, 2019  using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the following accounting policies related to this standard update:

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

As a result of the above, the adoption of ASC 842 did not have a material effect on the unaudited condensed consolidated financial statements.

Upon the acquisition of LHE Enterprises Limited, the Company recognized an operating lease right-of-use asset  of $367,513 and lease liabilities of $236,807 on the unaudited condensed consolidated balance sheet . Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 11.

Internal-Use Software

Capitalized internal-use software costs include external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software project, and continues during the application development stage. Capitalization ceases when the software has been tested and is ready for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets, including definite-lived intangible assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying amount exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows. There were no long-lived asset impairment charges recorded during the three and six months periods ended December 31, 2020 and 2019.

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the unaudited condensed consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between U.S. GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by considering taxable income in carryback years, existing taxable temporary differences, prudent and feasible tax planning strategies and estimated future taxable profits.

The Company accounts for uncertainty in income taxes recognized in the unaudited condensed consolidated financial statements by applying a twostep process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the unaudited condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.

Derivative Instruments

The Company evaluates its convertible notes 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 marked-to-market each balance sheet date and recorded as a liability. 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.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

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 re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to 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 marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the statements of operations.

The Company utilizes the Monte Carlo Method that values the liability of the debt conversion feature derivative financial instruments and utilizes the Black-Scholes valuation model to value the derivative warrants.

Fair Value of Financial Instruments

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, other receivables, loans receivable, receivables reserved for users, prepaid expenses and other current assets, accounts payable and accrued expenses, and liabilities to customers approximate fair value because of the immediate or short-term maturity of the financial instruments.

The Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.

Income (Loss) Per Share

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

The following securities were excluded from weighted average diluted common shares outstanding for the three and six months ended December 31, 2020 and 2019 because their inclusion would have been antidilutive.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Comprehensive Loss

Comprehensive loss consists of net loss and foreign currency translation adjustments related to the effect of foreign exchange on the value of assets and liabilities. The net translation loss for the period is included in the unaudited condensed consolidated statements of comprehensive loss.

Foreign Currency Translation

The functional currencies of the Company include the U.S. dollar, British Pounds Sterling, Euros, and Canadian dollar. The reporting currency of the Company is the U.S. Dollar. Assets and liabilities of the Company’s foreign operations with functional currencies other than the US dollar are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Stock-based Compensation

The Company applies ASC 718-10, “Share-Based Payments,” which requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors including employee stock options under the Company’s stock plans based on estimated fair values.

ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The fair value of the award is recognized as an expense on a straight-line basis over the requisite service periods in the Company’s consolidated statements of operations and comprehensive loss. The Company recognizes share-based award forfeitures as they occur rather than estimating by applying a forfeiture rate due to lack of historical experience.

All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. The Company recognizes compensation expense for the fair value of non-employee awards based on the straight-line method over the requisite service period of each award. The Company estimates the fair value of stock options granted as equity awards using a Black-Scholes options pricing model.

Advertising

Advertising costs consist primarily of online search advertising and placement, trade shows, advertising fees, and other promotional expenses. Advertising costs are expensed as incurred and are included in sales and marketing on the unaudited condensed consolidated statements of operations.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”) to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled. The Company determines revenue recognition through the following steps:

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

The Company generates revenue from end-users (“customers”) placing bets on its online gambling sites it operates for its brands. The performance obligations in the contract are the settlements of each individual bet. The Company offers a loyalty program that includes free play, cash bonuses, and loyalty points awarded based on individual play. The loyalty program is considered a nondiscretionary incentive available to the customer. The transaction price is the amount wagered by the customer less the amounts returned to, or won by, the customer. This is commonly referred to as the win or Gross Gaming Revenue (“GGR”). Management allocates the transaction price or the GGR to the performance obligations using relative standalone selling price.

The Company’s performance obligations are as follows:

The Company records revenue as Net Gaming Revenue (“NGR”), which is the difference between the amount of money players wager minus the amount that they win, less any nondiscretionary incentives awarded. The Company records liabilities for amounts due to users of which the balance consists of user deposits, user winnings and nondiscretionary incentives awarded less user withdrawals and user losses.

The Company applies a practical expedient by accounting for its performance obligations on a portfolio basis as these bets have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio will not differ materially from that which would result if applying the guidance to an individual bet placed.

The Company grants three types of incentives that are standard in the gaming industry: (i) free bet whereby upon making a deposit and get another free bet regardless of the outcome of the first bet (ii) deposit match bonus in which the Company will match the player’s deposit up to a certain specified percentage or amount and (iii) loyalty points are earned based on the customers level of play which can be exchanged for free bets or cash. The incentives typically expire 3-6 months after they are granted and represent consideration payable to a customer that are included as a reduction of the transaction price for the wagering transaction. The transaction price for the bonus is variable based on the percentage of rewards expected to expire.

We evaluate bets that users place on websites owned by third party brands in order to determine whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported gross or net. An entity is a principal if it has the ability to direct the use of and obtain substantially all the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. For these arrangements, we are the principal as we control the wagering service; therefore, any charges, including any applicable simulcast fees, we incur for delivering the wagering service are presented as operating expenses.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance in the first quarter of its fiscal 2021. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a proportionate basis. This update is effective for fiscal years beginning after December 15, 2019. The Company adopted this guidance in the first quarter of its fiscal 2021. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”): Simplifying the Accounting for Income Taxes. The new standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. For public business entities, it is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the potential impact of this standard on our consolidated financial statements.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the potential impact of this standard on our consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.

Note 3 – Business Acquisitions

Business acquisitions are accounted for under the purchase method of accounting in accordance with ASC 805. The results of operations of the acquired businesses since the date of acquisition are included in the unaudited condensed consolidated financial statements of the Company for the three and six months ended December 31, 2020. The total purchase consideration was allocated to the assets acquired and liabilities assumed at their preliminary estimated fair values as of the date of acquisition, as determined by management. The purchase price allocations are preliminary and a final determination of purchase accounting adjustments, which may be material, will be made upon the finalization of the Company’s integration activities, which are expected to be completed during the fiscal year ending 2021. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The value of the goodwill from the acquisitions described below can be attributed to a number of business factors including, but not limited to, cost synergies expected to be realized and a trained technical workforce.

Acquisition of LHE Enterprises Limited.

On July 7, 2020, the Company entered into the “Argyll Purchase Agreement” between the Company, LHE, and AHG, whereby upon closing on July 31, 2020 the Company acquired all of the outstanding capital stock of LHE and its subsidiaries, (i) Argyll Entertainment AG, (ii) Nevada Holdings Limited and (iii) Argyll Productions Limited. Argyll Entertainment AG is licensed and regulated by the UK Gambling Commission and the Irish Revenue Commissioners to operate online sportsbook and casino sites in the UK and Ireland, respectively. Argyll has a flagship brand, www.SportNation.bet, as well as two white label brands, www.RedZone.bet and www.uk.Fansbet.com, with over 300,000 registered players at the end of calendar year 2020.

On July 31, 2020, the Company consummated the closing of the Argyll Purchase Agreement. As consideration for the Acquired Companies, the Company (i) paid AHG $1,250,000 in cash (the “Cash Purchase Price”) of which $500,000 was previously paid;  (ii) issued to AHG 650,000 shares of common stock of the Company (the “Consideration Shares”); and (iii) issued to AHG warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00 per share (the “Consideration Warrants” together with the Cash Purchase Price and the Consideration Shares the “Purchase Price”).  The Consideration Warrants are exercisable for a term of three (3) years.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

The purchase price and purchase price allocation are preliminary pending the final determination of fair value for warrants issued as well as a final valuation of assets acquired and liabilities assumed. The preliminary purchase price and purchase price allocation as of the acquisition completion date follows:

The estimated useful life of the identifiable intangible assets is five years. The goodwill is not amortizable for tax purposes. Transaction related costs for the Argyll Purchase Agreement were $77,113 and included in general and administrative expenses on the unaudited condensed consolidated statements of operations.

Pro Forma Operating Results

The following table provides unaudited pro forma results for the three months ended December 31, 2019, as if the Argyll Purchase Agreement consummated on July 1, 2019. The pro forma results of operations for these three months ended were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the Argyll Purchase Agreement been made as of July 1, 2019 or results that may occur in the future.

The following table provides unaudited pro forma results for the six months ended December 31, 2020 and 2019, as if the Argyll Purchase Agreement consummated on July 1, 2019. The pro forma results of operations for these six month periods ended were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the Argyll Purchase Agreement been made as of July 1, 2019 or results that may occur in the future.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Acquisition of Flip

On September 3, 2020 the Company, entered into an Assignment of Intellectual Property Rights Agreement (the “IP Assignment Agreement”), by and among the Company, AHG and Flip Sports Limited (“Flip”) whereby the Company acquired all intellectual property rights in connection with the software developed by Flip and owned by AHG related to AHG’s online games and rewards platform and all other online software (the “Software”). This includes all works in relation to the same, including, but not limited to the source code of the Software and all technical and functional information and documentation required to operate the Software, all artwork, content and materials used in connection with the Software and any other works in respect of which AHG is the legal and beneficial owner and which are being used in connection with the Software (the “Works” together with the intellectual property rights in the Software the “Assigned Intellectual Property”).

As consideration for the Assigned Intellectual Property, the Company agreed to pay AHG an aggregate of $1,100,000 (the “Flip Purchase Price”) payable as follows: (a) $100,000 in cash on the Effective Date (“Cash Consideration”); and (b) that certain number of shares the Company’s restricted common stock, equal to $1,000,000 (the “Share Consideration”) at a price per share equal to the 30-day weighted average of the Company’s common stock immediately prior to the effective date, September 3, 2020, in accordance with the following payment schedule (i) that certain number of shares equal to $500,000 issued to AHG on the Effective Date (“Closing Shares”); and (ii) that certain number of shares equal to $500,000 of restricted common stock (the “Post Closing Shares”) issued to AHG on the sixth (6) month anniversary of the Effective Date (“Final Payment Date”), subject to the continued employment of certain key employees of Flip as identified in the IP Assignment Agreement (the “Key Employees”). The cash equivalent amount of the Post Closing Shares shall be reduced by $100,000 per Key Employee no longer with the Company on the Final Payment Date. On September 14, 2020, the Company issued 93,808 shares in accordance with the agreement.

The preliminary purchase price allocation of $1,100,000 as of the acquisition completion date of September 3, 2020 is as follows:

The unaudited pro forma financial results for Flip are immaterial for the three and six months ending December 31, 2020 and 2019. The estimated useful life of the identifiable intangible assets is five years. The goodwill is amortizable for tax purposes. Transaction related costs for the Flip acquisition were immaterial.

Note 4 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of December 31, 2020 and June 30, 2020 consists of the following

The Company completed the acquisition of Phoenix Games Network Limited on January 21, 2021. The settlement of the loan receivable from Phoenix Network Games Limited is included in the purchase consideration for this acquisition discussed further in Note 16, Subsequent Events.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Note 5 – Equipment

Fixed assets as of December 31, 2020 and June 30, 2020 consists of the following:

During the six months ended December 31, 2020 and 2019, the Company recorded total depreciation expense of $159,144  and $4,432, respectively. During the three months ended December 31, 2020 and 2019, the Company recorded total depreciation expense of $110,048  and $2,216, respectively.

Note 6 – Intangible Assets

Intangible assets as of December 31, 2020 and June 30, 2020 consists of the following:

During the six months ended December 31, 2020 and 2019, the Company recorded total amortization expense of $558,746  and $11,095, respectively. During the three months ended December 31, 2020 and 2019, the Company recorded total amortization expense of $341,394 and $501, respectively.

Note 7 – Loans Receivable

On September 22, 2020, the Company entered into two credit facility agreements with Helix and ggCircuit (the “Borrowers”). Under the agreements, the Company is willing to make a line of credit available to the Borrowers of up to $1,000,000, in the aggregate. The interest rate is 0%. The credit facility was entered into to make funds available to the Borrowers until the proposed acquisition of the Borrowers by the Company is consummated. The Company has entered into an agreement to acquire the Borrowers. The acquisition is expected to close by fiscal year ending 2021. As of December 31, 2020, the Company had recorded $1,000,000 as loans receivable in relation to the credit facility agreements.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Note 8 – Other Receivables

Other receivables as of December 31, 2020 consists of the following:

The Company did not have other receivables as of June 30, 2020.

Note 9 – Other Non-Current Assets

Other non-current assets as of December 31, 2020 and June 30, 2020 consists of the following :

Note 10 – Related Party Transactions

The Company entered into transactions the following transactions with officers and directors:

The Company currently reimburses the Chief Executive Officer for office rent and related expenses. During the three and six months ended December 31, 2020, the Company incurred charges of $1,200 and $2,400, respectively from the Chief Executive Officer. As of December 31, 2020, there were no amounts owed to the Chief Executive Officer. At June 30, 2020, the Company owed $21,658 to its Chief Executive Officer for rent and corporate related expenses.

The Company has entered into a services agreement and a referral agreement with Contact Advisory Services Ltd, which is partly owned by a member of the Board of Directors. During the three and six months ended December 31, 2020, the Company expensed approximately $17,192 and $68,577, respectively, in accordance with these agreements.

The Company has retained legal and corporate secretarial services from a member of Board of Directors through consultancy and employment agreements. The legal consultancy agreement requires payments of £18,000 per month (approximately $25,000) to the law firm that is controlled by this member of the Board of Directors. The individual also receives payroll of $500 per month through the employment agreement as Legal Counsel and Company Secretary.

Note 11 – Leases

In conjunction with the acquisition on July 31, 2020 (discussed in Note 3), the Company assumed a lease agreement for office space, which had under two years remaining on upon the acquisition. The assets and liabilities from operating leases are recognized at the acquisition date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend or not terminate the lease that the Company is reasonably certain to exercise, or any option to extend or not to terminate a lease controlled by the lessor.

Short-term leases, which have an initial term of 12 months or less, are not recorded on the unaudited condensed consolidated balance sheets.

The Company’s operating lease does not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on incremental borrowing rate of the Company, which is determined using the interest rate of the acquired Company’s long-term debt at the time of the commencement of the lease, which was 5%.

The Company’s weighted-average remaining lease term relating to its operating leases is 1.42 years, with a weighted-average discount rate of 5%.

The Company incurred lease expense for its operating leases of $87,868  which was included in “General and administrative expenses,” for the six months ended December 31, 2020. The Company incurred lease expense for its operating leases of $53,363 which was included in “General and administrative expenses,” for the three months ended December 31, 2020.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

At December 31, 2020, the Company had a right-of-use-asset related to operating leases of $388,854 and accumulated amortization related to operating leases of $86,320, both of which are included as right of use asset, net on the unaudited condensed consolidated balance sheets.

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of December 31, 2020.

Note 12 – Notes Payable

The Company assumed a sterling term loan facility from HSBC with a limit of £250,000 (approximately $340,000) in connection with its acquisition of LHE (Note 3). The loan allows for a drawdown period up to 60 days following the loan acceptance date, with LHE electing to borrow the total amount available under the loan facility. The loan is to be repaid on a monthly basis beginning on the thirteenth month following the drawdown date until the date 3 years from the date of the drawdown of the loan (“Final Repayment Date.”). There is no interest on the loan in the first year and interest subsequently accrues at a rate of 3.49% per annum over the Bank of England Base Rate. Interest is payable monthly on the outstanding principal amount of the loan and on the Final Repayment Date. On December 31, 2020, the notes payable balance related to this loan facility was $341,290.

Note 13 – Commitments  and contingencies 

Commitments

On October 1, 2019, the Company entered into a sponsorship agreement with an eSports team (the “Team”) in order to obtain certain sponsorship-related rights, benefits, and opportunities with respect to the eSports team. The term of the contract was from October 1, 2019 to June 30, 2022. The Company agreed to pay the Team $516,000 over the term of the contract and $230,000 worth of common stock. The stock is payable in 12 equal installments on the first day of each month. On August 6, 2020, the Company entered into an amended and restated sponsorship agreement whereby the Company agreed to pay a total of $2,545,000 in cash and $825,000 of common stock in tranches throughout the term of the contract which expires on January 31, 2023. The Company issued 33,333 shares of common stock to the Team under the agreement to-date valued at $21,000. As of December 31, 2020, the Company has accrued $196,423 as accrued expenses in relation to this agreement. For the three and six months ended December 31, 2020, the Company has expensed $418,954 and $649,833 in accordance with the agreement. As of December 31, 2020, the commitments under this agreement are estimate at approximately $1,250,000 for the calendar year ended December 31, 2021 and $1,500,000 for the calendar year ended December 2022.

On August 17, 2020, the Company entered into an agreement with Twin River Worldwide Holdings, Inc. (“Twin River”) that operates various online gaming and betting services in the state of New Jersey, USA. The organization will assist the Company in the operations and support to make available sports wagering to persons in New Jersey under the State Gaming Law. On the skin launch date (the “Launch Date”), which is expected to occur during the fiscal year ending June 30, 2021, the Company will pay the operator $1,500,000 and issue 50,000 shares of common stock. On each one-year anniversary of the Launch Date, the Company will pay an additional $1,250,000 and issue 10,000 shares of common stock. The agreement shall have a term of ten years from the Launch Date.

In the ordinary course of business, the Company enters into multi-year agreements to purchase sponsorships with professional teams as part of its marketing efforts to expand competitive esports gaming. As of December 31, 2020, the commitments under these agreements are estimated at approximately $700,000 for the calender year ended December 31, 2021, $700,000 for the calender year ended December 31,2022 and $700,000 for the calender year ended December 31, 2023.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Contingencies

In September 2018, Boustead Securities, LLC (“Boustead”) notified the Company of a claim that they were owed $192,664, as well as warrants to purchase 1,417,909 shares of the Company’s common stock as compensation for their acting as the placement agent for the sale of the Company’s securities between June 2017 and 2018. This matter was then brought to  arbitration pursuant to a clause in the placement agent agreement entered into by the Company and Boustead. Prior to the Arbitration hearing, Petitioner Boustead Securities, LLC offered a demand of nearly $500,000 to resolve the dispute. The offer was declined. The Arbitration hearing took place on December 7, 2020 through December 11, 2020. At the end of the Arbitration, Petitioner, Boustead Securities, LLC sought over $1.5 million in damages.

On February 3, 2021, the Arbitrator issued her final Award on the dispute. While ultimately, the Company did not prevail on liability, the Arbitrator awarded Petitioner, Boustead Securities, LLC significantly less in damages. In total, the Arbitrator awarded Petitioner Boustead Securities, LLC $289,874 in damages and allowable costs (not attorneys’ fees) with interest accruing approximately $21 per day. While the Company disagrees that the Arbitrator should have awarded Petitioner, it is highly unlikely that a award is subject to an favorable appeal or objection to Superior Court, however, the timeline do so has not passed. If no appeal is made by either party Petitioner Boustead Securities, LLC may seek to confirm the Arbitration Award as a Superior Court Judgment and seek collection efforts. The Company may in lieu of such seek to pay some discounted balance of the award. To date, no decisions have been made.

On August 3, 2020, Tangiers Global, LLC (“Tangiers”) filed a lawsuit in the United States District Court for the District of Nevada, entitled Tangiers Global, LLC, v. VGambling, Inc. et al, Case No. 2:20-cv-01434-APG-DJA. While filed in Nevada, the matter has now been successfully transferred to the District of Puerto Rico.  The new case number is 3:20-cv-01520-RAM.  The complaint for the lawsuit alleges, among other things, that the Company breached a certain 8% convertible promissory note, dated June 3, 2016, and Common Stock Purchase warrant of the same date.  The Company submitted an Answer with Affirmative Defenses.  The matter has not yet proceeded to the discovery phase, which is expected to begin in March, 2021. The Company believes the lawsuit lacks merit and will continue to vigorously challenge the action. At this time, the Company is unable to estimate potential damage exposure, if any, related to the litigation.

On November 2, 2020, Brylan Lee Whatley (“Whatley”) filed a lawsuit in the New York State Supreme Court, New York County, entitled Brylan Lee Whatley v. Esports Gambling Group, Inc. f/k/a VGambling, Inc., Index No. 655901/2020. On December 31, 2020, prior to serving the original Complaint, Whatley submitted an Amended Complaint in this matter. The Amended Complaint alleges that the Company breached a consulting agreement with Whatley.  The consulting agreement in question was never agreed to, or signed by, the Company.  For that reason, and in light of many other available legal defenses, the Company is submitting a Motion to Dismiss the Amended Complaint. The Company believes the lawsuit lacks merit and will vigorously challenge the action, in addition, to file any motions or counterclaims that may exist. At this time, the Company is unable to estimate potential damage exposure, if any, related to the litigation.

Note 14 – Revenue Recognition

As a result of the LHE Enterprises Limited acquisition, the Company has revenue generating operations. The Company recorded contract liabilities in the amount of $1,737,106 in connection with the acquisition of LHE Enterprises Limited. For the six months ended December 31, 2020, the Company recognized approximately $117,229 as revenues in relation to these contract liabilities.

As of December 31, 2020, contract liabilities were $2,229,724, which are recorded as “Liabilities to customers” in the accompanying unaudited condensed consolidated balance sheets. Contract liabilities primarily relate to deposits received from customers where bets were not yet settled.

The following table presents revenues from contracts with customers disaggregated by revenue source:

The Company has revenue sharing arrangements whereby it provides wagering services to customers, software, tools and infrastructure for the operation and maintenance of online gaming services through partner website.

The following table presents revenues from contracts with customers disaggregated by geographical area:

The Company did not have any revenues for the three and six months ended December 31, 2019.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

Note 15 – Equity

Preferred Stock

The Company has authorized 10,000,000 shares of preferred stock with a par value of $0.001 per share. There are no preferred shares designated, issued, and outstanding as of December 31, 2020 and June 30, 2020.

Common Stock 

During the six months ended December 31, 2020, the Company issued 482,992 shares of its common stock for services rendered with a weighted average fair value of $5.91 per share or $2,856,613 in the aggregate.

During the six months ended December 31, 2020, the Company issued 1,119,871 shares of common stock for the exercise of warrants with a weighted average exercise price of $3.85 per share or $4,258,042 in the aggregate.

During the six months ended December 31, 2020, the Company issued 650,000 shares of common stock in relation to the LHE Enterprises Limited acquisition. The Company recorded these shares at fair value in the amount of $3,802,500 (see Note 3).

On September 14, 2020, the Company issued 93,808 shares of common stock in relation to the Flip acquisition. The Company recorded these shares at fair value on the date of grant in the amount of $500,000 (see Note 3).

During the six months ended December 31, 2019, the Company issued 16,667 shares of common stock related to a consulting agreement dated June 4, 2019.

During the six months ended December 31, 2019, the Company issued 8,889 shares of its common stock for services rendered with a weighted average fair value of $6.52 per share or $58,000 in the aggregate.

During the six months ended December 31, 2019, the Company issued 4,444 shares of common stock for the exercise of warrants with a weighted average exercise price of $2.25 per share or $10,000 in the aggregate.

On October 8, 2019, the Company issued 41,779 shares of its common stock upon the exercise of 79,444 warrants upon a cashless exercise.

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

During the six months ended December 31, 2019, the Company issued 5,435 shares of its common stock upon entering waiver agreements.   In consideration for the investors entrance into the waiver agreements, the Company issued to each investor an additional warrant  to purchase such number of shares of the Company’s Common Stock equal to 5% of the warrant shares initially issuable to such investor under the warrant issued to such investor in the November 13, 2018 offering, as amended. The additional warrant has an exercise price of $11.25 per share.

Common Stock Warrants 

During the six months ended December 31, 2020, the Company issued a warrant to purchase 1,000,000 shares of common stock in relation to the LHE Enterprises Limited acquisition. The warrant is exercisable at $8.00 per share and expires on July 31, 2023. The Company recorded the warrant at fair   value of $5,488,171 (see Note 3). The warrant contains a cash settlement feature which results in a warrant liability. For the period ending December 31, 2020, the Company recorded a warrant liability of $4,859,782 in relation to the cash settlement feature. For the three months ending December 31, 2020, the Company recorded a loss on the change in fair value of warrant liability in the amount of $1,472,564. For the six months ending December 31, 2020, the Company recorded a gain on the change in fair value of warrant liability in the amount of $628,389. The Company valued the warrant using the Black-Scholes option pricing model with the following terms on July 31, 2020: (a) exercise price of $8.00, (b) volatility rate of 223.33%, (c) discount rate of 0.11%, (d) term of three years, and (e) dividend rate of 0%. The Company valued the warrant using the Black-Scholes option pricing model with the following terms on December 31, 2020: (a) exercise price of $8.00, (b) volatility rate of 156.04%, (c) discount rate of 0.17%, (d) term of 2 years and 6 months, and (e) dividend rate of 0%.

The warrant issued to LHE Enterprises Limited has a call feature where the Company shall have the right to cause the exercise of the warrant (the “Forced Exercise”) if the volume weighted average price of the common stock of the Company shall equal or exceed 125% of the $8.00 exercise price of the warrant. For twenty consecutive trading days. As of December 31, 2020, the warrants are callable by the Company.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

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

Common Stock Options

On August 1, 2017, the Company adopted the 2017 Stock Incentive Plan (the “2017 Plan”) whereby incentive stock options issued to employees, officers, and directors of the Company shall not exceed 166,667 of which the purchase price of the stock options shall not be less than 100% of the fair value of the Company’s common stock and the period for exercising the stock options not to exceed 10 years from the date of grant. The option price per share with respect to each option shall be determined by the committee for non-qualified stock options. On September 10, 2020, the Company’s board of directors adopted the 2020 Equity and Incentive Plan (the “2020 Plan”) which allows for 1,500,000 shares that may be awarded under the 2020 Plan. As of December 31, 2020, there were 683,854 shares available for issuance under the 2020 Plan.

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

As of December 31, 2020, the weighted average remaining life of the options outstanding was 4.94 years. As of December 31, 2020, there were 48,609 stocks options that were available for exercise.

Stock Based Compensation

During the six months ended December 31, 2020 and 2019, the Company recorded stock-based compensation expense of $2,311,591 and $329,960, respectively, for the amortization of stock options and the issuance of common stock to employees which has been recorded as general and administrative expense in the unaudited condensed consolidated statements of operations.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

As of December 31, 2020, unamortized stock compensation for stock options was $1,051,455 with a weighted-average recognition period of 1.07 years.

The options granted during the six months ended December 31, 2020 were valued using the Black-Scholes option pricing model using the following weighted average assumptions:

Note 16 – Subsequent  Events

Equity Issuances

On February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors resulting in the raise of $30,000,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 2,000,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share at a price of $15.00 per Share. The closing of the sale of the Shares under the Purchase Agreement is expected to occur on or about February 16, 2021, subject to customary closing conditions.

Subsequent to December 31, 2020, the Company issued 1,672,159 shares of common stock upon the exercise of warrants at a weighted average exercise price of $6.48 per share.

Lucky Dino Purchase Agreement

On December 14, 2020, the Company, via its wholly owned subsidiary, Esports Entertainment (Malta) Limited (“EEL”), entered into an asset purchase agreement (the “Lucky Dino Purchase Agreement”), subject to certain closing conditions, by and among EEL, Lucky Dino Gaming Limited, a company registered in Malta (“Lucky Dino”), and Hiidenkivi Estonia OU, a company registered in Estonia (“HEOU” and, together with Lucky Dino, the “Sellers”) whereby EEL purchased and assumed from the Sellers substantially all the assets and assumed certain specified liabilities of the Sellers’ business of real money online casino gaming (the “Acquired Business”).

As consideration for the Acquired Business, the Company agreed to pay the Sellers EUR €25,000,000 (approximately USD $30,000,000) (the “Lucky Dino Purchase Price”) subject to certain adjustments set forth in the Lucky Dino Purchase Agreement.

The Lucky Dino Purchase Agreement contains customary representations, warranties, covenants, indemnification and other terms for transactions of this nature. The closing of the transactions contemplated by the Lucky Dino Purchase Agreement is subject to certain conditions, including, among other things, the completion of an audit of Lucky Dino and HEOU.

Phoenix Purchase Agreement

On December 17, 2020, the Company entered into a share purchase agreement (the “Purchase Agreement”), by and among the Company, Phoenix Games Network Limited, a company registered in England and Wales (“Phoenix”), and the shareholders of Phoenix (the “Phoenix Shareholders” and, together with Phoenix, the “Selling Parties”), whereby the Company acquired from the Selling Parties all of the issued and outstanding share capital of Phoenix (the “Phoenix Shares”). Pursuant to the Purchase Agreement, as consideration for the Phoenix Shares, the Company agreed to pay the Sellers: (i) GBP £1,000,000 (approximately $1,370,000) (the “Original Cash Consideration”); and (ii) shares of common stock of the Company, par value $0.001 per share, in the aggregate value of GBP£3,000,000 (approximately $4,100,600) (the “Original Share Consideration” and, together with the Cash Consideration, the “Original Purchase Price”), subject to adjustment based on certain revenue milestones as outlined therein.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

On January 21, 2021, the Company and Sellers, having met all conditions precedent, consummated the closing for the Phoenix Shares pursuant to the terms of the Purchase Agreement. The Original Purchase Price was adjusted at closing and as consideration for the Phoenix Shares, the Company paid the Sellers: (i) GBP £350,000 (US $493,495) (the “Closing Cash Consideration”); and (ii) 292,211 shares of common stock of the Company, par value $0.001 per share (aggregate value of $1,927,647) (the “Closing Share Consideration” and, together with the Cash Closing Consideration, the “Closing Purchase Price”). The Closing Cash Consideration was be paid in US Dollars and was calculated in accordance with the applicable exchange rate on the Closing Date (as such term is defined in the Purchase Agreement). The Sellers shall remain eligible to receive the remainder of the Original Purchase Price upon Phoenix meeting certain revenue targets by May 16, 2021.

Pursuant to the Purchase Agreement, the Selling Parties shall be entitled to receive an additional GBP£2,000,000 (approximately $2,700,000) if Phoenix has reached certain revenue milestones by the 18 month anniversary of the Closing Date as further outlined therein.

Helix Holdings, LLC Purchase Agreement

On January 22, 2021, the Company entered into an equity purchase agreement (the “Helix Purchase Agreement”), by and among the Company, Helix Holdings, LLC, a limited liability company incorporated under the laws of Delaware (“Helix”), and the equity holders of Helix (the “Helix Equity Holders”), whereby the Company can acquire from the Helix Equity Holders all of the issued and outstanding membership units of Helix (the “Helix Units”), making Helix a wholly owned subsidiary of the Company.

As consideration for the Helix Units, the Company agreed to pay the Helix Equity Holders $17,000,000 (the “Helix Purchase Price”), to be paid fifty percent (50%) in shares of common stock of the Company, par value $0.001 per share (the “Common Stock”) (the “Helix Share Consideration”), and fifty percent (50%) in cash (the “Helix Cash Consideration”. The per share price of the Common Stock issuable as Helix Share Consideration shall be the Closing Base Price minus the Discount. “Closing Base Price” means the volume weighted average price (“VWAP”) of the Common Stock during the thirty (30) trading days immediately preceding the date of the closing under the Helix Purchase Agreement (the “Closing”). “Discount” equals the greater of (A) and (B) minus the lesser of (A) and (B) multiplied by 0.25 where (A) is the VWAP of the common stock during the thirty (30) trading days immediately preceding October 26, 2020 (which was $4.54 per share) multiplied by 1.25 (which is $5.675); and (B) is the Closing Base Price.

The Closing under the Helix Purchase Agreement is subject to the simultaneous closing under an equity purchase agreement (the “GGC Purchase Agreement”) among the Company, ggCircuit LLC, an Indiana limited liability company (“GGC”) and the equity holders of GGC (the “GGC Equity Holders”), the principal terms of which are described below. The Closing is also subject to (i) the completion of an opinion (the “Fairness Opinion”) respecting the fairness of the consideration to be paid by the Company and received by the Helix Equity Holders and the GGC Equity Holders pursuant to the Helix Purchase Agreement and the GGC Purchase Agreement from a financial point of view; (ii) an audit, as of and for the two years ending December 31, 2019, and a financial review, for the nine month periods ended September 30, 2019 and 2020, of Helix and affiliated entities; and (iii) the approval of the Company’s shareholders to the issuance of the Helix Share Consideration and GGC Share Consideration (as defined below) in satisfaction of NASDAQ Rule 5635(a).

The parties to the Helix Purchase Agreement may terminate the Helix Purchase Agreement, among other reasons, if (i) the Fairness Opinion does not support an aggregate purchase price for Helix and GGC of $43,000,000 and, based thereon, the Company is no longer willing to pay the Helix Purchase Price, or (ii) the Closing has not occurred on or before May 14, 2021 or such later date as may be mutually agreed to by the parties. The Company can also terminate the Helix Purchase Agreement if (i) upon completion of its legal, financial, tax and commercial due diligence of Helix and affiliated entities, it is not satisfied, with the results thereof; (ii) the audit and/or review of Helix and affiliated entities cannot be completed due to fraud, material accounting errors or otherwise or if the results of the audit or the review are materially and adversely different from the financial information provided by Helix and the Helix Equity Holders to the Company prior to the execution of the Helix Purchase Agreement.

In connection with the negotiation of the Helix Purchase Agreement, the Company advanced an aggregate of $400,000 to Helix during 2020 in the form of loans (the “Helix Loans”). Upon execution of the Helix Purchase Agreement, the Company paid Helix an additional $400,000 to be used for operating expenses pending the Closing (the “Operating Expense Payments”). If the Closing takes place on or prior to May 14, 2021, the Company will receive a full credit against the Helix Purchase Price for the Helix Loans and if the Closing takes place prior to April 30, 2021 the Company will receive a full credit against the Helix Purchase Price for the Operating Expense Payments. If Closing takes place after April 30, 2021, but on or prior to May 14, 2021, the Company shall receive a credit against the Helix Purchase Price for 60% of the Operating Expense Payments. If the transaction does not close, depending on the reason, a portion of the Helix Loans and the Operating Expense Payments may be forgiven.

The Helix Purchase Agreement contains customary representations, warranties, covenants, indemnification and other terms for transactions of a similar nature.

Esports Entertainment Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in U.S. dollars)

ggCIRCUIT LLC Purchase Agreement

On January 22, 2021, the Company entered into the GGC Purchase Agreement whereby the Company can acquire from the GGC Equity Holders all of the issued and outstanding membership units of GGC (the “GGC Units”), making GGC a wholly owned subsidiary of the Company.

As consideration for the GGC Units, the Company agreed to pay the GGC Equity Holders $26,000,000 (the “GGC Purchase Price”) to be paid fifty percent (50%) in shares of Common Stock (the “GGC Share Consideration”), and fifty percent (50%) in cash (the “GGC Cash Consideration”) The per share price of the Common Stock issuable as GGC Share Consideration shall be the Closing Base Price minus the Discount. “Closing Base Price” means the volume weighted average price (“VWAP”) of the Common Stock during the thirty (30) trading days immediately preceding the date of the closing under the GGC Purchase Agreement (the “Closing”). “Discount” equals the greater of (A) and (B) minus the lesser of (A) and (B) multiplied by 0.25 where (A) is the VWAP of the common stock during the thirty (30) trading days immediately preceding October 26, 2020 (which was $4.54 per share) multiplied by 1.25(which is $5.675); and (B) is the Closing Base Price.

The Closing under the GGC Purchase Agreement is subject to the simultaneous closing under the Helix Purchase Agreement. The Closing is also subject to (i) the completion of the Fairness Opinion; (ii) an audit, as of and for the two years ending December 31, 2019, and a financial review, for the nine month periods ended September 30, 2019 and 2020, of GGC and affiliated entities; and (iii) the approval of the Company’s shareholders to the issuance of the GGC Share Consideration and Helix Share Consideration in satisfaction of NASDAQ Rule 5635(a).

The parties to the GGC Purchase Agreement may terminate the GGC Purchase Agreement, among other reasons, if (i) the Fairness Opinion does not support an aggregate purchase price for Helix and GGC of $43,000,000 and, based thereon, the Company is no longer willing to pay the GGC Purchase Price, or (ii) the Closing has not occurred on or before May 14, 2021 or such later date as may be mutually agreed to by the parties. The Company can also terminate the GGC Purchase Agreement if (i) upon completion of its legal, financial, tax and commercial due diligence of GGC and affiliated entities, it is not satisfied, with the results thereof; (ii) the audit and/or review of GGC and affiliated entities cannot be completed due to fraud, material accounting errors or otherwise or if the results of the audit or the review are materially and adversely different from the financial information provided by GGC and the GGC Equity Holders to the Company prior to the execution of the GGC Purchase Agreement.

In connection with the negotiation of the GGC Purchase Agreement, the Company advanced an aggregate of $600,000 to GGC during 2020 in the form of loans (the “GGC Loans”). Upon execution of the GGC Purchase Agreement, the Company paid GGC an additional $600,000 to be used for operating expenses pending the Closing (the “Operating Expense Payments’). If the Closing takes place on or prior to May 14, 2021, the Company will receive a full credit against the GGC Purchase Price for the GGC Loans and if the Closing takes place prior to April 30, 2021 the Company will receive a full credit against the GGC Purchase Price for the Operating Expense Payments. If Closing takes place after April 30, 2021, but on or prior to May 14, 2021, the Company shall receive a credit against the GGC Purchase Price for 60% of the Operating Expense Payments. If the transaction does not close, depending on the reason, a portion of the GGC Loans and the Operating Expense Payments may be forgiven.

The GGC Purchase Agreement contains customary representations, warranties, covenants, indemnification and other terms for transactions of a similar nature.

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

This section of this report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

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 LHE Enterprises Limited took place after the fiscal year end this Management Discussion and Analysis of Financial Condition and Results of Operations speaks only to the historical operations of the Company during the 2020 fiscal year end and the Company’s historical business prior such acquisition. Forward looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

Overview

Esports is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter and multiplayer online battle arena games. As of December 2020, the three largest selling esports games were Dota 2, League of Legends (each multiplayer online battle arena games) and Counter Strike: Global Offensive (a first-person shooter game). Other popular games include Smite, StarCraft II, Call of Duty¸ Heroes of the Storm, Hearthstone and Fortnite. Esports also includes games which can be played, primarily by amateurs, in multiplayer competitions on the Sony PlayStation, Microsoft Xbox and Nintendo Switch. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including twitch.tv, azubu.tv, ustream.tv and youtube.com.

Esports Entertainment Group is a diversified operator of esports, sports and igaming businesses with a global footprint. Our strategy is to build and acquire betting and related platforms in the businesses of igaming and sports betting, and lever them into the rapidly growing esports business. Our tag line is “Play, Watch, Bet”. In esports, we are creating and assembling best-in-class technologies to generate profit from the various elements of esports competition and betting. We are primarily focused on three verticals, (i): esports entertainment, (ii) esports wagering, and (iii) iGaming and traditional sports betting. We believe focusing on these verticals positions the Company to take advantage of a trending and expanding marketplace in esports with the rise of competitive gaming as well as the legalization of online gambling in the United States

Esports Entertainment:

Our esports entertainment vertical includes any activity that we pursue within esports that does not include real-money wagering. Right now, the main component of this pillar is our skill-based tournament platform This allows us to engage and monetize players across 41 states where skill-based gambling is legal as well as create relationships with players that can eventually migrate into our real-money wagering platforms.

Esports Wagering:

We intend 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 Maltese Gaming Authority (MGA) license, we are able to accept wagers from residents of over 180 jurisdictions including Canada, Germany, New Zealand and South Africa, on our “Vie.bet” platform

On August 20, 2020, it was announced that we entered into a multi-year partnership with Twin River Worldwide Holdings, Inc (NYSE: TRWH), now Bally’s Corporation (NYSE: BALY), to launch our proprietary mobile sports betting product, “Vie.gg”, in the state of New Jersey. We intend to have our platform, which was previously licensed in Curacao, live in the state during April 2021.

iGaming  and Traditional Sports Betting:

The goal of our iGaming and traditional Sports Betting vertical is to provide profitable growth and access to strategic licenses in jurisdictions that we can cross-sell into our Vie.bet platform. On July 7, 2020, we entered into a stock purchase agreement (the “Argyll Purchase Agreement”), by and among the Company, LHE Enterprises Limited (“LHE”), and AHG Entertainment, LLC (“AHG”) whereby, upon closing on July 31, 2020, the Company acquired all of the outstanding capital stock of LHE and its subsidiaries, (i) Argyll Entertainment AG, (ii) Nevada Holdings Limited and (iii) Argyll Productions Limited (collectively the “Acquired Companies” or “Argyle”). AHG is licensed and regulated by the UK Gambling Commission and the Irish Revenue Commissioners to operate online sportsbook and casino sites in the UK and Ireland, respectively. Argyll has a flagship brand, www.sportnation.bet, as well as two white label brands, www.redzone.bet and www.uk.fansbet.com (collectively the “Argyll Brands”), with over 300,000 registered players at the end of calendar year 2020.

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

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.

On April 16, 2020, the Company consummated its public offering of securities (the “April Offering”) in which we sold 1,980,000 units, with each unit consisting of one share of the Company’s common stock and two warrants (“Unit A Warrant” and “Unit B Warrant”, and collectively with the common stock the “Units”), each to purchase one share of common stock, at a public offering price of $4.25 per share. In connection with the April Offering, we (i) received proceeds of approximately $7 million, after deducting underwriting discounts and commissions, (ii) converted our convertible debt and accrued interest, (iii) and issued 1,217,241 shares of common stock and 2,434,482 warrants with an exercise price of $4.25 per share in connection with the conversion of our convertible debt. In addition, the underwriters were granted a 45-day option to purchase up to an additional 297,000 shares of Common Stock, and/or 297,000 Unit A Warrants, and/or 297,000 Unit B Warrants, or any combination thereof, to cover over-allotments, if any (the “Over-Allotment Option”). The underwriters exercised Over-Allotment Option” and the Company received net proceeds of $823,759 from the exercise. The Units were offered and sold to the public pursuant to our registration statement on Form S-1, filed by us with the Securities and Exchange Commission on May 2, 2019, as amended, which became effective on April 14, 2020.

Results of Operations

Comparison of the  three months ended December 31, 2020 and 2019

Revenue

Revenue for the three months ended December 31, 2020 totaled $2,362,193, an increase of $2,362,193 over the $0 recorded for the three months ended December 31, 2019. The increase was primarily attributable to the acquisition of LHE Enterprises Limited as we are now a revenue generating company.

Cost of Revenue

Cost of revenue expenses consists primarily of costs associated with online betting platform fees, sports data feed, and revenue share.

Cost of revenue for the three months ended December 31, 2020 totaled $1,333,678, an increase of $1,333,678 over the $0 recorded for the three months ended December 31, 2019. The increase was attributable to the revenue generated for the three months ended December 31, 2020.

Sales and Marketing

Sales and marketing expense for the three months ended December 31, 2020 totaled $1,888,372, an increase of $1,810,060 over the $78,312 recorded for the three months ended December 31, 2019. The increase was primarily attributable to an increase of $1,391,106 related to the acquisition of LHE Enterprises Limited and $418,954 related to our sponsorship agreement.

General and Administrative

General and administrative expenses for the three months ended December 31, 2020 totaled $4,909,431, an increase of $4,318,865 over the $590,566 recorded for the three months ended December 31, 2019. The increase was primarily attributable to increases of $1,561,946 directly related to the LHE Enterprises Limited general and administrative expenses, as well as increases of $642,560 in wages and benefits, $409,302 in consulting and professional, $41,867 in investor relations, $1,308,583 in stock based compensation, $50,233 in insurance, $155,682 in information technology, and $148,692 in other general and administrative costs.

Other Expenses

Other expense for the three months ended December 31, 2020 totaled $1,520,751, a decrease of $879,018 over the $2,399,769 of other expense recorded for the three months ended December 31, 2019. The decrease was primarily attributable to the favorable impact of decreases in interest expense of $1,550,418, net amortization of debt discount and premium on convertible debt of $840,170, the impairment of intangible asset of $67,131 and an increase in other income of $479. Other expenses was negatively impacted during the three months ended December 31, 2020 by changes in the fair value of warrant liability of 1,472,564, change in gain on settlement of debt of $42,896, change in foreign exchange loss of $47,089, and change in fair value of derivative liabilities of $16,631.

Comparison of the six months ended December 31, 2020 and 2019

Revenue

Revenue for the six months ended December 31, 2020 totaled $2,584,585, an increase of $2,584,585 over the $0 recorded for the six months ended December 31, 2019. The increase was primarily attributable to the acquisition of LHE Enterprises Limited as we are now revenue a generating company.

Cost of Revenue

Cost of revenue expenses consists primarily of costs associated with online betting platform fees, sports data feed, and revenue share.

Cost of revenue for the six months ended December 31, 2020 totaled $1,753,753, an increase of $1,753,753 over the $0 recorded for the six months ended December 31, 2019. The increase was attributable to the revenue generated for the six months ended December 31, 2020.

Sales and Marketing

Sales and marketing expense for the six months ended December 31, 2020 totaled $2,492,488, an increase of $2,388,137 over the $104,351 recorded for the six months ended December 31, 2019. The increase was primarily attributable an increase of $1,738,304 related to the acquisition of LHE Enterprises Limited and $649,833 related to our sponsorship agreement.

General and Administrative

General and administrative expenses for the six months ended December 31, 2020 totaled $7,965,239, an increase of $6,707,778 over the $1,257,461 recorded for the six months ended December 31, 2019. The increase was primarily attributable to increases of $2,427,093 directly related to the LHE Enterprises Limited general and administrative expenses, increases of $980,594 in wages and benefits, $531,019 in consulting and professional, $114,419 in investor relations, $2,163,014 in stock based compensation, $100,100 in insurance, $200,240 in information technology, and $191,299 in other general and administrative costs.

Other Income (Expenses)

Other income for the six months ended December 31, 2020 totaled $528,363 compared to total other expense of $4,546,619 for the six months ended December 31, 2019, a change of $5,074,982 when comparing the six months ended December 31, 2020 and 2019. The change was primarily attributable to the favorable impact of decreases of $2,795,582 in the loss on extinguishment of debt, $2,262,312 in interest expense, a decrease of $550,259 from the net amortization of debt discount and premium on convertible debt, a decrease of $67,131 from the loss on impairment of intangible asset, an increase in income of $628,389 from the change in fair value of warrant liability, and an increase in other income of $2,990. This was offset by a decrease of $1,087,347 of income from the change in fair value of derivative liabilities, a decrease of $42,896 of gain on settlement of debt, and an increase in foreign exchange loss of $101,438.

Capital Resources and Liquidity

We had $5,571,431 in available cash as of December 31, 2020. Subsequently on February 11, 2021, the Company announced that it had entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors resulting in the raise of $30,000,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 2,000,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share at a price of $15.00 per Share. The sale of the Shares under the Purchase Agreement closed on February 16, 2021. Subsequent to December 31, 2020, the Company also issued 1,672,159 shares of common stock upon the exercise of warrants at a weighted average exercise price of $6.48 per share. We believe our cash on hand, considered with additional sources of funding are sufficient to meet our current working capital and capital expenditure requirements for a period of at least twelve months from the date of this filing, irrespective of the continuing impact of COVID-19.

The Company’s sources and (uses) of cash for the six months ended December 31, 2020 are shown below:

At December 31, 2020, we had total current assets of $10,600,625 and total current liabilities of $11,151,621. Net cash used in operating activities for the six months ended December 31, 2020 was $6,746,415, which includes a net loss of $9,098,530, offset by non-cash adjustments of $2,487,412 principally related to share based compensation expense of $2,311,591, amortization and depreciation of $717,890, and the amortization of the right of use asset of $86,320, offset by a gain from the change in fair value of warrant liability of $628,389. The change in net working capital items resulted in a use of cash of $135,297 primarily related to the increase in receivables reserved for users of $282,326 and the increase in prepaid expenses and other current assets of $279,452. This was offset by increases in liabilities to customers of $403,250 and other receivables of $169,801.

Net cash used in investing activities for the six months ended December 31, 2020 totaled $2,179,413 principally related to the final payment of $750,000 made in connection with the acquisition of LHE Enterprises Limited (“LHE”), and AHG Entertainment, LLC (“AHG”) whereby upon closing on July 31, 2020 the Company acquired all of the outstanding capital stock of LHE and its subsidiaries, (i) Argyll Entertainment AG, (ii) Nevada Holdings Limited and (iii) Argyll Productions Limited (collectively the “Acquired Companies”), the payment of $100,000 made in connection with the Flip acquisitions, the $1,000,000 payment made in connection with loans receivables, the $337,827 purchase of intangible assets, and $12,660 purchase of property and equipment, offset by $21,074 of cash received upon the acquisition of LHE Enterprises Limited.

Net cash provided by financing activities for the six months ended December 31, 2020 totaled $4,258,042 principally related to the proceeds from the exercise of warrants.

Off Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer performed an evaluation (the “Evaluation”) of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Previously identified material weakness

During fiscal 2020, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures and internal control over financial reporting were not operating effectively at a reasonable assurance level. The material weakness identified during management’s assessment included insufficient segregation of duties within the accounting function, inadequacies in the control environment, and a lack of sufficient internal accounting expertise related to GAAP.

During fiscal 2021, and the three months ended December 31, 2020, we continued to implement remediation initiatives in response to the previously identified material weakness, including, but not limited to, hiring additional experienced accounting and compliance personnel, and engaging with third party experts to strengthen the design and implementation of additional internal controls over financial reporting, including those designed to strengthen our segregation of duties and review processes related to accounting and financial statement presentation and disclosures. While we believe that these efforts have improved and will continue to improve our internal control over financial reporting, remediation of the material weakness will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles.

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

Changes in internal control over financial reporting

Other than the remediation efforts underway, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitation on the effectiveness of internal control

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

PART II - OTHER INFORMATION