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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended June 30, 2023

 

OR

 

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

 

For the Transition Period From                  to

 

Commission File Number: 001-40334

 

EBET, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   85-3201309

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV   89169
(Address of Principal Executive Offices)   (Zip Code)

 

(888) 411-2726

(Registrant's Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock EBET The NASDAQ Stock Market LLC

 

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

 

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

 

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

 

Large Accelerated Filer ☐ Accelerated Filer ☐
Non-Accelerated Filer Smaller Reporting Company
  Emerging Growth Company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The registrant had 300,183,243 shares of common stock outstanding on August 14, 2023.

 

 

   

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

The forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to those described under the “Risk Factors” section and include, among other things:

 

  · our ability to successfully integrate our asset acquisitions;
     
  · our ability to operate under the gaming licenses of third-party entities;
     
  · our ability to satisfy our debt obligations during the period provided to us pursuant to the forbearance agreement under which we are operating, or to obtain additional waivers until we are able to do so;
     
  · compliance with obligations under intellectual property licenses with third parties;
     
  · market acceptance of our new offerings;
     
  · competition from existing online offerings or new offerings that may emerge;
     
  · our ability to establish or maintain collaborations, licensing or other arrangements;
     
  · our ability and third parties’ abilities to protect intellectual property rights;
     
  · our ability to adequately support future growth; and
     
  · our ability to attract and retain key personnel to manage our business effectively.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.

 

We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments we may make or enter into.

 

 

 2 

 

 

EBET, Inc.

 

FORM 10-Q

For the Quarter Ended June 30, 2023

 

INDEX

 

    Page
PART I. FINANCIAL INFORMATION  
       
  Item 1. Unaudited Financial Statements 4
         
    a) Consolidated Balance Sheets as of June 30, 2023 and September 30, 2022 4
    b) Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2023 and 2022 5
    c) Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended June 30, 2023 and 2022 6
    d) Consolidated Statements Cash Flows for the Nine Months Ended June 30, 2023 and 2022 7
    e) Notes to Consolidated Financial Statements 8
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
         
  Item 4. Controls and Procedures 34
         
PART II.  OTHER INFORMATION  
         
  Item 1. Legal Proceedings 35
         
  Item 1A. Risk Factors 35
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
       
  Item 3. Defaults Upon Senior Securities 36
       
  Item 4. Mine Safety Disclosure 36
         
  Item 5. Other Information 36
         
  Item 6. Exhibits 37
         
SIGNATURES 38

 

 

 

 3 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

EBET, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

         
   June 30,   September 30, 
   2023   2022 
         
ASSETS          
Current assets:          
Cash  $1,437,787   $5,486,210 
Accounts receivable, net   994,312    1,647,345 
Prepaid expenses and other current assets   1,464,448    1,772,332 
Derivative asset       1,116,153 
Right of use asset, operating lease, current portion   22,740    129,975 
           
Total current assets   3,919,287    10,152,015 
           
Long term assets:          
Fixed assets, net   347,817    546,408 
Intangible assets, net   10,279,418    27,545,329 
Goodwill   16,805,753    30,657,460 
           
Total assets  $31,352,275   $68,901,212 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $9,073,412   $13,384,906 
Current lease liabilities       129,974 
Borrowings, current portion   39,385,951    21,202,585 
Warrant liabilities   260,238     
Liabilities to users   1,018,626    1,272,308 
Total current liabilities   49,738,227    35,989,773 
           
Long-term liabilities          
Borrowings, net of current portion   546,634    11,145,863 
           
Total liabilities   50,284,861    47,135,636 
           
COMMITMENTS AND CONTINGENCIES        
           
Stockholders' equity (deficit):          
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 32,367 and 37,700 issued and outstanding as of June 30, 2023 and September 30, 2022, respectively   32    38 
Common stock; $0.001 par value, 500,000,000 shares authorized 34,218,213 and 16,654,573 shares issued and outstanding as of June 30, 2023 and September 30, 2022, respectively   34,218    16,654 
Additional paid-in capital   102,785,259    91,941,757 
Accumulated other comprehensive income (loss)   462,306    (7,365,129)
Accumulated deficit   (122,214,401)   (62,827,744)
Total stockholders’ equity (deficit)   (18,932,586)   21,765,576 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)  $31,352,275   $68,901,212 

 

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

 

 

 4 

 

 

EBET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                 
   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
   2023   2022   2023   2022 
                 
Revenue  $7,974,517   $18,168,515   $33,962,971   $44,311,030 
Cost of revenue   (4,203,293)   (10,918,796)   (19,314,114)   (27,537,479)
                     
Gross profit   3,771,224    7,249,719    14,648,857    16,773,551 
                     
Operating expenses:                    
Sales and marketing expenses   1,980,211    9,262,851    8,660,841    22,711,724 
Product and technology expenses   280,201    1,115,165    816,309    3,270,328 
Acquisition costs               2,240,147 
Impairment loss   32,653,626        32,653,626     
General and administrative expenses   3,585,489    3,863,298    10,365,751    12,454,493 
Total operating expenses   38,499,527    14,241,314    52,496,527    40,676,692 
                     
Loss from operations   (34,728,303)   (6,991,595)   (37,847,670)   (23,903,141)
                     
Other expenses:                    
Interest expense   (9,824,363)   (1,790,520)   (15,543,788)   (5,531,757)
Loss on derivative       (130,033)   (142,187)   (203,116)
Change in fair value of warrant liabilities   1,034,400        1,034,400     
Foreign currency gain (loss)   (212,132)   (66,552   (2,800,593)   (62,794)
Total other expense   (9,002,095)   (1,987,105)   (17,452,168))   (5,797,667)
                     
Loss before provision for income taxes   (43,730,398)   (8,978,700)   (55,299,838)   (29,700,808)
Provision for income taxes                
                     
Net loss   (43,730,398)   (8,978,700)   (55,299,838)   (29,700,808)
                     
Preferred stock dividends   (992,274)   (1,416,242)   (4,086,819)   (3,267,319)
Net loss attributable to common shareholders   (44,722,672)   (10,394,942)   (59,386,657)   (32,968,127)
                     
Other comprehensive income (loss):                    
Foreign currency translation income (loss)   142,779    (3,560,908)   7,827,435    (4,530,305)
Total other comprehensive income (loss)   142,779    (3,560,908)   7,827,435    (4,530,305)
                     
Comprehensive loss  $(44,580,393)  $(13,955,850)  $(51,559,222)  $(37,498,432)
                     
Net loss per common share – basic and diluted  $(1.73)  $(0.70)  $(2.71)  $(2.31)
                     
Weighted average common shares outstanding – basic and diluted   25,908,005    14,842,497    21,896,714    14,267,461 

 

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

 

 

 5 

 

 

EBET, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED JUNE 30, 2023 AND 2022

(Unaudited)

 

                                 
   Preferred stock   Common Stock       Accumulated         
   Number of       Number of       Additional paid-in  

Other

Comprehensive

   Accumulated     
   Shares   Amount   Shares   Amount   capital   income (loss)   deficit   Total 
                                 
Balance at September 30, 2021      $    13,315,414   $13,315   $26,834,354   $53,911   $(16,649,550)  $10,252,030 
Shares & warrants issued for cash, net   37,700    38            37,699,962            37,700,000 
Shares issued to Aspire Global plc           186,838    187    13,326,565            13,326,752 
Cashless exercise of warrants           244,346    244    (244)            
Shares issued for conversion of debt           423,141    423    112,077            112,500 
Exercise of stock options for cash           2,000    2    5,998            6,000 
Stock-based compensation           20,000    20    1,435,296            1,435,316 
Preferred share dividends   484                483,817         (483,817)    
Issuance costs                   (2,100,000)           (2,100,000)
Net loss                           (8,881,038)   (8,881,038)
Comprehensive income                       187,428        187,428 
Balance at December 31, 2021   38,184    38    14,191,739    14,191   $77,797,825    241,339    (26,014,405)   52,038,988 
                                         
Cashless exercise of warrants and RSU           225,091    225    (225)            
Stock-based compensation                   1,814,607            1,814,607 
Preferred share dividends   1,367    2            1,367,258        (1,367,260)    
Net loss                           (11,841,071)   (11,841,071)
Comprehensive loss                       (1,156,825)       (1,156,825)
Balance at March 31, 2022   39,551    40    14,416,830    14,416    80,979,465    (915,486)   (39,222,736)   40,855,699 
                                         
Common stock and warrants issued for cash           977,659    978    3,499,022            3,500,000 
Issuance costs                   (2,091,550)           (2,091,550)
Cashless exercise of warrants and RSU           178,465    178    (178)            
Shares issued for conversion of debt           600,000    600    299,400            300,000 
Stock-based compensation                   1,091,167            1,091,167 
Preferred share dividends   1,416    1            1,416,241        (1,416,242)    
Net loss                           (8,978,700)   (8,978,700)
Comprehensive loss                       (3,560,908)       (3,560,908)
Balance at June 30, 2022   40,967   $41    16,172,54   $16,172   $85,193,567   $(4,476,394)  $(49,617,678)  $31,115,708 
                                         
Balance at September 30, 2022   37,700   $38    16,654,573   $16,654   $91,941,757   $(7,365,129)  $(62,827,744)  $21,765,576 
Stock-based compensation           20,750    21    503,084            503,105 
Shares issued for conversion of debt           600,000    600    299,400            300,000 
Preferred share dividends                   1,536,969        (1,536,969)    
Net loss                           (7,557,765)   (7,557,765 
Comprehensive income                       6,356,110        6,356,110 
Balance at December 31, 2022   37,700    38    17,275,323    17,275    94,281,210    (1,009,019)   (71,922,478)   21,367,026 
                                         
Common stock issued for cash           6,372,530    6,373    5,915,609            5,921,982 
Stock-based compensation           31,500    31    377,664            377,695 
Shares issued for conversion of debt           1,465,322    1,465    731,196            732,661 
Preferred share dividends                   1,557,576        (1,557,576)    
Net loss                           (4,011,675)   (4,011,675)
Comprehensive income                       1,329,046        1,329,046 
Balance at March 31, 2023   37,700    38    25,144,675    25,145    102,863,225    320,027    (77,491,729)   25,716,735 
                                         
Common stock issued for conversion of preferred stock   (5,333)   (6)   9,028,538    9,029    (9,023)            
Stock-based compensation           45,000    45    233,391            233,436 
Reclassification of common stock warrants as liabilities                   (1,294,638)           (1,294,638)
Preferred share dividends                   992,274        (992,274)    
Net loss                           (43,730,398)   (43,730,398)
Comprehensive income                       142,779        142,779 
                                         
Balance at June 30, 2023   32,367   $32    34,218,213   $34,218   $102,785,259   $462,306   $(122,214,401)  $(18,932,586)

 

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

 

 

 6 

 

 

EBET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2023 AND 2022

(Unaudited)

 

         
   For the Nine Months Ended
June 30,
 
   2023   2022 
         
Cash flow from operating activities:          
Net loss  $(55,299,838)  $(29,700,808)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount, issuance costs   10,999,866    1,319,608 
Amortization of right of use assets   119,563     
Change in fair value of warrant liabilities   (1,034,400)    
Depreciation and amortization expense   5,290,082    4,770,509 
Stock-based compensation   1,114,236    4,341,090 
Impairment loss   32,653,626     
Derivative loss   142,187    233,397 
Foreign exchange loss   2,806,500    50,377 
Changes in operating assets and liabilities:          
Accounts receivable   822,257    (1,597,324)
Prepaid expenses and other   459,915    (1,566,211)
Accounts payable and accrued liabilities   (5,090,898)   11,853,570 
Current lease liabilities   (141,822)    
Liabilities to users   (396,179)   1,345,100 
Net cash used in operating activities   (7,554,905)   (8,950,692)
           
Cash flow from investing activities:          
Purchase of fixed assets   (11,341)   (1,141,449)
Cash paid for business combinations       (56,229,526)
Net cash used by investing activities   (11,341)   (57,370,975)
           
Cash flow from financing activities:          
Proceeds from settlement of derivative instruments   973,965     
Repayment of senior note   (5,000,000)    
Proceeds from debt issuance, net of issuance costs       27,130,837 
Proceeds from equity issuance, net of issuance costs   5,921,982    37,014,450 
Net cash provided by financing activities   1,895,947    64,145,287 
           
Effect of foreign exchange rates on cash   1,621,876     
           
NET CHANGE IN CASH   (4,048,423)   (2,176,380)
CASH AT BEGINNING OF PERIOD   5,486,210    9,064,859 
CASH AT END OF PERIOD  $1,437,787   $6,888,479 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $3,064,661   $2,493,083 
           
Non-cash transactions          
Preferred share dividends  $4,086,819   $3,267,319 
Stock warrants issued in connection with Senior Notes  $   $7,661,382 
Reclassification of warrants to liabilities  $1,294,638   $ 
Shares issued for conversion of preferred stock  $9,029   $ 
Shares issued for conversion of debt and accrued interest  $1,032,661   $412,500 

 

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

 

 7 

 

 

EBET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION, NATURE OF OPERATIONS AND GOING CONCERN

 

Organization

 

EBET, Inc. (“EBET” or “the Company”) was formed on September 24, 2020 as a Nevada corporation. EBET is a technology company operating platforms focused on i-gaming including casino, sportsbook and esports events. The Company operates under a Curacao gaming sublicense pursuant to a set of agreements with Aspire Global plc (“Aspire”) as a platform provider allowing EBET to provide online betting services to various countries around the world.

 

Acquisition of the B2C business of Aspire Global plc

 

On October 1, 2021, the Company, and Esports Product Technologies Malta Ltd. (“Esports Malta”) entered into a Share Purchase Agreement (the “Acquisition Agreement”) with Aspire and various Aspire group companies to acquire all of the issued and outstanding shares of Karamba Limited. The total acquisition price was €65,000,000 paid as follows: (i) cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms of an unsecured subordinated promissory note (the “Note”); and (iii) shares of Company common stock, which are valued at €5,000,000 (based on the weighted-average per-share price of the ten days prior to the execution date of the Acquisition Agreement (the “Exchange Shares”). See Notes 3, 4 and 5 for additional information.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain equity or debt financings to continue operations. The Company has a history of and expects to continue to report negative cash flows from operations and a net loss. The Company's forecasts for 2023 and beyond indicate that it we will need additional funding in order to have sufficient financial resources to continue to settle its debts as they fall due. The Company has taken significant measures to increase the profitability of its business in the short term. These actions include optimizing the efficiency of marketing campaigns, reducing the total number of employees and contractors, terminating software and other immaterial contracts as well as generally reducing the operating costs of the business. These efforts have also resulted in an increased focus on the Company’s i-gaming business and a significant reduction in the investment of the Company’s esports products and technologies, which resulted in the recognition of an impairment loss on certain intangible assets and fixed assets. As a result of the Company’s actions as referenced above, it does not expect to launch its esports products in the foreseeable future. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. Management cannot be certain that such events or a combination thereof can be achieved.

 

Impact of COVID-19

 

The outbreak of the 2019 novel coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, has severely impacted the U.S. and world economies. Economic recessions, including those brought on by the COVID-19 outbreak may have a negative effect on the demand for the Company’s products and the Company’s operating results. The range of possible impacts on the Company’s business from the coronavirus pandemic could include: (i) changing demand for the Company’s online betting products; and (ii) increasing contraction in the capital markets.

 

 

 8 

 

 

A significant or prolonged decrease in consumer spending on entertainment or leisure activities would also likely have an adverse effect on demand for the Company’s products, reducing cash flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations. In addition, a materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 necessitated a shift away from a traditional office environment for many employees, the Company implemented business continuity programs to ensure that employees were safe and that the business continued to function with minimal disruptions to normal work operations while employees worked remotely. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.

 

Other Events

On April 27, 2023, the Company was notified by its gaming platform operator services provider Aspire that the gaming regulatory authority in Germany had sent a letter received by Aspire on April 25, 2023 stating that Aspire would be required to shut down activity of its gaming operations in Germany effective as of 10 days from receipt of said letter until such time as Aspire was otherwise granted a license to operate in Germany. Aspire informed the Company that although it sought an extension of the requested shutdown deadline, it was not successful in receiving an extension of time and/or any form of other relief from this request. In order to meet the subject German regulator requirement, Aspire shut down its activities in Germany on May 7, 2023 and as a result the gaming websites owned by the Company that operate in Germany were shut down on that date. During the nine months ended June 30, 2023 and 2022 revenue generated in German markets was $9,686,372 and $12,806,072, respectively. During the same periods gross profit contributed from the German markets was $2,775,605 and $2,967,251, respectively.

 

On June 28, 2023, based on the approval of the Strategic Alternatives Committee, that committee’s favorable recommendation to the Board, and the Board’s subsequent approval, the Company hired Houlihan Lokey Capital, Inc. (“Houlihan”) as the Company’s exclusive financial advisor to provide financial advisory and investment banking services in connection with one or more of a sale, recapitalization, restructuring or any other financial transactions involving the Company. The continued engagement of Houlihan is required by the Lender during the term of the Forbearance Agreement described in Note 4 below.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The significant accounting policies followed in the preparation of the consolidated financial statements are as follows:

 

Basis of Presentation

 

The accompanying unaudited financial statements of the Company, include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles accepted in the United States (“U.S. GAAP”) for interim unaudited financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary in order to make the condensed financial statements not misleading. Operating results for the nine months ended June 30, 2023, are not necessarily indicative of the final results that may be expected for the year ended September 30, 2023. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited consolidated financial statements for the year ended September 30, 2022 included in our Form 10-K filed with the SEC. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. All intercompany accounts, transactions and balances have been eliminated in consolidation.

 

Certain reclassifications have been made to prior period amounts to conform to the current year presentation.

 

Accounts Receivable

 

Accounts receivables are recorded at amortized cost, less any allowance for doubtful accounts. Accounts receivable consists primarily of amounts due from our platform provider. The receivable balance as of September 30, 2022 owed to the Company represents the net amount owed to the Company by Aspire related to the strategic agreement for the Company’s i-gaming platform and is stated at historical cost less any allowance for doubtful accounts. The allowance for doubtful accounts was $0 as of June 30, 2023 and September 30, 2022.

 

 

 9 

 

 

Intangible Assets

 

The Company’s intangible assets consist primarily of customer relationships, trademarks and internet domain names. Certain intangible assets have a defined useful life and others are classified as indefinite-lived intangible assets. Other intangible assets with a defined useful life are amortized over their estimated useful economic lives on a straight-line basis. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.

 

Impairment of Long-Lived Assets

 

Long-lived assets consist of software and equipment, finite-lived acquired intangible assets, such as license agreements, and indefinite-lived assets such as internet domain names. Long-lived assets are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. Impairment expense is recognized to the extent an asset’s expected undiscounted future cash flows are less than the asset’s carrying amount. As of June 30, 2023, the Company determined that it’s intangible assets and goodwill were impaired and recognized an impairment loss of $32,653,626.

 

Leases

 

The Company accounts for leases under ASC 842. The Company assesses whether a contract contains a lease on its execution date. If the contract contains a lease, lease classification is assessed upon its commencement date under ASC 842. For leases that are determined to qualify for treatment as operating leases, rent expense is recognized on a straight-line basis over the lease term. Leases that are determined to qualify for treatment as finance leases recognize interest expense as determined using the effective interest method with corresponding amortization of the right-of-use assets. For leases with terms of 12 months and greater, an asset and liability are initially recorded at an amount equal to the present value of the unpaid lease payments over the lease term. In determining the lease term for each lease, the Company includes options to extend the lease when it is reasonably certain that the option will be exercised. The Company uses the interest rate implicit in the lease, when known, or its estimated incremental borrowing rate, which is derived from information available at the lease commencement date including prevailing financial market conditions, in determining the present value of the unpaid lease payments.

 

The Company’s only significant lease is for office space in Malta, which has a two-year lease term beginning August 1, 2021, and is classified as an operating lease. The lease has an option to extend the term for an additional two years with a 10% increase in annual rent. On May 1, 2023, the Company notified the landlord that it will not renew the lease beyond its expiration date of July 31, 2023. The Company paid €176,001 at commencement and owed an additional €160,001 in August 2022. The Company has been making monthly payments of €13,335 on this annual payment. The Company recognized a right of use asset and lease liability of $381,346 at commencement based on the present value of lease payments at commencement and utilizing an estimate incremental borrowing rate of 10%.

 

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at June 30, 2023 and September 30, 2022: 

        
  

June 30,

2023

  

September 30,

2022

 
Operating Leases:          
Operating lease right-of-use assets  $22,740   $129,975 
Right of use liability operating lease current portion       129,974 
Right of use liability operating lease long term        
Total operating lease liabilities  $   $129,974 

 

The Company has no remaining lease payments under its operating lease. Operating lease expense was $43,564 and $42,613 during the nine months ended June 30, 2023 and 2022, respectively. Operating lease expense was $127,174 and $133,231 during the nine months ended June 30, 2023 and 2022, respectively.

 

 

 10 

 

 

Liabilities to Users

 

The Company records liabilities for user account balances at a given reporting period based on deposits made by players either to the Company or the sales affiliate, less any losses on wagers and payout made to players. Liabilities to users amounts are not required to be backed by cash reserves of the Company. The user balances are maintained by the Company’s third-party platform provider, and the Company has an asset of an equivalent amount included within Prepaid expense and other current assets on the Company’s consolidated balance sheets.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers, which requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Revenue is recognized based on the following five step model:

 

· Identification of the contract with a customer
   
· Identification of the performance obligations in the contract
   
· Determination of the transaction price
   
· Allocation of the transaction price to the performance obligations in the contract
   
· Recognition of revenue when, or as, the Company satisfies a performance obligation 

 

No single customer accounted for more than 10% of revenue for the three and nine months ended June 30, 2023 or 2022. In addition, no disaggregation of revenue is required because all current revenue is generated from gaming revenue.

 

i-gaming, or online casino, typically includes digital versions of wagering games available in land-based casinos, such as blackjack, roulette and slot machines. For these offerings, the Company functions similarly to land-based casinos, generating revenue through casino hold, as users play against the house. i-gaming revenue is generated from user wagers net of payouts made on users’ winning wagers and incentives awarded to users.

 

Sportsbook or sports betting involves a user wagering money on an outcome or series of outcomes occurring. When a user’s wager wins, the Company pays the user a pre-determined amount known as fixed odds. Sportsbook revenue is generated by setting odds such that there is a built-in theoretical margin in each sports wagering opportunity offered to users. Sportsbook revenue is generated from users’ wagers net of payouts made on users’ winning wagers and incentives awarded to users.

 

Performance Obligations

 

The Company operates an online betting platform allowing users to place wagers on a variety of live sporting events, i-gaming and esports events. Each wager placed by users create a single performance obligation for the Company to administer each event wagered. The performance obligation is satisfied once the event wagered on has been completed. Gross gaming revenue is the aggregate of gaming wins and losses based on results of each event that customers wager bets on.

 

Transaction Price Considerations

 

Variability in the transaction price arises primarily due to market-based pricing, cash discounts, revenue sharing and usage-based fees. The Company offers loyalty programs, free plays, deposit bonuses, discounts, rebates and other rewards and incentives to its customers. Revenue for Sportsbook and i-gaming is collected prior to the contest or event and is fixed once the outcome is known. Prizes paid and payouts made to users are recognized when awarded to the player.

  

 

 11 

 

 

Cost of Revenue

 

Cost of revenue consists of third-party costs associated with the betting software platform and gaming taxes.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of expenses associated with amounts paid to affiliates, advertising and related software, strategic league and team partnerships and costs related to free to play contests, and the compensation of sales and marketing personnel, including stock-based compensation expenses. Variable commission fees are paid to sales affiliates based on a percentage of revenue generated from the affiliate. The commissions rebated to affiliates are recorded as a component of marketing expense. Advertising costs are expensed as incurred.

 

Product and Technology Expenses

 

Product and technology expenses consist primarily of expenses which are not subject to capitalization or otherwise classified within Cost of Revenue. Product and Technology expenses include software licenses, depreciation of hardware and software and costs related to the compensation of product and technology personnel, including stock-based compensation.

 

General and Administrative Expenses

 

General and administrative expenses include costs related to the compensation of the Company’s administrative functions, insurance costs, professional fees and consulting expense.

 

Fair value of financial instruments

 

The Company discloses fair value measurements for financial and non-financial assets and liabilities measured at fair value. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets but are corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value as of June 30, 2023 and September 30, 2022 based on the three-tier fair value hierarchy:

            
   Fair Value Measurements at June 30, 2023 
   Level 1   Level 2   Level 3 
Assets            
Cash  $1,437,787   $   $ 
Total assets   1,437,787         
                
Liabilities               
Senior Notes, net of discount       26,086,927     
Note due to Aspire       12,617,111     
Convertible notes payable, net of discount       681,891     
Other notes payable, net of discount       546,634     
Warrant liabilities           260,238 
Total liabilities  $   $39,932,563   $260,238 

 

 

 12 

 

 

             
   Fair Value Measurements at September 30, 2022 
   Level 1   Level 2   Level 3 
Assets            
Cash  $5,486,210   $   $ 
Derivative asset       1,116,153     
Total assets   5,486,210    1,116,153     
                
Liabilities               
Senior Notes, net of discount       19,595,694     
Note due to Aspire       10,636,343     
Convertible notes payable, net of discount       1,606,891     
Other notes payable, net of discount       509,520     
Total liabilities  $   $32,348,448   $ 

 

Derivative Instruments

 

The Company accounts for its derivative financial instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”) and ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (loss) (a component of Total shareholders' equity), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items.

 

The Company's derivative instruments do not subject its earnings or cash flows to material risk, as gains and losses on these derivatives are intended to offset losses and gains on the item being hedged. The Company does not enter into derivative transactions for speculative purposes and it does not have any non-derivative instruments that are designated as hedging instruments pursuant to ASC 815. The Company manages the credit risk of its counterparties by dealing only with institutions that it considers financially sound and considers the risk of non-performance to be remote.

 

The Company entered into foreign exchange forward contracts to mitigate the change in fair value of specific liabilities and cash flows on the Consolidated Balance Sheets that were denominated in Euros related to the acquisition of the Aspire B2C business in November 2021. These undesignated hedging instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other income (expense), net. The cash flows related to the gains and losses are classified in the consolidated statements of cash flows as part of cash flows from operating activities. The total notional amount of outstanding undesignated derivative instruments was $16,050,000 as of September 30, 2022. During the nine months ended June 30, 2023, the Company settled all of its foreign exchange forward contracts, receiving cash proceeds of $973,965 and recognized a loss of $142,187. The Company recognized a loss on derivative instruments of $203,116 during the nine months ended June 30, 2022.

 

Foreign Currency

 

The Company’s reporting currency is the U.S. Dollar. Certain subsidiaries of the Company have a functional currency other than the U.S. Dollar and are translated to the Company’s reporting currency at each reporting date. Non-monetary items are translated at historical rates. Monetary assets and liabilities are translated from British pounds and Euro into U.S. Dollars, at the period-end exchange rate, while foreign currency expenses are translated at the exchange rate in effect on the date of the transaction. The net effect of translation is reflected as other comprehensive income. The gains or losses on transactions denominated in currencies other than an entity’s functional currency are included in the consolidated statement of operations.

 

 

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Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. When assessing goodwill for impairment, the Company uses qualitative and if necessary, quantitative methods in accordance with FASB ASC Topic 350, Goodwill. The Company also considers its enterprise value and if necessary, discounted cash flow model, which involves assumptions and estimates, including the Company’s future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws.

 

Circumstances that could indicate impairment and require the Company to perform a quantitative impairment test include a significant decline in the Company’s financial results, a significant decline in the Company’s enterprise value relative to its book value, an unanticipated change in competition of the Company’s market share and a significant change in the Company’s strategic plans.

 

Recently Issued Accounting Pronouncements

 

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The Company will adopt this guidance on October 1, 2023, and is currently evaluating the potential impact to its consolidated financial statements.

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“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 COMBINATIONS

 

Acquisition of the B2C business of Aspire Global plc

 

On October 1, 2021, in order to accelerate the growth and expand market access for our product offerings, the Company and Esports Malta entered into the “Acquisition Agreement” with Aspire, Aspire Global International Limited, AG Communications Limited, Aspire Global 7 Limited (collectively the “Aspire Related Companies”), and Karamba Limited (“Karamba”) whereby Esports Malta acquired all of the issued and outstanding shares of Karamba. The total acquisition price, paid at the closing of the acquisition of the Karamba shares, was €65,000,000 paid as follows: (i) a cash amount of €50,000,000; (ii) €10,000,000, paid in accordance with the terms of an unsecured subordinated promissory note (the “Note”); and (iii) shares of Company common stock, which were valued at €5,000,000 (based on the weighted-average per-share price of the ten days prior to the execution date of the Acquisition Agreement). The transaction closed on November 29, 2021.

 

Unaudited Proforma Information

 

The following schedule contains pro-forma consolidated results of operations for the three months and nine months ended June 30, 2023 and 2022 as if the Aspire B2C acquisition occurred on October 1, 2021. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on October 1, 2021, or of results that may occur in the future.

                
   Three Months Ended   Nine Months Ended 
   June 30, 2023   June 30, 2022   June 30, 2023   June 30, 2022 
Revenue  $7,974,517   $18,168,515   $33,962,971   $54,342,568 
Operating loss   (34,728,303)   (6,991,597)   (37,847,670)   (23,747,079)
Net loss   (43,730,398)   (8,978,699)   (55,299,838)   (30,971,308)
Net loss attributable to common shareholders   (44,722,672)   (10,402,922)   (59,386,657)   (35,172,147)
Loss per common share - basic and diluted  $(1.73)   (0.73)  $(2.71)   (2.47)

 

 

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The most significant proforma adjustments relate to annual interest on the Senior Notes and Note to Aspire issued in connection with the acquisition, amortization expense of the estimated intangible assets recognized as part of the purchase price allocation, and the preferred dividends incurred in connection with the financing of the acquisition.

 

NOTE 4 – BORROWINGS

 

The following is a summary of borrowings outstanding as at June 30, 2023 and September 30, 2022:

                                
          June 30, 2023 
   Contractual Interest      Principal outstanding balance   Principal outstanding balance   Unamortized
debt
discount
   Accrued Interest   Issuance costs   Carrying amount 
   rate   Cur  Local   USD   USD   USD   USD   USD 
Senior notes   15%   USD   26,086,927    26,086,927                26,086,927 
Note due to Aspire   10%   EUR   10,000,000    10,866,000        1,751,133        12,617,133 
Convertible notes   10%   USD   681,891    681,891                681,891 
Other   0%   USD   675,000    675,000    (128,366)           546,634 
Total borrowings                38,309,818    (128,366)   1,751,133        39,932,585 
                                       
Current                                    39,385,951 
Long-term                                    546,634 
Total borrowings                                    39,932,585 

 

            
          September 30, 2022 
   Contractual Interest      Principal outstanding balance   Principal outstanding balance   Unamortized debt discount   Accrued Interest   Issuance costs   Carrying amount 
   rate   Cur  Local   USD   USD   USD   USD   USD 
Senior notes   15%   USD   30,558,446    30,558,446    (8,526,776)       (2,435,976)   19,595,694 
Note due to Aspire   10%   EUR   10,000,000    9,748,000        888,343        10,636,343 
Convertible notes   10%   USD   1,606,891    1,606,891                1,606,891 
Other   0%   USD   675,000    675,000    (165,480)           509,520 
Total borrowings                42,588,337    (8,692,256)   888,343    (2,435,976)   32,348,448 
                                       
Current                                    21,202,585 
Long-term                                    11,145,863 
Total borrowings                                    32,348,448 

 

Senior Notes

 

On November 29, 2021, the Company entered into a credit agreement (the “Credit Agreement”) with CP BF Lending, LLC (“Lender”), pursuant to which the Lender agreed to make a single loan to the Company of $30,000,000 (the “Loan”). The Loan bears interest on the unpaid principal amount at a rate per annum equal to 15.0% as follows: (1) cash interest on the unpaid principal amount of the Loan at a rate equal to 14.0% per annum, plus (2) payable-in-kind interest (“PIK Interest”) on the unpaid principal amount of the Loan at a rate equal to 1.0% per annum. The Company paid to Lender on the closing date a non-refundable origination fee in an amount equal to $750,000.

 

 

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The Senior Note matures in 36 months, provided that the Company may receive two 12-month extensions of the maturity date by paying to the Lender (1) an extension fee equal to 1.0% of the unpaid principal balance of the Loan as of the date of such extension, and (2) all reasonable and documented out-of-pocket fees and expenses paid or incurred by Lender, in each case in connection with the extension request, including but not limited to fees and expenses for appraisals, collateral exams and audits, and legal counsel. The foregoing extension right is subject to, among other items, (i) the Loan not being in default, (ii) the representations and warranties contained in Credit Agreement being true and correct; and (iii) the Lender granting its written approval thereof in its sole discretion. 

 

The Senior Note may be prepaid by the Company at any time. In addition, the Credit Agreement provides that in the event there shall be excess cash flow from the Aspire Business (as such concept is defined in the Credit Agreement) for any calendar month, commencing with the month ended December 31, 2022, the Company shall apply a portion of such excess cash flow amount to prepay the outstanding principal balance of the Loan; provided that no such prepayment shall be required once the unpaid principal balance of the Loan has been reduced to $15,000,000.

 

The Credit Agreement requires the Company to meet certain financial covenants. The Loan is secured by all of the assets of the Company and its subsidiaries. The Loan may be accelerated by the Lender upon an event of default, which in addition to customary events of default include: (i) if (1) any of the Company or its subsidiaries shall fail to maintain in full force and effect any gaming approval (as defined in the Credit Agreement) required for the operation of its business or (2) any gaming regulator shall impose any condition or limitation on any of the foregoing entities that could be reasonably expected to have a material adverse effect; or (ii) the suspension from trading or failure of the Company’s common stock to be trading or listed on the Nasdaq exchange for a period of three consecutive trading days.

 

As of March 31, 2022, the Company had not maintained compliance with the covenants of the Senior Notes and obtained a waiver from its lender which waiver was contingent on the completion of an equity raise of $3.5 million, which was completed in June 2022. In consideration for obtaining a waiver from the compliance with certain covenants, the Company agreed to amend the Senior Notes such that $5 million of principal loan balance becomes convertible at $3.58 per share commencing after the Company raises the $5,000,000 of common equity (including the foregoing $3.5 million). On February 2, 2023, the conversion option became exercisable upon closing of the offering that generated $6,500,000 of gross proceeds.

 

In connection with the Loan, the Company issued the Lender a warrant (the “Lender Warrant”) to purchase 1,567,840 shares of Company common stock at an initial exercise price of $25.00 per share expiring on the earlier to occur of (i) five years following the issue date or (ii) the second anniversary of the satisfaction of all obligations of the Company under the Credit Agreement. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. In addition, the exercise price of the Lender Warrant is subject to “weighted-average” anti-dilution protection for issuances by the Company below the exercise price (other than certain defined exempt issuances), and, upon shareholder approval, which was received on February 9, 2022, the number of shares underlying the Lender Warrant shall also be adjusted for issuances to which the “weighted-average” anti-dilution protection applies. Pursuant to the foregoing anti-dilution provision, in connection with the $3.5 million offering completed in June 2022, the number of shares underlying the warrant increased to 1,654,538 and the exercise price was reduced to $23.69. Pursuant to the foregoing anti-dilution provision, in connection with the $6.5 million offering completed in February 2023, the number of shares underlying the warrant increased to 2,312,449 and the exercise price was reduced to $16.95. The Lender will not have the right to exercise any portion of the Lender Warrant if the Lender (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Company common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Lender Warrant, which beneficial ownership amount, at the election of the Lender may be increased to any other percentage not in excess of 19.99% as specified by the Lender. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for the Company, and will assume all of the Company’s obligations under the Lender Warrant with the same effect as if such successor entity had been named in the Lender Warrant itself.

 

On September 2, 2022, the Lender provided the Company with a limited waiver of the Senior Note covenants until September 30, 2022 in exchange for a one-time payment of $151,158 to be added to the principal amount of the Senior Note. In addition, the Senior Note required the Company to maintain a minimum balance of $4.0 million in the account utilized to collect the revenues from the Company’s i-gaming business. On September 30, 2022, the Lender provided the Company with a limited waiver of these covenants until October 31, 2022 in exchange for a one-time payment of $152,032 to be added to the principal amount of the Senior Note. In addition, the Senior Note required the Company to maintain a minimum balance of $5.0 million in the account utilized to collect the revenues from the Company’s i-gaming business.

 

 

 

 16 

 

 

On October 6, 2022, the Lender provided the Company with an additional limited waiver allowing the foregoing minimum balance to be reduced to $4.0 million until October 31, 2022, in exchange for a one-time payment of $76,409 to be added to the principal amount of the Senior Note. On October 31, 2022, the Lender provided the Company with a limited waiver of these covenants until November 30, 2022 in exchange for a one-time payment of $229,959 to be added to the principal amount of the Senior Note. On November 30, 2022, the Lender provided the Company with a limited waiver of these covenants until December 16, 2022. On December 16, 2022, the Lender provided the Company with a limited waiver of these covenants until January 9, 2023.

  

On January 9, 2023, the Lender provided the Company with a limited waiver of these covenants until January 31, 2023 and required a principal payment of $3,000,000 which was made on January 10, 2023. This waiver and principal payment reduced the minimum balance in the account to $2,000,000. On January 31, 2023, the Lender provided the Company with a limited waiver of these covenants until February 17, 2023. On February 1, 2023, the Lender provided the Company with a further limited waiver of these covenants until April 28, 2023. On April 28, 2023, the Lender provided the Company with a further limited waiver of these covenants until May 12, 2023. On May 12, 2023, the Lender provided the Company with a further limited waiver of these covenants until May 26, 2023. On May 26, 2023, the Lender provided the Company with a limited waiver of these covenants until June 9, 2023. On June 9, 2023, the Lender provided the Company with a limited waiver of these covenants until June 20, 2023. On June 20, 2023, the Lender provided the Company with a limited waiver of these covenants until June 30, 2023.

 

On June 30, 2023, the Company, the subsidiaries of the Company and the Lender entered into a forbearance agreement (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, the Company acknowledged, among other items, that, as June 30, 2023, it was in default under the Credit Agreement, the Lender had the right to accelerate the Loan, and the Lender had the right to impose the default rate of interest under the Credit Agreement. Pursuant to the Forbearance Agreement, the Lender agreed to forbear from exercising its rights and remedies against the Company and the Guarantors under the Credit Documents until the earlier of September 15, 2023, which may be extended by the Lender, or until a termination event occurs pursuant to the Forbearance Agreement. A termination event under the Forbearance Agreement consists of the filing of a bankruptcy proceeding by the Company or any Guarantor, the occurrence of a new event of default under the Credit Agreement, or the failure by the Company or any Guarantor to perform any material requirement, covenant, or obligation under the Forbearance Agreement. During the forbearance period, the Lender agreed, among other items, not to accelerate the Loan, initiate any bankruptcy filings, or apply any default rates of interest. As partial consideration for the Lender agreeing to enter into the Forbearance Agreement, the Company paid a forbearance fee equal to 50 basis points of the outstanding principal amount of the Loan (or $130,425), which amount was added to the principal balance of the loan. In addition, on June 30, 2023, the Company made a prepayment of the Loan in the amount of $2.0 million, which in turn reduced the minimum cash balance requirement under the Credit Agreement to $0.

 

In connection with the Forbearance Agreement, the Lender agreed to provide the Company with a revolving line of credit in the amount of $2.0 million (the “Revolving Note”), with any advances under the Revolving Note to be made in the sole discretion of the Lender. The Revolving Note will have a maturity date of November 29, 2024 and carry an interest rate of 15.0% per annum, provided that upon an occurrence of default the interest rate will increase to the default rate under the Loan. The Revolving Note shall be an Obligation as defined in the Credit Agreement and as such shall be secured by the collateral in which the Company and the Guarantors have granted liens and security interests to the Lender in connection with the Loan. All discretionary advances shall terminate automatically and all outstanding principal together with accrued but unpaid interest and fees shall become immediately due and payable, without notice to or action by any party, on the earlier of the termination date of the Forbearance Agreement, or the maturity date of the Revolving Note, unless otherwise extended by the Lender. As of June 30, 2023, there was no outstanding balance on the Revolving Note.

 

As a result of the event of default on the Senior Note, the Company amortized all remaining debt discount and debt issuance costs associated with the Senior Note. During the three months ended June 30, 2023 and 2022, the Company recognized interest expense of $8,432,886 and $1,596,244, respectively, from the amortization debt discount and debt issuance costs related to the Senior Note. During the nine months ended June 30, 2023 and 2022, the Company recognized interest expense of $10,962,752 and $2,942,169, respectively, from the amortization debt discount and debt issuance costs related to the Senior Note. There was no unamortized debt discount and debt issuance costs as of June 30, 2023.

 

 

 

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Note due to Aspire

 

The Note provides for an interest rate of 10% per annum. The maturity date of the Note will be the earlier of that date which is four years from the issuance date or a liquidity event. The Note will require repayment of the principal amount plus any accrued interest in three equal installments, payable annually starting on the second anniversary after issuance. No interest payment shall be due until that date which is the last day of the end of the second-year anniversary of issuance should the Note remain unpaid at such time. Should the Note remain unpaid at the second-year anniversary, the total accrued interest due at that time shall be paid at the second-year anniversary for accrued interest for the period from the issuance date through the second-year anniversary date. Thereafter, and on each annual anniversary date thereafter, the interest due for the prior annual period shall be paid. Notwithstanding the foregoing, if the Company owes greater than $15,000,000 under the Credit Agreement, then the parties agree that the Company shall repay any principal amount plus any accrued interest due through the issuance of Company common stock in lieu of any cash payment and the amount of said common stock shares to be issued by the Company shall be determined by using the Conversion Price as defined below. Should an event of default occur on the Note, then at the election of Aspire, either (i) the Operator Services Agreement will be amended such that the fees payable shall increase by 5% during the continuation of the event of default, or (ii) Aspire may elect to convert the entire outstanding principal amount plus any accrued interest into shares of common stock of the Company at a price per share based on the weighted-average per-share price for the ten trading days prior to the date of the occurrence of the event of default (“Conversion Price”). In no event shall the Conversion Price be lower than $18.00 per share (as adjusted for stock splits, stock dividends, or similar events occurring after the date hereof) and the total maximum number of shares of common stock that may be issued to Aspire upon any such conversion in the aggregate shall be 650,000 shares (as adjusted for stock splits, stock dividends, or similar events occurring after the date hereof). As a result of the default on the Senior Note and the Forbearance Agreement described above, a potential event of default exists pursuant to the terms of the Note, and as such as classified all principal and interest as a current liability.

 

Convertible Notes and other

 

On September 1, 2020, ESEG entered into three promissory notes, with a combined principal amount of $2,100,000. The notes bore interest at the rate of 10% per annum and matured on March 1, 2022 and are now convertible at the noteholder’s option. The Company also agreed to pay two of the lenders a total of $675,000 on September 1, 2025, bearing no interest. The Company issued each of the lenders a conversion option at a fixed price of $0.50 per share and issued 2,015,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.30 per share, each with a term of five years. The convertible notes bear interest at 10% per annum and matured on March 1, 2022. The holder may convert the note into shares of common stock at any time throughout the maturity date, to the extent and provided that no holder of the notes was or will be permitted to convert such notes so long as it or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion.

 

The Company evaluated the conversion option and concluded a beneficial conversion feature was present at issuance. The Company recognized the beneficial conversion feature and relative fair value of the warrants as a debt discount and additional paid in capital. The fair value of the warrants at the grant date was estimated using a Black-Scholes model and the following assumptions: 1) volatility of approximately 85% based on a peer group of companies; 2) dividend yield of 0%; 3) risk-free rate of 0.26%; and 4) an expected term of five years. The $2,100,000 debt discount will be amortized through the maturity date of the convertible notes payable. During the twelve months ended September 30, 2021, a total of $187,500 of principal was converted into 375,000 shares of common stock. During the year ended September 30, 2022, a total of $305,609 of principal and $106,891 of accrued interest was converted into 825,000 shares of common stock. During the nine months ended June 30, 2023, a total of $925,000 of principal and $107,661 of accrued interest was converted into 1,465,322 shares of common stock. As of June 30, 2023, the outstanding principal and accrued interest balance of the convertible notes was $681,891 and $93,286, respectively.

 

During the three months ended June 30, 2023 and 2022, the Company recorded a charge of $12,663 and $11,430, respectively, in the accompanying consolidated statement of operations from the amortization of its debt discount related to the convertible notes payable and other liabilities described above. During the nine months ended June 30, 2023 and 2022, the Company recorded a charge of $37,114 and $33,793, respectively, in the accompanying consolidated statement of operations from the amortization of its debt discount related to the convertible notes payable and other liabilities described above.

 

 

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NOTE 5 – STOCKHOLDERS’ EQUITY

 

The Company is currently authorized to issue up to 500,000,000 shares of common stock with a par value of $0.001. In addition, the Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001. The specific rights of the preferred stock, when so designated, shall be determined by the board of directors.

 

Shares issued in the current year

 

On February 2, 2023 the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with several institutional and accredited investors to issue, in an offering (the “February Offering”): (i) 6,372,530 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and (ii) warrants to purchase up to an aggregate of 6,372,530 shares of Common Stock (the “Warrants”). The combined purchase price of one share of Common Stock and accompanying Warrant was $1.02.

 

Subject to certain ownership limitations, the Warrants are exercisable commencing six months after issuance. Each Warrant is exercisable into one share of Common Stock at a price per share of $1.02 (as adjusted from time to time in accordance with the terms thereof) and will expire five and one-half years from the issuance date. The closing of the sales of these securities under the Purchase Agreements was on February 6, 2023.

 

On February 2, 2023, the Company entered into a Placement Agent Agreement (the “Placement Agent Agreement”) with WestPark Capital, Inc. (the “WestPark”), pursuant to which the Company has agreed to pay WestPark an aggregate fee equal to 7.0% of the gross proceeds received by the Company from the sale of the securities in the transaction. In addition, the Company agreed to pay to WestPark on the Closing Date a cash fee equal to 1.0% of gross proceeds received by the Company from the sale of the securities in the transaction for non-accountable expenses. The Company also agreed to pay WestPark up to $50,000 of fees and other expenses.

 

The Company received gross proceeds of $6,500,000 and paid fees and expenses of $577,018.

 

In connection with the offering described above, the exercise price of a total of 2,019,672 warrants issued in connection with the Company’s Series A Convertible Preferred Stock were adjusted to $1.02 per share. No adjustments will be made to the number of shares underlying the Warrants. Additionally, the exercise price of the Lender Warrant issued in connection with the Senior notes was reset to $16.95 and the number of shares underlying the Lender Warrant became 2,312,449, and $5,000,000 of the principal balance of the Senior Note became convertible at $3.58 per share.

 

During the nine months ended June 30, 2023, the Company issued 2,065,322 shares pursuant to a conversion of principal of $925,000 and accrued interest of $107,661 on its convertible notes.

 

During the nine months ended June 30, 2023, the Company issued 9,028,538 shares pursuant to the conversion of 5,333 shares of Preferred Stock

 

During the nine months ended June 30, 2023, the Company issued 97,250 shares related to vesting of restricted stock units by employees.

 

Acquisition of the B2C segment of Aspire Global plc

 

On October 1, 2021, in connection with the Acquisition, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “Investors”). Pursuant to the Subscription Agreements, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to such Investors, simultaneous with the closing of the Acquisition Agreement, an aggregate of 37,700 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) for a purchase price of $1,000.00 per share, for aggregate gross proceeds of $37,700,000 (the “Private Placement”). For each share of Preferred Stock issued, the Company issued the Investor a warrant to purchase 150% of the shares of Company common stock underlying the Preferred Stock (the “Warrants”).

 

 

 

 19 

 

 

Pursuant to the Subscription Agreement, the Company has obtained shareholder approval of the conversion of the Preferred Stock and Warrants into Company common stock in compliance with the rules and regulations of the Nasdaq Stock Market (“Shareholder Approval”). The Preferred Stockholders are entitled to receive dividends, at a rate of 14.0% per annum, which shall be payable quarterly in arrears on January 1, April 1, July 1 and October 1, beginning on the first such date after the issuance date. With limited exceptions, the Preferred Stockholders will have no voting rights. The dividends can be paid in either cash or in the issuance of additional preferred shares. Upon any liquidation, dissolution or winding-up of the Company, the holders of the Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company available to shareholders, an amount equal to the greater of: (i) the purchase price for each share of Preferred Stock then held, or (ii) the amount the holders would have received had the holders fully converted the Preferred Stock to Company common stock, in each case, before any distribution or payment shall be made to the holders of the Company’s common stock. The Preferred Stock was convertible into Company common stock at an initial conversion price of $28.00 per share (“Conversion Price”); provided that the Conversion Price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the Conversion Price then in effect. Pursuant to the terms of the Preferred Stock, on April 28, 2023, the conversion price of the Preferred Stock was reduced from $28.00 per share to $0.71 per share. During the six months ended June 30, 2023, the Company has received conversion notices with respect to 5,333 shares of Preferred Stock, resulting in the issuance of 9,028,538 shares of common stock. As of June 30, 2023, there were 32,367 shares of Preferred Stock outstanding.

 

In addition, on July 31, 2023, and October 31, 2023 (each an “Adjustment Date”), the Conversion Price was to be adjusted to the lesser of: (i) the Conversion Price in effect on the Adjustment Date, or (ii) 85% of the average closing price of the Company’s common stock for the fifteen trading days prior to the Adjustment Date. Pursuant to the terms of the Preferred Stock, on July 31, 2023, the conversion price of the Preferred Stock was reduced to $0.086 per share.

 

The Warrants are exercisable and expire on the fifth anniversary thereafter. The Warrants were initially to be exercisable at an exercise price of $30.00 per share, provided that the exercise price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the exercise price then in effect. Notwithstanding the foregoing anti-dilution provision, in connection with the $3.5 million offering completed in June 2022, the exercise price was reduced to $5.00. In February 2023, the warrants exercise price was reset to $1.02 in connection with the February 2023 equity financing. The Warrants can be exercised on a cashless basis if there is no effective registration statement registering, or no current prospectus available for, the resale of the ordinary shares underlying the Warrants.

 

The holders of the Preferred Stock and Warrants will not have the right to convert or exercise any portion of the Preferred Stock and Warrants to the extent that, after giving effect to such conversion, such holder (together with certain related parties) would beneficially own in excess of 4.99% of the Company’s common stock outstanding immediately after giving effect to such conversion or exercise.

 

Warrants

 

As discussed above, the Company has issued common stock warrants in connection with its fundraising activities to preference shareholders, its lender and convertible notes issued during the nine months ended June 30, 2023. The following table summarizes warrant activity during the nine months ended June 30, 2023:

 

             
   Common Stock Warrants 
   Shares   Weighted
Average
Exercise
Price
   Weighted
average
Remaining
Life in years
 
Outstanding at September 30, 2022   6,033,365   $9.14    4.01 
Granted   7,030,441    2.51    5.33 
Cancelled            
Expired            
Exercised            
Outstanding at June 30, 2023   13,063,806   $4.07    4.17 
Exercisable at June 30, 2023   13,063,806   $4.07    4.17 

 

At June 30, 2023, the outstanding and exercisable common stock warrants had no intrinsic value.

 

 

 20 

 

 

As a result of the reset of the conversion price of the Company’s preferred stock to $0.71 on April 28, 2023 as disclosed above, as of June 30, 2023 the Company had insufficient shares to settle its equity-linked instruments until it increased its authorized shares of Company common stock in July 2023. The Company applied a sequencing approach to determine which instruments may not be settled in shares based on the Company’s current authorized shares of common stock and should be accounted for as derivatives under ASC 815. The Company ordered its equity-linked instruments in order of issuance date, excluding employee awards that are not within the scope of ASC 815. Based on this analysis, the Company determined the 6,372,530 common stock warrants issued in connection with the sale of common stock on February 6, 2023 should be accounted for as liabilities at fair value. The Company estimated the fair value at April 28, 2023 using a Black Scholes option pricing model and the following inputs: 1) exercise price of $1.02; 2) volatility based on a peer group of companies of 89%; 3) risk-free rate of 3.51%; 4) dividend yield of 0% and 5) expected term of 5.3 years. The Company reclassified $1,294,638 from additional paid in capital to the warrant liability. The Company estimated the fair value as of June 30, 2023 to be $260,238 using the following assumptions: 1) exercise price of $1.02; 2) volatility based on a peer group of companies of 89%; 3) risk-free rate of 4.13%; 4) dividend yield of 0% and 5) expected term of 5.1 years.

 

2020 Stock Plan

 

In December 2020, the Company adopted the 2020 Stock Plan, or the 2020 Plan. The 2020 Plan is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, stock unit awards and stock appreciation rights to key employees, non-employee directors and consultants.

 

Under the 2020 Plan, the aggregate value of all compensation granted or paid to any individual for service as a non-employee director with respect to any calendar year, including awards granted under the 2020 Plan and cash fees paid to such non-employee director, will not exceed $300,000 in total value. For purposes of this limitation, the value of awards is calculated based on the grant date fair value of such awards for financial reporting purposes.

 

The number of shares of the common stock that may be issued under the 2020 Plan is 5,000,000. As of June 30, 2023, the Company had awarded a total of 2,060,144 share awards under the 2020 Plan, with 2,939,856 remaining under the 2020 Plan. On July 26, 2023, the Company amended the 2020 Plan to increase the number of shares of common stock that may be issued under the 2020 Plan to 7,500,000.

 

Common Stock Awards

 

The Company has historically awarded restricted units that convert into common stock to various employees, consultants and officers under the 2020 Plan that will vest annually over a period of one to four years from the date of issuance. At June 30, 2023, the Company had 298,750 restricted stock units outstanding. During the nine months ended June 30, 2023, 97,250 restricted stock units were converted into shares of common stock.

 

During the nine months ended June 30, 2023 and 2022, the Company recognized a total of $827,694 and $3,125,498 of stock-based compensation expense, respectively, related to common stock awards and expects to recognize additional compensation cost of $1,910,443 upon vesting of all awards.

 

Options

 

The following table summarizes option activity during the nine months ended June 30, 2023:

             
   Common Stock Options 
   Shares   Weighted
Average
Exercise
Price
   Weighted
average
Remaining
Life in years
 
Outstanding at September 30, 2022   1,977,000   $2.25    7.33 
Granted            
Cancelled   (781,250)   1.78    7.06 
Expired            
Exercised            
Outstanding at June 30, 2023   1,195,750   $2.55    6.44 
Exercisable at June 30, 2023   842,500   $1.71    5.36 

 

 

 21 

 

 

During the nine months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $284,183 and $1,215,592, respectively, related to common stock options awarded. The exercisable common stock options had no intrinsic value as of June 30, 2023. The Company expects to recognize an additional $535,155 of compensation cost related to stock options expected to vest.

 

NOTE 6 – LONG-LIVED ASSETS

 

Fixed Assets

 

The Company’s fixed assets consisted of the following as of June 30, 2023 and September 30, 2022:

        
  

June 30,

2023

  

September 30,

2022

 
Software  $328,902   $391,851 
Furniture and fixtures   524,890    368,432 
Total fixed assets   853,792    760,283 
Accumulated depreciation   (505,975)   (213,875)
Fixed assets, net  $347,817   $546,408 

 

Depreciation expense was $271,347 and $68,987 for the nine months ended June 30, 2023 and 2022, respectively.

 

Intangible Assets – Aspire b2C Acquisition

 

As disclosed in Note 3, the Company acquired intangible assets as part of the Aspire B2C Business acquisition. The acquired intangibles consisted of the following as of June 30, 2023 and September 30, 2022:

        
  

June 30,

2023

  

September 30,

2022

 
Trademarks and tradenames, indefinite lives  $3,230,000   $14,232,080 
Trademarks and tradenames, three year lives   5,826,014    4,562,064 
Customer relationships   12,113,607    13,910,396 
Other   15,224    10,493 
Total acquired intangibles   21,184,845    32,715,033 
Accumulated amortization   (10,905,427)   (5,169,704)
Acquired intangible assets, net  $10,279,418   $27,545,329 

 

The Karamba trademarks and tradenames represent approximately 75% of the total of the acquired intangibles and have an indefinite useful life. As of June 30, 2023, the Company determined that its intangible assets and goodwill were impaired as a result of the loss of the gaming websites owned by the Company that operate in Germany after being shut down in May 2023. The Company recognized a total impairment loss of $32,653,626, consisting of $17,367,817 related to goodwill and $15,285,809 related to intangible assets, primarily indefinite lived assets and customer relationships. The remaining trademarks and tradenames and customer relationships are amortized over an estimated useful life of three years. Amortization expense on the Aspire intangible assets was $5,018,736 and $4,701,522, respectively, for the nine months ended June 30, 2023 and 2022. Amortization for the year ended September 30, 2023, 2024 and 2025 is expected to be approximately $6,114,685, $4,383,796 and $7630,633, respectively.

  

 

 

 22 

 

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

Financial Advisor’s Claims

 

The Company’s previous financial advisor, Boustead Securities LLC (“Advisor”) has alleged a breach by the Company over the termination of their engagement and the timing of the payment and amount of the fees owed to the Advisor (collectively the “Claims”). The fees the Company expects to pay are accrued in the accompanying balance sheet. On June 2, 2022, the Advisor named EBET in an arbitration proceeding with Financial Industry Regulatory Authority (“FINRA”) in connection with the Claims. The Statement of Claim alleged damages of $5.7 million and sought a declaration that the Company be required to utilize the Advisor for a certain follow-on offering pursuant to an alleged right of first refusal between the parties. On August 4, 2022, EBET, Inc. counterclaimed against Boustead Securities, LLC for tortious interference with prospective economic advantage and demanded damages and attorneys’ fees in an amount to be determined. Boustead Securities, LLC’s current Second Amended Statement of Claim, filed on May 24, 2023, alleges $12 million in damages and no longer seeks declaratory relief. In response to Boustead Securities, LLC’s Second Amended Statement of Claim, Company maintains its counterclaim and all affirmative defenses previously asserted. The case is ongoing, with a hearing before a 3-arbitrator panel initially scheduled for July 19, 2023, but now continued to November 6, 2023. Arbitration is inherently unpredictable. However, the Company believes that it has meritorious defenses to a portion of the alleged fee claim asserted and to the claim that the Company has any obligations pursuant to a right of first refusal between the parties. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of this matter.

 

Other Commitments

 

During June 2023, the Compensation Committee of the Company’s Board of Directors, the recently formed Strategic Alternatives Committee of the Board, and the Board reviewed and considered, and discussed with the Company’s executive officers, a plan to retain the Company’s executives through the conclusion of the Company’s strategic process by providing these officers with appropriate financial incentives to do so. In that regard, the Board and the Committees considered advice provided by the Company’s compensation consultant, Frederick W. Cook & Co., Inc. (“FW Cook”) and used FW Cook’s recommendations as part of their decision-making process in arriving at what the Board and the Committees regard as appropriate to achieve the Company’s retention goals. On June 30, 2023, the Compensation Committee and the Strategic Alternatives Committee reviewed and approved an executive retention plan, the Strategic Alternatives Committee recommended that the full Board approve it, and the Board did so. On June 30, 2023, the Compensation Committee and the Strategic Alternatives Committee reviewed and approved the payment of compensation to members of the Strategic Alternatives Committee in addition to the Company’s standard compensation arrangements for non-employee directors, the Strategic Alternatives Committee recommended that the full Board approve it, and the Board did so. The directors who are members of the Strategic Alternatives Committee are Christopher Downs (the Chairman), Dennis Neilander and Michael Nicklas. Under this plan, the Chairman of the committee will receive a monthly retainer of $15,000 and the other two members of the committee will receive a monthly retainer of $12,000. These fee arrangements will be reevaluated if the committee remains in place after six months.

 

Following the approval of the executive retention plan by the Committees and the Board and in accordance with the executive retention plan, on June 30, 2023, the Company agreed to enter into amendments to the employment agreements (each, a “Retention Letter”), with each of Aaron Speach, the Company’s Chief Executive Officer, and Matthew Lourie, the Company’s Chief Financial Officer.

 

Pursuant to the Retention Letters,

 

  (a) Mr. Speach will be entitled to receive a cash retention bonus of $175,000 payable 20% upon execution of the Retention Letter, 40% after three months, and the remainder after six months, and

 

  (b) Mr. Lourie will be entitled to an increase in his base salary to $320,000 and to receive a cash retention bonus of $240,000 payable 20% upon execution of the Retention Letter, 30% after three months, 30% after six months, and the remainder after nine months.

 

Any unpaid retention bonus will be paid earlier if the Company completes a strategic transaction (a “Transaction”), or if the executive is terminated without “cause”.

 

 

 23 

 

 

In addition, pursuant to the Retention Letters, each of Mr. Speach and Mr. Lourie will be eligible to receive a cash transaction bonus equal to 0.95% of the gross proceeds of any Transaction, provided that the net proceeds from the Transaction are at least $26.0 million; and further provided that the executive may receive an additional 0.25% of the gross proceeds if the net proceeds from the Transaction are not less than the amount that would result in (a) the Company repaying its outstanding debt and all trade creditors, and (b) the Series A preferred holders and common shareholders receiving consideration of not less than the value of their equity holdings as of June 30, 2023 (the “Deal Threshold”).

 

If Mr. Speach and Mr. Lourie are terminated without “cause” prior to June 30, 2024, the Company agreed to pay a cash severance payment of:

 

  (a) with respect to Mr. Speach, the greater of 1.0 times Mr. Speach’s base salary or the severance payable pursuant to Mr. Speach’s current employment agreement; and

 

  (b) with respect to Mr. Lourie, 0.5 times Mr. Lourie’s base salary.

 

In addition to the amounts payable to Messrs. Speach and Lourie set forth above, the Company also agreed on June 30, 2023 to pay additional retention bonuses under the executive retention plan to two consultants and advisors of up to $310,000, in the aggregate, and additional cash transaction bonuses equal to 1.9% of the gross proceeds of any Transaction, provided that the net proceeds from the Transaction are at least $26.0 million; and provided further that an additional 0.50% of the gross proceeds will be payable if the net proceeds from the Transaction are not less than the Deal Threshold.

 

NOTE 8 – LOSS PER COMMON SHARE

 

The basic net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the weighted average number of common shares during the year. The diluted net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the diluted weighted average number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding is the basic weighted number of common shares adjusted for any potentially dilutive debt or equity. Common shares issuable under convertible debt, stock options and common stock warrants were excluded from the calculation of diluted net loss per share due to their antidilutive effect. 

                 
   Three Months Ended   Nine Months Ended 
  

June 30,

2023

  

June 30,

2022

  

June 30,

2023

  

June 30,

2022

 
Numerator:                
Net loss  $(43,730,398)  $(8,978,700)  $(55,299,838)  $(29,700,808)
Preferred stock dividends   (992,274)   (1,416,242)   (4,086,819)   (3,267,319)
Net loss attributable to common stockholders  $(44,722,672)  $(10,394,942)  $(59,386,657)  $(32,968,127)
                     
Denominator:                    
Basic and diluted weighted average common shares   25,908,005    14,842,497    21,896,714    14,267,461 
Basic and diluted net loss per common share  $(1.73)  $(0.70)  $(2.71)  $(2.31)

 

NOTE 9 – TRANSACTION WITH RELATED PARTIES

 

The Company engaged a firm owned by Matthew Lourie, the Company’s Chief Financial Officer to provide financial reporting services. For the nine months ended June 30, 2023 and 2022, the Company incurred consulting fees of $83,300 and $19,624, respectively.

 

 

 

 24 

 

 

NOTE 10 SUBSEQUENT EVENTS

 

Subsequent to June 30, 2023, a total of 22,030 shares of Preferred Stock were converted into 96,499,500 shares of common stock. Pursuant to the terms of the Preferred Stock, on July 31, 2023, the conversion price of the Preferred Stock was reduced to $0.086 per share. As of August 14, 2023, 10,337 shares of Preferred Stock remain outstanding that are convertible into 147,867,809 shares of common stock.

 

After being adjourned on April 27, 2023, May 8, 2023 and May 26, 2023, the 2023 annual meeting of stockholders (the “Annual Meeting”) of the Company was reconvened on July 26, 2023. At the Annual Meeting the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 100,000,000 to 500,000,000 (the “Authorized Share Increase”). An amendment to the Company's Articles of Incorporation (the “Certificate of Amendment”) was filed with the Secretary of State of the State of Nevada to effect the Authorized Share Increase on July 27, 2023.

 

As previously reported, on November 21, 2022, EBET, Inc. (the “Company”) received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying the Company that for the last 30 consecutive business days the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period Rule”), the Company was provided an initial period of 180 calendar days to regain compliance with the Bid Price Rule. The Company requested an additional 180 days in which to regain compliance, and on May 23, 2023 the Company received notice from Nasdaq informing the Company that it had been granted an additional 180-day period, or until November 20, 2023, to regain compliance with the minimum bid price requirement.

 

On July 31, 2023, the Company was notified by the Staff that it had determined that the Company’s common stock had a closing bid price of $0.10 or less for ten consecutive trading days from July 17, 2023 through July 28, 2023. Accordingly, since the Company was subject to the provisions set forth under Listing Rule 5810(c)(3)(A)(iii), the Staff had determined to delist the Company’s securities from The Nasdaq Capital Market.

 

The Staff letter stated that unless the Company requests an appeal of the Staff’s determination, trading of the Company’s common stock will be suspended at the opening of business on August 9, 2023, and a Form 25-NSE will be filed with the Securities and Exchange Commission, which will remove the Company’s securities from listing and registration on The Nasdaq Stock Market.

 

The Company plans to timely submit a hearing request to Nasdaq’s Hearings Department, which will stay the suspension of the Company’s common stock and the filing of the Form 25-NSE pending the panel’s decision.

 

 

 25 

 

 

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

 

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

 

Overview

 

We operate platforms to provide a real money online gambling experience focused on i-gaming including casino, sportsbook and esports events. The Company operates under a Curacao gaming sublicense and under a strategic partnership with Aspire Global plc (“Aspire”) allowing EBET to provide online betting services to various countries around the world.

 

Acquisition of Aspire Global Plc’s (“Aspire”) Business to Consumer (“B2C”) Business

 

In order to accelerate the growth and expand market access for our esports product offerings, on November 29, 2021, we acquired Aspire’s B2C Business, for €65,000,000 payable as follows: (i) a cash amount of €50,000,000; (ii) €10,000,000, payable in accordance with the terms of an unsecured subordinated promissory note; and (iii) 186,838 shares of our common stock, which were valued at €5,000,000.

 

The acquisition of Aspire’s B2C business provides the following strategic benefits:

 

  · ownership of a portfolio of B2C proprietary online casino and sportsbook brands consisting of Karamba, Hopa, Griffon Casino, BetTarget, Dansk777, and GenerationVIP;
     
  · market access for our esports products in key regulated markets including the United Kingdom, Germany, Ireland, Malta, and Denmark, among others, allowing us to cross-sell esports wagering opportunities;
     
  · enhanced strategic partnership with Aspire who provides the on-line gaming platform and a managed services offering, including customer service, customer on-boarding and payment processing ensuring operational stability and continuity.

 

Our gaming sub-license from the Curacao Gaming Authority and the licenses made available to us from the acquisition of the Aspire B2C business allows us to accept esports and sports wagers from residents around the world.

 

Focus on I-Gaming Operations

 

During the quarter ending September 30, 2022, we took significant measures to increase the profitability of our business in the short term. These actions include optimizing the efficiency of marketing campaigns, reducing the total number of employees and contractors by approximately 45 positions, terminating software and other immaterial contracts as well as generally reducing the operating costs of the business. While these efforts focus on the goal of attaining profitability of our business, it is likely to reduce overall revenue growth in the short to medium term. In addition, even after these efforts, we are not currently generating sufficient cash from our operations to settle our debts as they fall due and continue to require near term financing to fund our operations and continue our business. These efforts have also resulted in an increased focus on our i-gaming business and the halting of investment in the Company’s esports products and technologies. As a result of these actions as referenced above, we do not expect to launch our esports products in the foreseeable future.

 

 

 26 

 

 

Recent Developments

 

On April 27, 2023, the Company was notified by its gaming platform operator services provider Aspire Global plc (“Aspire”) that the gaming regulatory authority in Germany had sent a letter received by Aspire on April 25, 2023 stating that Aspire would be required to shut down activity of its gaming operations in Germany effective as of 10 days from receipt of said letter until such time as Aspire was otherwise granted a license to operate in Germany. Aspire informed the Company that although it sought an extension of the requested shutdown deadline, it was not successful in receiving an extension of time and/or any form of other relief from this request. In order to meet the subject German regulator requirement, Aspire shut down its activities in Germany on May 7, 2023 and as a result the gaming websites owned by the Company that operate in Germany were shut down on that date.  During the nine months ended June 30, 2023 and 2022 revenue generated in German markets was $9,686,372 and $12,806,072, respectively.  During the same periods gross profit contributed from the German markets was $2,775,605 and $2,967,251, respectively. As of June 30, 2023, the Company determined that its intangible assets and goodwill were impaired as a result of the loss of the gaming websites owned by the Company that operate in Germany after being shut down in May 2023. The Company recognized a total impairment loss of $32,653,626, consisting of $17,367,817 related to goodwill and $15,285,809 related to intangible assets, primarily indefinite lived assets and customer relationships.

 

On June 7, 2023, the Board of Directors of the Company created a Strategic Alternatives Committee to review and evaluate potential strategic alternatives in its sole discretion and exercise related powers that are typical of such committees. The directors who are members of the Strategic Alternatives Committee are Christopher Downs (the Chairman), Dennis Neilander and Michael Nicklas. On June 30, 2023, the Compensation Committee and the Strategic Alternatives Committee reviewed and approved the payment of compensation to members of the Strategic Alternatives Committee in addition to the Company’s standard compensation arrangements for non-employee directors, the Strategic Alternatives Committee recommended that the full Board approve it, and the Board did so. Under this plan, the Chairman of the committee will receive a monthly retainer of $15,000 and the other two members of the committee will receive a monthly retainer of $12,000. These fee arrangements will be reevaluated if the committee remains in place after six months.

 

On June 28, 2023, based on the approval of the Strategic Alternatives Committee, that committee’s favorable recommendation to the Board, and the Board’s subsequent approval, the Company hired Houlihan Lokey Capital, Inc. (“Houlihan”) as the Company’s exclusive financial advisor to provide financial advisory and investment banking services in connection with one or more of a sale, recapitalization, restructuring or any other financial transactions involving the Company. The continued engagement of Houlihan is required by the Lender during the term of the Forbearance Agreement

 

On June 30, 2023, the Company, the subsidiaries of the Company and the Lender entered into the Forbearance Agreement. Pursuant to the Forbearance Agreement, the Company acknowledged, among other items, that, as June 30, 2023, it was in default under the Credit Agreement, the Lender had the right to accelerate the Loan, and the Lender had the right to impose the default rate of interest under the Credit Agreement. Pursuant to the Forbearance Agreement, the Lender agreed to forbear from exercising its rights and remedies against the Company and the Guarantors under the Credit Documents until the earlier of September 15, 2023, which may be extended by the Lender, or until a termination event occurs pursuant to the Forbearance Agreement. A termination event under the Forbearance Agreement consists of the filing of a bankruptcy proceeding by the Company or any Guarantor, the occurrence of a new event of default under the Credit Agreement, or the failure by the Company or any Guarantor to perform any material requirement, covenant, or obligation under the Forbearance Agreement. During the forbearance period, the Lender agreed, among other items, not to accelerate the Loan, initiate any bankruptcy filings, or apply any default rates of interest. As partial consideration for the Lender agreeing to enter into the Forbearance Agreement, the Company paid a forbearance fee equal to 50 basis points of the outstanding principal amount of the Loan (or $130,425), which amount was added to the principal balance of the loan. In addition, on June 30, 2023, the Company made a prepayment of the Loan in the amount of $2.0 million, which in turn reduced the minimum cash balance requirement under the Credit Agreement to $0.

 

In connection with the Forbearance Agreement, the Lender agreed to provide the Company with a revolving line of credit in the amount of $2.0 million (the “Revolving Note”), with any advances under the Revolving Note to be made in the sole discretion of the Lender. The Revolving Note will have a maturity date of November 29, 2024 and carry an interest rate of 15.0% per annum, provided that upon an occurrence of default the interest rate will increase to the default rate under the Loan. The Revolving Note shall be an Obligation as defined in the Credit Agreement and as such shall be secured by the collateral in which the Company and the Guarantors have granted liens and security interests to the Lender in connection with the Loan. All discretionary advances shall terminate automatically and all outstanding principal together with accrued but unpaid interest and fees shall become immediately due and payable, without notice to or action by any party, on the earlier of the termination date of the Forbearance Agreement, or the maturity date of the Revolving Note, unless otherwise extended by the Lender.

 

 

 27 

 

 

As previously reported, on November 21, 2022, the Company received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying the Company that for the last 30 consecutive business days the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period Rule”), the Company was provided an initial period of 180 calendar days to regain compliance with the Bid Price Rule. The Company requested an additional 180 days in which to regain compliance, and on May 23, 2023 the Company received notice from Nasdaq informing the Company that it had been granted an additional 180-day period, or until November 20, 2023, to regain compliance with the minimum bid price requirement.

 

On July 31, 2023, the Company was notified by the Staff that it had determined that the Company’s common stock had a closing bid price of $0.10 or less for ten consecutive trading days from July 17, 2023 through July 28, 2023. Accordingly, since the Company was subject to the provisions set forth under Listing Rule 5810(c)(3)(A)(iii), the Staff had determined to delist the Company’s securities from The Nasdaq Capital Market.

 

The Staff letter stated that unless the Company requests an appeal of the Staff’s determination, trading of the Company’s common stock will be suspended at the opening of business on August 9, 2023, and a Form 25-NSE will be filed with the Securities and Exchange Commission, which will remove the Company’s securities from listing and registration on The Nasdaq Stock Market.

 

The Company plans to timely submit a hearing request to Nasdaq’s Hearings Department, which will stay the suspension of the Company’s common stock and the filing of the Form 25-NSE pending the panel’s decision

 

Results of Operations for the Three Months Ended June 30, 2023, compared to the Three Months Ended June 30, 2022

 

Results of operations in dollars and as a percentage of net revenue were as follows:

 

   Three Months Ended June 30, 
   2023   2022 
   $   %   $   % 
                 
Revenue  $7,974,517    100%   $18,168,515    100% 
Cost of revenue   (4,203,293)   53%    (10,918,796)   60% 
                     
Gross profit   3,771,224    47%    7,249,719    40% 
                     
Operating expenses:                    
Sales and marketing expenses   1,980,211    25%    9,262,851    51% 
Product and technology expenses   280,201    4%    1,115,165    6% 
Acquisition costs       0%        0% 
Impairment   32,653,626    409%        0% 
General and administrative expenses   3,585,489    45%    3,863,298    21% 
Total operating expenses   38,499,527    483%    14,241,314    78% 
                     
Loss from operations   (34,728,303)   435%    (6,991,595)   38% 
                     
Other expenses:                    
Interest expense   (9,824,363)   123%    (1,790,520)   10% 
Loss on derivative instruments       0%    (130,033)   1% 
Change in fair value of warrant liabilities   1,034,400    13%        0% 
Foreign currency loss and other   (212,132)   3%    (66,553   0% 
Total other expense   (9,002,095)   113%    (1,987,105)   11% 
                     
Loss before provision for income taxes   (43,730,398)   548%    (8,978,700)   49% 
Provision for income taxes       0%        0% 
                     
Net loss  $(43,730,398)   548%   $(8,978,700)   49% 

 

 

 28 

 

 

Revenue

 

For the three months ended June 30, 2023, we generated $7,974,517 in revenue compared to $18,168,515 in revenue during the three months ended June 30, 2022. The decrease in revenue in the three months ended June 30, 2023, when compared with the same period in the prior year, was driven by the loss of the Company’s operations in Germany, and a shift in the Company’s focus on higher margin revenue sources. As a result of the Company’s restructuring of the business to improve its immediate profitability, certain inefficient sales and marketing efforts have been curtailed, which have adversely impacted revenue growth since the restructuring. In addition, the loss of operations in Germany in May 2023 will materially impact the Company’s ongoing revenue generation.

 

Cost of Revenue

 

During the three months ended June 30, 2023, cost of sales was $4,203,293 as compared with $10,918,796 in the same period in the prior year. The decrease in cost of sales is due to the decline on volume of revenue disclosed above. The improvement in gross profit percentage is a result of the Company’s restructuring efforts to reduce costs and increase efficiencies. Cost of revenue consists of third-party costs associated with the betting software platform and gaming taxes. 

 

Sales and Marketing Expense

 

Sales and marketing expense was $1,980,211 for the three months ended June 30, 2023 compared to $9,262,851 for the three months ended June 30, 2022, a decrease of $7,282,640. As a percentage of revenue sales and marketing expense was 25% in the three months ended June 30, 2023 compared to 51% in the three months ended June 30, 2022. The dramatic improvement is the result of a shift in focus on higher margin revenue sources. Further the decrease in sales and marketing expense is driven by the Company’s efforts to streamline operations and a result of the reduction in headcount over the past year. Sales and marketing expenses also included $100,568 and $598,677 of stock-based compensation costs to employees and consultants for the three months ended June 30, 2023 and 2022, respectively, and payroll costs of $171,399 and $947,155, respectively, for the three months ended June 30, 2023 and 2022, respectively. We expect sales and marketing expenses to increase in future periods as our marketing campaigns increase in both number and volume.

 

Product and Technology Expense

 

Product and technology expense was $280,201 for the three months ended June 30, 2023 compared to $1,115,165 for the three months ended June 30, 2022, a decrease of $834,964. The decrease is due to decreased spending related to development of the esports operations that were abandoned in the fourth quarter of fiscal 2022. Product and technology expenses for the three months ended June 30, 2023, included payroll-related costs of $180,110, stock-based compensation of $20,694 and other development costs of $79,397 consisting primarily of consulting and other development costs. Product and technology expenses for the three months ended June 30, 2022, included payroll-related costs of $874,750, stock-based compensation of $102,676 and other development costs of $137,740 consisting primarily of consulting and other development costs.

 

General and Administrative Expense

 

General and administrative expense was $3,585,489 for the three months ended June 30, 2023, as compared to $3,863,298 for the same period in the prior year. General and administrative expense for the three months ended June 30, 2023 included amortization of intangible assets of $1,688,328, payroll-related costs of $731,273 and stock-based compensation cost of $112,177. General and administrative expense for the three months ended June 30, 2022 included amortization of intangible assets of $2,307,050, payroll-related costs of $510,887 and stock-based compensation cost of $389,814. The increase in payroll costs in the current period is related to the retention costs associated with new agreements with the Company’s executives as part of the restructuring plan.

 

Impairment loss

 

During the three months ended June 30, 2023, the Company determined that its intangible assets and goodwill were impaired as a result of the loss of the gaming websites owned by the Company that operate in Germany after being shut down in May 2023. The Company recognized a total impairment loss of $32,653,626, consisting of $17,367,817 related to goodwill and $15,285,809 related to intangible assets, primarily indefinite lived assets and customer relationships.

 

 

 29 

 

 

Interest and Other Expenses

 

During the three months ended June 30, 2023 and 2022, we recognized interest expense of $9,824,363 and $1,790,520, respectively, which included amortization of debt discounts and deferred finance costs of $8,445,549 and $1,607,674 related to the Senior Notes issued to acquire the Aspire business, and convertible debt issued to acquire certain intangible assets in the previous year. During the three months ended June 30, 2023 and 2022 we also incurred a foreign currency loss of $212,132 and $66,552, respectively, due to fluctuations in the Euro compared to the US dollar. The Company also recognized a gain from the change in fair value of warrants of $1,034,400 during the three months ended June 30, 2023 and had a loss on derivatives in the comparable period of $130,033.

 

Net Income/Loss

 

Net loss for the three months ended June 30, 2023, was $43,730,398 compared to a net loss of $8,978,700 for the same period in the prior year. The increase in net loss was primarily due to the impairment loss of $32,653,626, the increase in interest expense associated with accelerated amortization of debt discount and deferred finance costs as a result of the Forbearance Agreement, partially offset by lower operating expenses from the Company’s restructuring efforts in late 2022.

 

Results of Operations for the Nine Months Ended June 30, 2023, compared to the Nine Months Ended June 30, 2022

 

Results of operations in dollars and as a percentage of net revenue were as follows:

 

   Nine Months Ended June 30, 
   2023   2022 
   $   %   $   % 
                 
Revenue  $33,962,971    100%   $44,311,030    100% 
Cost of revenue   (19,314,114)   57%    (27,537,479)   62% 
                     
Gross profit   14,648,857    43%    16,773,551    38% 
                     
Operating expenses:                    
Sales and marketing expenses   8,660,841    26%    22,711,724    51% 
Product and technology expenses   816,309    2%    3,270,328    7% 
Acquisition costs       0%    2,240,147    5% 
Impairment loss   32,653,626    96%        0% 
General and administrative expenses   10,365,751    31%    12,454,493    28% 
Total operating expenses   52,496,527    155%    40,676,692    92% 
                     
Loss from operations   (37,847,670)   111%    (23,903,141))   54% 
                     
Other expenses:                    
Interest expense   (15,543,788)   46%    (5,531,757)   12% 
Loss on derivative instruments   (142,187)   0%    (203,116)   0% 
Change in fair value of warrant liabilities   1,034,400    3%        0% 
Foreign currency loss and other   (2,800,593)   8%    (62,794)   0% 
Total other expense   (17,452,168))   51%    (5,797,667)   13% 
                     
Loss before provision for income taxes   (55,299,838)   163%    (29,700,808)   67% 
Provision for income taxes       0%        0% 
                     
Net loss  $(55,299,838)   163%   $(29,700,808)   67% 

 

 

 30 

 

 

Revenue

 

For the nine months ended June 30, 2023, we generated $33,962,971 in revenue compared to $44,311,030 in revenue during the nine months ended June 30, 2022. The decrease in revenue in the nine months ended June 30, 2023, when compared with the same period in the prior year, was driven by the loss of the Company’s German operations in May 2023 and the Company’s shift to focus on higher margin revenue sources. The prior period also included only four months of activity since the closing date of the Aspire acquisition on November 29, 2021. As a result of the Company’s restructuring of the business to improve its immediate profitability, certain inefficient sales and marketing efforts will be curtailed, which have adversely impacted revenue growth since the restructuring. In addition, the loss of operations in Germany in May 2023 will materially impact the Company’s ongoing revenue generation.

 

Cost of Revenue

 

During the nine months ended June 30, 2023, cost of sales was $19,314,114 as compared with $27,537,479 in the same period in the prior year. The decrease in cost of sales is due to the decline on volume of revenue disclosed above. The improvement in gross profit percentage is a result of the Company’s restructuring efforts to reduce costs and increase efficiencies.

 

Sales and Marketing Expense

 

Sales and marketing expense was $8,660,841 for the nine months ended June 30, 2023 compared to $22,711,724 for the nine months ended June 30, 2022, a decrease of $14,050,883. As a percentage of revenue sales and marketing expense was 26% in the nine months ended June 30, 2023 compared to 51% in the nine months ended June 30, 2022. The dramatic improvement is the result of a shift in focus on higher margin revenue sources, and the loss of the Company’s German operations in May 2023. The prior period also included only seven months of activity since the closing date of the Aspire acquisition on November 29, 2021. Sales and marketing expenses also included $479,280 and $2,440,760 of stock-based compensation costs to employees and consultants for the nine months ended June 30, 2023 and 2022, respectively, and payroll costs of $877,927 and $2,150,908, respectively, for the nine months ended June 30, 2023 and 2022, respectively. We expect sales and marketing expenses to increase in future periods as our marketing campaigns increase in both number and volume.

 

Product and Technology Expense

 

Product and technology expense was $816,309 for the nine months ended June 30, 2023 compared to $3,270,328 for the nine months ended June 30, 2022, a decrease of $2,454,019. The decrease is due to decreased spending related to development of the esports operations that were abandoned in the fourth quarter of fiscal 2022 and reduced headcount. Product and technology expenses for the nine months ended June 30, 2023, included payroll-related costs of $523,660, stock-based compensation of $81,925 and other development costs of $210,724 consisting primarily of consulting and other development costs. Product and technology expenses for the nine months ended June 30, 2022, included payroll-related costs of $2,018,465, stock-based compensation of $798,696 and other development costs of $453,167 consisting primarily of consulting and other development costs.

 

Acquisition Costs

 

Acquisition costs were $0 for the nine months ended June 30, 2023, as compared to $2,240,147 for the nine months ended June 30, 2022. Acquisition costs in the comparable period included a non-cash hedging loss of $1,570,000 from executing a forward contract on the purchase price of the acquisition of the Aspire B2C business to hedge exposure to fluctuations in the Euro. Acquisition costs also included various legal and consultant fees associated with completing the acquisition. 

 

Impairment loss

 

During the nine months ended June 30, 2023, the Company determined that its intangible assets and goodwill were impaired as a result of the loss of the gaming websites owned by the Company that operate in Germany after being shut down in May 2023. The Company recognized a total impairment loss of $32,653,626, consisting of $17,367,817 related to goodwill and $15,285,809 related to intangible assets, primarily indefinite lived assets and customer relationships.

 

 

 31 

 

 

General and Administrative Expense

 

General and administrative expense was $10,365,751 for the nine months ended June 30, 2023, as compared to $12,454,493 for the same period in the prior year. General and administrative expense for the nine months ended June 30, 2023 included amortization of intangible assets of $5,018,736, payroll-related costs of $1,456,535 and stock-based compensation cost of $553,031. General and administrative expense for the nine months ended June 30, 2022 included amortization of intangible assets of $4,701,522, payroll-related costs of $2,203,729 and stock-based compensation cost of $1,101,634. The decline in payroll costs is a result of the Company’s efforts to reduce headcount and streamline operations.

 

Interest and Other Expenses

 

During the nine months ended June 30, 2023 and 2021, we recognized interest expense of $15,543,788 and $5,531,757, respectively, which included amortization of debt discounts and deferred finance costs of $10,999,866 and $2,975,962 related to the Senior Notes issued to acquire the Aspire business, and convertible debt issued to acquire certain intangible assets in the previous year. During the nine months ended June 30, 2023 we also incurred a foreign currency loss of $2,800,593 compared to $62,794 due to fluctuations in the Euro compared to the US dollar, and a derivative loss of $142,187 compared to a loss of $203,116 in the nine months ended June 30, 2022. The Company also recognized a gain of $1,034,400 from the change in fair value of warrant liabilities during the three months ended June 30, 2023.

 

Net Income/Loss

 

Net loss for the nine months ended June 30, 2023, was $55,299,838 compared to a net loss of $29,700,808 for the same period in the prior year. The increase in net loss was primarily due to the impairment loss of $32,653,626, the increase in interest expense and foreign currency losses, partially offset by decreased operating expenses from the lack of acquisition costs in the current period and the Company’s restructuring efforts and reduced headcount.

 

Liquidity and Capital Resources

 

On June 30, 2023, we had cash and cash equivalents of $1,437,787, and had a working capital deficit of $45,818,940. We have historically funded our operations from proceeds from debt and equity sales, and funds received from customers. Our forecasts for fiscal year 2023 indicate that we will need near term additional funding in order to have sufficient financial resources to satisfy our outstanding debts and to continue to settle our debts as they fall due. As discussed below, pursuant to the Forbearance Agreement we entered into with our Lender, the Lender has agreed to forbear from exercising its rights and remedies against us under the Senior Notes until the earlier of September 15, 2023, which may be extended by the Lender, or until a termination event occurs pursuant to the Forbearance Agreement. As such, if we are unable to satisfy the Senior Notes prior to September 15, 2023, and if the Lender is unwilling to further extend the term of the Forbearance Agreement, the Lender will have the right to foreclose on our assets On February 6, 2023, we sold 6,372,530 shares of common stock and an equal number of warrants for net proceeds of $5,921,982. We do not have any commitments for additional funding and there is no assurance that we will be able to raise additional financing on favorable terms, if at all.

 

The following is a summary of borrowings outstanding as at June 30, 2023:

                                
              June 30, 2023 
   Contractual Interest      Principal outstanding balance   Principal outstanding balance   Unamortized
debt
discount
   Accrued Interest   Issuance costs   Carrying amount 
   rate   Cur  Local   USD   USD   USD   USD   USD 
Senior notes   15%   USD   26,086,927    26,086,927                26,086,927 
Note due to Aspire   10%   EUR   10,000,000    10,866,000        1,751,133        12,617,133 
Convertible notes   10%   USD   681,891    681,891                681,891 
Other   0%   USD   675,000    675,000    (128,366)           546,634 
Total borrowings                38,309,818    (128,366)   1,751,133        39,932,585 
                                       
Current                                    39,385,951 
Long-term                                    546,634 
Total borrowings                                    39,932,585 

 

 

 32 

 

 

As of March 31, 2022, we had not maintained compliance with the covenants of the Senior Notes and obtained a waiver from the Lender which waiver was contingent on the completion an equity raise of at least $3.5 million, which was completed in June 2022. In consideration for obtaining a waiver from the compliance with certain covenants, we agreed to amend the Senior Notes such that $5 million of principal loan balance becomes convertible at $3.58 per share commencing after we raised the $5,000,000 of common equity (including the foregoing $3.5 million). Upon closing of the equity financing on February 6, 2023, the $5,000,000 of principal became convertible at $3.58 per share.

 

On June 30, 2023, the Company, the subsidiaries of the Company and the Lender entered into the Forbearance Agreement. Pursuant to the Forbearance Agreement, the Company acknowledged, among other items, that, as June 30, 2023, it was in default under the Credit Agreement, the Lender had the right to accelerate the Loan, and the Lender had the right to impose the default rate of interest under the Credit Agreement. Pursuant to the Forbearance Agreement, the Lender agreed to forbear from exercising its rights and remedies against the Company and the Guarantors under the Credit Documents until the earlier of September 15, 2023, which may be extended by the Lender, or until a termination event occurs pursuant to the Forbearance Agreement. In connection with the Forbearance Agreement, the Lender agreed to provide the Company with a revolving line of credit in the amount of $2.0 million (the “Revolving Note”), with any advances under the Revolving Note to be made in the sole discretion of the Lender. The Revolving Note will have a maturity date of November 29, 2024 and carry an interest rate of 15.0% per annum, provided that upon an occurrence of default the interest rate will increase to the default rate under the Loan.

 

In addition, as a result of the default on the Senior Note and the Forbearance Agreement described above, a potential event of default exists pursuant to the terms of the Note due to Aspire, which Note provides that upon such an event of default of the Credit Agreement with the Lender, the holder of the Note may choose to demand immediate repayment of the Note. To date, we have not received such notice with respect to the Note.

 

 The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain equity or debt financings to continue operations. We have a history of and expect to continue to report negative cash flows from operations and a net loss.  Our forecasts for 2023 and beyond indicate that we will need additional funding in order to have sufficient financial resources to continue to settle our debts as they fall due. We have taken significant measures to increase the profitability of our business in the short term, but we are not currently generating sufficient cash from our operations to settle our debts as they fall due and continue to require near term financing. These actions include optimizing the efficiency of marketing campaigns, reducing the total number of employees and contractors, terminating software and other immaterial contracts as well as generally reducing the operating costs of the business. These efforts have also resulted in an increased focus on our i-gaming business and a significant reduction in the investment of our esports products and technologies, which resulted in the recognition of an impairment loss on certain intangible assets and fixed assets. As a result of our actions as referenced above, we do not expect to launch our esports products in the short or medium term. These factors raise substantial doubt regarding our ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. We may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. Management cannot be certain that such events or a combination thereof can be achieved.

 

As of June 30, 2023, we have incurred an accumulated deficit of $122,862,549 since inception and have not yet generated any meaningful income from operations. 

 

Cash used in operating activities

 

Net cash used in operating activities was $7,554,905 for the nine months ended June 30, 2023, as compared to cash used in operating activities of $8,950,692 for the same period in the prior year. Net cash used in operating activities during the nine months ended June 30, 2023, included payments made for employee costs, professional fees to our consultants, attorneys and accountants for services and a reduction of our outstanding accounts payable. Net cash used in operating activities for the nine months ended June 30, 2022, and were primarily impacted by the increase in accounts payable. Cash flow from operations were also included payments made for, professional fees to our consultants, attorneys and accountants required to complete the Acquisition.

 

 

 33 

 

 

Cash used in investing activities

 

Net cash used in investing activities was $11,341 during the nine months ended June 30, 2023 related to the purchase of fixed assets. Net cash used in investing activities was $57,370,975 for the nine months ended June 30, 2022 and was primarily related to the completion of the Acquisition. Also contributing to the cash used in investing activities in the comparable period were purchase of fixed assets of $1,141,449 due primarily to opening of our office in Malta and purchase of software assets to support the wagering platform. 

 

Cash used provided by financing activities

 

Net cash provided by financing activities was $1,895,947 for the nine months ended June 30, 2023 due to the cash received from sale of common stock of $5,921,982, proceeds from settlement of derivatives of $973,965 partially offset by the repayment of $5,000,000 on the Senior Notes. Net cash provided by financing activities was $64,145,287 for the nine months ended June 30, 2022 and was related to the issuance of Preferred Shares and Senior Notes of $37,014,450 and $27,130,837, respectively.

 

Off Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervisions of and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and Chief Financial Officer, who is our principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures. Based upon such evaluation, our chief executive officer and our chief financial officer have concluded that, as of June 30, 2023, our disclosure controls and procedures were ineffective because of the material weaknesses in our internal control over financial reporting due to a lack of segregation of duties and the lack of formal documentation of our control environment.

 

In light of the material weakness described above, we continue to perform additional analysis and other post-closing procedures to ensure our financial statements are prepared in accordance with GAAP. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

There were no changes to our internal control over financial reporting during the three months ended June 30, 2023, that have materially affected, or are reasonable likely to materially effect, our internal controls over financial reporting.

 

 

 

 34 

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company’s previous financial advisor, Boustead Securities LLC (“Advisor”) has alleged a breach by the Company over the termination of their engagement and the timing of the payment and amount of the fees owed to the Advisor (collectively the “Claims”). The fees the Company expects to pay are accrued in the accompanying balance sheet. On June 2, 2022, the Advisor named EBET in an arbitration proceeding with Financial Industry Regulatory Authority (“FINRA”) in connection with the Claims. The Statement of Claim alleged damages of $5.7 million and sought a declaration that the Company be required to utilize the Advisor for a certain follow-on offering pursuant to an alleged right of first refusal between the parties. On August 4, 2022, EBET, Inc. counterclaimed against Boustead Securities, LLC for tortious interference with prospective economic advantage and demanded damages and attorneys’ fees in an amount to be determined. Boustead Securities, LLC’s current Second Amended Statement of Claim, filed on May 24, 2023, alleges $12 million in damages and no longer seeks declaratory relief. In response to Boustead Securities, LLC’s Second Amended Statement of Claim, Company maintains its counterclaim and all affirmative defenses previously asserted. The case is ongoing, with a hearing before a 3-arbitrator panel initially scheduled for July 19, 2023, but now continued to November 6, 2023. Arbitration is inherently unpredictable. However, the Company believes that it has meritorious defenses to a portion of the alleged fee claim asserted and to the claim that the Company has any obligations pursuant to a right of first refusal between the parties. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of this matter. 

 

On September 15, 2022, the Company filed a Complaint in the United States District Court for the District of Nevada against its former CTO Jason Finch for: (1) Breach of Contract; (2) Violation of Nevada Revised Statutes section 205.511; (3) Conversion; and (4) Misappropriation of Trade Secrets.  In the subject matter, we seek injunctive relief and demand damages and attorneys’ fees in an amount to be determined.  In reply to our Complaint, Mr. Finch filed a Motion to Dismiss the matter and such motion is currently pending decision before the court.  On May 12, 2023, the subject matter was resolved in full and the parties agreed to settle all claims and enter mutual releases of claims.

 

On June 26, 2023, a former vendor of the Company, Litebox USA, LLC filed a Complaint against EBET, Inc. alleging causes of action including Breach of Contract; Breach of the Implied Covenant of Good Faith and Fair Dealing; Unjust Enrichment; Quantum Meruit; Promissory Estoppel; Open Book Account/Account Stated; and other causes of action.  The action stems from an alleged nonpayment pursuant to a Master Service Agreement and three separate Statements of Work for the alleged development of software thereunder.   On August 4, 2023, EBET, Inc. filed a declaration stating its intention to file a Demurrer to the Complaint on the grounds that the claims are preempted by the California Uniform Trade Secret Act, among other things.  The filing of this declaration automatically extends EBET, Inc.’s responsive pleading deadline date by 30 days.   EBET intends to vigorously defend this matter.

  

Other than as described above, we are not at this time involved in any additional legal proceedings that we believe could have a material effect on our business, financial condition, results of operations or cash flows. 

 

Item 1A. Risk Factors

 

For a discussion of potential risks or uncertainties, see “Risk Factors” in the Company’s most recent annual report on Form 10-K on file with the SEC. Except as set forth below, there have been no material changes to the risk factors disclosed in such annual report.

 

Future sales of shares by our preferred stockholders could cause our stock price to decline.

 

On November 29, 2021, in connection with the Acquisition, we issued an aggregate of 37,700 shares of Preferred Stock for a purchase price of $1,000.00 per share, for aggregate gross proceeds of $37,700,000 (the “Private Placement”). The Preferred Stock was initially convertible into common stock at an initial conversion price of $28.00 per share (“Conversion Price”); provided that the Conversion Price is subject to anti-dilution protection upon any subsequent transaction at a price lower than the Conversion Price then in effect. In addition, on April 28, 2023, July 31, 2023 and October 31, 2023 (each, an “Adjustment Date”), the Conversion Price shall be adjusted to the lesser of: (i) the Conversion Price in effect on the Adjustment Date, or (ii) 85% of the average closing price of the Company’s common stock for the fifteen trading days prior to the Adjustment Date. Notwithstanding the foregoing, the adjusted Conversion Price may not be less than $0.71, unless the terms of the new adjustment dates are approved by our shareholders, as required pursuant to applicable rules and regulations of NASDAQ. We agreed to submit for a vote the approval the terms of the new adjustment dates at our next meeting of shareholders and use our reasonable best efforts to solicit our shareholders’ approval of such vote. We did not receive shareholder approval to permit an adjustment of the Conversion Price prior to April 28, 2023. As such, although the adjusted price pursuant to the foregoing provision was less than $0.71 per share, on April 28, 2023, the Conversion Price was adjusted to $0.71 per share and on July 31, 2023, the conversion price of the Preferred Stock was reduced to $0.086 per share. Through the date of this filing, a total of 27,363 shares of Preferred Stock were converted into 274,968,568 shares of common stock. Accordingly, as of the date hereof, there are 147,867,809 shares of common stock issuable upon conversion of the Preferred Stock. The trading price of our common stock could be adversely impacted if these preferred stockholders sell, or if the market believes such holders may sell, substantial amounts of our common stock in the public market. As a result of the preferred stock conversion price reset discussed above, the Company currently does not have sufficient authorized shares to settle its convertible instruments.

 

 

 35 

 

 

We are party to a Forbearance Agreement which expires on September 15, 2023, unless extended by the Lender, and if we are unable to comply with the Forbearance Agreement then the lender could declare a default of the Credit Agreement wherein we would be required to immediately repay the amounts due under the Credit Agreement.

 

On June 30, 2023, we, our subsidiaries and our Lender with respect to our Senior Notes, entered into a Forbearance Agreement. Pursuant to the Forbearance Agreement, we acknowledged, among other items, that, as June 30, 2023, we were in default under the Credit Agreement, the Lender had the right to accelerate the Loan, and the Lender had the right to impose the default rate of interest under the Credit Agreement. Pursuant to the Forbearance Agreement, the Lender agreed to forbear from exercising its rights and remedies against the Company and the Guarantors under the Credit Documents until the earlier of September 15, 2023, which may be extended by the Lender, or until a termination event occurs pursuant to the Forbearance Agreement. A termination event under the Forbearance Agreement consists of the filing of a bankruptcy proceeding by us or any guarantor, the occurrence of a new event of default under the Credit Agreement, or the failure by us or any guarantor to perform any material requirement, covenant, or obligation under the Forbearance Agreement. During the forbearance period, the Lender agreed, among other items, not to accelerate the Loan, initiate any bankruptcy filings, or apply any default rates of interest. As partial consideration for the Lender agreeing to enter into the Forbearance Agreement, we paid a forbearance fee equal to 50 basis points of the outstanding principal amount of the Loan (or $130,425.16), which amount was added to the principal balance of the loan. In addition, on June 30, 2023, we made a prepayment of the Loan in the amount of $2.0 million, which in turn reduced the minimum cash balance requirement under the Credit Agreement to $0. Upon the execution of the Forbearance Agreement and after the receipt of the forbearance fee and loan repayment, the principal amount of the Loan is $26,215,457.61.

 

The borrowings under the Credit Agreement are secured by a first priority lien on our assets. If we fail to comply with the terms of the Forbearance Agreement, the Lender could declare an event of default, which would give it the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, since the borrowings under the Credit Agreement are secured by a first priority lien on our assets, upon such an event of default, the Lender may foreclose on our assets. . There is no assurance that the Company will be successful in restructuring the terms of the Credit Agreement prior to the September 15, 2023 deadline in the Forbearance Agreement.

 

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

 

There were no sales of equity securities during the period covered by this Quarterly Report that were not registered under the Securities Act and were not previously reported on a Current Report on Form 8-K filed by the Company.

 

In May and June 2023, a total of 5,333 shares of Preferred Stock were converted into 9,028,538 shares of common stock by three holders of our Preferred Stock at a conversion price of $0.71 per share. The holders are “accredited investors” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)), and the shares of Preferred Stock and common stock were issued in reliance upon an exemption from registration contained in Section 4(a)(2) of the Securities Act.

 

Item 3. Defaults Upon Senior Securities

 

See the information set forth in “Item 1. Financial Statements – Note 4 – Borrowings – Senior Notes” for a discussion of our default under the Credit Agreement with respect to the Senior Notes. See the information set forth in “Item 1. Financial Statements – Note 4 – Borrowings – Notes Due to Aspire” for a discussion of the event of default that occurred pursuant to our Note to Aspire.

 

Item 4. Mine Safety Disclosure

 

Not Applicable.

 

Item 5. Other Information

 

During the period covered by this Quarterly Report, none of the Company’s directors or executive officers has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Securities Exchange Act of 1934, as amended).

 

 

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 Item 6. Exhibits

 

Exhibit Number   Description
 3.1   Certificate of Amendment of the Articles of Incorporation of EBET, Inc. (incorporated by reference to exhibit 3.1 of the Form 8-K filed July 28, 2023)
10.1 +   Forbearance Agreement dated June 30, 2023 between EBET, Inc., certain subsidiaries of EBET, Inc., and CP BF Lending, LLC (incorporated by reference to exhibit 10.1 of the Form 8-K filed July 3, 2023)
10.2    Form of Revolving Note issuable by EBET, Inc. to CP BF Lending, LLC (incorporated by reference to exhibit 10.2 of the Form 8-K filed July 3, 2023)
10.3   EBET, Inc. 2020 Stock Plan, as amended, and forms of award agreement (incorporated by reference to exhibit 10.1 of the Form 8-K filed July 28, 2023)
10.4*   Amendment to the First Amended and Restated Employment Agreement dated October 1, 2021 by and between Aaron Speach and EBET, INC.
10.5*   Amendment to the Employment Agreement dated September 9, 2022, as amended, by and between Matthew Lourie and EBET, INC.
31.1*   Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
31.2*   Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
32.1*(1)   Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*(1)   Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104   Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

____________________

* Filed herewith.

 

+ Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of any omitted schedule or exhibit to the SEC upon request.

 

 

(1) The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

 

 

 

 37 

 

 

SIGNATURES

 

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

 

  EBET, INC.
     
Date: August 14, 2023 By: /s/ Aaron Speach
   

Aaron Speach

Chief Executive Officer, President and Director

(Principal Executive Officer)

     
     
Date August 14, 2023 By: /s/ Matthew Lourie
   

Matthew Lourie

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 38 

 

Exhibit 10.4

 

Amendment to First Amended and Restated Employment Agreement

 

This Amendment to the First Amended and Restated Employment Agreement dated October 1, 2021 by and between Aaron Speach and EBET, INC. (fka Esports Techologies, Inc.) (“Prior Agreement”) is made and effective as of July 1, 2023 (“Effective Date”) and amends said Prior Agreement as well as that certain Employment Agreement made prior to the Prior Agreement and supersedes same only to the extent identified hereinbelow and any and all other provisions, terms and conditions of said Prior Agreement which are not referenced herein shall remain in full force and effect (“Amendment”):

 

Amendments to Prior Agreement

 

---Section 5(B.) as stated below shall be inserted below Section 5 (A.) of said Prior Agreement as follows:

 

5 (B.) Retention Compensation.

 

(i) Retention Bonus: Employee shall be entitled to a one-time cash retention bonus paid in installments as follows:

 

a.$35,000 on execution hereof;
   
b.$70,000 on October 1, 2023; and
   
c.$70,000 on January 1, 2024 (collectively the “Retention Bonus Payment”).

 

Said Retention Bonus Payment shall be accelerated and paid in full at such time as the earlier to occur, if any, of:

 

d.A merger, sale or change of control of Company; or
   
e.that date in which the Employee’s employment is terminated so long as such termination is made without cause in accordance with the Prior Agreement.

 

(ii)Transaction Bonus: Employee shall be entitled to a transaction bonus equal to 0.95% of proceeds from any merger, sale or change of control transaction entered by the Company (“Transaction”) during the Term of Employees Prior Agreement, as amended and for a period of up to two (2) months thereafter termination thereof so long as any such Transaction exceeds Net Proceeds of no less than $26,000,000 (“Threshold”). The term “Net Proceeds” shall be defined for purposes of this Amendment as Gross Proceeds received in cash from a Transaction: plus (a) cash on deposit, and (b) amounts received from Aspire Global plc or its affiliates/acquiror (“Aspire”) in respect of claims thereon (which may include forgiveness of the seller note due to Aspire if all obligations to the senior lender are paid in full); less (a) revolving credit facility and any debtor-in- possession (DIP) balance(s), (c) amounts owed to Houlihan Lokey Capital (financial advisor), (d) amounts owed to Nelson Mullins (SAC legal counsel), (e) amounts owed to Buchalter, LLP, (f) amounts owed to Fennemore Craig law firm, (g) amounts owed to a financial advisors engaged by the Company and/or the Strategic Alternatives Committee specifically to render a fairness opinion on the proposed transaction, and (h) amounts owed to other management for other Transaction Bonuses. If Net Proceeds before said Transaction Bonus are in excess of the Threshold but insufficient to pay full bonuses without reducing Net Proceeds below the threshold, the Bonuses due will be reduced to bring Net Proceeds exactly to the threshold.
   
a.Employee shall be entitled to an additional Transaction Bonus equal to 0.25% of any proceeds from any Transaction entered during the Term of Employees Prior Agreement, as amended and for a period of up to two (2) months thereafter termination thereof, so long as any such Transaction exceeds the Threshold and also results in repayment of any and all loans of the Company outstanding and redemption of preferred equity as of the Transaction date, termination, extinguishment or otherwise the satisfaction and all trade creditor payables as of the date of Transaction, and the recoupment of capital by all common shareholders of the Company based on any such shareholders common shareholding value as determined based on the EBET closing market price of common shares as of June 30, 2023.

 

 

   

 

 

   
(iii)Additional Severance. As an additional incentive, Employee shall be entitled to a payment upon termination made in accordance with Section 10.2 of the Prior Agreement which is equal to the greater of either (a) a severance payment equal to 100% of his annual base salary compensation applicable as of the date of any termination, or (b) that severance consideration which may be due to Employee under Section 10.2.1 of the Prior Agreement.

 

 

READ, APPROVED, AND AGREED as of the Effective Date first written hereinabove.

 

 

 

FOR: EBET, INC.

 

 

/s/ Matt Lourie                                   

Matt Lourie- CFO

 

 

 

FOR: Employee

 

 

/s/ Aaron Speach                                 

Aaron Speach--CEO

 

 

Exhibit 10.5

 

Amendment to Employment Agreement

 

This Amendment to the Employment Agreement dated September 9, 2022, as amended, by and between Matthew Lourie and EBET, INC. (fka Esports Techologies, Inc.) (“Prior Agreement”) is made and effective as of July 1, 2023 (“Effective Date”) and amends said Prior Agreement and any amendments made thereto and supersedes same only to the extent identified hereinbelow and any and all other provisions, terms and conditions of said Prior Agreement which are not referenced herein shall remain in full force and effect (“Amendment”):

 

Amendments to Prior Agreement

 

---The following Prior Agreement sections shall be replaced as follows:

 

 

2 (a) Base Salary. During the Term, the Company shall pay the Employee a base salary of $26,666.67 per month.

 

 

2 (b)(i) Retention Bonus: Employee shall be entitled to a one-time cash retention bonus paid in installments as follows:

 

a.$48,000 on execution hereof;
   
b.$72,000 on October 1, 2023; and
   
c.$72,000 on January 1, 2024; and
   
d.$48,000 on April 1, 2024 (collectively the “Retention Bonus Payment”).

 

Said Retention Bonus Payment shall be accelerated and paid in full at such time as the earlier to occur, if any, of:

 

e.A merger, sale or change of control of Company; or
   
f.that date in which the Employee’s employment is terminated so long as such termination is made without cause in accordance with the Prior Agreement.

 

2(b)(ii) Transaction Bonus: Employee shall be entitled to a transaction bonus equal to 0.95% of proceeds from any merger, sale or change of control transaction entered by the Company (“Transaction”) during the Term of Employees Prior Agreement, as amended and for a period of up to two (2) months thereafter termination thereof so long as any such Transaction exceeds Net Proceeds of no less than $26,000,000 (“Threshold”). The term “Net Proceeds” shall be defined for purposes of this Amendment as Gross Proceeds received in cash from a Transaction: plus (a) cash on deposit, and (b) amounts received from Aspire Global plc or its affiliates/acquiror (“Aspire”) in respect of claims thereon (which may include forgiveness of the seller note due to Aspire if all obligations to the senior lender are paid in full); less (a) revolving credit facility and any debtor-in-possession (DIP) balance(s), (c) amounts owed to Houlihan Lokey Capital (financial advisor), (d) amounts owed to Nelson Mullins (SAC legal counsel), (e) amounts owed to Buchalter, LLP, (f) amounts owed to Fennemore Craig law firm, (g) amounts owed to a financial advisors engaged by the Company and/or the Strategic Alternatives Committee specifically to render a fairness opinion on the proposed transaction, and (h) amounts owed to other management for other Transaction Bonuses. If Net Proceeds before said Transaction Bonus are in excess of the Threshold but insufficient to pay full bonuses without reducing Net Proceeds below the threshold, the Bonuses due will be reduced to bring Net Proceeds exactly to the threshold.

 

Employee shall be entitled to an additional Transaction Bonus equal to 0.25% of any proceeds from any Transaction entered during the Term of Employees Prior Agreement, as amended and for a period of up to two (2) months thereafter termination thereof, so long as any such Transaction exceeds the Threshold and also results in repayment of any and all loans of the Company outstanding and redemption of preferred equity as of the Transaction date, termination, extinguishment or otherwise the satisfaction and all trade creditor payables as of the date of Transaction, and the recoupment of capital by all common shareholders of the Company based on any such shareholders common shareholding value as determined based on the EBET closing market price of common shares as of June 30, 2023.

 

 

   

 

 

3(c)(i) Severance. Employee shall be entitled to a payment upon termination made in accordance with Section 4 of the Prior Agreement, so long as any such termination is made without cause, and with such payment being equal 50% of his annual base salary compensation applicable as of the date of any termination.

 

 

READ, APPROVED, AND AGREED as of the Effective Date first written hereinabove.

 

 

 

FOR: EBET, INC.

 

 

/s/ Aaron Speach                               

Aaron Speach-- CEO

 

 

 

 

FOR: Employee

 

 

/s/ Matthew Lourie                              

Matthew Lourie--CFO

Exhibit 31.1

 

CERTIFICATION PURSUANT TO

18 USC, SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

 

I, Aaron Speach, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of EBET, Inc.;
     
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedure to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;