NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and under a strategic agreement with Aspire Global plc (“Aspire”)
allowing EBET to provide online betting services to various countries around the world. On May 5, 2022, the Company changed its name to
EBET, Inc. from Esports Technologies, Inc.
Acquisition of the B2C business of Aspire Global plc
On October 1, 2021, the Company, and its wholly owned
subsidiary, 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, a subsidiary of Aspire. 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 short or medium term. 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.
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.
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 and Consolidation
The basis of accounting applied is United
States generally accepted accounting principles (“US GAAP”). All amounts included in these financial statements and
footnotes are expressed in U.S. Dollars, unless otherwise noted. The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. 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.
Business combinations
The Company accounts for business combinations under the acquisition
method of accounting, in accordance with ASC 805, which requires assets acquired and liabilities assumed to be recognized at their fair
values as of the acquisition date. Any fair value of purchase consideration in excess of the fair value of the assets acquired less liabilities
assumed is recorded as goodwill. The fair values of the assets acquired, and liabilities assumed are determined based upon the valuation
of the acquired business and involve management making significant estimates and assumptions.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of expenses during the reporting periods. Making estimates requires management to exercise judgment.
It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the
date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or
more future confirming events. Accordingly, actual results could differ significantly from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with original
maturities of 90 days or less at the date of purchase. The recorded value of our cash and cash equivalents approximates their fair value.
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 and $50,932 as of September 30, 2022 and 2021, respectively, related to the Company’s former third-party operator.
Fixed Assets, net
Software and equipment are carried at cost, net of accumulated depreciation.
Depreciation is computed utilizing the straight-line method over the estimated useful life of the asset. Additions and improvements are
capitalized, while repairs and maintenance are expensed as incurred. Software costs are depreciated over periods of one to three years.
Intangible Assets
Cryptocurrencies
There is currently no specific guidance under GAAP or alternative accounting
framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in
determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required
to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
Cryptocurrencies held are accounted for as an indefinite-lived intangible
asset under ASC 350, Intangible – Goodwill and Other. 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, which is measured
using the quoted price of the cryptocurrency at the time its fair value is being measured. 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 not 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.
The Company uses its cryptocurrencies to pay vendors and users. The
Company also receives payments on its receivables and player deposits in cryptocurrency. Gains and losses realized upon settlement of
cryptocurrencies are also recorded in general and administrative expense in our consolidated statements of operations.
Other Intangible Assets
The Company’s other intangible assets consist 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. During the year ended September 30, 2022, the Company determined that its long-lived assets related to
the esports business, including intangible assets, were impaired. As a result, the Company recognized an impairment loss of $3,851,503,
including $3,282,243 related to intangible assets and $569,260 related to property and equipment.
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. 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 September 30, 2022 and 2021:
Schedule of lease-related assets and liabilities | |
| | |
| |
| |
September 30, 2022 | | |
September 30, 2021 | |
Operating Leases: | |
| | | |
| | |
Operating lease right-of-use assets | |
$ | 129,975 | | |
$ | 343,427 | |
Right of use liability operating lease current portion | |
$ | 129,974 | | |
$ | 170,511 | |
Right of use liability operating lease long term | |
| – | | |
| – | |
Total operating lease liabilities | |
$ | 129,974 | | |
$ | 170,511 | |
The following table provides
the maturities of lease liabilities at September 30, 2022:
Schedule of maturities of lease liabilities | | |
| |
| | |
Operating | |
| | |
Leases | |
2023 | | |
$ | 141,312 | |
2023 | | |
| – | |
2024 | | |
| – | |
2025 | | |
| – | |
2026 and thereafter | | |
| – | |
Total future undiscounted lease payments | | |
| 141,312 | |
Less: Interest | | |
| (11,338 | ) |
Present value of lease liabilities | | |
$ | 129,974 | |
Operating lease expense was $201,978 and $31,877 during the years ended
September 30, 2022 and 2021, respectively.
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 was adopted on October 1, 2018 using the modified retrospective method. ASC Topic 606 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. The adoption
of ASC Topic 606 had no impact to the Company’s comparative consolidated financial statements. 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 year
ended September 30, 2022. For the year ended September 30, 2021, a single customer accounted for approximately 77% of the Company’s
revenue and 100% of the Company’s outstanding accounts receivable. 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.
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. Advertising costs incurred was $1,188,392
and $452,473 for years ended September 30, 2022 and 2021, respectively.
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 includes costs related to the compensation
of the Company’s administrative functions, insurance costs, professional fees and consulting expense.
Income Taxes
Deferred taxes are determined utilizing the "asset and liability"
method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and
the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, when it's more likely than not that deferred tax assets will not
be realized in the foreseeable future. Deferred tax liabilities and assets are classified as current or non-current based on the underlying
asset or liability or if not directly related to and asset or liability based on the expected reversal dates of the specific temporary
differences.
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 September 30, 2022 and 2021 based on the three-tier fair value hierarchy:
Schedule of fair value of financial assets and liabilities | |
| | | |
| | | |
| | |
| |
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 | | |
$ | – | |
| |
| | | |
| | | |
| | |
| |
Fair Value Measurements at September 30, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | | |
| | | |
| | |
Cash | |
$ | 9,064,859 | | |
$ | – | | |
$ | – | |
Derivative asset | |
| – | | |
| – | | |
| – | |
Total assets | |
$ | 9,064,859 | | |
$ | – | | |
$ | – | |
Liabilities | |
| | | |
| | | |
| | |
Senior Notes, net of discount | |
| – | | |
| – | | |
| – | |
Note due to Aspire | |
| – | | |
| – | | |
| – | |
Convertible notes payable, net of discount | |
| – | | |
| 1,396,133 | | |
| – | |
Other notes payable, net of discount | |
| – | | |
| 463,925 | | |
| – | |
Total liabilities | |
$ | – | | |
$ | 1,860,058 | | |
$ | – | |
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. The Company recognized
a gain on derivative instruments of $1,239,510 during the year ended September 30, 2022. Subsequent to September 30, 2022, the Company
settled all of its foreign exchange forward contracts.
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 Sterling 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.
Earnings per share
The Company computes earnings per share in accordance with Accounting
Standards Codification Topic 260 – Earnings per Share (Topic 260). Topic 260 requires presentation of both basic and diluted earnings
per shares (EPS) on the face of the income statement. 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.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible
debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated
from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion
feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion
and Other Options.” Under the ASC 470-20, an entity must separately account for the liability and equity components of the convertible
debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic
interest cost. The effect of ASC 470-20 on the accounting for our convertible debt instruments is that the equity component is required
to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheets and the value
of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. As a result,
the Company is required to record non-cash interest expense as a result of the amortization of the discounted carrying value of the convertible
debt to their face amount over the term of the convertible debt. We report higher interest expense in our financial results because ASC
470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon
interest.
For conventional convertible debt where the rate of conversion is below
market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount. When the
Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt
instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.
Recently Issued Accounting Pronouncements
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 COMBINATION
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 from the
Aspire Related Companies. 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.
The acquired assets were recorded at their estimated fair values. The
purchase price allocation is preliminary, and as additional information becomes available, the Company may further revise the preliminary
purchase price allocation, including the fair value of identified intangible assets, during the remainder of the measurement period. Measurement
period adjustments will be recognized in the reporting period in which the adjustment amounts are determined. Any such adjustments may
be material.
The purchase price of this acquisition was allocated on a preliminary
basis as follows:
Schedule of allocation of purchase price | |
| |
| |
Fair Value | |
Trademarks | |
$ | 21,836,528 | |
Customer relationships | |
| 16,162,202 | |
Goodwill | |
| 35,620,270 | |
Total | |
$ | 73,619,000 | |
Useful life is the period over which an asset
is expected to add to the future cash flows of an entity. Useful life for identifiable assets is generally estimated using a modified
straight-line method or a usage period. The Company has determined that the useful life of the trademarks vary from 5 years to an indefinite
life and determined that the useful life of the Customer Relationships was three years.
Goodwill represents the excess of the gross considerations
transferred over the fair value of the underlying net assets acquired and liabilities assumed. Goodwill recognized is not deductible for
local tax purposes.
Upon completing the acquisition of Aspire, the
company incurred the following costs:
Schedule of acquisition costs | |
| |
Debt issuance costs | |
$ | 3,372,889 | |
Equity issuance costs | |
$ | 4,184,000 | |
Transaction expenses | |
$ | 2,240,147 | |
Debt issuance costs relate to costs associated with acquiring the loan
from the CP BF Lending LLC. These have been recorded as reduction of the face value of the debt and are amortized over the life of the
loan. Equity issuance costs relate to the costs associated with the private placement. These have been recorded as reduction of the equity
proceeds. Transactions costs relate to all direct and indirect costs associated with the acquisition and expensed as incurred.
The Company’s revenue and net loss for the year ended September
30, 2022 included $58,596,620 and $17,908,280, respectively from the Aspire B2C business since the acquisition date, including interest
expense on the debt issued to acquire the business.
Unaudited proforma information
The following schedule contains pro-forma consolidated results of
operations for the year ended September 30, 2021 as if the Aspire B2C acquisition occurred on October 1, 2020. 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, 2020, or of results that may occur in the future.
Schedule of business combination proforma results | |
| | | |
| | |
| |
Fiscal Year Ended | |
| |
September 30, 2022 | | |
September 30, 2021 | |
Revenue | |
$ | 68,628,158 | | |
$ | 76,613,148 | |
Operating loss | |
| (32,488,215 | ) | |
| (12,898,566 | ) |
Net loss | |
| (42,698,109 | ) | |
| (20,728,132 | ) |
Net loss attributable to common shareholders | |
| (48,398,814 | ) | |
| (26,428,836 | ) |
Loss per common share - basic and diluted | |
$ | (3.26 | ) | |
$ | (2.28 | ) |
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 September 30, 2022 and September 30, 2021:
Schedule of borrowings outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2022 |
|
|
September
30, 2021 |
|
|
|
Contractual Interest |
|
|
|
|
Principal
outstanding balance |
|
|
Principal
outstanding balance |
|
|
Unamortized
debt discount |
|
|
Accrued
Interest |
|
|
Issuance
costs |
|
|
Carrying
amount |
|
|
Principal
outstanding balance |
|
|
Unamortized
debt discount |
|
|
Carrying
amount |
|
|
|
rate |
|
|
Currency |
|
Currency |
|
|
USD |
|
|
USD |
|
|
USD |
|
|
USD |
|
|
USD |
|
|
USD |
|
|
USD |
|
|
USD |
|
Senior Note |
|
|
15% |
|
|
USD |
|
|
30,000,000 |
|
|
|
30,000,000 |
|
|
|
(8,526,776 |
) |
|
|
558,446 |
|
|
|
(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 |
|
|
|
1,912,500 |
|
|
|
(516,367 |
) |
|
|
1,396,133 |
|
Other |
|
|
0% |
|
|
USD |
|
|
675,000 |
|
|
|
675,000 |
|
|
|
(165,480 |
) |
|
|
– |
|
|
|
– |
|
|
|
509,520 |
|
|
|
675,000 |
|
|
|
(211,075 |
) |
|
|
463,925 |
|
Total
borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
42,029,891 |
|
|
|
(8,692,256 |
) |
|
|
1,446,789 |
|
|
|
(2,435,976 |
) |
|
|
32,348,448 |
|
|
|
2,587,500 |
|
|
|
(727,442 |
) |
|
|
1,860,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,202,585 |
|
|
|
|
|
|
|
|
|
|
|
1,396,133 |
|
Long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,145,863 |
|
|
|
|
|
|
|
|
|
|
|
463,925 |
|
Total borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,348,448 |
|
|
|
|
|
|
|
|
|
|
$ |
1,860,058 |
|
Senior Note
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 “Senior Note”). The Senior Note bears interest on the unpaid principal amount at a rate per annum equal
to 15.0% as follows: (1) cash interest on the unpaid principal amount of the Senior Note at a rate equal to 14.0% per annum, plus (2) payable-in-kind
interest (“PIK Interest”) on the unpaid principal amount of the Senior Note at a rate equal to 1.0% per annum. The Company paid to
Lender on the closing date a non-refundable origination fee in an amount equal to $750,000.
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 Senior Note 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 Senior Note 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 such excess cash flow amount to prepay the outstanding principal balance of the Senior Note; provided
that no such prepayment shall be required once the unpaid principal balance of the Senior Note has been reduced to $15,000,000.
The Credit Agreement requires the Company to meet certain financial
covenants commencing June 30, 2022. The Senior Note is secured by all of the assets of the Company and its subsidiaries. The Senior Note
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 June 30, 2022, the Company had not maintained compliance
with the covenants of the Senior Note and obtained a waiver from its lender which waiver is 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 Note such that $5,000,000 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).
In connection with the Senior Note, the Company issued the Lender a warrant
(the “Lender Warrant”) to purchase 1,567,840 shares of Company common stock at an 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. 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 these 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.
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 $1,500,000. The Company does not expect to satisfy certain of these covenants
prior to January 31, 2023 and is currently in discussions with the Lender on modifying the financial covenants, although there is no
assurance that the Company will be successful in making such modifications to the Senior Note.
During the year ended September 30, 2022, the Company recognized interest
expense of $4,216,442 from the amortization debt discount and debt issuance costs related to the Senior Note.
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).
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 mature 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 determined that the assignment of the notes payable by the subsidiary to the parent company was an extinguishment
of the original notes payable due to the addition of a substantive conversion feature, and the Company recognized a loss on extinguishment
of $265,779 during the year ended September 30, 2020.
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 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 twelve months ended September 30, 2021, a total of $187,500
of principal was converted into 375,000
shares of common stock. During the years ended September 30, 2022 and 2021, the Company recorded a charge of $561,963
and $1,466,966,
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.
NOTE 5 – STOCKHOLDERS’ EQUITY
The Company is currently authorized to issue up to 100,000,000 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.
June 2022 Private Placement
On June 16, 2022, the Company issued, in a private placement priced
at-the-market under Nasdaq rules: (i) 977,657 shares of the Company’s common stock, and (ii) warrants to purchase up to an
aggregate of 977,657 shares of common stock. The combined purchase price of one share of common stock and accompanying warrant was $3.58.
The gross proceeds to the Company from the private placement were approximately $3.5 million, before deducting fees and other offering
expenses, and excluding the proceeds, if any, from the exercise of the warrants.
Acquisition of the B2C segment of Aspire Global plc
On October 1, 2021, in connection with the acquisition of the Aspire B2C business in November
2021, 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”).
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 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 is 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. In addition,
on December 31, 2022 and April 15, 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. On December 30, 2022, the holders
of a majority of the Preferred Stock approved an amendment to the terms of the Preferred Stock to: (i) extend the initial Adjustment Date
from December 31, 2022 to January 31, 2023; and (ii) to modify the definition of “Exempt Issuance” to permit the issuance
of shares of Company common stock to consultants. On December 30, 2022, the Amended and Restated Certificate of Designation of Preferences,
Rights and Limitations of the Series A Convertible Preferred Stock was filed in the State of Nevada.
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. 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.
Shares issued in the prior year
During the three months ended December 31, 2020, the Company received
gross cash proceeds of $4,000,000 in exchange for 2,000,000 shares of common stock. In conjunction with this fundraising, broker commission
and expenses of $351,929 were paid and 173,625 common stock warrants with an exercise price of $2.00 and a five-year term were issued.
The fair value of the warrants issued in connection with the financing was estimated to be $228,500 as discussed below.
In January 2021, the Company sold 250,014 shares of common stock to
investors for $3.00 per share, receiving gross proceeds of $750,042. The company paid $30,314 of broker fees and commissions related to this
fundraising and issued 8,750 warrants to purchase common stock with an exercise price of $3.00 per share and a term of 5 years. The fair
value of the warrants issued in connection with the financing was estimated to be $228,500 as discussed below.
In April 2021, the Company completed its IPO and issued 2,400,000
shares of common stock for gross cash proceeds of $14,400,000
and received net proceeds of $13,514,200
after costs of $885,800
which were recorded in shareholders’ equity. The Company also issued 168,000
common stock warrants with a five-year term and exercise price of $7.20
to the underwriter. These warrants had an estimated fair value at issuance of $5,474,076.
2020 Stock Plan
In December 2020, the Company adopted the EBET, Inc. 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 September 30, 2022, the Company had awarded a total 2,907,019 shares under the 2020 Plan, with 2,092,981
remaining under the 2020 Plan.
Common Stock Awards
During the year ended September 30, 2021, the Company agreed to award
a total of 1,210,750 restricted stock units that convert into common stock to various employees, consultants and officers under the 2020
Plan. Of the restricted stock unit awarded, 810,750 will vest annually over a period of one to four years, 200,000 will vest upon the
completion of various performance goals related to the operations of the Company, and 200,000 shares of common stock underlying awards
made to the Company’s CEO will vest equally upon reaching trailing twelve months revenue of $10 million and $20 million. The Company
estimated the fair value of the awards granted prior to the IPO, at $2 per share based on recent sales of common stock. For awards granted
after the IPO, the closing price of the Company’s stock on the grant date is used to determine the fair value.
In November 2020, the Company entered into four consulting agreements
under which the Company issued a total of 683,334 shares of common stock, which vest equally over terms ranging from three to twelve months.
The Company also awarded 100,000 shares to an additional consultant in May 2021 which vested immediately but were not yet issued as of
September 30, 2021.
During the year ended September 30, 2021, the Company recognized a
total of $2,766,480 of stock-based compensation expense related to common stock awards and expects to recognize additional compensation
cost of $5,656,423 upon vesting of all awards.
During the year ended September 30, 2022, the Company agreed to award
a total of 459,600 restricted stock units that convert into common stock to various employees, consultants and officers under the 2020
Plan. Of the restricted stock unit awarded, 414,600 will vest annually over a period of one to four years and 45,000 vest over six months.
At September 30, 2022, the Company had 461,625 restricted stock units in issuance.
During the years ended September 30, 2022 and 2021, the Company recognized
a total of $4,000,578 and $2,766,480, respectively, of stock-based compensation expense related to common stock awards and expects to
recognize additional compensation cost of $4,075,076 upon vesting of all awards.
Warrants
As discussed above, the Company has issued common stock warrants in
connection with its fundraising activities to brokers, an asset purchase agreement and convertible notes issued during the years ended
September 30, 2022 and 2021. The following table summarizes warrant activity during the years ended September 30, 2022 and 2021:
Schedule of warrant activity |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants |
|
|
|
|
Shares |
|
|
|
Weighted
Average
Exercise
Price |
|
|
|
Weighted
average
Remaining
Life in years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020 |
|
|
2,015,000 |
|
|
$ |
0.30 |
|
|
|
4.24 |
|
Granted |
|
|
386,541 |
|
|
|
4.15 |
|
|
|
5.00 |
|
Cancelled |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Expired |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Exercised |
|
|
(202,000 |
) |
|
|
0.86 |
|
|
|
– |
|
Outstanding at September 30, 2021 |
|
|
2,199,541 |
|
|
|
0.93 |
|
|
|
4.04 |
|
Granted |
|
|
4,761,199 |
|
|
|
22.23 |
|
|
|
5.00 |
|
Cancelled |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Expired |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Exercised |
|
|
(927,375 |
) |
|
|
1.78 |
|
|
|
– |
|
Outstanding at September 30, 2022 |
|
|
6,033,365 |
|
|
$ |
17.61 |
|
|
|
4.01 |
|
Exercisable at September 30, 2022 |
|
|
6,033,365 |
|
|
$ |
17.61 |
|
|
|
4.01 |
|
The outstanding and exercisable common stock warrants as of September
30, 2022 had an estimated intrinsic value of $1,168,400.
During the year ended September 30, 2022, the Company estimated the
fair value of the warrants using a Black-Scholes option pricing model and the following assumptions: 1) stock price of $2 to $28.95 per
share; 2) dividend yield of 0%; 3) risk-free rate of between 1.18% and 3.35%; 4) expected term of between 5 years; 5) an exercise price
of $2.49 or $28.95 and 6) expected volatility of 42.14% based on a peer group of public companies. The warrants issued in connection with
the Senior Notes had a fair value of $19,467,688, and the relative fair value of $11,806,307 was recorded as debt discount. The estimated
fair value of the warrants issued to preferred stockholders was $24,171,423, and the estimated fair value of the warrants issued in connection
with the June 2022 private placement was $504,952.
During the year ended September 30, 2021, the Company estimated the
fair value of the warrants using a Black-Scholes option pricing model and the following assumptions: 1) stock price of $2 to $3 per share;
2) dividend yield of 0%; 3) risk-free rate of between 0.18% and 0.81%; 4) expected term of between 2.5 and 5 years; 5) an exercise price
of $0.25, $2 $3 or $7.20 and 6) expected volatility of between 84.1% and 99.0% based on a peer group of public companies. The warrants
granted to brokers in connection with sales of common stock during the year ended September 30, 2021, had an estimated fair value of $5,474,076
which was reflected as a cost of capital, warrants granted to consultants for services had a fair value of $8,819, and the warrants granted
in connection with the asset purchase agreement had an estimated fair value of $57,252.
Options
During the years ended September 30, 2022 and 2021, the Company entered
into various agreements with employees, members of the Board of Directors and consultants whereby the Company awarded common stock options
under the 2020 Plan. Of the 997,437 unvested options as of September 30, 2022, 20,000 will vest upon future performance conditions being
met, and the remainder vest equally over periods of between one and four years from issuance.
The following table summarizes option activity during the years ended
September 30, 2022 and 2021:
Schedule of option activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options |
|
|
|
|
Shares |
|
|
|
Weighted
Average
Exercise
Price |
|
|
|
Weighted
average
Remaining
Life in years |
|
Outstanding at September 30, 2020 |
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
Granted |
|
|
2,714,348 |
|
|
|
2.62 |
|
|
|
8.83 |
|
Cancelled/Forfeited |
|
|
(235,000 |
) |
|
|
0.66 |
|
|
|
– |
|
Exercised |
|
|
(5,000 |
) |
|
|
3.00 |
|
|
|
– |
|
Outstanding at September 30, 2021 |
|
|
2,474,348 |
|
|
$ |
2.81 |
|
|
|
7.95 |
|
Granted |
|
|
55,000 |
|
|
|
28.06 |
|
|
|
10.00 |
|
Cancelled/Forfeited |
|
|
(495,563 |
) |
|
|
8.14 |
|
|
|
– |
|
Exercised |
|
|
(56,785 |
) |
|
|
0.25 |
|
|
|
– |
|
Outstanding at September 30, 2022 |
|
|
1,977,000 |
|
|
$ |
2.25 |
|
|
|
7.33 |
|
Exercisable at September 30, 2022 |
|
|
979,563 |
|
|
$ |
1.33 |
|
|
|
6.70 |
|
During the years ended September 30, 2022 and 2021, the Company recognized
stock-based compensation expense of $1,446,794 and $1,413,011, respectively, related to common stock options awarded. The exercisable
common stock options had an intrinsic value as of September 30, 2022, of $705,736. The Company expects to recognize an additional $1,242,141
of compensation cost related to stock options expected to vest.
The Company estimated the fair value of the stock options awarded during
the year ended September 30, 2022 using a Black-Scholes option pricing model and the following assumptions: 1) stock price of $3 to $31.33
per share; 2) dividend yield of 0%; 3) risk-free rate of between 0.85% and 1.20%; 4) expected term of between 3.5 and 6.25 years; 5) an
exercise price between $0.25 and $31.33 and 6) expected volatility of 42.14% based on a peer group of public companies.
NOTE 6 – LONG-LIVED ASSETS
Fixed Assets
The Company’s fixed assets consisted of
the following as of September 30, 2022 and 2021:
Schedule of fixed assets | |
| | |
| |
| |
September 30, 2022 | | |
September 30, 2021 | |
Software | |
$ | 391,851 | | |
$ | 214,996 | |
Furniture and fixtures | |
| 368,432 | | |
| – | |
Total fixed assets | |
| 760,283 | | |
| 214,996 | |
Accumulated depreciation | |
| (213,875 | ) | |
| (129,662 | ) |
Fixed assets, net | |
$ | 546,408 | | |
$ | 85,334 | |
The software costs above relate to acquired components of the Company’s
existing platform and other future products which were being depreciated over the expected useful life of 3 years. During the year ended
September 30, 2022, the Company determined that the software related to the esports platform was impaired, and recognized a loss of $569,260,
included in Impairment loss on the consolidated statement of comprehensive loss.
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 September 30, 2022 and 2021:
Schedule of intangible assets acquired | |
| | |
| |
| |
September 30, 2022 | | |
September 30, 2021 | |
Trademarks and tradenames, indefinite lives | |
$ | 14,232,080 | | |
$ | – | |
Trademarks and tradenames, three year lives | |
| 4,562,064 | | |
| – | |
Customer relationships | |
| 13,910,396 | | |
| – | |
Total acquired intangibles | |
| 32,704,540 | | |
| – | |
Accumulated amortization | |
| (5,169,148 | ) | |
| – | |
Acquired intangible assets, net | |
$ | 27,535,392 | | |
$ | – | |
The Karamba trademarks and tradenames represent approximately 75% of
the total of the acquired intangibles and have an indefinite useful life. The remaining trademarks and tradenames and customer relationships
are amortized over an estimated useful life of three years. Amortization for the year ended September 30, 2023, 2024 and 2025 is expected
to be approximately $6,146,000, $6,134,741 and $1,022,457, respectively.
Intangible Assets – Domain Names
On September 1, 2020, the Company’s wholly owned
subsidiary, ESEG, entered into domain purchase agreements to acquire the rights to certain domain names from third parties. The cost
to acquire the domain names was $2,239,606,
based on the estimated fair value of the consideration transferred to the sellers. ESEG issued notes payable with a combined
principal amount of $2,100,000,
which were to mature on March
1, 2022, bearing interest at 10%.
These notes were exchanged for notes of the Company in September 2020. The Company also agreed to pay a total of $675,000
on September
1, 2025, with no interest. The Company estimated discount of these liabilities totaling $535,394
at the date of the transaction, to be amortized over the maturity period of the liabilities. The domain names were recorded as an
intangible asset with an indefinite useful life. In connection with the preparation of these financial statements for inclusion
in the Company’s Form 10-K for the year ended September 30, 2022, the Company’s management evaluated the domain names
related to its esports operations at September 30, 2022 and determined that the assets were impaired due to the lack of progress in
developing its esports operations and the Company’s decision to no longer pursue those operations, recognizing an impairment
loss of $2,239,606,
included in Impairment loss on the consolidated statement of comprehensive loss.
Intangible Assets - Cryptocurrencies
The following table presents the activities of the Company’s
cryptocurrency holdings for the year ended September 30, 2022 and 2021:
Cryptocurrency activity table | |
| |
Cryptocurrency at September 30, 2020 | |
$ | 44,562 | |
Additions of cryptocurrency | |
| 36,605 | |
Payments of cryptocurrency | |
| (125,530 | ) |
Gain on cryptocurrency | |
| 45,267 | |
Cryptocurrency at September 30, 2021 | |
| 904 | |
Additions of cryptocurrency | |
| 21,488 | |
Payments of cryptocurrency | |
| (16,971 | ) |
Gain on cryptocurrency | |
| (428 | ) |
Cryptocurrency at September 30, 2022 | |
$ | 4,993 | |
Additions of cryptocurrency during the year ended September 30, 2022
represent net deposits from players, and payments of cryptocurrency represent payments of accounts payable and accrued expenses. Additions
of cryptocurrency during the year ended September 30, 2021 represent settlement of outstanding accounts receivable of $18,158 and net
deposits from players of $18,447. Payments of cryptocurrency during the year ended September 30, 2021 included payments of accounts payable
and accrued expenses of $64,023 and prepaid expenses of $61,509. Use of cryptocurrency to settle receivables and payables during the period
are reflected as a component of changes in operating assets and liabilities in the consolidated statement of cash flows.
Intangible Assets - License Agreement
On October 1, 2020, the Company entered into an option agreement which
gave the Company rights to acquire a license for proprietary technology related to online betting. The Company paid $133,770 upon execution
of the option agreement, paid an additional $286,328 in cash, and issued 65,000 shares of common stock upon exercise of the option on
or about May 3, 2021. The shares had a fair value of $1,456,650 at the date of exercise of the option and execution of the license agreement
resulting in total value for the license agreement of $1,876,748. During the year ended September 30, 2022 and 2021, the Company recognized
amortization expense of $573,451 and $260,659 included in product and technology expenses. In connection with the preparation of these
financial statements for inclusion in the Company’s Form 10-K for the year ended September 30, 2022, the Company determined that
the intangible asset, which was related to the esports operations due to the lack of progress in developing its esports operations and
the Company’s decision to no longer pursue those operations, was impaired and recognized an impairment loss of $1,042,637, included
in Impairment loss on the consolidated statement of comprehensive loss.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
On September 2, 2020, the Company entered into a financial advisor
agreement with Boustead Securities LLC, the representative of the underwriters in the Company’s initial public offering, to provide
services related to fundraising on the Company’s planned public listing. The Company agreed to pay the financial advisor a success
fee of 4% of any gross proceeds from any debt financing, and a 7% success fee related to any equity or convertible debt financing, subject
to customary approval by the regulatory authorities. In April 2021, the Company completed its IPO and issued 2,400,000 shares of common
stock for gross cash proceeds of $14,400,000. The Company paid underwriting fees of $885,800 and issued 168,000 warrants to purchase shares
of common stock at a price of $7.20 per share for a period of five 5 years.
On September 26, 2020, the Company entered into a consulting agreement
with a registered foreign broker dealer for fundraising services and paid 10% of any gross proceeds through capital raises from non-US
investors introduced by the consultant, up to a maximum payment to the consultant of $200,000 and the consultant also received warrants
to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. These warrants were exercised in April
2021 and were converted into 62,386 shares of the Company stock.
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 among other claims (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
alleges damages of $5.7
million and seeks 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. The case is ongoing, with a hearing before a 3-arbitrator panel currently scheduled for July 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. At this time, any estimated loss potentially arising from the Claims cannot be reasonably estimated and no liability has
been recognized.
Employment Agreements
On November 5, 2021, the Company entered into
an amended and restated employment agreement, effective October 1, 2021, with Aaron Speach pursuant to which Mr. Speach agreed to continue
to serve as the Company’s Chief Executive Officer for an initial term of three years. The agreement provides for an initial annual
base salary of $315,000, which may be increased to $350,000 retroactively as of the effective date provided the closing and consummation
of the share purchase transaction by and between Company and Aspire Global plc occurs. Pursuant to the agreement, Mr. Speach is eligible
for an annual bonus of up to 75% of his base salary, as determined solely at the discretion of the Compensation Committee. Pursuant to
the agreement, if Mr. Speach is required to be located outside of the United States for a period of 30 consecutive days or more, the Company
shall pay him a pro-rated monthly travel stipend of $3,500 for each month that he is so required to live outside of the United States.
Pursuant to the agreement, Mr. Speach is eligible to receive the following potential performance stock grants: (i) 100,000 shares of Company
common stock at such date as the Company reaches total gross revenues of $10,000,000 in any trailing 12 month period during the term of
the employment agreement; and (ii) 100,000 shares of Company common stock at such date as the Company reaches total gross revenues of
$20,000,000 in any trailing 12 month period during the term of the employment agreement. These awards were earned during the year ended
September 30, 2022. Contemporaneous with the execution of the agreement, Mr. Speach received a restricted stock unit award (the “RSU
Grant”) for 100,000 shares of Company common stock. The RSU Grant shall vest in four equal annual installments, provided Mr. Speach
is employed on each such vesting date. If Mr. Speach’s employment is terminated at our election without “cause” (as
defined in the agreement), Mr. Speach shall be entitled to receive severance payments equal to 150% of the balance due of Mr. Speach’s
base salary for the remainder of the initial term of three years.
On November 5, 2021, the Company’s Board
of Directors, upon recommendation of the Compensation Committee, approved the following policy for compensating non-employee members of
the Board. Each independent director shall receive annual cash compensation of $40,000. In addition, the chairperson of the Audit Committee,
Compensation Committee and Nominating and Governance Committee shall receive an annual compensation of $15,000, $10,000 and $5,000, respectively;
the other members of such committees shall receive an annual compensation of $7,500, $5,000 and $2,500, respectively. In addition, the
Company agreed to pay a one-time make-whole payment to the independent directors for services rendered since the Company’s initial
public offering of $27,000.
On September 9, 2022, the Company entered into an employment agreement
with Mr. Matthew Lourie pursuant to which Mr. Lourie agreed to serve as interim Chief Financial Officer of the Company commencing on such
date. The agreement provides for a monthly salary of $16,000. Mr. Lourie may receive a cash bonus of $20,000 and a restricted stock unit
grant for 20,000 shares of Company common stock upon a successful transition of services to a full time Chief Financial Officer, provided
that the final determination on the amount of the bonus and grant, if any, will be made by the Compensation Committee of the Board of
Directors, based on criteria established by the Compensation Committee. Pursuant to the agreement, Mr. Lourie will receive a restricted
stock unit award for 45,000 shares of Company common stock, which shall vest in six equal monthly installments, provided Mr. Lourie is
employed on each such vesting date. The Company may terminate the agreement at any time during the term of the agreement on 30 days’
notice.
NOTE 8 – TRANSACTION WITH RELATED PARTIES
At September 30, 2020 the Company owed $155,228 to Gogawi Inc. (a company
controlled by certain initial shareholders of the Company). The advances were due on demand and were non-interest bearing. In May 2021,
the Company repaid the advances in full.
On November 10, 2020, the Company entered into an employment agreement
with Michael Barden, a family member of the Company’s Chief Operating Officer, to serve as the Company’s marketing director.
The employment agreement provides for an annual salary of $132,000, a technology allowance of $5,000, and an award of 30,000 shares of
common stock in the Company, vesting in four equal annual installments. On August 2, 2022, Mr. Barden’s employment was terminated.
The Company engaged a firm owned by Matthew Lourie, the Company’s
Chief Financial Officer to provide financial reporting services. For the year ended September 30, 2022 and 2021, the Company incurred
consulting fees of $18,273 and $122,950, respectively.
NOTE 9 – INCOME TAXES
Deferred taxes are determined by applying the provisions of enacted
tax laws and rates for the jurisdictions in which the Company operates to the estimated future tax effects of the differences between
the tax basis of assets and liabilities and their reported amounts in the Company's consolidated financial statements. A valuation allowance
is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
The reconciliation of the provision for income taxes at the United
States federal statutory rate compared to the Company’s income tax expense as reported is as follows:
Schedule of reconciliation of provision for income taxes | |
| | |
| |
| |
Year Ended September 30, 2022 | | |
Year Ended September 30, 2021 | |
Income tax benefit computed at the statutory rate | |
$ | 8,700,000 | | |
| 3,192,000 | |
Non-deductible expenses | |
| (2,696,000 | ) | |
| (1,251,000 | ) |
Change in valuation allowance | |
| (6,004,000 | ) | |
| (1,941,000 | ) |
Provision for income taxes | |
$ | – | | |
| – | |
Significant components of the Company’s
deferred tax assets after applying enacted corporate income tax rates are as follows:
Schedule of deferred tax assets | |
| | |
| |
| |
As of September 30, 2022 | | |
As of September 30, 2021 | |
Deferred income tax assets: | |
| | | |
| | |
Net operating losses | |
$ | 8,000,000 | | |
$ | 1,996,000 | |
Valuation allowance | |
| (8,000,000 | ) | |
| (1,996,000 | ) |
Net deferred income tax assets | |
$ | – | | |
$ | – | |
The Company has an operating loss carry forward of approximately $38,090,000.
Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding
the loss carry forwards and other temporary differences will not be realized in the foreseeable future. The Company believes that carryforward
limitations will be applied to the historical net operating losses prior to the Share Exchange.
The Company has recorded no liability for income taxes associated with
unrecognized tax benefits at the date of adoption and has not recorded any liability associated with unrecognized tax benefits during
2022 and 2021. Accordingly, the Company has not recorded any interest or penalty in regard to any unrecognized benefit.
NOTE 10 – 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. For the years ended September 30, 2022 and 2021, common shares issuable under
preferred stock (1,510,806 and 0 shares), convertible debt, (5,151,986 and 3,825,000 shares), stock options (1,977,000 and 2,474,348 shares)
and common stock warrants (6,033,365 and 1,915,166 shares) were excluded from the calculation of diluted net loss per share due to their
antidilutive effect.
Schedule of earnings per share | |
| | |
| |
| |
Year Ended | |
| |
September 30, 2022 | | |
September 30, 2021 | |
Numerator: | |
| | | |
| | |
Net income (loss) | |
$ | (41,427,609 | ) | |
$ | (15,200,024 | ) |
Preferred stock dividends | |
| (4,750,585 | ) | |
| – | |
Net income (loss) attributable to common stockholders | |
$ | (46,178,194 | ) | |
$ | (15,200,024 | ) |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Basic and diluted weighted average common shares | |
| 14,839,645 | | |
| 11,397,739 | |
Basic and diluted net income (loss) per common share | |
$ | (3.11 | ) | |
$ | (1.33 | ) |
NOTE 11 – SUBSEQUENT EVENTS
On
October 4, 2022, a convertible note holder converted $300,000 of principal into 600,000 shares of common stock.
In
October 2022, the Company issued 20,750 related to outstanding restricted stock units.
On
December 30, 2022, the holders of a majority of the Preferred Stock approved an amendment to the terms of the Preferred Stock to: (i)
extend the initial Adjustment Date from December 31, 2022 to January 31, 2023; and (ii) to modify the definition of “Exempt Issuance”
to permit the issuance of shares of Company common stock to consultants. On December 30, 2022, the Amended and Restated Certificate of
Designation of Preferences, Rights and Limitations of the Series A Convertible Preferred Stock was filed in the State of Nevada.