The accompanying notes are an integral part
of these condensed consolidated financial statements.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Note
1 – Nature of Operations
Esports
Entertainment Group, Inc. (formerly VGambling Inc.) (the “Company”) was incorporated in the state of Nevada on July
22, 2008. On April 18, 2017, the majority of the shareholders of the Company’s common stock voted to approve a change of
the name of the Company from VGambling, Inc. to Esports Entertainment Group, Inc.
The
Company operates a licensed online gambling platform focused purely on the esports industry. Utilizing our peer-to-peer wagering
system, we offer real money betting exchange style wagering on esports events from around the world in a secure environment. A
betting exchange allows players to bet against one another rather than a bookmaker. Players can offer odds to, or request odds
from, other players who wish to wager. Where traditional bookmakers risk going head-to-head with gamblers on markets, a betting
exchange takes on no risk on the particular outcome of an event. Instead, a betting exchange provides the platform for its customers
to match bets against one another and takes a small commission on winnings. Betting exchanges are becoming an increasingly integral
part of the global gambling landscape, in many cases enabling customers to obtain better odds, more transparency and an experience
that feels intuitively fairer. Further, the platform also facilitates gambling through “pool betting” whereby a group
of people, be it a fan base of a team or a player or a group of friends and family, can pay a fixed price into a “pool”
and then make a selection on an outcome, related to a tournament or game in esport. After the event has finished, those that selected
the winner get an equal share of the pool.
At the current time, under our existing
Curacao license, we are able to accept wagers from residents of over 149 jurisdictions including Canada, Japan, Germany and South
Africa. On April 30, 2020, we received our Gaming Service License (“License”)
for online pool betting from the Malta Gaming Authority (“MGA”). The MGA is a long established authority that
sets standards for gambling practices across the world with emphasis on safeguarding players and promoting responsible gambling.
As an MGA license holder we will be able to benefit from onshore status in Europe as Maltese registered operators can advertise
across the European Union.
We do not accept wagers from United States
residents at this time.
Note
2 – Liquidity
The
Company is in the development stage and has not yet realized profitable operations and has relied on non-operational sources to
fund operations. The Company has incurred recurring losses and additional future losses are anticipated as the Company has not
yet been able to generate revenue. The Company’s activities are subject to significant risks and uncertainties, including
failing to obtain the licenses required to operate its gambling business, failing to secure the additional funding required to
fully operationalize the Company’s business, and the risk of existing or future competitors offering similar or more advanced
technology.
As of March 31, 2020, the Company had an accumulated
deficit of $22,400,446 and a working capital deficiency of $13,985,840. The Company has not generated any revenues during the nine
months ended March 31, 2020 and 2019. These factors raised substantial doubt regarding the Company’s ability to continue
as a going concern, which has been alleviated by the execution of management’s plans. On April 15, 2020, the Company raised
approximately $7,000,000 in net proceeds from its Offering (see subsequent events). The funds received in the Offering are expected
to be enough to satisfy the Company’s current obligations to continue operations at least for the next twelve months from
the date of this filing.
There
have been recent outbreaks in several countries, including the United States, of the highly transmissible and pathogenic coronavirus
(“COVID-19”). The outbreak of such communicable diseases could result in a widespread health crisis that could adversely
affect general commercial activity and the economies and financial markets of many countries, including the United States. An
outbreak of communicable diseases, or the perception that such an outbreak could occur, and the measures taken by the governments
of countries affected could adversely affect the Company’s business, financial condition, and results of operations.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Note
3 – Summary of Significant Accounting Policies
A
summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial
statements follows:
Basis
of presentation and principles of consolidation
The accompanying unaudited condensed consolidated
financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United
States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim
financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative
of the results for the full fiscal year. These financial statements should be read along with the Annual Report filed on Form 10-K of
the Company for the annual period ended June 30, 2019. The consolidated balance sheet as of June 30, 2019 was derived from
the audited consolidated financial statements as of and for the year then ended. The consolidated statements include the accounts
of the Company and its wholly owned subsidiaries Esports Services Antigua Ltd., Vie Esports Services B.V., Esports Services (Malta)
Limited and Esports Entertainment (Malta) Ltd. All material intercompany transactions and balances have been eliminated on consolidation.
Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current
period presentation.
Reverse Stock-Split
All share and per share amounts have been presented to give
retroactive effect to a 1 for 15 reverse stock-split that occurred in January 2020.
Income
(Loss) Per Share
Basic
income (loss) per share is computed by dividing net loss attributable to common shareholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the period. In periods of losses, diluted loss per share is computed
on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.
The
following securities were excluded from weighted average diluted common shares outstanding for the nine months ended March 31,
2020 and 2019 because their inclusion would have been antidilutive.
|
|
|
As of March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
Common stock options
|
|
|
51,941
|
|
|
|
41,941
|
|
|
Warrants issued with notes and placement agent warrants
|
|
|
414,549
|
|
|
|
725,112
|
|
|
Convertible notes
|
|
|
447,889
|
|
|
|
537,778
|
|
|
Equity to be issued
|
|
|
2,667
|
|
|
|
-
|
|
|
Totals
|
|
|
917,046
|
|
|
|
1,304,831
|
|
Recent
Accounting Pronouncements
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements.
In
February 2016, the FASB issued Accounting Standards Codification (ASC) 842, Leases, which requires lessees to recognize most leases
on their balance sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is
substantially unchanged. Additional qualitative and quantitative disclosures are also required. The Company adopted the standard
effective July 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard
at the effective date without adjusting the comparative periods presented. The Company adopted all practical expedients and elected
the following accounting policies related to this standard:
|
|
●
|
Short-term
lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term
of twelve months or less; and
|
|
|
●
|
The
option to not separate lease and non-lease components for equipment leases.
|
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
The
package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing contracts
are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii) not reassessing
initial direct costs for any existing leases.
Adoption
of this standard did not result in the recognition of operating lease right-of-use assets or liability as of July 1, 2019. The
Company’s accounting for finance leases remained substantially unchanged. The standard did not materially impact operating
results or liquidity.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic
718 applies to all share- based payment transactions in which a grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment awards. The guidance was adopted effective July 1, 2019, and the
adoption of this ASU did not have a material effect on its consolidated financial statements.
In
July 2017 the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic
480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial
instruments with down round features. The ASU, among other things, eliminates the need to consider the effects of down round features
when analyzing convertible debt, warrants and other financing instruments. On July 1, 2019, the Company adopted this standard,
as a result, freestanding equity-linked financial instruments (or embedded conversion options) no longer are accounted for as
a derivative liability at fair value as a result of the existence of a down round feature.
The
following are new accounting pronouncements that have been issued that might have a material impact on its financial position
or results of operations.
In
August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses
customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and
also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing
arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can
be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company
is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s financial
statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount
of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements
for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within
those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company is evaluating the effect
of adopting this new accounting guidance to determine the impact it may have on the Company’s financial statements.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Note
4 – Fixed Assets
Fixed
assets as of March 31, 2020 and June 30, 2019 consists of the following:
|
|
|
March 31,
2020
|
|
|
June 30,
2019
|
|
|
Computer equipment
|
|
$
|
14,450
|
|
|
$
|
14,450
|
|
|
Furniture and equipment
|
|
|
20,241
|
|
|
|
20,241
|
|
|
Total
|
|
|
34,691
|
|
|
|
34,691
|
|
|
Accumulated depreciation
|
|
|
(24,533
|
)
|
|
|
(18,114
|
)
|
|
Net carrying value
|
|
$
|
10,158
|
|
|
$
|
16,577
|
|
During
the nine months ended March 31, 2020 and 2019, the Company recorded total depreciation expense of $6,419 and $8,963 respectively.
Note
5 – Intangible Assets
Intangible
assets as of March 31, 2020 and June 30, 2019 consists the following:
|
|
|
March 31,
2020
|
|
|
June 30,
2019
|
|
|
Online gaming website
|
|
$
|
127,133
|
|
|
$
|
127,133
|
|
|
Accumulated amortization
|
|
|
(57,502
|
)
|
|
|
(45,907
|
)
|
|
Impairment of intangible assets
|
|
|
(67,131
|
)
|
|
|
-
|
|
|
Net carrying value
|
|
$
|
2,500
|
|
|
$
|
81,226
|
|
During
the nine months ended March 31, 2020 and 2019, the Company recorded total amortization expense of $11,595 and $37,079, respectively.
During
the nine months ended March 31, 2020 and 2019, the Company recorded total impairment expense of $67,131 and $0, respectively.
Note
6. Related Party Transactions
The
Company entered into transactions and owes balances related to cash to officers and directors.
a)
The Company currently leases office space from the Chief Executive Officer of the Company, Grant Johnson. During the nine months
ended March 31, 2020 and 2019, the Company incurred rent of $7,200 for both periods, charged by its Chief Executive Officer. As
of March 31, 2020 and 2019, the Company owed $0 and $3,151, respectively, to its Chief Executive Officer related to rent payments.
b)
The Company provides an expense advance to David Watt, a Director of the Company. For the nine months ended March 31, 2020 and
2019, the Company had provided an expense advance of $0 and $18,750, respectively, to Mr. Watt. As of March 31, 2020 and June
30, 2019, the Company included in prepaid expenses and other current assets – related party was $0 and $16,050 for both
periods related to David Watt’s expense advance.
c) During the nine months ended March 31, 2020
and 2019, Swiss Interactive Software GmbH (“Swiss”) charged the Company software consulting fees of $20,505 and $0,
respectively, related to the development of the Company’s online gaming website. Mr. Rozum is the controlling shareholder
of Swiss and was a director and the CTO of the Company until his resignation on September 19, 2019. As of March 31, 2020 and June
30, 2019, the Company has accrued $36,650 and $93,265, respectively in relation to this agreement.
d)
During the nine months ended March 31, 2020 and 2019, Ardmore Software SP.Z.O.O. (“Ardmore”) charged the Company IT
consulting fees of $0 and $243,426, respectively and rent expense, totaling $0 and $35,379, respectively. Mr. Rozum is the controlling
shareholder of Ardmore and was a director and the CTO of the Company until his resignation on September 19, 2019. As of March
31, 2020 and June 30, 2019, the Company owed $0 and $53,000, respectively.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Note
7 – Commitments and contingencies
Swiss
Interactive – Related Party
On
April 7, 2019, the Company entered into the Software Transfer Agreement with Swiss Interactive for the purchase of the Licensed
Software for consideration of $1,700,000, the consummation of which was contingent upon either the Company’s completion
of (i) any private placement offerings or registered public offerings pursuant to which the Company receives proceeds in excess
of $6,000,000 or (ii) any private or public offerings in connection with the listing of the Company’s securities on a national
securities exchange (“Qualified Offering”). If the Company did not complete a Qualified Offering within six months
of the execution date of the transfer agreement, such agreement would become void and the Company and Swiss Interactive would
continue to abide by the terms of the existing Betting Gaming Platform Software Agreement entered into with Swiss Interactive
Software GmbH on June 12, 2014 (the “Original Software Licensing Agreement”).
On November 6, 2019 the Software Transfer
Agreement was terminated.
Consultant
Agreements
On
June 12, 2014, the Company entered into a Betting Gaming Platform Software Agreement with Swiss Interactive Software GmbH. The
monthly fees due under the agreement are based on the percentage of total revenues per month ranging from 5.0% to 10.0%. Monthly
fees for platform support and maintenance services are set at a minimum of 2,500 Euros and a maximum of 25,000 Euros. During December
2019, the Betting Gaming Platform Software Agreement was terminated
On
August 1, 2017, the Company entered into a consulting agreement with a consultant for compensation of $48,000 per year. If the
Company’s generates revenues exceeding $1,000,000 per month for six consecutive months the base annual compensation will
increase to $72,000 per year.
On
July 13, 2018, the Company entered into an agreement in principle with a third party, to assist the Company with an offering of
common stock of the Company or any other financing. Pursuant to this agreement, the Company advanced $50,000 for expenses which
has been included in prepaid expenses as a deferred financing cost as of March 31, 2020 and June 30, 2019. In the event the agreement
is terminated, the Company has agreed to reimburse the third party for the full amount of accountable expenses incurred to such
date, up to a maximum of $200,000.
Contingencies
Boustead Securities, LLC (“Boustead”) has notified the
Company that it owes Boustead $192,664, as well as warrants to purchase 94,528 shares of common stock of the Company, as compensation
for their acting as the placement agent for the sale of Company securities between June 2017 and 2018. Unless this matter is settled,
Boustead has notified us that they plan to file an arbitration claim to resolve this dispute. Management believes this claim to
be without merit as it is management’s position that Boustead has been paid in full for the services provided and that no
further cash or warrants are owed. The JAMS arbitration was originally scheduled for the end of January 2020 and has since been
deferred due to COVID-19. It is our position that we have paid Boustead in full for the services it provided to us. We have denied
that we owe Boustead any additional cash or warrants and have filed motions to dismiss these claims as well as filed counterclaims
against Boustead. We plan to continue to vigorously defend the Company against these claims.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
On
December 19, 2018, Mr. Bryan Whatley, filed the first amended complaint against the Company (the “Defendant”) in the
United States District Court in the District of Nevada for breach of contract in connection with its acting as a finder to assist
the Company in finding potential investors. In their complaint, they sought damages in excess of $85,000 plus warrants to purchase
shares of the Company’s common stock. The Company filed an answer to the first amended complaint denying the existence of
a contract between the Company and Mr. Whatley, among other things. Management believes this claim to be without merit as it is
management’s position that there was no contract. We plan to continue to vigorously defend the Company against this claim.
The deadline for Mr. Whatley to respond to the Company’s answer was April 12, 2019, and no such response was filed.
On April
23, 2019, the Company filed a motion to dismiss with the United States District Court of the State of Nevada. On August 27, 2019,
an order that the Defendant’s motion to dismiss was granted.
Note
8 – Convertible Debt
The Notes and the Bridge (each as defined
below) were mandatorily converted in full on April 15, 2020 upon consummation of the April Offering.
$2,200,000
Secured Convertible Note
On
November 13, 2018 (the “November 2018 Offering”), the Company issued face value $2,200,000 5% Senior Convertible
Notes issued at a 10% original issue discount along with 244,445 warrants for net proceeds of $2,000,000 (the “Notes”).
Cash fees paid for financing costs were $336,193. The Notes are secured by all of our assets and accrues interest at 5% per annum,
payable in cash at maturity. However, the principal amount may be converted at the option of the holder at any time during the
term to maturity into shares of our common stock at a conversion price of $9.0 per share subject to adjustment for capital reorganization
events and subsequent sales by the Company of shares of its common stock at a price per share below $9.0. The Notes also contain
certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation
events and corporate existence. The Company has concluded that the Notes contain an embedded conversion option that is indexed
to the Company’s stock which contain an optional cash settlement feature. Therefore, the embedded conversion option is subject
to classification in the Company’s financial statement in liabilities at fair value both at inception and subsequently pursuant
to ASC 815.
In
connection with the issuance of the Note, the Company issued the holders warrants to purchase our common stock. The warrant is
exercisable until November 13, 2021 for 244,445 of shares at a purchase price of $11.25 per share subject to adjustment for capital
reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25. The
Company has concluded that the Warrants contain an optional cash settlement feature. Therefore, the Warrants are subject to classification
in the Company’s financial statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815.
Additionally,
the Company issued its placement agents warrants to purchase its common stock. The warrant is exercisable until December 12, 2023
for 48,889 of shares at a purchase price of $11.25 per share subject to adjustment for capital reorganization events and subsequent
sales by the Company of shares of its common stock at a price per share below $11.25. The Company has concluded that the Warrants
contain an optional cash settlement feature. Therefore, the Warrants are subject to classification in the Company’s financial
statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815.
On July 17, 2019, the Company and the investors
(the “Investors”) in its November , 2018 Offering entered into Waiver Agreements (the “Waiver Agreements”).
Pursuant to the terms of the Waiver Agreement, the Investors waived the exercise of remedies with regard to certain breaches of
agreements and any and all events of defaults between the Company and the Investors, including the Notes, Warrants, and Securities
Purchase Agreements (the “Transaction Documents”).
In
consideration for the Investors entrance into the Waiver Agreements, the Company increased the principal amount of each Note issued
in the November 2018 Offering by 30%, in the form of an Amended and Restated Senior Secured Convertible Promissory Note (the
“Amended and Restated Note”). Additionally, for its role as lead investor, facilitator and negotiating the terms of
the Waiver Agreement, the Company issued to Cavalry Fund I LP warrants to purchase 3,333 shares of Common Stock exercisable on
or after October 1, 2019 for a term of three (3) years from such date at an exercise price of $11.25 per share (the “Cavalry
Warrant”).
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
The
Company evaluated the debt modification for the Amended and Restated Note in accordance with ASC 470-50 and concluded that the
debt qualified for debt extinguishment as the 10% cash flow test was met. As a result, the $2,200,000 Secured Convertible Note
was written off and the Amended and Restated Note was recorded at fair value as of July 17, 2019. On July 17, 2019 the Company
wrote off the remaining principal balance of $2,200,000 and recorded the Amended and Restated Note at fair market value in the
amount of $4,476,412. On July 17, 2019, of the $4,476,412 fair market value, $2,860,000 represents the face amount of the Amended
and Restated Note and $1,616,412 represents the deemed premium paid for the Amended and Restated Note which was recorded as additional
debt principal to be amortized over the remaining life of the Amended and Restated Note. The Company accelerated the remaining
amortization of the July 17, 2019 premium on November 19, 2019. For the nine months ended March 31, 2020, the Company recorded
a reduction to amortization expense in the amount of $1,616,412 for the amortization of the deemed premium and a loss on extinguishment
of debt in the amount of $2,795,582.
On
November 19, 2019, the Company and the Investors in its November 2018 Offering have agreed to or entered into subsequent Waiver
Agreements (the “November Waiver Agreements”). Pursuant to the terms of the November Waiver Agreement, the Investors
agreed to waive the exercise of remedies with regard to any and all events of default between the Company and the Investors, in
connection with the Transaction Documents and agreed to extend the maturity of their Notes until February 14, 2020. As of March
31, 2020, the Investors verbally agreed to extend the maturity date until the filing of the Company’s registration statement,
which was subsequently filed on April 15, 2020.
In
consideration for the Investors entrance into the Waiver Agreements, the Company has agreed to issue to each Investor an additional
Warrant (the “Additional Warrant”) to purchase such number of shares of the Company’s Common Stock equal to
5% of the Warrant Shares initially issuable to such Investor under the Warrant issued to such Investor in the November 13, 2018
Offering, as amended. The Additional Warrant shall have an exercise price of $11.25 per share and shall be in form substantially
the same as the Warrants issued in the November 13, 2018 Offering, provided that no cashless provision, ratchet provision or piggyback
registration provisions shall be contained in the Additional Warrants.
The
Company evaluated the debt modification for the Amended and Restated Note in accordance with ASC 470-50 and concluded that the
debt did not qualify for debt extinguishment as the 10% cash flow test was not met. As a result, the additional warrants issued
in connection with the waiver were fair valued and recorded as a debt discount, and are being amortized to interest expense over
the remaining term of the debt. In addition, the Company incurred $50,000 of deferred financing fees in connection with the modification
and expensed the fees to interest expense immediately.
These Notes were verbally agreed to be extended
at the maturity date. The Notes were mandatorily converted in full on April 15, 2020 upon the consummation of the Company’s
public offering of its securities and simultaneous listing on the Nasdaq Capital Market (the “April Offering”).
Private
Placement Offerings
On
August 14, 2019 and August 29, 2019, the Company consummated the initial closings (“Initial Closings”) of a private
placement offering (the “Offerings”) whereby the Company entered into those certain securities purchase agreement
(the “August 2019 Purchase Agreements”) with seven (7) accredited investors (the “August Investors”).
Pursuant to the August 2019 Purchase Agreements, the Company issued the August Investors those certain convertible promissory
notes (the “August Convertible Promissory Notes”) in the aggregate principal amount of $522,500 (including a 10% original
issue discount) and warrants (the “August Investor Warrants”) to purchase 58,057 shares of the Company’s common
stock for aggregate gross proceeds of $475,000.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
On
October 11, 2019 and December 16, 2019, Company consummated additional closings of the Offerings whereby the Company entered into
certain securities purchase agreement accredited investors (the “Q2 Closings”). Pursuant to the Q2 Closings, the Company
issued the investors those certain convertible promissory notes (the “Q2 Promissory Notes”) in the aggregate principal
amount of $753,500 (including a 10% original issue discount) and to purchase 92,278 shares of the Company’s common stock
for aggregate gross proceeds of $685,000.
The
August Convertible Promissory Notes and Q2 Promissory Notes, together and in the aggregate the (“Bridge Notes”) accrue
interest at a rate of 5% per annum and are initially convertible into shares of the Company’s common stock at a conversion
price of $9.00 per share, subject to adjustment (the “Conversion Price”). The Bridge Notes contain a mandatory conversion
mechanism whereby unpaid principal and accrued interest on the Bridge Notes, upon the closing of a Qualified Offering (as defined
therein) converts into the securities offered in such a Qualified Offering at the lower of (i) the Conversion Price and (ii) 80%
of the offering price in the Qualified Offering. The Bridge Notes contain customary events of default (each an “Event of
Default”) and mature on August 14, 2020, August 29, 2020, October 16, 2020 and December 6, 2020. If an Event of Default
occurs, the outstanding principal amount of the Bridge Notes, plus accrued but unpaid interest, liquidated damages and other amounts
owing with respect to the Bridge Notes will become, at the holder’s election, immediately due and payable in cash at the
“Mandatory Default Amount”. The Mandatory Default Amount means the sum of 130% of the outstanding principal amount
of the Bridge Notes plus accrued and unpaid interest, including default interest of 18% per year, and all other amounts, costs,
expenses and liquidated damages due in respect of the Bridge Notes.
Pursuant
to the Bridge Notes, each investor was entitled to 100% warrant coverage, such that investor in the Bridge Notes received the
same number of warrants to purchase shares of Common Stock as is the number of shares of Common Stock initially issuable upon
conversion of the Bridge Notes as of the date of issuance. The warrants issued in accordance with the Bridge Notes are exercisable
at a price of $11.25 per share, subject to adjustment from the date of issuance through August 14, 2022, August 29, 2022, October
11, 2022 and December 16, 2022.
The Bridge Notes were mandatorily converted in full on April
15, 2020 upon the consummation of the April Offering.
Joseph
Gunnar & Co., LLC (the “Placement Agent”) acted as placement agent for the Offerings and received cash compensation
of $85,000 and warrants to purchase 20,778 shares of the Company’s common stock, at an initial exercise price of $11.25
per share, subject to adjustment (“Agent Warrants”). The Agent Warrants may be exercised on a “cashless”
basis and expire in August 14, 2024 and August 29, 2024.
Accounting
for the Amended and Restated Notes and Convertible Promissory Notes
The
Company evaluated the terms and conditions of the Amended and Restated Notes and Convertible Promissory Notes issued in the private
placement offerings under the guidance of ASC 815. Because the economic characteristics and risks of the equity-linked conversion
options are clearly and closely related to a debt-type host and the conversion features contain an optional cash settlement, the
conversion features require classification and measurement as derivative financial instruments. Further, these features individually
were not afforded the exemption normally available to derivatives indexed to a company’s own stock. Accordingly, our evaluation
resulted in the conclusion that this compound derivative financial instrument requires bifurcation and liability classification,
at fair value. The compound derivative financial instrument consists of an embedded conversion feature. Current standards contemplate
that the classification of financial instruments requires evaluation at each report date.
The
following tables reflect the allocation of the purchase on the financing dates:
|
Secured Convertible Notes
|
|
Face Value
|
|
|
|
|
March 31,
2020
|
|
|
June 30,
2019
|
|
|
Face value of Amended and Restated Note
|
|
$
|
2,755,000
|
|
|
$
|
2,200,000
|
|
|
Face value of Bridge Notes
|
|
|
1,276,000
|
|
|
|
-
|
|
|
Total face value
|
|
|
4,031,000
|
|
|
|
2,200,000
|
|
|
Aggregate debt discount
|
|
|
(-)
|
|
|
|
(1,919,280
|
)
|
|
Carrying value
|
|
$
|
4,031,000
|
|
|
$
|
290,720
|
|
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
The
carrying value of the aggregate secured convertible notes at March 31, 2020 and June 30, 2019 was $4,031,000 and $290,720, respectively.
Discounts and premiums on the convertible notes
arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor
and (iii) initial recognition at fair value, which is greater than face value. Discounts and premiums are amortized through charges
to and reductions to amortization of interest expense using the effective interest rate method over the term of the debt agreement.
Amortization of debt discounts amounted to $2,841,617 and amortization of debt premium amounted to $1,616,412, which resulted in
expense from net amortization in the amount of $1,225,205 during the nine months ended March 31, 2020. During the nine months ended
March 31, 2019, the Company recorded amortization of debt discount in the amount of $1,176,324.
Derivative
Liabilities
The
carrying value of the compound embedded derivative and warrant derivative liabilities are on the balance sheet, with changes in
the carrying value being recorded as a change in fair market value of derivative liabilities on the statements of operations and
comprehensive loss.
The
components of the compound embedded derivative and warrant derivative liabilities as of March 31, 2020 are as follows:
|
Our financing giving rise to derivative financial instruments
|
|
Indexed
Shares
|
|
|
Fair
Values
|
|
|
Compound embedded derivatives:
|
|
|
|
|
|
|
|
$4,031,000 face value secured convertible notes
|
|
|
447,889
|
|
|
$
|
7,974,983
|
|
|
Warrant derivative liabilities (Placement agent Warrants)
|
|
|
94,775
|
|
|
|
984,913
|
|
|
|
|
|
1,360,670
|
|
|
$
|
8,959,896
|
|
The
components of the compound embedded derivative and warrant derivative liabilities as of June 30, 2019 are as follows:
|
Our financing giving rise to derivative financial instruments
|
|
Indexed
Shares
|
|
|
Fair
Values
|
|
|
Compound embedded derivatives:
|
|
|
|
|
|
|
|
$2,200,000 face value secured convertible notes
|
|
|
244,444
|
|
|
$
|
1,777,363
|
|
|
Warrant derivative liabilities (Issued with Notes)
|
|
|
244,445
|
|
|
|
2,398,057
|
|
|
Warrant derivative liabilities (Placement agent Warrants)
|
|
|
48,889
|
|
|
|
479,611
|
|
|
|
|
|
537,778
|
|
|
$
|
4,655,031
|
|
Fair
Value Considerations
GAAP
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented
in the tables below, this hierarchy consists of three broad levels:
Level
1 valuations: Quoted prices in active markets for identical assets and liabilities.
Level
2 valuations: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets
or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level
3 valuations: Significant inputs to valuation model are unobservable.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
Financial
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as
of March 31, 2020.
|
|
|
Amounts at
|
|
|
Fair Value Measurement
Using Level 3 Inputs Total
|
|
|
Liabilities
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Derivative liability – conversion feature
|
|
$
|
7,974,983
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,974,983
|
|
|
Derivative liability – warrants
|
|
|
984,913
|
|
|
|
-
|
|
|
|
-
|
|
|
|
984,913
|
|
|
Total
|
|
$
|
8,959,896
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,959,896
|
|
Financial
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as
of June 30, 2019.
|
|
|
Amounts at
|
|
|
Fair Value Measurement
Using Level 3 Inputs Total
|
|
|
Liabilities
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Derivative liability – conversion feature
|
|
$
|
1,777,363
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,777,363
|
|
|
Derivative liability – warrants
|
|
|
2,877,668
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,877,668
|
|
|
Total
|
|
$
|
4,655,031
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,655,031
|
|
The
table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended March
31, 2020:
|
|
|
Amount
|
|
|
Balance at June 30, 2019
|
|
$
|
4,655,031
|
|
|
Change due to warrant exercise
|
|
|
(1,222,602
|
)
|
|
Change due to extinguishment of debt
|
|
|
(1,426,323
|
)
|
|
Change due to acquired amended and restated note
|
|
|
2,504,127
|
|
|
Change due to issuance of warrants
|
|
|
2,210,550
|
|
|
Change in fair value of derivative liabilities
|
|
|
5,162,712
|
|
|
Change in fair value of warrant liabilities
|
|
|
702,739
|
|
|
Change due to redemption of convertible debt
|
|
|
(42,896
|
)
|
|
Change due to extinguishment of warrant liabilities upon Warrant Exchange
|
|
|
(3,583,442
|
)
|
|
Balance at March 31, 2020
|
|
$
|
8,959,896
|
|
The
fair value of the derivative conversion features and warrant liabilities as of March 31, 2020 were calculated using a Monte-Carlo
option model valued with the following assumptions:
|
|
|
March 31,
2020
|
|
Dividend
yield
|
|
0%
|
|
Expected
volatility
|
|
173.1%
- 244.8%
|
|
Risk
free interest rate
|
|
2.05%
- 2.31%
|
|
Contractual
term (in years)
|
|
1.62
– 5.00
|
|
Conversion/Exercise
price
|
|
$0.39
- $6.00
|
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Changes
in the observable input values would likely cause material changes in the fair value of the Company’s Level 3 financial
instruments.
The
features embedded in the secured convertible notes and the warrants were valued using a Monte Carlo based valuation model. The
Monte Carlo valuation technique was utilized because it embodies all of the requisite assumptions (including the underlying price,
exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward
contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts
future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial
instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration
of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly
volatile and sensitive to changes in the trading market price of the Company’s common stock. Because derivative financial
instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these
estimate and assumption changes.
Note
9 – Common Stock
Issued
Common Stock
During
the nine months ended March 31, 2019, the Company issued 110,667 shares of its common stock related to the exercise warrants with
a weighted average exercise price of $2.55 per share.
During
the nine months ended March 31, 2019, the Company issued 84,444 shares of its common stock related equity to be issued for the
exercise of warrants in a previous period with an exercise price of $2.55 per share. The Company recorded these shares as equity
to be issued at June 30, 2018 and did not receive any cash proceeds during the nine months ended March 31, 2019. For the nine
months ended March 31, 2019, the Company recorded $220,602 as a reduction in equity to be issued.
During
the nine months ended March 31, 2019, the Company issued 13,778 shares of its common stock related to a subscription agreement
entered into in a previous period. The Company recorded these shares as equity to be issued at June 30, 2018 and did not receive
any cash proceeds during the nine months ended March 31, 2019. For the nine months ended March 31, 2019, the Company recorded
$31,000 as a reduction in equity to be issued.
During
the nine months ended March 31, 2019, the Company issued 11,000 shares of its common stock related to services received in a previous
period. The Company recorded these shares as equity to be issued at June 30, 2018. For the six months ended December 31, 2018,
the Company recorded $127,500 as a reduction in equity to be issued and $6,000 as stock based compensation.
During
the nine months ended March 31, 2019, the Company issued 6,667 shares of common stock related to an employment agreement of an
officer of the Company. For the nine months ended March 31, 2019, the Company recorded $60,000 as stock based compensation in
relation to the employment agreement
During
the nine months ending March 31, 2019, the Company issued 2,222 shares of its common stock in relation to a sponsorship agreement
and recorded stock based compensation in the amount of $21,999 in relation to the agreement.
During
the nine months ended March 31, 2020, the Company issued 53,028 shares of its common stock upon the exercise of warrants upon
a cashless exercise.
During
the nine months ended March 31, 2020, the Company issued 44,445 shares of its common stock upon the exercise of warrants and received
cash proceeds of $100,000.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
On November 19, 2019, the Company and the
Investors in its November 2018 Offering entered into subsequent Waiver Agreements (the “November Waiver Agreements”).
Pursuant to the terms of the November Waiver Agreement, the Investors agreed to waive the exercise of remedies with regard to
any and all events of default between the Company and the Investors, in connection with the Transaction Documents and agreed to
extend the maturity of their Notes until February 14, 2020. As of March 31, 2020, the Investors verbally agreed to extend the
maturity. The Company issued 5,435 shares of common stock in relation to the November Waiver Agreements. These Notes were mandatorily
converted in full upon the consummation the April Offering
In consideration for the Investors entrance
into the Waiver Agreements, the Company has agreed to issue to each Investor an additional Warrant (the “Additional Warrant”)
to purchase such number of shares of the Company’s Common Stock equal to 5% of the Warrant Shares initially issuable to such
Investor under the Warrant issued to such Investor in the November 13, 2018 Offering, as amended. The Additional Warrant shall
have an exercise price of $11.25 per share and shall be in form substantially the same as the Warrants issued in the November 2018
Offering, provided that no cashless provision, ratchet provision or piggyback registration provisions shall be contained in the
Additional Warrants.
During
the nine months ended March 31, 2020, the Company issued 16,667 shares of its common stock related to a consulting agreement dated
June 4, 2019. These shares were recorded as equity to be issued at June 30, 2019, and during the nine months ended March 31, 2020,
the Company recorded $200,000 as a reduction to equity to be issued. As of March 31, 2020, the Company recorded a prepaid expense
in the amount of $125,000 related to the value of the common stock granted for future services to be rendered.
Note
10 – Warrants
Warrant
Exchange
On
January 17, 2020 the Company entered into Exchange Agreements with eighteen of its investors whereby the investors agreed to exchange
warrants to purchase an aggregate of 288,722 shares of common stock for 288,722 shares of the Company’s common stock (the
“Warrant Exchange”). The Company recorded $1,894,418 as a gain on Warrant Exchange which represents the difference
in the fair value of the exchanged warrants in the amount of $3,583,442 and the fair value of the common stock issued in the amount
of $1,689,024. The Exchange Agreements were entered into in order to extinguish the derivative liability associated with the warrants.
A
summary of the Company’s warrant activities is as follows:
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Intrinsic
Value
|
|
|
Outstanding, June 30, 2019
|
|
|
727,779
|
|
|
$
|
6.30
|
|
|
|
2.09
|
|
|
$
|
2,563,939
|
|
|
Issued
|
|
|
190,996
|
|
|
|
11.25
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(138,612
|
)
|
|
|
8.50
|
|
|
|
-
|
|
|
|
-
|
|
|
Exchanged
|
|
|
(288,722
|
)
|
|
|
11.25
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(76,892
|
)
|
|
|
3.12
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding and Exercisable, March 31, 2020
|
|
|
414,549
|
|
|
$
|
4.75
|
|
|
|
1.86
|
|
|
$
|
306,523
|
|
There
were 138,612 warrants exercised during the nine months ended March 31, 2020. The intrinsic value of the warrants exercised during
the nine months March 31, 2020 and 2019 was $49,334 and $1,274,000, respectively.
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Note
11 – Stock Options
On August 1, 2017, the Company adopted
the 2017 Stock Incentive Plan (the “2017 Plan”) whereby incentive stock options issued to employees, officers, and
directors of the Company shall not exceed 166,667 of which the purchase price of the stock options shall not be less than 100%
of the fair market value of the Company’s common stock and the period for exercising the stock options not exceed 10 years
from the date of grant. The option price per share with respect to each option shall be determined by the committee for non-qualified
stock options.
A
summary of the Company’s stock option activity is as follows:
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding, June 30, 2019
|
|
|
51,942
|
|
|
$
|
10.50
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding, December 31, 2019
|
|
|
51,942
|
|
|
$
|
10.50
|
|
As
of March 31, 2020, the weighted average remaining life of the options was 4.6 years.
During
the three and nine months ended March 31, 2019, the Company recorded stock-based compensation expense of $146,340 and $328,959,
respectively, which has been recorded as general and administrative expense in the statements of operations.
For
the three and nine months ended March 31, 2020, the Company recorded stock based compensation as general and administrative expense
in the amount of $118,475 and $448,434, respectively. For the three and nine months ended March 31, 2019, the Company recorded
stock based compensation as general and administrative expense in the amount of $328,959 and $160,500, respectively. Of the $448,434
stock based compensation, $244,094 was related to the amortization of stock based compensation recorded as prepaid expense. As
of March 31, 2020, there was $120,407 of unrecognized expense related to non-vested stock-based compensation arrangements.
Note
12 – Segment Information
The
following tables summarizes financial information by geographic segment.
For
the nine months ended March 31, 2020:
|
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
U.S.
|
|
|
Total
|
|
|
Net Loss
|
|
$
|
27,974
|
|
|
$
|
46,375
|
|
|
$
|
126,864
|
|
|
$
|
12,015,048
|
|
|
$
|
12,216,261
|
|
For
the nine months ended March 31, 2019:
|
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
U.S.
|
|
|
Total
|
|
|
Net Loss
|
|
$
|
-
|
|
|
$
|
37,172
|
|
|
$
|
8,182
|
|
|
$
|
6,346,710
|
|
|
$
|
6,392,064
|
|
As
of March 31, 2020:
|
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
U.S.
|
|
|
Total
|
|
|
Assets
|
|
$
|
38,172
|
|
|
$
|
11,009
|
|
|
$
|
2,257
|
|
|
$
|
107,628
|
|
|
$
|
159,066
|
|
As
of March 31, 2019:
|
|
|
Antigua
|
|
|
Malta
|
|
|
Curacao
|
|
|
U.S.
|
|
|
Total
|
|
|
Assets
|
|
$
|
571,796
|
|
|
$
|
8,283
|
|
|
$
|
807
|
|
|
$
|
131,213
|
|
|
$
|
712,099
|
|
Esports Entertainment Group, Inc.
Notes to the Unaudited Interim Condensed
Consolidated Financial Statements
March 31, 2020
(Unaudited)
(Expressed in U.S. dollars)
Note
13 – Subsequent Events
On April 16, 2020, the Company closed its
offering (the “April Offering”) in which it sold 1,980,000 units, with each unit consisting of one share of the Company’s
common stock and two warrants (“Unit A Warrant” and “Unit B Warrant”, and collectively with the common
stock the “Units”), each to purchase one share of common stock, at a public offering price of $4.25 per share. In connection
with the Offering, the Company (i) received proceeds of approximately $7.6 million, after deducting underwriting discounts and
commissions, (ii) converted the Company’s convertible debt and accrued interest, (iii) and issued 1,217,241 shares of common
stock and 2,434,482 warrants with an exercise price of $4.25 per share in connection with the conversion of the Company’s
convertible debt. In addition, the underwriters were granted a 45-day option to purchase up to an additional 297,000 shares of
Common Stock, and/or 297,000 Unit A Warrants, and/or 297,000 Unit B Warrants, or any combination thereof, to cover over-allotments,
if any (the “Over-Allotment Option”). The Units were offered and sold to the public pursuant to the Company’s
registration statement on Form S-1, filed by the Company with the Securities and Exchange Commission on May 2, 2019, as amended,
which became effective on April 14, 2020.
In connection with the April Offering,
the Company entered into an underwriting agreement (the “Underwriting Agreement”) dated April 14, 2020 with the underwriters
(the “Underwriters”) of the Offering. Pursuant to the Underwriting Agreement, the Underwriters provided notice that
they would partially exercise the over-allotment option to purchase 209,400 additional Unit A Warrants and 209,400 additional Unit
B Warrants at a price of $0.01 for each of the Unit A and Unit B Warrants (the “Over-Allotment Option”). The Company
has received gross proceeds of approximately $8.42 million from the Offering to date, including the exercise of the Over-Allotment
Option, prior to deducting underwriting discounts and commission and offering expenses payable by the Company.
In connection with the April Offering the Notes and the Bridge Notes were mandatorily converted into shares of the Company’s
common stock and warrants pursuant to the terms therein. The Notes and Bridge Notes are no longer of any force or effect.
See Note 8.
On April 30, 2020 the Company received
its Gaming Service License (“License”) for online pool betting from the Malta Gaming Authority (“MGA”).
The License, is effective for a 10-year term and may be renewed by MGA for further 10-year periods subject to regulatory provisions.
On May 6, 2020, the Company entered into
a binding letter of intent (the “Letter of Intent”), setting forth the basic terms under which the Company will acquire
from AHG Entertainment Associates, LLC, a Florida limited liability company (“AHG” or the “Seller”), 100%
of the outstanding share capital (the “Sale Shares”) of LHE Enterprises Limited (“LHE”), a company incorporated
under the laws of Gibraltar, and a wholly-owned subsidiary of AHG (the “Transaction”).
The Letter of Intent provides that the
completion of the Transaction is subject to, amongst other things, the: (i) negotiation and execution of a mutually satisfactory
definitive stock purchase and/or merger agreement (the “Definitive Agreement”); (ii) completion by the Company of a
satisfactory review of the legal, financial and business conditions of LHE; and (iii) approval of the board of directors of the
Company.
As consideration for the Sale Shares, the
Company agreed to pay Seller (i) $1,250,000 in cash (the “Cash Purchase Price”); (ii) 650,000 shares of common stock
of the Company; and (iii) warrants to purchase up to 1,000,000 shares of common stock of the Company at an exercise price of $8.00
per share. The Company paid say Seller a $500,000 advance against the Cash Purchase Price in exchange for exclusivity. The Letter
of Intent shall automatically terminate upon the earlier of the execution of the Definitive Agreement or July 3, 2020.
The Definitive Agreement will contain standard
representations, warranties, covenants, indemnification and other terms customary in similar transactions. The Company and Seller
have agreed to use their commercially reasonable best efforts to negotiate and execute in good faith the Definitive Agreement by
not later than July 3, 2020.