Quarterly report pursuant to Section 13 or 15(d)

Accounting Policies, by Policy (Policies)

v3.21.2
Accounting Policies, by Policy (Policies)
9 Months Ended
Sep. 30, 2021
Accounting Policies [Abstract]  
Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual consolidated financial statements. For additional information, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements of and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 13, 2021.

 

In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2021, and for the three and nine months ended September 30, 2021 and 2020. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021 or any other period. These unaudited condensed consolidated financial statements have been derived from the accounting records of AESE, WPT and Allied Esports and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on April 13, 2021.

 

Net Income (Loss) per Common Share

Net Income (Loss) per Common Share

 

Basic loss per common share is computed by dividing net loss attributable to the Company by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the exercise of outstanding stock options and warrants and the conversion of convertible instruments. There were no dilutive securities outstanding during the three and nine months ended September 30, 2021 or the three and nine months ended September 30, 2020 (computed using the treasury stock or if-converted method).

 

The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:

 

    As of September 30,  
    2021     2020  
Restricted common shares     80,000       199,143  
Options     2,565,000       2,430,000  
Warrants     20,091,549       20,091,549  
Convertible debt    
-
      3,609,839  
Equity purchase options     600,000       600,000  
Contingent consideration shares     192,308       269,231  
      23,528,857       27,199,762  

 

Warrant Liabilities

Warrant Liabilities

 

Entities must consider whether to classify contracts that may be settled in its own stock, such as warrants, as equity of the entity or as an asset or liability. If an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity.

 

Management has determined that its publicly-traded warrants (the “public warrants”) are of a form that qualify for equity classification.

 

Management has determined that the common stock purchase warrants issued by the Company on June 8, 2020 in connection with the issuance of convertible notes (the “convertible note warrants”) are of a form that qualify for equity classification.

 

Management has determined that the warrants previously issued to the Company’s sponsor (the “sponsor warrants”) contain provisions that change depending on who holds the sponsor warrant. If the sponsor warrants are held by someone other than the initial purchasers or their permitted transferees, the sponsor warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants. This feature precludes the sponsor warrants from being indexed to the Company’s common stock, and thus the sponsor warrants are classified as a liability measured at fair value, with changes in fair value each period reported in earnings.

  

As of September 30, 2021 and December 31, 2020, the fair value of our warrant liabilities totaled $4,100 and $3,000, respectively, which are included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet. See Note 4 – Accrued Expenses and Other Current Liabilities.

 

Financial Instruments and Fair Value

Financial Instruments and Fair Value

 

Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

  Level 1 - Unadjusted quoted market prices for identical assets or liabilities;
       
  Level 2 - Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets or liabilities; and
       
  Level 3 - Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

 

This hierarchy requires management to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

 

The carrying amounts of the Company’s financial instruments, such as accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The Company’s convertible debt, bridge notes and loans payable approximate fair value due to their short-term nature and market rate of interest.

 

The sponsor warrants are carried at fair value as of September 30, 2021 and December 31, 2020. The sponsor warrants are valued using level 3 inputs. The fair value of the sponsor warrants is estimated using the Black-Scholes option pricing method. Significant level 3 inputs used to calculate the fair value of the sponsor warrants include the share price on the valuation date, expected volatility, expected term and the risk-free interest rate.

 

The following is a roll forward of the Company’s Level 3 instruments:

 

Balance, December 31, 2020   $ 3,000  
Change in fair value of sponsor warrants     36,300  
Balance, March 31, 2021     39,300  
Change in fair value of sponsor warrants     (25,300 )
Balance, June 30, 2021     14,000  
Change in fair value of sponsor warrants     (9,900 )
Balance, September 30, 2021   $ 4,100  

 

The key inputs into the Black-Scholes model at the relevant measurement dates were as follows:

 

    September 30,     December 31,  
Input   2021     2020  
Risk-free rate     0.53 %     0.27 %
Remaining term in years     2.86       3.61  
Expected volatility     46.0 %     42.0 %
Exercise price   $ 11.50     $ 11.50  
Fair value of common stock   $ 1.77     $ 1.58  

 

Revenue Recognition

Revenue Recognition

 

To determine the proper revenue recognition method, the Company evaluates each of its contractual arrangements to identify its performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’s contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is therefore not distinct. Some of the Company’s contracts have multiple performance obligations, primarily related to the provision of multiple goods or services. For contracts with more than one performance obligation, the Company allocates the total transaction price in an amount based on the estimated relative standalone selling prices underlying each performance obligation.

 

Revenue recognized from continuing operations during the three and nine months ended September 30, 2021 and 2020 was from the following sources:

 

In-person revenue

 

The Company’s in-person revenue is comprised of event revenue, sponsorship revenue, merchandising revenue and other revenue. Event revenue is generated through Allied Esports events held at the Company’s esports properties. Event revenues recognized from the rental of the Allied Esports arena and gaming trucks are recognized at the point in time when the event occurs. In-person revenue also includes revenue from ticket sales, admission fees and food and beverage sales for events held at the Company’s esports properties. Ticket revenue is recognized at the completion of the applicable event. Point of sale revenues, such as food and beverage, gaming and merchandising revenues, are recognized when control of the related goods are transferred to the customer.

 

The Company also generates sponsorship revenues for naming rights for, and rental of, the Company’s arena and gaming trucks. Sponsorship revenues from naming rights of the Company’s Las Vegas esports arena and from sponsorship arrangements are recognized on a straight-line basis over the contractual term of the agreement. The Company records deferred revenue to the extent that payment has been received for services that have yet to be performed. In-person revenue was comprised of the following for the three and nine months ended September 30, 2021 and 2020:

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Event revenue   $ 1,002,452     $ 126,289     $ 1,420,364     $ 412,361  
Sponsorship revenue     161,825       314,924       535,355       1,305,014  
Food and beverage revenue     129,549       34,427       300,357       266,726  
Ticket and gaming revenue     159,533       118,996       357,488       270,247  
Merchandising revenue     2,508       678       14,117       19,065  
Other revenue     -       618       100       722  
Total in-person revenue   $ 1,455,867     $ 595,932     $ 2,627,781     $ 2,274,135  

 

Multiplatform content revenue

 

The Company’s multiplatform content revenue is comprised of distribution revenue. Distribution revenue is generated primarily through the development, promotion, and execution of Esports Tournaments covering multiple, Company-approved game titles. The Company recognizes distribution revenue pursuant to the terms of each individual contract with the customer and records deferred revenue to the extent the Company received a payment for services that have yet to be performed or products that have yet to be delivered. The Company recorded multiplatform content revenue of $229,961 and $383,684, respectively, for the three and nine months ended September 30, 2021, and $951 for the three and nine months ended September 30, 2020.

 

The following table summarizes our revenue recognized in our condensed consolidated statements of operations:

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
                         
Revenues Recognized at a Point in Time:                        
Event revenue   $ 1,002,452     $ 126,289     $ 1,420,364     $ 412,361  
Distribution revenue     229,961       951       383,684       951  
Food and beverage revenue     129,549       34,427       300,357       266,726  
Ticket and gaming revenue     159,533       118,996       357,488       270,247  
Sponsorship revenue     -       2,502       -       2,502  
Merchandising revenue     2,508       678       14,117       19,065  
Other revenue     -       618       100       722  
Total Revenues Recognized at a Point in Time     1,524,003       284,461       2,476,110       972,574  
                                 
Revenues Recognized Over a Period of Time:                                
Sponsorship revenue     161,825       312,422       535,355       1,302,512  
Total Revenues Recognized Over a Period of Time     161,825       312,422       535,355       1,302,512  
Total Revenues   $ 1,685,828     $ 596,883     $ 3,011,465     $ 2,275,086  

 

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. 

 

Concentration Risks

Concentration Risks

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution which, at times, may exceed Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses in such accounts, periodically evaluates the creditworthiness of the financial institutions and has determined the credit exposure to be negligible.

 

During the three months ended September 30, 2021 and 2020, 1% and 18%, respectively, of the Company’s revenues from continuing operations were from customers in foreign countries. During the nine months ended September 30, 2021 and 2020, 3% and 14%, respectively, of the Company’s revenues from continuing operations were from customers in foreign countries.

 

During the three months ended September 30, 2021, the Company’s two largest customers accounted for 32% and 14% of the Company’s consolidated revenues from continuing operations. During the nine months ended September 30, 2021, the Company’s four largest customers accounted for 22%, 15%, 13% and 11% of the Company’s consolidated revenues from continuing operations. During the three months ended September 30, 2020, the Company’s three largest customers accounted for 46%, 15%, and 11% of the Company’s consolidated revenues from continuing operations. During the nine months ended September 30, 2020, the Company’s two largest customers accounted for 53% and 18% of the Company’s consolidated revenues from continuing operations.

 

Foreign Currency Translation

Foreign Currency Translation

 

The Company’s reporting currency is the United States Dollar. The functional currencies of the Company’s operating subsidiaries are their local currencies (United States Dollar and Euro). Euro-denominated assets and liabilities are translated into the United States Dollar using the exchange rate at the balance sheet date (1.1589 and 1.2264, at September 30, 2021 and December 31, 2020, respectively), and revenue and expense accounts are translated using the weighted average exchange rate in effect for the period (1.1790 and 1.1243 for the nine months ended September 30, 2021 and 2020, respectively). Resulting translation adjustments are made directly to accumulated other comprehensive (loss) income.

 

Subsequent Events

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed.

 

Discontinued Operations

Discontinued Operations

 

The assets and liabilities of WPT are classified as “discontinued operations” as of December 31, 2020 and are reflected in the accompanying condensed consolidated balance sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations,” respectively. The results of operations of WPT are included in “Income (loss) from discontinued operations, net of tax provision” in the accompanying condensed consolidated statements of operations and comprehensive loss. For comparative purposes, all prior periods presented have been reclassified to reflect the classifications on a consistent basis.

 

Reclassifications

Reclassifications

 

Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

 

On May 3, 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company is evaluating this new standard.

 

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

 

In March 2019, the FASB issued ASU 2019-02, which aligns the accounting for production costs of episodic television series with the accounting for production costs of films. In addition, ASU 2019-02 modifies certain aspects of the capitalization, impairment, presentation and disclosure requirements in Accounting Standards Codification (“ASC”) 926-20 and the impairment, presentation and disclosure requirements in ASC 920-350. This ASU must be adopted on a prospective basis and is effective for annual periods beginning after December 15, 2020, including interim periods within those years, with early adoption permitted. This standard was adopted on January 1, 2021 and did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 effective for January 1, 2021 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.