UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For
the quarterly period ended
For the transition period from to
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☐
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
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No
As of June 15, 2022,
ALLIED ESPORTS ENTERTAINMENT, INC
Index to Condensed Consolidated Financial Statements
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Restricted cash | ||||||||
| Property and equipment, net | ||||||||
| Digital assets | - | |||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities, current portion | ||||||||
| Accrued expenses - related party | ||||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Deferred rent | ||||||||
| Accrued expenses, non-current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 4) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| In-person | $ | |||||||
| Multiplatform content | ||||||||
| Total Revenues | ||||||||
| Costs and Expenses: | ||||||||
| In-person (exclusive of depreciation and amortization) | ||||||||
| Multiplatform content (exclusive of depreciation and amortization) | ||||||||
| Selling and marketing expenses | ||||||||
| General and administrative expenses | ||||||||
| Depreciation and amortization | ||||||||
| Total Costs and Expenses | ||||||||
| Loss From Operations | ( | ) | ( | ) | ||||
| Other Expense: | ||||||||
| Other (expense) income, net | ( | ) | ||||||
| Interest income (expense), net | ( | ) | ||||||
| Total Other Expense | ( | ) | ( | ) | ||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Income from discontinued operations, net of tax provision | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted Net Loss (Income) per Common Share | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations, net of tax | $ | $ | ||||||
| Weighted Average Number of Common Shares Outstanding: | ||||||||
| Basic and Diluted | ||||||||
| Comprehensive Loss | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive (loss) income: | ||||||||
| Foreign currency translation adjustments | ||||||||
| Total Comprehensive Loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For The Three Months Ended March 31 2022 and 2021
(unaudited)
| For The Three Months Ended March 31, 2022 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
| Balance - January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||
| Restricted common stock | - | |||||||||||||||||||||||
| Stock options | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive loss | - | |||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| For The Three Months Ended March 31, 2021 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
| Balance - January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||
| Common stock | ||||||||||||||||||||||||
| Restricted common stock | - | |||||||||||||||||||||||
| Stock options | - | |||||||||||||||||||||||
| Shares issued for redemption of debt and accrued interest | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Balance - March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Income from discontinued operations, net of tax provision | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Digital currency received as revenue | ( | ) | ||||||
| Change in fair value of warrant liabilities | ||||||||
| Amortization of debt discount | ||||||||
| Expenses paid on behalf on WPT | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Deferred rent | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued interest | ||||||||
| Due to affiliates | ||||||||
| Deferred revenue | ||||||||
| Total Adjustments | ||||||||
| Net Cash (Used In) Provided By Operating Activities | ( | ) | ||||||
| Cash Flows From Investing Activities | ||||||||
| Deposit for sale of WPT | ||||||||
| Investment in digital assets | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net Cash (Used In) Provided By Investing Activities | ( | ) | ||||||
| Cash Flows From Discontinued Operations | ||||||||
| Operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Financing activities | ( | ) | ||||||
| Change in cash balance of discontinued operations | ||||||||
| Net Cash Provided By Discontinued Operations | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, continued
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Effect of Exchange Rate Changes on Cash | ||||||||
| Net (Decrease) Increase In Cash And Restricted Cash | ( | ) | ||||||
| Cash and restricted cash - Beginning of period | ||||||||
| Cash and restricted cash - End of period | $ | $ | ||||||
| Cash and restricted cash consisted of the following: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Shares issued for redemption of debt and accrued interest | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 – Business Organization and Nature of Operations
Allied Esports Entertainment Inc. (“AESE” and together with its subsidiaries, “the Company”) operates a public esports and entertainment company, consisting of the Allied Esports business and, until the sale of World Poker Tour (“WPT”) on July 12, 2021, the World Poker Tour business. Allied Esports operates through its wholly owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena Las Vegas, LLC (“ESALV”) and ELC Gaming GMBH (“ELC Gaming”). AEII operates global competitive esports properties designed to connect players and fans via a network of connected arenas. ESALV operates a flagship gaming arena located at the Luxor Hotel in Las Vegas, Nevada. ELC Gaming operates a mobile esports truck that serves as both a battleground and content generation hub and also operates a studio for recording and streaming gaming events.
AESE’s wholly owned subsidiaries, Peerless Media Limited, Club Services, Inc. (“CSI”) and WPT Enterprises, Inc., operated the poker-related business of AESE and are collectively referred to herein as “World Poker Tour” or “WPT”. World Poker Tour is an internationally televised gaming and entertainment company that has been involved in the sport of poker since 2002 and created a television show based on a series of high-stakes poker tournaments.
On January 19, 2021, the
Company entered into a stock purchase agreement (as amended and restated, the “SPA”) for the sale of
COVID-19 Pandemic. The magnitude and duration of the COVID19 pandemic has had a significant adverse effect on the Company. As a global entertainment company that hosts numerous live events with spectators and participants in destination cities, such outbreak has caused people to avoid traveling to and attending our events. Early on, the Allied Esports and WPT businesses had cancelled or postponed live events, and until Allied Esports’ flagship gaming arena located at the Luxor Hotel in Las Vegas, Nevada reopened on June 25, 2020 these businesses were operating online only. Truck events in Europe have been slow to return but the Luxor arena is currently running at full capacity for daily play and weekly tournaments. and, given the positive effects of vaccines on the US and global populations along with relaxed restrictions on travel and social gatherings, we expect that such impacts will be less significant on our future operations and liquidity.
Risks and Uncertainties
At this time, the regulation of digital assets, blockchain and NFTs remains in an early stage. The extent to which securities laws or other regulations apply or may apply in the future to such assets is unclear at this time. However, on March 9, 2022, the White House issued an Executive Order on Ensuring Responsible Development of Digital Assets proposing, among other things, regulation of digital assets. Future regulation of such assets may increase our compliance costs or adversely impact our business.
Note 2 – Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.
6
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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. 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 March 31, 2022, and for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on May 26, 2022.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”).
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 - quoted prices in active markets for identical assets or liabilities.
Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Warrants previously issued
to the Company’s sponsor (the “Sponsor Warrants”) are classified as a liability measured at fair value. As March 31,
2022 and December 31, 2021, the fair value of warrant liabilities related to our Sponsor Warrants totaled $
7
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The following is a roll forward of the Company’s Level 3 instruments:
| Balance, January 1, 2022 | $ | |||
| Change in fair value of sponsor warrants | ||||
| Balance, March 31, 2022 | $ |
The key inputs into the Black-Scholes model at the relevant measurement dates were as follows:
| March 31, | December 31, | |||||||
| Input | 2022 | 2021 | ||||||
| Risk-free rate | % | % | ||||||
| Remaining term in years | ||||||||
| Expected volatility | % | % | ||||||
| Exercise price | $ | $ | ||||||
| Fair value of common stock | $ | $ | ||||||
Net (Loss) Income per Common Share
Basic (loss) income per common share is computed by dividing net (loss) income attributable to the Company by the weighted average number of common shares outstanding during the period. Diluted (loss) income per common share is computed by dividing net (loss) income attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the potential (a) exercise of outstanding stock options, warrants and equity purchase options; (b) the conversion of convertible instruments; (c) vesting of restricted stock awards; (d) and receipt of contingent consideration shares.
The following table presents the computation of basic and diluted net loss per common share:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Numerator: | ||||||||
| Net loss - continuing operations | $ | ( |
) | $ | ( |
) | ||
| Net income - discontinued operations | $ | $ | ||||||
| Denominator: | ||||||||
| Weighted-average common shares outstanding | ||||||||
| Less: weighted-averages unvested restricted shares | ( |
) | ( |
) | ||||
| Denominator for basic and diluted net loss per share | $ | $ | ||||||
| Basic and Diluted Net (Loss) Income per Common Share | ||||||||
| Continuing operations | $ | ( |
) | $ | ( |
) | ||
| Discontinued operations, net of tax | $ | $ | ||||||
8
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Restricted common shares | ||||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible debt | ||||||||
| Equity purchase options | ||||||||
| Contingent consideration shares (1) | ||||||||
| (1) | Holders who elected to convert their Bridge Note into common stock are entitled to receive contingent consideration shares equal to the product of (i) 3,846,153 shares, multiplied by (ii) that holder’s investment amount, divided by (iii) $100,000,000, if at any time within five years after the August 9, 2019 closing date, the last exchange-reported sale price of common stock trades at or above $13.00 for thirty (30) consecutive calendar days. |
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.
9
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The Company recognizes revenue from continuing operations primarily 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 a 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 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 months ended March 31, 2022 and 2021:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Event revenue | $ | $ | ||||||
| Sponsorship revenue | ||||||||
| Food and beverage revenue | ||||||||
| Ticket and gaming revenue | ||||||||
| Merchandising revenue | ||||||||
| Total in-person revenue | $ | $ | ||||||
Multiplatform revenue
Multiplatform revenue was comprised of the following for the three months ended March 31, 2022 and 2021:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| NFT revenue | $ | $ | ||||||
| Distribution revenue | ||||||||
| Total multiplatform revenue | $ | $ | ||||||
The Company’s NFT revenue was generated from the sale of non-fungible tokens (NFTs). The Company’s NFTs exist on the Ethereum Blockchain under the Company’s EPICBEAST brand, a digital art collection of 1,958 unique beasts inspired by past and present e-sport games. The Company uses the NFT exchange, OpenSea, to facilitate its sales of NFTs. The Company, through OpenSea, has custody and control of the NFT prior to the delivery to the customer and records revenue at a point in time when the NFT is delivered to the customer and the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale.
10
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The Company also earns a
royalty of up to
The Company’s distribution revenue is generated primarily through the distribution of content to online channels. Any advertising revenue earned by online channels is shared with the Company. The Company recognizes online advertising revenue at the point in time when the advertisements are placed in the video content.
Revenue recognition
The following table summarizes our revenue recognized under ASC 606 in our condensed consolidated statements of operations:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues Recognized at a Point in Time: | ||||||||
| Event revenue | $ | $ | ||||||
| NFT revenue | ||||||||
| Food and beverage revenue | ||||||||
| Ticket and gaming revenue | ||||||||
| Merchandising revenue | ||||||||
| Sponsorship revenue | ||||||||
| Distribution revenue | ||||||||
| Total Revenues Recognized at a Point in Time | ||||||||
| Revenues Recognized Over a Period of Time: | ||||||||
| Sponsorship revenue | ||||||||
| Total Revenues Recognized Over a Period of Time | ||||||||
| Total Revenues | $ | $ | ||||||
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. As of March 31, 2022 and December 31, 2021,
the Company had contract liabilities of $
11
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Digital Assets
The Company purchases Ether cryptocurrency and accepts Ether as a form of payment for NFT sales. The Company accounts for these digital assets held as the result of the purchase or receipt of Ether, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and we may use third-party custodial services to secure them. The digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition.
We determine the fair value of our digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for Ether (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired. In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value.
The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within other expense in our condensed consolidated statements of operations and comprehensive loss. There were no impairment losses for the three months ended March 31, 2022 and we did not sell any digital assets during the same time period.
The following table sets forth changes in our Ether holdings:
| Balance, December 31, 2021 | $ | |||
| Purchases | ||||
| Received from customers | ||||
| Impairment loss | ||||
| Foreign currency translation | ||||
| Balance, March 31, 2022 | $ |
Concentration Risks
During the three months ended
March 31, 2022 and 2021,
During the three months ended
March 31, 2022, the Company’s two largest customers accounted for
12
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 (
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
The results of operations of WPT for the three months ended March 31, 2021 are included in “Income from discontinued operations, net of tax provision” in the accompanying condensed consolidated statements of operations.
Reclassifications
Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications had no effect on previously reported results of operations or loss per share.
Recently Adopted 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. This standard was adopted on January 1, 2022 and did not have a material impact on the Company’s condensed
consolidated financial statements.
13
ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 3 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Compensation expense | $ | $ | ||||||
| Current portion of deferred rent | ||||||||
| Event costs | ||||||||
| Legal and professional fees | ||||||||
| Warrant liabilities | ||||||||
| Other accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Total | $ | $ | ||||||
| Less: non current portion of accrued compensation expense | ( | ) | ||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||
| Accrued expenses, related party(1) | $ | $ | ||||||
| (1) | Represents amounts accrued to reimburse a principal shareholder for costs incurred in connection with specified Company transactions, including $ |
Note 4 – Commitments and Contingencies
Litigations, Claims, and Assessments
The Company is involved in various disputes, claims, liens and litigation matters arising out of the normal course of business. While the outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, after consulting with legal counsel, management does not believe that the outcome of these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Resignation of Chief Executive Officer
On
February 18, 2022, Libing (Claire) Wu resigned as Chief Executive Officer and General Counsel of the Company. In connection with her
resignation, the Company entered into a Separation Agreement and Release with Ms. Wu (the “Release”) pursuant to which, among
other things, Ms. Wu released the Company from any and all claims she may have against the Company (subject to certain exclusions), and
the Company agreed to provide Ms. Wu with certain separation benefits, including $
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ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Board of Directors
On
February 18, 2022, Jerry Lewin resigned as a Class C Director of the Company. In appreciation of Mr. Lewin’s services to the Company
as a director, Chair of the Compensation Committee and a member of the Audit Committee, the Company paid to Mr. Lewin $
Note 5 – Stockholders’ Equity
Stock Options
A summary of the option activity during the three months ended March 31, 2022 is presented below:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Options | Price | Term (Yrs) | Value | |||||||||||||
| Outstanding, January 1, 2022 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding, March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, March 31, 2022 | $ | $ | ||||||||||||||
Options outstanding and exercisable as of March 31, 2022 are as follows:
| Options Outstanding | Options Exercisable | |||||||||||||
| Weighted | ||||||||||||||
| Outstanding | Average | Exercisable | ||||||||||||
| Exercise | Number of | Remaining Life | Number of | |||||||||||
| Price | Options | In Years | Options | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
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ALLIED ESPORTS ENTERTAINMENT, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The expected term used for options is the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” option grants. The Company uses a blended volatility calculation, the components of which are the Company’s historical volatility for the period from its initial public offering through the valuation date and the average peer-group data of four comparable entities to supplement the Company’s own historical data for the preceding years in computing the expected volatility. Accordingly, the Company is utilizing an expected volatility figure based on a review of the historical volatility of comparable entities over a period of time equivalent to the expected life of the instrument being valued. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
For the three months ended
March 31, 2022 and 2021, the Company recorded $
Restricted Common Stock
A summary of the non-vested restricted common stock activity during the three months ended March 31, 2022 is presented below:
| Weighted | ||||||||
| Number of | Average | |||||||
| Restricted | Grant Date | |||||||
| Stock | Fair Value | |||||||
| Non-vested balance, January 1, 2022 | $ | |||||||
| Vested | ( | ) | ||||||
| Non-vested balance, March 31, 2022 | $ | |||||||
For the three months ended
March 31, 2022 and 2021, the Company recorded $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statements
The following discussion and analysis of the results of operations and financial condition of Allied Esports Entertainment Inc. (the “Company”) as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2021 and for the year then ended, which are included in the Form 10-K (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on May 26, 2022. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company and its subsidiaries. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” in our Annual Report, and other factors that we may not know. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements above, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
The Company
Allied Esports Entertainment Inc. (“AESE” or the “Company”) operates a premier public esports and entertainment company, consisting of the Allied Esports business. AESE also operated the World Poker Tour business until AESE sold such business on July 12, 2021.
Allied Esports
Gaming is one of the largest and fastest growing markets in the entertainment sector, with an estimated 2.56 billion gamers playing esports globally, and esports is the major driver of this growth. Esports, short for “electronic sports,” is a general label that comprises a diverse offering of competitive electronic games that gamers play against each other. It is projected that by 2023, 646 million people will be watching esports globally, and that global esports revenue will grow to approximately $1.5 billion.
The esports gaming industry is relatively new and is challenging. Competition is rapidly developing. Allied Esports’ business relies upon its ability to grow and garner an active gamer community, and successfully monetize this community through tournament fees, live event ticket sales, and advertising and sponsorships utilizing a three-pillar approach, which includes:
| ● | in-person experiences; |
| ● | developing multiplatform content; and |
| ● | providing interactive services. |
Its growth also depends, in part, on its ability to respond to technological evolution, shifts in gamer trends and demands, introductions of new games, game publisher intellectual property right practices, and industry standards and practices. While change in this industry may be inevitable, Allied Esports will try to adapt its business model as needed to accommodate change and remain on the forefront of its competitors.
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Allied Esports’ business plan requires significant capital expenditures, and it expects its operating expenses to increase significantly as it continues to expand its marketing efforts and operations in existing and new geographies and vertical markets (including its online esports tournament and gaming subscription platform it intends to develop). A key element of Allied Esports’ growth strategy is to extend its brand by opening additional flagship arenas throughout the world and by licensing the Allied Esports brand to third party esports arena operators, which it believes will provide attractive returns on investment.
Results of Operations
Continuing Operations
Our continuing operations consist of our esports gaming operations, which take place at global competitive esports properties designed to connect players and fans via a network of connected arenas. We offer esports fans state-of-the-art facilities to compete against other players in esports competitions, host live events with esports superstars that potentially stream to millions of viewers worldwide, produce and distribute esports content with at our on-site production facilities and studios. At our flagship arena in Las Vegas, Nevada, we provide an attractive facility for hosting corporate events, tournaments, game launches or other events. Additionally, Allied Esports has two mobile esports arenas, which are 18-wheel semi-trailers that convert into first class esports arenas and competition stages with full content production capabilities and interactive talent studios. During the quarter ended March 31, 2022, we began generating revenue from digital asset sales of NFTs.
Discontinued Operations
The World Poker Tour (“WPT”) is an internationally televised gaming and entertainment with brand presence in land-based poker tournaments, television, online and mobile. Leading innovation in the sport of poker since 2002, WPT helped ignite the global poker boom with the creation of a unique television show based on a series of high-stakes poker tournaments. On July 12, 2021, we consummated the sale of the WPT business for $106.0 million. As a result of the sale of WPT, the WPT business has been recast as discontinued operations.
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Results of Operations for the Three Months Ended March 31, 2022 and 2021
| For the Three Months | ||||||||||||
| Ended | ||||||||||||
| March 31, | Favorable | |||||||||||
| (in thousands) | 2022 | 2021 | (Unfavorable) | |||||||||
| Revenues: | ||||||||||||
| In-person | $ | 2,203 | $ | 501 | $ | 1,702 | ||||||
| Multiplatform content | 209 | - | 209 | |||||||||
| Total Revenues | 2,412 | 501 | 1,911 | |||||||||
| Costs and Expenses: | ||||||||||||
| In-person (exclusive of depreciation and amortization) | 1,810 | 538 | (1,272 | ) | ||||||||
| Multiplatform (exclusive of depreciation and amortization) | 21 | - | (21 | ) | ||||||||
| Selling and marketing expenses | 69 | 44 | (25 | ) | ||||||||
| General and administrative expenses | 3,452 | 3,913 | 461 | |||||||||
| Depreciation and amortization | 809 | 882 | 73 | |||||||||
| Loss From Operations | (3,749 | ) | (4,876 | ) | 1,127 | |||||||
| Other Income (Expense): | ||||||||||||
| Other (expense) income, net | (7 | ) | 55 | (62 | ) | |||||||
| Interest income (expense), net | 4 | (153 | ) | 157 | ||||||||
| Loss from continuing operations | (3,752 | ) | (4,974 | ) | 1,222 | |||||||
| Income from discontinued operations, net of tax provision | - | 1,637 | (1,637 | ) | ||||||||
| Net loss | $ | (3,752 | ) | $ | (3,337 | ) | $ | (415 | ) | |||
Revenues
In-person experience revenues increased by approximately $1.7 million, or 340%, to approximately $2.2 million for the three months ended March 31, 2022 from approximately $0.5 million for the three months ended March 31, 2021. The increase of in-person experience revenues was driven by (a) a $1.1 million increase in sponsorship revenue from a new contract entered into in the first quarter of 2022, (b) a $0.4 million increase in studio and truck rental revenue, and (c) a $0.2 million increase in food and beverage and event revenue primarily attributable to the removal of COVID-19 pandemic-related capacity restrictions at the Company’s HyperX Esports Arena in Las Vegas.
Multiplatform revenue increased by approximately $209 thousand for the three months ended March 31, 2022 from $0 for the three months ended March 31, 2021. The increase in multiplatform revenues is the result of NFT sales, which were sold for the first time beginning in March of 2022.
Costs and expenses
In-person costs (exclusive of depreciation and amortization) increased by approximately $1.3 million, or 236%, to approximately $1.8 million for the three months ended March 31, 2022 from approximately $0.5 million for the three months ended March 31, 2021. In-person costs increased as the result of the increased revenues described above.
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Multiplatform costs (exclusive of depreciation and amortization) increased by approximately $21 thousand for the three months ended March 31, 2022 from $0 for the three months ended March 31, 2021. The increase in multiplatform costs corresponds to the increase in revenue as discussed above.
Selling and marketing expenses increased by approximately $25 thousand, or 57%, to approximately $69 thousand for the three months ended March 31, 2022 from approximately $44 thousand for the three months ended March 31, 2021. The increase in selling and marketing expenses was driven by the increase in events for the three months ended March 31, 2022.
General and administrative expenses decreased by approximately $0.5 million, or 12%, to approximately $3.4 million for the three months ended March 31, 2022, from approximately $3.9 million for the three months ended March 31, 2021. The decrease in general and administrative expenses resulted from higher expenses during the first quarter of 2021 as follows: (i) $0.7 million higher legal and professional fees during the first quarter of 2021 due to additional expenses related to the sale of WPT; (ii) $0.2 million higher stock-based compensation in 2021 due to the issuance of director grants and restricted stock units issued to the former CEO during the period, and (iii) $0.4 million higher payroll costs during the first quarter of 2021, related to higher corporate payroll. These decreases were slightly offset by a $0.8 million increase in payroll expenses resulting from severance costs incurred upon the termination of employment of our former Chief Executive Officer (“CEO”).
Depreciation and amortization decreased by approximately $73 thousand, or 8%, to approximately $809 thousand for the three months ended March 31, 2022, from approximately $882 thousand for the three months ended March 31, 2021.
Other income (expense)
We recognized other expense of approximately $7 thousand during the three months ended March 31, 2022 compared to $55 thousand of other income recorded for the three months ended March 31, 2021. Other income recognized in the first quarter of 2021 was related to an insurance payment received for a claim submitted for damaged equipment.
Interest income (expense)
Interest income was approximately $4 thousand for the three months ended March 31, 2022 compared to $153 thousand of interest expense for the three months ended March 31, 2021. The decrease in interest expense is a result of the decrease in the principal balance of notes payable and convertible notes outstanding during the period, since these debt instruments were repaid from the proceeds of the sale of WPT.
Results of Discontinued Operations
We recognized income from discontinued operations, net of tax, of $0 and $1.6 million during the three months ended March 31, 2022 and 2021, respectively, representing an decrease of $1.6 million. The decrease is due to the sale of the WPT business on July 12, 2021.
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Liquidity and Capital Resources
The following table summarizes our total current assets, current liabilities and working capital from continuing operations at March 31, 2022 and December 31, 2021, respectively:
| March 31, | December 31, | |||||||
| (in thousands) | 2022 | 2021 | ||||||
| Current Assets | $ | 92,421 | $ | 94,261 | ||||
| Current Liabilities | $ | 5,970 | $ | 5,249 | ||||
| Working Capital | $ | 86,451 | $ | 89,012 | ||||
As of March 31, 2022, we had cash of approximately $90.7 million (not including $5 million of restricted cash) and working capital from continuing operations of approximately $86.5 million. For the three months ended March 31, 2022 and 2021, we incurred a net loss from continuing operations of approximately $3.8 million and $5.0 million, respectively, and had cash (used in) provided by continuing operations of approximately $(2.1) million and $0.1 million, respectively.
Cash requirements for our current liabilities include approximately $5.8 million for accounts payable and accrued expenses. Cash requirements for lease payments are approximately $1.9 million. The Company intends to meet these cash requirements from its current cash balance. As of March 31, 2022, the Company had no material commitments for capital expenditures.
The global impact of the Covid-19 pandemic and its variants (“COVID-19”) continues to evolve. While the arena is currently running at full capacity for daily play and weekly tournaments, we are continuing to monitor the outbreak of COVID-19 and the related business and travel restrictions, and changes to behavior intended to reduce its spread, and the related impact on our operations, financial position and cash flows, as well as the impact on our employees. The magnitude and duration of the pandemic has had a significant adverse impact on our historical operations and liquidity. Given the positive effects of vaccines on the US and global populations along with relaxed restrictions on travel and social gatherings, we expect that such impacts will be less significant on our future operations and liquidity.
On July 12, 2021, we completed the sale of the WPT business for an aggregate purchase price of $106.2 million. With the sale of the WPT business, we believe our current cash on hand is sufficient to meet our operating and capital requirements for at least the next twelve months from the date these financial statements are issued.
21
Cash Flows from Operating, Investing and Financing Activities
The table below summarizes cash flows from continuing operations for the three months ended March 31, 2022 and 2021:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| (in thousands) | 2022 | 2021 | ||||||
| Net cash (used in) provided by | ||||||||
| Operating activities | $ | (2,125 | ) | $ | 88 | |||
| Investing activities | $ | (50 | ) | $ | 9,990 | |||
| Financing activities | $ | - | $ | - | ||||
Net Cash (Used in) Provided By Operating Activities
Net cash (used in) provided by operating activities for the three months ended March 31, 2022 and 2021 was approximately $(2.1) million and $0.1 million, respectively, representing increased usage of cash of $2.2 million. During the three months ended March 31, 2022 and 2021, the net cash used in operating activities was primarily attributable to the net loss from continuing operations of approximately $3.8 million and $5.0 million, respectively, adjusted for approximately $1.0 million and $1.4 million, respectively, of net non-cash expenses, and approximately $0.6 million and $3.6 million, respectively, of cash provided by changes in the levels of operating assets and liabilities.
Net Cash (Used in) Provided by Investing Activities
Net cash used in investing activities during the three months ended March 31, 2022 consisted primarily of approximately $41 thousand for an investment in Ether and $9 thousand of cash used for the purchase of property and equipment.
Net cash provided by investing activities for the three months ended March 31, 2021 consisted primarily of a $10.0 million deposit for the sale of WPT.
Off-Balance Sheet Arrangements
The Company does not engage in any off-balance sheet financing activities, nor does the Company have any interest in entities referred to as variable interest entities.
Critical Accounting Policies and Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on May 26, 2022 and Note 2 to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q, for a discussion of our critical accounting policies and use of estimates.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Effectiveness of Disclosure Controls and Procedures
Our management, under the direction of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2022. Based on this evaluation our management, including the Company’s Chief Executive Officer and Chief Financial Officer, has concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2022 to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis.
Despite not conducting a formal assessment regarding internal control over financial reporting, management identified the following material weaknesses as of December 31, 2021, which persist as of March 31, 2022:
| ● | inadequate internal controls over the timely filing of the consolidated financial statements; |
| ● | inadequate segregation of duties resulting from limited accounting staff and resources; and | |
| ● | inadequate information technology general controls as it relates to user access and change management. |
Management has begun to take action, including the engagement of additional accounting personnel and compliance resources, to address these material weaknesses. Notwithstanding the material weaknesses in internal control over financial reporting described above, our management has concluded that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2022, management has hired additional accounting personnel in order enhance our internal control over financial reporting and plans to take additional steps to remediate the material weaknesses.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
As a “smaller reporting company”, we are not required to provide information required by this Item. However, investors are encouraged to review our current risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on May 26, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALLIED ESPORTS ENTERTAINMENT, INC. | ||
| Dated: June 24, 2022 | By: | /s/ Lyle Berman |
Lyle Berman, Interim Chief Executive Officer,
| ||
| Dated: June 24, 2022 | By: | /s/ Roy Anderson |
| Roy Anderson, Chief Financial Officer (Principal Financial Officer) | ||
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