Quarterly report pursuant to Section 13 or 15(d)

Significant Accounting Policies

v3.22.2
Significant Accounting Policies
3 Months Ended
Mar. 31, 2022
Background [Abstract]  
Significant Accounting Policies

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.

 

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 $4,500 and $3,200, respectively, which is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet. See Note 3 – Accrued Expenses and Other Current Liabilities. 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, January 1, 2022   $ 3,200  
Change in fair value of sponsor warrants     1,300  
Balance, March 31, 2022   $ 4,500  

 

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     2.44 %     0.97 %
Remaining term in years     2.36       2.61  
Expected volatility     51.0 %     46.0 %
Exercise price   $ 11.50     $ 11.50  
Fair value of common stock   $ 1.73     $ 1.81  

 

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   $ (3,751,197 )   $ (4,973,718 )
Net income - discontinued operations   $ -     $ 1,637,042  
                 
Denominator:                
Weighted-average common shares outstanding     39,116,907       39,162,811  
Less: weighted-averages unvested restricted shares     (52,444 )     (199,143 )
Denominator for basic and diluted net loss per share   $ 39,064,463     $ 38,963,668  
                 
Basic and Diluted Net (Loss) Income per Common Share                
Continuing operations   $ (0.10 )   $ (0.13 )
Discontinued operations, net of tax   $ -     $ 0.04  

 

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     -       199,143  
Options     2,415,000       2,430,000  
Warrants     20,091,549       20,091,549  
Convertible debt     -       235,294  
Equity purchase options     600,000       600,000  
Contingent consideration shares (1)     192,308       269,231  
      23,298,857       23,825,217  

 

(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.  

 

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   $ 536,597     $ 110,441  
Sponsorship revenue     1,326,250       244,294  
Food and beverage revenue     201,318       70,704  
Ticket and gaming revenue     117,779       68,644  
Merchandising revenue     21,122       6,945  
Total in-person revenue   $ 2,203,066     $ 501,028  

 

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   $ 208,758     $
-
 
Distribution revenue     230      
-
 
Total multiplatform revenue   $ 208,988     $
-
 

 

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.

 

The Company also earns a royalty of up to 10% of the sale price when an NFT is resold by its owner in a secondary market transaction. The Company recognizes this royalty as revenue when the sale is consummated, consideration for which is payable as Ether cryptocurrency.

 

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   $ 536,597     $ 110,441  
NFT revenue     208,758      
-
 
Food and beverage revenue     201,318       70,704  
Ticket and gaming revenue     117,779       68,644  
Merchandising revenue     21,122       6,945  
Sponsorship revenue    
-
      2,502  
Distribution revenue     230      
-
 
Total Revenues Recognized at a Point in Time     1,085,804       259,236  
                 
Revenues Recognized Over a Period of Time:                
Sponsorship revenue     1,326,250       241,792  
Total Revenues Recognized Over a Period of Time     1,326,250       241,792  
Total Revenues   $ 2,412,054     $ 501,028  

 

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 $365,537 and $141,825, respectively, which is included in deferred revenue on the condensed consolidated balance sheet. 

 

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     36,746  
Received from customers     177,946  
Impairment loss    
-
 
Foreign currency translation     4,093  
Balance, March 31, 2022   $ 218,785  

 

Concentration Risks 

 

During the three months ended March 31, 2022 and 2021, 3% and 10%, respectively, of the Company’s revenues from continuing operations were from customers in foreign countries. 

 

During the three months ended March 31, 2022, the Company’s two largest customers accounted for 41%, and 12% of the Company’s consolidated revenues from continuing operations. During the three months ended March 31, 2021, the Company’s two largest customers accounted for 31%, and 16% of the Company’s consolidated revenues from continuing operations. 

 

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 (1.1114 and 1.1342 at March 31, 2022 and December 31, 2021, respectively), and revenue and expense accounts are translated using the weighted average exchange rate in effect for the period (1.1165 and 1.1829 for the three months ended March 31, 2022 and 2021, respectively). Resulting translation adjustments are made directly to accumulated other comprehensive income. Losses of $1,890 and $324 arising from exchange rate fluctuations on transactions denominated in a currency other than the reporting currency for the three months ended March 31, 2022 and 2021, respectively, are recognized in operating results in the accompanying condensed consolidated statements of operations. The Company engages in foreign currency denominated transactions with customers and suppliers, as well as between subsidiaries with different functional currencies.  

 

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.